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TECTONIC FINANCIAL, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operation.
This management's discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see "Cautionary Statement Regarding Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions associated with these statements. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere in this Annual Report on Form 10-K. Our actual results could differ significantly from those anticipated in these estimates and in the forward-looking statements as a result of certain factors, including those discussed in the section of this Form 10-K captioned "Risk Factors," and elsewhere in this Form 10-K. Company Overview
We are a financial holding company headquartered in
wide array of financial products and services including banking, trust,
investment advisory, securities brokerage, factoring, third-party
administration, qualified plan recordkeeping and insurance services to
individuals, small businesses and institutions across
We operate through four main direct and indirect subsidiaries: (i)T Bancshares, Inc. ("T Bancshares") which was incorporated under the laws of theState of Texas onDecember 23, 2002 to serve as the bank holding company for the Bank, (ii)Sanders Morris Harris LLC ("Sanders Morris"), a registered broker-dealer withFINRA , and registered investment advisor with theSEC , (iii)Tectonic Advisors, LLC ("Tectonic Advisors ") a registered investment advisor registered with theSEC focused generally on managing money for relatively large, affiliated institutions and investment advisors, as well as for their clients, and (iv)HWG Insurance Agency LLC ("HWG"), an insurance agency registered with theTexas Department of Insurance ("TDI"). 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 Bank's traditional fiduciary services clients primarily consist of clients ofCain Watters & Associates L.L.C. ("Cain Watters"). The Bank also offers lending services, including commercial loans to small-to medium-sized businesses and professional concerns, as well as consumers,The Nolan Company ("Nolan"), operating from its office inOverland Park, Kansas as a division within the Bank, offers third party administration ("TPA") services, andIntegra Funding Solutions, LLC ("Integra"), operating from itsFort Worth, Texas office 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 includesDallas ,Tarrant ,Denton ,Collin andRockwall counties which encompass an area commonly referred to as theDallas/Fort Worth Metroplex . The Bank also provides focused services to the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office inDallas, Texas . In addition, the Bank serves the small business community by offering loans guaranteed by theSmall Business Administration ("SBA") and theU.S. Department of Agriculture ("USDA"). Sanders Morris provides brokerage, advisory, and wealth management services to high and ultra-high net worth individuals in a broad geographic area that includesTexas , with a concentration of clients in theHouston, Texas metroplex area, as well as clients acrossthe United States .Tectonic Advisors provides advisory and wealth management services primarily to affiliated institutions and their clients, including the Bank, Cain Watters, and their clients, under long-standing advisory and due diligence agreements. We have three operating segments: Banking,Other Financial Services andHoldCo . Our banking operating segment encompasses both commercial and consumer banking services, as well as factoring services. OurOther Financial Services segment includes the activities ofTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes Nolan, and HWG. OurHoldCo operating segment includes the Bank's immediate parent,T Bancshares , and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. See the section entitled Segment Reporting, below, for more information. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries,T Bancshares , the Bank,Tectonic Advisors , Sanders Morris, and through Sanders Morris, HWG. All intercompany transactions and balances are eliminated in consolidation.
Critical Accounting Policies and Estimates
We prepare consolidated financial statements based on GAAP and to customary
practices within the financial services industry. These policies, in certain
areas, require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While we
base estimates on historical experience, current information and other factors
deemed to be relevant, actual results could differ from those estimates.
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We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements.
Estimation of the allowance for loan losses
Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance with FASB ASC Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio. In estimating the specific and general exposure to loss on impaired loans, we have considered a number of factors, including the borrower's character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral. We also consider other internal and external factors when determining the allowance for loan losses, which include, but are not limited to, changes in national and local economic conditions, loan portfolio concentrations, and trends in the loan portfolio. Based on an analysis performed by management atDecember 31, 2022 , the allowance for loan losses is believed to be adequate to cover estimated loan losses in the portfolio as of that date based on the loan loss methodology employed by management. However, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required. Senior management and the Directors' Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly. See additional discussion of the allowance for loan losses in Note 1 to our Consolidated Financial Statements. Integra Acquisition OnJuly 1, 2021 , we, through our wholly-owned subsidiaryT Bancshares , acquired Integra through the merger of Integra with and intoT Bancshares , withT Bancshares surviving the merger. Integra's activity is reported within our Banking segment. Integra is a factoring company that provides financing to smaller transportation companies acrossthe United States principally by purchasing their accounts receivable at a discount and then collecting such receivables at face value. The acquisition of this small business lending vertical enables us to provide the Bank with additional breadth in its lending platform and enable the Bank to continue to prudently grow its balance sheet and generate relatively attractive returns on its assets.
For further information, see Note 18 - Integra Acquisition in the accompanying
notes to the consolidated financial statements included elsewhere in this
report.
Climate Change
Refer to Item 1. Business for background as it relates to the Company and
climate change.
There have been significant completed and pending developments in federal and
state legislation and regulation regarding climate change in recent years. Given
our size and the nature of our business, the incurred direct impact and expected
future direct impact of climate-related regulation is not material, nor expected
to be material, to our business, financial condition, or results of operations.
Further, we have not experienced any physical effects of climate change on our
operations and results.
We recognize that, while not material to our operations to-date, indirect
consequences of climate-related regulation could exist that might be associated
with our lending to certain types of customers who engage in activity that some
could deem potentially harmful to the environment. The Company notes that the
climate change landscape is constantly evolving and at this time, it is not
possible for us to know or predict the full universe or extent that these
indirect effects will have on the Company's future operations.
While programs and initiatives focused on sustainability and resource
conservation have been put in place by the Company, there have been no material
past capital expenditures for climate-related projects. We do not plan to have
material future capital expenditures for climate-related projects at this time.
Additionally, we have not incurred any material compliance costs related to
climate change.
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Table of Contents Performance Summary Net income available to common shareholders for the years endedDecember 31, 2022 and 2021 was unchanged at approximately$15.5 million . Earnings per diluted common share were$2.11 and$2.21 for the years endedDecember 31, 2022 and 2021, respectively. For the year endedDecember 31, 2022 , changes in the components of net income compared to the prior year included a$1.7 million increase in net interest income, a$3.4 million increase in non-interest income, a$6.5 million increase in non-interest expense, a$950,000 decrease in the provision for loan losses and a$381,000 decrease in income tax expense. Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, this Form 10-K contains financial information determined by methods other than in accordance with GAAP, which includes return on average tangible common equity. We calculate return on average tangible common equity as net income available to common shareholders (net income less dividends paid on preferred stock) divided by average tangible common equity. The most directly comparable GAAP financial measure for tangible common equity is average total shareholders' equity. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, measures and ratios prepared in accordance with GAAP. For the year endedDecember 31, 2022 , annual return on average assets was 2.89%, compared to 3.06% for the prior year, and annual return on average equity was 18.88%, compared to 24.99% for the same period in the prior year. The lower annual returns on average assets and on average equity were primarily due to no change in net income for the years endedDecember 31, 2022 and 2021 which is explained in the "Results of Operations" section, and growth in average assets primarily related to the Company's acquisition ofIntegra Funding Solutions, LLC , aTexas limited liability company ("Integra") onJuly 1, 2021 , and average equity during the year endedDecember 31, 2022 . The annual return on average equity was impacted by the shares of Company common stock issued for the Company's acquisition of Integra. The following table reconciles net income to income available to common shareholders and presents the calculation of return on average tangible common equity: As of and for the As of and for the Year Ended Year Ended (In thousands, except percentages) December 31, 2022 December 31, 2021 Income available to common shareholders $ 15,478 $ 15,482 Average shareholders' equity $ 90,194 $ 68,156 Less: average goodwill 21,440 16,129 Less: average core deposit intangible 681 885 Less: average preferred stock 17,250 17,250 Average tangible common equity $ 50,823 $ 33,892 Return on average tangible common equity 30.45 % 45.68 % Total assets grew by$27.5 million , or 4.7%, to$612.5 million as ofDecember 31, 2022 , from$585.0 million as ofDecember 31, 2021 . This increase was primarily due to increases of$21.2 million loans held for investment,$9.1 million for investments, partly offset by decrease of$3.8 million in cash and cash equivalents. Shareholders' equity increased$11.7 million , or 13.8%, to$96.5 million as ofDecember 31, 2022 , from$84.8 million as ofDecember 31, 2021 . See analysis of shareholders' equity in the section captioned "Capital Resources and Regulatory Capital Requirements" included elsewhere in this discussion. Results of Operations
Details of the changes in the various components of net income are discussed
below.
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Table of Contents Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies ofthe United States government, its agencies and various other governmental regulatory authorities. As ofDecember 31, 2022 , the target range for the federal funds rate was 4.25% to 4.50%. The target range for the federal funds rate was increased 25 basis points from 4.50% to 4.75% effectiveFebruary 2, 2023 , and from 4.75% to 5.00% effectiveMarch 23, 2023 . The following table presents the changes in net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. 2022 vs 2021 Increase (Decrease) Due to Change in Average (In thousands) Rate Volume Total
Interest-bearing deposits and federal funds sold
(27 )$ 563 Securities 353 579 932 Loans, net of unearned discount (1) 1,786 720 2,506 Total earning assets 2,729 1,272 4,001 Savings and interest-bearing demand 7 7 14 Money market deposit accounts 1,063 144 1,207 Time deposits 793 444 1,237 FHLB and other borrowings 173 (390 ) (217 ) Subordinated notes 36 - 36 Total interest-bearing liabilities 2,072 205 2,277 Changes in net interest income$ 657 $ 1,067 $ 1,724
(1) Include non-accrual loans.
Net interest income increased$1.7 million , or 6.6% from$25.8 million for the year endedDecember 31, 2021 , to$27.5 million for year endedDecember 31, 2022 . Net interest margin for the year endedDecember 31, 2022 and 2021 was 5.06% and 4.96%, respectively, an increase of 10 basis points. The increase in net interest income was primarily due to an increase in the average yield and average volume on total earning assets (attributable to the factored receivables acquired in the Integra acquisition onJuly 1, 2021 ), partly offset by an increase in the average rate paid on money market deposit accounts and on time deposits. 64
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The average volume of interest-earning assets increased$23.4 million , or 4.5%, from$519.2 million for the year endedDecember 31, 2021 to$542.6 million for the year endedDecember 31, 2022 . The average volume of securities increased$14.3 million , or 44.3%, from$32.3 million for the year endedDecember 31, 2021 , to$46.6 million for the year endedDecember 31, 2022 , and the average volume of loans increased$10.7 million , or 2.4%, from$448.3 million for the year endedDecember 31, 2021 to$459.0 million for the year endedDecember 31, 2022 . The increase in the average volume of loans included increases of$65.9 million for organic loan growth and$14.3 million for factored receivables related to the Integra acquisition during the third quarter of 2021, partly offset by a$69.5 million decrease of PPP loans. The average yield on interest-earning assets increased 49 basis points from 5.66% for the year endedDecember 31, 2021 to 6.15% for the year endedDecember 31, 2022 . The average yield on interest earning assets was impacted by changes in market interest rates, which was attributed to theFOMC repeatedly raising their target benchmark interest rate during the year endedDecember 31, 2022 , resulting in subsequent prime rate increases of 425 basis points between March and December of 2022, and changes in the mix of interest-earning assets. The average yield for loans increased 40 basis points from 6.33% for the year endedDecember 31, 2021 , to 6.73% for the year endedDecember 31, 2022 . During the year endedDecember 31, 2022 , we recognized$175,000 in PPP related deferred fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. This was a decrease of$4.6 million from the same period in the prior year. The decrease in PPP fees was partly offset by an increase in factored receivables interest income of$2.6 million from the same period in the prior year. The average yield on securities increased 109 basis points from 2.96% for the year endedDecember 31, 2021 , to 4.05% for the year endedDecember 31, 2022 , and the average yield on interest-bearing deposits increased 153 basis points from 0.13% for the year endedDecember 31, 2021 , to 1.66% for the year endedDecember 31, 2022 . The average volume of interest-bearing liabilities decreased$21.0 million , or 5.2%, from$404.1 million for the year endedDecember 31, 2021 to$383.2 million for the year endedDecember 31, 2022 . The average volume of interest-bearing deposits increased$43.3 million , or 13.6%, from$319.1 million for the year endedDecember 31, 2021 , to$362.5 million for the year endedDecember 31, 2022 . The average interest rate paid on interest-bearing liabilities increased 64 basis points from 0.90% for the year endedDecember 31, 2021 , to 1.54% for the year endedDecember 31, 2022 . The average interest rate paid on interest-bearing deposits increased 58 basis points from 0.78% for the year endedDecember 31, 2021 , to 1.36% for the year endedDecember 31, 2022 . Non-interest bearing deposits increased$27.9 million , or 36.6%, from$76.3 million for the year endedDecember 31, 2021 , to$104.2 million for the year endedDecember 31, 2022 . The average volume of FHLB and other borrowings decreased$64.3 million , or 88.1%, from$73.0 million for the year endedDecember 31, 2021 , to$8.7 million for the year endedDecember 31, 2022 , due to the decline in the PPPLF borrowings related to the decrease in PPP loan balances. The average cost of FHLB and other borrowings increased 24 basis points from 0.37% for the year endedDecember 31, 2021 , to 0.61% for the year endedDecember 31, 2022 , due to the aforementioned significant increases in the market interest rates during the year endedDecember 31, 2022 and the decrease in PPPLF borrowings during the period. The following table sets forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin, for the years endedDecember 31, 2022 and 2021. Year Ended December 31, 2022 2021 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 37,032 $ 613 1.66 %$ 38,634 $ 50 0.13 % Securities 46,576 1,887 4.05 32,292 955 2.96 Loans, net of unearned discount (1) 458,980 30,885 6.73 448,284 28,379 6.33 Total earning assets 542,588 33,385 6.15 519,210 29,384 5.66 Cash and other assets 49,995 41,652 Allowance for loan losses (4,192 ) (3,344 ) Total assets$ 588,391 $ 557,518 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 16,287 49 0.30 %$ 13,907 35 0.25 % Money market deposit accounts 129,972 1,639 1.26 118,577 432 0.36 Time deposits 216,196 3,252 1.50 186,647 2,015 1.08 Total interest-bearing deposits 362,455 4,940 1.36 319,131 2,482 0.78 FHLB and other borrowings 8,730 53 0.61 73,015 270 0.37 Subordinated notes 12,000 911 7.59 12,000 875 7.29 Total interest-bearing liabilities 383,185 5,904 1.54 404,146 3,627 0.90 Non-interest-bearing deposits 104,170 76,328 Other liabilities 10,842 8,888 Total liabilities 498,197 489,362 Shareholders' equity 90,194 68,156 Total liabilities and shareholders' equity$ 588,391 $ 557,518 Net interest income$ 27,481 $ 25,757 Net interest spread 4.61 % 4.76 % Net interest margin 5.06 % 4.96 %
(1) Includes non-accrual loans.
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Table of Contents Provision for Loan Losses We determined a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date. For additional information concerning this determination, see the section captioned "Allowance for Loan Losses" elsewhere in this discussion. For the years endedDecember 31, 2022 and 2021, the provision for loan losses totaled$1.3 million and$2.2 million , respectively. See the section captioned "Allowance for Loan Losses" included elsewhere in this discussion for further analysis of the provision for loan losses. Non-Interest Income
The components of non-interest income were as follows:
Year Ended December 31,
(In thousands) 2022 2021
Trust income $ 6,098 $ 6,252
Gain on sale of loans - 101
Advisory income 13,549 13,472
Brokerage income 11,754 9,644
Service fees and other income 8,293 6,790
Rental income 346 365
Total $ 40,040 $ 36,624
Total non-interest income for the year ended December 31, 2022 , increased $3.4
million , or 9.3%, as compared to the year ended December 31, 2021 . Changes in
the various components of non-interest income are discussed below.
Trust Income. Trust income is earned from trust services on the value of managed
and non-managed assets held in custody. The volatility of the bond and equity
markets impacts the market value of trust assets and the related fees. Trust
income for the year ended December 31, 2022 , decreased $154,000 , or 2.5%,
compared to the year ended December 31, 2021 . The fee income decreased between
the two years due to a decrease in the average market value of the trust assets
over the year ended December 31, 2022 , due to decreases in asset values of $970
million which offset net asset inflows of $561 million .
Gain on sale of loans. The gain on sale of loans primarily reflects the gain
from the sale of the guaranteed portion of SBA 7(a) and USDA loans originated by
the Bank's SBA lending group. Gain on sale of loans decreased $101,000 during
the year ended December 31, 2022 , during which there was no gain on sale of
loans, compared to the same period in the prior year, when there was gain on
sale of loans of $101,000 resulting from the sale of $1.1 million of SBA loans.
Advisory income. Advisory fees are typically based on a percentage of the
underlying average asset value for a given period, where each percentage point
represents 100 basis points. These revenues are of a recurring nature but are
directly affected by increases and decreases in the values of the underlying
assets. In addition to fees based on a percentage of underlying assets, payments
under certain advisory agreements at Sanders Morris are based on the performance
of the respective account, measured as a percentage of the increase achieved in
the asset values in the respective account. Performance-based fees, though the
agreements may remain in place from year to year, are far less predictable,
given the uncertainty of the ability to achieve an increase of the same level as
in prior periods, or at all. For the year ended December 31, 2022 , advisory
income increased $77,000 , or 0.6%, compared to the year ended December 31, 2021 .
This increase during the year ended December 31, 2022 , was primarily due an
increase in advisory fees based on a percentage of the underlying assets at
Tectonic Advisors totaling $378,000 , partially offset by a decrease in advisory
fees based on a percentage of underlying assets at Sanders Morris Harris
totaling $301,000 .
Brokerage income. Brokerage revenues are generally based on a per share fee or
commission to trade a share of a particular stock, bond or other security. In
addition, brokerage revenues in this context include private placements,
participation in syndication of public offerings, and certain other brokerage
revenues, including interest earned on margin lending. Brokerage revenue is
dependent on the volume of trading, cash held in brokerage accounts which funds
margin lending, and on private placement and syndication activity during the
period. Brokerage income for the year ended December 31, 2022 , increased $2.1
million , or 21.9%, compared to the year ended December 31, 2021 . This increase
is primarily due to a recovery in private placement activity due to a recovery
in demand for these investments and a backlog of this activity related to a
loosening of the travel and contact restrictions put in place during the peak of
the COVID-19 pandemic, and a recovery in traditional brokerage activity.
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The table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as ofDecember 31, 2022 and 2021, and the inflows and outflows and market appreciation during the years then ended. Our brokerage and advisory assets experienced a decrease of approximately$409.8 million , or 7.3%, and an increase of$1.1 billion , or 24.0%, during the years endedDecember 31, 2022 and 2021, respectively. The decrease for the year endedDecember 31, 2022 was related to market depreciation of$970.4 million , or 17.3%, which offset positive net flows of$560.5 million , or 10.0%. Tectonic (In thousands) Advisors Sanders Morris Total As of January 1, 2021$ 2,334,037 $ 2,190,339 $ 4,524,376 Client inflows 531,768 2,110,859 2,642,627 Client outflows (296,819 ) (1,906,936 ) (2,203,755 ) Net flows 234,949 203,923 438,872 Market appreciation 283,994 362,070 646,064 As of December 31, 2021 2,852,980$ 2,756,332 $ 5,609,312 Client inflows 857,461 1,545,368 2,402,829 Client outflows (492,064 ) (1,350,240 ) (1,842,304 ) Net flows 365,397 195,128 560,525 Market appreciation/(depreciation) (494,912 ) (475,454 ) (970,366 ) As of December 31, 2022$ 2,723,465 $ 2,476,006 $ 5,199,471 Service fees and other income. Service fees include fees for deposit-related services, and third-party administrative fees from the Bank's Nolan division. Service fees and other income for the year endedDecember 31, 2022 increased$1.5 million , or 22.1%, compared to the year endedDecember 31, 2021 , which was primarily due to an increase in the administrative fees recorded for services provided by Nolan of$1.4 million , increase in factoring service fees from the Bank's Integra factoring division of$360,000 related to the Integra acquisition during the third quarter of 2021, increase in credit interest bySanders Morris Harris of$57,000 , as well as individually immaterial increases in other bank service fees totaling$32,000 . These increases were offset by a decrease in income distributions from an interest in securities not readily marketable carried at cost basis totaling$191,000 , a decrease in gains and losses on marketable securities at Sanders Morris totaling$74,000 , a decrease in net loan servicing fees of$26,000 , and other individually immaterial decreases in other income of$54,000 . Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the year endedDecember 31, 2022 decreased$19,000 , or 5.2%, compared to the year endedDecember 31, 2021 due to a decrease in occupancy in 2022 compared to 2021 and to rent concessions given during 2022. Non-Interest Expense
The components of non-interest expense were as follows:
Year Ended December 31,
(In thousands) 2022 2021
Salaries and employee benefits
Occupancy and equipment
1,707 1,837 Trust expenses 2,243 2,416 Brokerage and advisory direct costs 2,015 2,051 Professional fees 1,480 1,539 Data processing 794 964 Other expense 5,473 4,576 Total$ 44,805 $ 38,330 Total non-interest expense for the year endedDecember 31, 2022 increased$6.5 million , or 16.9%, compared to the year endedDecember 31, 2021 . Changes in the various components of non-interest income are discussed below. 67
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Salaries and employee benefits. Salaries and employee benefits include employee payroll expense, incentive compensation, health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased$6.1 million , or 24.6%, from$24.9 million for the year endedDecember 31, 2021 to$31.1 million for the year endedDecember 31, 2022 . In our other financial services segment, salaries and employee benefits increased$2.8 million . The increase was primarily from a increase in incentive bonuses at Sanders Morris related to traditional brokerage, private placement, and syndicated offerings activity of$1.6 million , offset by a decrease in commission salaries of$559,000 , and an increase in salaries, payroll taxes, and other benefits of$543,000 atTectonic Advisors and$213,000 at Sanders Morris. Salaries, bonuses and payroll taxes at the Bank's Nolan division increased$862,000 related to staff increases to accommodate the increase in the number of plans administered and merit increases. Salaries, taxes and other benefits in our trust group within our other financial services segment increased$186,000 related to staffing additions to accommodate additional recordkeeping clients, as well as a decrease in reliance on third-party consultants. Salaries and employee benefits in our banking segment increased$3.0 million , primarily driven by an accrual for severance expense of$532,000 , increases in staff including a full year of Integra as compared to 2021, where Integra was acquired early in the third quarter 2021, and merit increases and incentive bonuses. Stock-based compensation decreased$113,000 primarily related to an offset to expense due to a forfeiture of stock grants due to separation prior to vesting, and salaries, taxes and other benefits increased$362,000 . Health insurance related benefits overall increased approximately$372,000 , primarily due to increases in headcount, including the addition of the Bank's Integra factoring division. Occupancy and equipment expense. Occupancy and equipment expenses include building, furniture, fixtures and equipment depreciation and maintenance costs. Occupancy and equipment expenses decreased$130,000 , or 7.1%, from$1.8 million for the year endedDecember 31, 2021 to$1.7 million for the year endedDecember 31, 2022 . The decrease is primarily due to a decrease occupancy and equipment expense in our other financial services division of$234,000 , led by a decrease in rent of$103,000 , due to Nolan giving up leased space andSanders Morris Harris's new lease agreement, a decrease in depreciation expense of$89,000 from certain fixed assets and software costs that reached full depreciation/amortization in 2021, and a decrease in rental and common area maintenance expense of$26,000 driven by lower costs related to the COVID-19 pandemic, and a decrease in property taxes and repairs and maintenance of 28,000. This was partially offset by increases in parking and facilities expenses totaling$12,000 . Rent expenses in our banking segment increased$99,000 , primarily from the addition of the Bank's Integra factoring division, where rent expense increased$58,000 , along with an increase of$41,000 in rent expense at the bank facility. Trust expenses. Trust expenses are incurred in our other financial services segment, and include advisory fees paid on the common trust funds managed by the Company based on the value of the assets held in custody. The volatility of the bond and equity markets impacts the market value of trust assets and the related expenses. The monthly advisory fees are assessed based on the market value of assets at month-end. Trust expenses decreased by$173,000 for the year endedDecember 31, 2022 , as compared to the year endedDecember 31, 2021 based on decreases in asset values of the Bank's common trust funds from decreases in asset values whit offset net inflows. Brokerage and advisory direct costs. Brokerage and advisory direct costs decreased$36,000 , or 1.8%, and were approximately$2.0 million for each the year endedDecember 31, 2021 andDecember 31, 2022 . Brokerage and advisory direct costs are incurred primarily in our other financial services segment and include the cost of clearing firm services and fees on advisory assets from custodians and certain referral fees, as well as information services related to our advisory and trading activity. Expenses atTectonic Advisors increased$36,000 , related to increases in information services, which were offset by decreases in referral and service fees. The increase was offset by a decrease in brokerage and advisory direct costs at Sanders Morris and HWG of$72,000 , related to a decrease in clearing firm service fees, fees on advisory assets and referral fees of$97,000 , offset by an increase in information services and service fees of$25,000 . Professional fees. Professional fees, which include legal, consulting, audit and tax fees, decreased$59,000 , or 3.8%, and were approximately$1.5 million for the years endedDecember 31, 2021 , andDecember 31, 2022 . The decrease included a decrease of$142,000 at the Bank's trust department due to a decrease in consulting fees related to our participant directed plan services team, where staff increases have allowed us to reduce our reliance on consultants. In addition to a decrease of$81,000 in professional fees inHoldco , due to the acquisition of Integra in 2021, offset by in an increase in professional fees of$111,000 in the banking and other financial services divisions, due to a new lease atTectonic Advisors , new deals atSanders Morris Harris , a new pension portal consulting at Nolan. In addition, legal fees decreased$97,000 , primarily in our Banking segment related to the acquisition of Integra during the year endedDecember 31, 2021 . The decrease in legal fees was offset by an increase in audit and tax consulting fees of$151,000 , primarily in our Banking and Parent segments related to the increase in complexity of our annual audit and tax preparation services. 68
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Data processing. Data processing includes costs related to the Company's operating systems. Data processing expenses decreased$170,000 , or 17.6%, from$964,000 for the year endedDecember 31, 2021 , to$794,000 for the year endedDecember 31, 2022 . The decrease was due to decreases in data processing expenses within the Banking segment of$210,000 , offset by an increase of$40,000 in ourOther Financial Services segment. The decreases in our Banking segment were primarily related to the conversion of the Bank's core accounting system during the same periods in the prior year, which increased expense during the earlier periods, and the offsetting increases were primarily related to increases at the Bank's trust division related to increasing activity and improvements in the participant directed services group. Other expense. Other expenses include costs for insurance,Federal Deposit Insurance Corporation ("FDIC") andOffice of the Comptroller of the Currency ("OCC") assessments, director fees, and regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses increased$897,000 , or 19.6%, from$4.6 million for the year endedDecember 31, 2021 to$5.5 million for the year endedDecember 31, 2022 . The increase includes increases in software costs and licensing primarily at the banking and other financial services divisions of$259,000 , advertising and marketing expense across all segments of the Company of$190,000 , including the initiative atTectonic Advisors where we are investing in marketing costs related to assets under management associated with Cain Watters above$2.5 billion , travel and lodging expense at the banking and other financial services divisions of$161,000 , increases in employee recruitment and office expense across all segments of the company of$127,000 , increases in loan and other real estate operating costs at the Bank of$41,000 , and other individually immaterial increases. Income Taxes The income tax expense for the years endedDecember 31, 2022 and 2021 was$4.4 million and$4.8 million , respectively. The effective income tax rate was 20.6% and 22.0% for the years endedDecember 31, 2022 and 2021, respectively. Segment Reporting
We have three operating segments: Banking,
Our primary operating segments are Banking and
Our Banking operating segment includes both commercial and consumer banking
services. Commercial banking services are provided primarily to small- to
medium-sized businesses and their employees, which includes a wide array of
lending and cash management products. Consumer banking services include lending
and depository services.
OurOther Financial Services segment includesTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes a TPA services unit, and HWG. Through these business divisions, we offer investment advisory and brokerage services to individuals and businesses, private trust services, and financial management services, including personal wealth management, retirement plan design and administrative services, and insurance brokerage services.
A third operating segment,
related subordinated debt, as well as operations of the financial holding
company that serves as parent for the group overall. Our principal source of
revenue is dividends from our subsidiaries.
The following table presents key metrics related to our segments:
Year Ended December 31, 2022
Other
Financial
(In thousands) Banking Services HoldCo Consolidated
Revenue(1) $ 29,630 $ 38,788 $ (897 ) $ 67,521
Net income (loss) before taxes $ 13,106 $ 11,164 $ (2,818 ) $ 21,452
Year Ended December 31, 2021
Other
Financial
(In thousands) Banking Services HoldCo Consolidated
Revenue(1) $ 27,639 $ 35,428 $ (686 ) $ 62,381
Net income (loss) before taxes $ 13,605 $ 10,547 $ (2,315 ) $ 21,837
(1) Net interest income plus non-interest income
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Table of Contents Banking Income before taxes for the year endedDecember 31, 2022 decreased$499,000 , or 3.7%, compared to the year endedDecember 31, 2021 . The decrease was primarily the result of a$3.4 million increase in non-interest expense, partly offset by a$1.7 million increase in net interest income, a$247,000 increase in non-interest income, and a$950,000 decrease in the provision for loan losses. Net interest income for the year endedDecember 31, 2022 increased$1.7 million , or 6.5%, compared to the year endedDecember 31, 2021 . The increase in net interest income was primarily due to an increase in the average yield and average volume on total earning assets, partly offset by an increase in the average rate paid on money market deposit accounts and time deposits and an increase in the average volume of deposits. The average yield on interest earning assets and average rate paid on deposits were impacted by changes in market interest rates and changes in the mix of interest-earning assets. See the analysis of net interest income included in the section captioned "Net Interest Income" included elsewhere in this discussion. The provision for loan losses for the year endedDecember 31, 2022 decreased$950,000 , or 43.2%, to$1.3 million , compared to$2.2 million for the year endedDecember 31, 2021 . See "Allowance for Loan Losses" included elsewhere in this discussion. Non-interest income for the year endedDecember 31, 2022 increased$247,000 , or 24.9%, compared to the year endedDecember 31, 2021 . The increase was primarily due to a$360,000 increase for factoring service fees related to the Integra acquisition during the third quarter of 2021, and a$33,000 increase in deposit service fees and other, partly offset by a$19,000 decrease in rental income, a$26,000 decrease in net loan servicing income and a$101,000 decrease in gain on sale of See the analysis of non-interest income included in the section captioned "Non-Interest Income" included elsewhere in this discussion. Non-interest expense for the year endedDecember 31, 2022 increased$3.4 million , or 29.1%, compared to the year endedDecember 31, 2021 . The increase was primarily related to a$3.1 million increase in salaries and employee benefits for annual merit increases, increases in (including$1.3 million for the addition of Integra), and incentive bonuses. Other changes include a$99,000 increase in occupancy and equipment expense for increase in facilities expense (including$68,000 for the addition of Integra), a$16,000 increase in professional fees including increases in audit and tax consulting fees, partly offset by legal fees related to the acquisition of Integra during the prior year, a$211,000 decrease in data processing related to banking core system conversion costs in 2022 partly offset by expenses for the operations of Integra, and a$483,000 increase in other expenses including$169,000 for the addition of Integra,$138,000 for software development,$52,000 forFDIC premiums,$45,000 for employee recruitment,$50,000 for travel and a net of$29,000 for various other expenses. See the analysis of non-interest expense included in the section captioned "Non-Interest Expense" included elsewhere in this discussion. Other Financial Services Income before taxes for the year endedDecember 31, 2022 increased$617,000 , or 5.9%, compared to the year endedDecember 31, 2021 . The increase was primarily the result of a$3.4 million increase in non-interest income partly offset by a$2.8 million increase in non-interest expense. Non-interest income for the year endedDecember 31, 2022 increased$3.4 million , or 9.5%, compared to the year endedDecember 31, 2021 . The increase was due to increases in brokerage income of$2.1 million , primarily from increases in private placement activity at Sanders Morris, service fees and other income of$1.3 million , resulting from increases at the Bank's Nolan division and increases in factoring fees due to having a full year of activity in the year endedDecember 31, 2022 , and an increase of$76,000 in advisory fees, partially offset by a decrease in trust fees of$154,000 . See the analysis of non-interest income included in the section captioned "Non-Interest Income" above in this discussion. Non-interest expense for the year endedDecember 31, 2022 increased$2.7 million , or 11.0%, compared to the year endedDecember 31, 2021 . The increase was primarily from an increase in salaries and employee benefits of$2.8 million , other operating costs of$360,000 , and data processing expense of$41,000 , which were offset by decreases in occupancy and equipment costs of$234,000 , trust expense of$173,000 , professional fees of$60,000 , and brokerage and advisory direct costs of$36,000 . The increase in salaries and employee benefits expense was primarily from an increase in incentive bonuses at Sanders Morris related to traditional brokerage, private placement, and syndicated offerings activity of$1.6 million , and at the Bank's Nolan division of$862,000 related to staff increases to accommodate the increase in the number of plans administered and merit increases. The increase in other operating costs was primarily related to an increase in software costs and advertising and marketing expense across our advisory, brokerage, and third party administration businesses. The decrease in occupancy and equipment costs was the result of a decrease in office lease expense at Nolan related to a reduction in space at their home office location inOverland Park, Kansas , and the decrease in trust expense related to fluctuations in asset values during the year endedDecember 31, 2022 . The decrease in professional fees related to a reduction in reliance on consultants, and the decrease in brokerage and advisory direct costs related to individually immaterial changes in these expenses atSanders Morris Harris . See also the analysis of non-interest expense included in the section captioned "Non-Interest Expense" included elsewhere in this discussion. 70
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Table of ContentsHoldCo The net loss before taxes at theHoldCo operating segment increased by$503,000 during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 . The increase is the result of an increase in salaries and employee benefits of$248,000 , primarily related to annual bonuses and merit increases, as well as the addition of staff at the holding company. Other operating costs increased$54,000 related to increases in public relations expense and software and computer expenses for initiatives at the holding company to increase integration and efficiency of human resources and overlay management functions across the company. These increases were offset by a decrease in professional fees related to expenses incurred during the year endedDecember 31, 2021 related to the acquisition of Integra in 2021, which were offset by increases in tax and accounting fees related to an increase in complexity in our annual audit services and market increases in pricing for these services. See also the analysis of non-interest expense included in the section captioned "Non-Interest Expense" included elsewhere in this discussion. Financial ConditionInvestment Securities The primary purpose of the Company's investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Company seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment. Securities are classified as available for sale when we intend to hold for an indefinite period of time but might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported as a separate component of stockholders' equity as other comprehensive income (loss), net of tax. Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. As ofDecember 31, 2022 and 2021, securities available for sale consisted ofU.S. government agency securities and mortgage-backed securities guaranteed byU.S. government agencies. Securities held to maturity consist of Property Assessed Clean Energy ("PACE") andPublic Improvement District/Tax Increment Reinvestment Zone ("PID/TIRZ") investments. These investment contracts or bonds located inTexas ,California andFlorida , 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. Restricted securities consisted of FRB stock, having an amortized cost and fair value of$2.2 million and$1.2 million as ofDecember 31, 2022 and 2021, respectively, and FHLB stock, having an amortized cost and fair value of$1.3 million as ofDecember 31, 2022 and 2021.
Securities not readily marketable consists of an income interest in a private
investment.
The following presents the amortized cost and fair values of the securities
portfolio as of the dates indicated:
As of December 31, 2022 As of December 31, 2021
Amortized Estimated Amortized Estimated
(In thousands) Cost Fair Value Cost Fair Value
Securities available for sale:
U.S. Treasuries $ 1,990 $ 1,953 $ - $ -
U.S. government agencies 15,715 13,088 15,847 15,402
Mortgage-backed securities 5,925 5,592 1,724 1,754
Total securities available for sale
Securities held to maturity: Property assessed clean energy$ 1,596 $ 1,722 $ 2,731 $ 2,731 Public improvement district/TIRZ 23,666 24,760 16,942 16,942
Total securities held to maturity
$ 19,673 $ 19,673 Securities, restricted: Other$ 3,496 $ 3,496 $ 2,432 $ 2,432
Securities not readily marketable
$ 100 $ 100 71
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The following table summarizes the maturity distribution schedule with corresponding weighted-average yields of securities available for sale and securities held to maturity as ofDecember 31, 2022 . Yields are calculated based on amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as restricted include stock in the FRB and the FHLB, which have no maturity date. These securities have been included in the total column only and are not included in the total yield. Maturing After One Year After Five Years One Year Through Through After or Less Five Years Ten Years Ten Years Total (In thousands, except percentages) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Securities available for sale: U.S Treasuries$ 992 2.16 %$ 998 2.62 % $ - - % $ - - %$ 1,990 2.39 % U.S. government agencies - - 10,098 0.98 2,000 1.00 3,617 0.83 15,715 0.94 Mortgage-backed securities 47 3.92 3,841 3.12 - - 2,037 3.67 5,925 3.32 Total$ 1,039 2.24 %$ 14,937 1.63 %$ 2,000 1.00 %$ 5,654 1.85 %$ 23,630 1.66 % Securities held to maturity: PACE $ - - % $ - - % $ - - %$ 1,596 7.16 %$ 1,596 7.16 % PID/TIRZ - - 2,172 4.12 - - 21,494 6.26 23,666 6.33 Total $ - - %$ 2,172 4.12 % $ - - %$ 23,090 6.33 %$ 25,262 6.14 % Securities, restricted: Other $ - - % $ - - % $ - - % $ - - %$ 3,496 - % Securities not readily marketable $ - - % $ - - % $ - - % $ - - %$ 100 - % Loan Portfolio Composition Total loans excluding allowance for loan losses, increased$21.6 million , or 5.0%, to$450.3 million atDecember 31, 2022 , compared to$428.7 million atDecember 31, 2021 . The increase includes$60.0 million for non-PPP SBA loans,$9.6 million for commercial and industrial loans and$2.4 million for real estate loans. The increases were partly offset by a$34.1 million decrease for SBA PPP loans and a$16.2 million decrease in factored receivables. PPP loans had a zero balance atDecember 31, 2022 , compared to$34.1 million atDecember 31, 2021 . SBA loans comprise the largest group of loans in our portfolio totaling$258.3 million , or 57.4% of the total loans atDecember 31, 2022 , compared to$233.9 million , or 54.5% (50.6% excluding PPP) of the total loans atDecember 31, 2021 . Commercial and industrial loans totaled$92.9 million , or 20.6% of the total loans atDecember 31, 2022 , compared to$83.3 million , or 19.4% (21.1% excluding PPP) of the total loans atDecember 31, 2021 . Commercial and construction real estate loans totaled$67.8 million , or 15.1% of the total loans atDecember 31, 2022 , compared to$65.6 million , or 15.3% (16.6% excluding PPP), of the total loans atDecember 31, 2021 . The following table sets forth the composition of our loans held for investment: (In thousands) 2022 2021 2020 2019 2018 Loans held for investment at December 31, Commercial and industrial$ 92,946 $ 83,348 $ 79,864 $ 85,476 $ 88,915 Consumer installment 1,058 1,099 10,259 3,409 3,636 Real estate - residential 5,566 5,452 4,319 5,232 7,488 Real estate - commercial 63,924 62,966 44,484 46,981 35,221 Real estate - construction and land 3,873 2,585 8,396 7,865 4,653 SBA 7(a) guaranteed 149,374 145,983 164,687 69,963 33,884 SBA 7(a) unguaranteed 56,268 52,524 52,179 47,132 44,326 SBA 504 52,668 35,348 35,553 22,591 13,400 USDA 2,235 806 801 2,430 3,367 Factored receivables 22,420 38,636 - - - Other - - - - 17 Total loans$ 450,332 $ 428,747 $ 400,542 $ 291,079 $ 234,907 72
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The Company initially records the guaranteed portion of the SBA 7(a) andUSDA loans as held for sale at the lower of cost or fair value. Loans held for sale totaled$33.9 million and$33.8 million atDecember 31, 2022 and 2021, respectively. During the year endedDecember 31, 2022 , the Company elected to reclassify$55.4 million of the SBA loans held for sale to held for investment. The Company determined that holding these loans provides better long-term risk adjusted returns than selling the loans. Loan Origination/Risk Management. The Company has certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. Management reviews and approves these policies and procedures on an annual basis and makes changes as appropriate. Management receives and reviews monthly reports related to loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geographic location. Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business related other expenses. Collateral is generally a lien on all available assets of the business borrower including intangible assets. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores. Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources. Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable. The Company originates SBA loans which are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programs that the Company offers are the basic SBA 7(a) loan guaranty program and the SBA 504 loan program in conjunction with junior lien financing from aCertified Development Company ("CDC"). The SBA 7(a) program serves as the SBA's primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for non-real estate collateral and up to 25 years for real estate collateral. The SBA 7(a) loan is approved and funded by a qualified lender, partially guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 75% of the loan amount depending on loan size. The Company is required by the SBA to service the loan and retain a contractual minimum of 5% on all SBA 7(a) loans, but generally retains 25% (the unguaranteed portion). The servicing spread is 1% of the guaranteed portion of the loan that is sold in the secondary market. The SBA 504 program is an economic development-financing program providing long-term, low down payment loans to businesses. Typically, an SBA 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are$5.0 million for regular 504 loans and$5.5 million for those SBA 504 loans that meet a public policy goal.
The SBA has designated the Bank as a "Preferred Lender". As a Preferred Lender,
the Bank has been delegated loan approval, closing and most servicing and
liquidation authority from the SBA.
The Company also offers Business & Industry ("B&I") program loans through the
USDA . These loans are similar to the SBA product, except they are guaranteed by
the USDA . The guaranteed amount is generally 80%. B&I loans are made to
businesses in designated rural areas and are generally larger loans to larger
businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be
sold into the secondary market. These loans can be utilized for rural commercial
real estate and equipment. The loans can have maturities up to 30 years and the
rates can be fixed or variable.
Construction and land development loans are evaluated based on the borrower's
and guarantor's credit worthiness, past experience in the industry, track record
and experience with the type of project being considered, and other factors.
Collateral value is determined generally by independent appraisal utilizing
multiple approaches to determine value based on property type.
For all 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.
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Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. As ofDecember 31, 2022 , our loan portfolio included$83.9 million of loans, approximately 18.6% of our total funded loans to the dental industry, as compared to$67.3 million of loans, approximately 15.7% of our total funded loans (17.1% of total funded loans, net of the SBA PPP loans), atDecember 31, 2021 . We believe that these loans are to credit worthy borrowers and are diversified geographically. Paycheck Protection Program InApril 2020 , we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. Loans covered by the PPP may be eligible for loan forgiveness for certain costs incurred related to payroll, group health care benefit costs and qualifying mortgage, rent and utility payments. The remaining loan balance after forgiveness of any amounts is still fully guaranteed by the SBA. During the year endedDecember 31, 2020 , we funded$98.3 million of PPP loans which have been forgiven by the SBA and were paid off or repaid by the borrower as ofDecember 31, 2021 . The Consolidated Appropriations Act, 2021, which was signed into law onDecember 27, 2020 , allocated an additional$284 billion to the SBA to fund a second round of PPP and extended the application period for the PPP toMarch 31, 2021 . The PPP application period was later extended to the earlier ofMay 31, 2021 , or such date when all PPP funds are exhausted. As ofDecember 31, 2022 , there were no PPP loans outstanding. During the year endedDecember 31, 2021 , we originated$66.2 million of PPP loans. As ofDecember 31, 2021 , approximately$32.1 million of the PPP loans originated in 2021 have been forgiven by the SBA and were paid off or repaid by the borrower, leaving an outstanding balance of$34.1 million as ofDecember 31, 2021 , which was forgiven by the SBA and were paid off or repaid by the borrower during the year endedDecember 31, 2022 . We also participated in the PPPLF which, throughJune 30, 2021 , extended loans to banks who are loaning money to small businesses under the PPP. There were no borrowings under the PPPLF as ofDecember 31, 2022 . The total amount borrowed under the PPPLF as ofDecember 31, 2021 was$34.5 million and was non-recourse and secured by an equal amount of the PPP loans we originated. The borrowings under the PPPLF fully paid off during the year endedDecember 31, 2022 . As ofDecember 31, 2022 , 60.8% of the loan portfolio, or$274.0 million , matured or re-priced within one year or less. The following table presents the contractual maturity ranges for loans outstanding as ofDecember 31, 2022 , and also presents portion of loans that have fixed interest rates or floating adjustable interest rates over the life of the loan in accordance with changes in the interest rate environment: Maturity
Distribution of Loan Portfolio
Over One Over Five
Year Years Over
One Year Through Through Fifteen Total Loans
(In thousands) or Less Five Years Fifteen Years Years Receivable
Commercial and industrial $ 7,259 $ 14,607 $ 70,944 $ 136 $ 92,946
Consumer installment 272 786 - - 1,058
Real estate - residential 998 4,568 - - 5,566
Real estate - commercial 24,193 33,553 4,647 1,531 63,924
Real estate - construction and land 1,996 1,549 328 - 3,873
SBA 7(a) guaranteed 132,250 12,633 3,501 990 149,374
SBA 7(a) unguaranteed 47,462 6,782 1,472 552 56,268
SBA 504 34,916 14,158 3,594 - 52,668
USDA 2,235 - - - 2,235
Factored Receivables 22,420 - - - 22,420
Total $ 274,001 $ 88,636 $ 84,486 $ 3,209 $ 450,332
Loans Due After One Year
Floating or
Adjustable
(In thousands) Fixed Rate Rate Total
Commercial and industrial $ 82,693 $ 2,994 $ 85,687
Consumer installment 786 - 786
Real estate - residential 4,568 - 4,568
Real estate - commercial 4,205 35,526 39,731
Real estate - construction and land 714 1,163 1,877
SBA 7(a) guaranteed 4,638 12,486 17,124
SBA 7(a) unguaranteed 1,970 6,836 8,806
SBA 504 - 17,752 17,752
USDA - - -
Factored Receivables - - -
Total $ 99,574 $ 76,757 $ 176,331
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Scheduled contractual principal repayments of loans do not reflect the actual
life of such assets. The average life of loans is less than their average
contractual terms due to prepayments.
Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. The fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield," is accreted into interest income over the life of the loans. Non-performing Assets Our primary business segments are banking and other financial services, and as outlined above, the banking segment's primary business is lending. That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. While we have instituted underwriting guidelines and policies and credit review procedures to protect us from avoidable credit losses, some losses will inevitably occur. The COVID-19 pandemic has contributed to an increased risk of delinquencies, defaults and foreclosures. Through the date of this filing, the Company has not experienced any loan charge-offs caused by the economic impact from the COVID-19 pandemic. Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing, and foreclosed assets. Non-performing assets totaled$2.8 million as ofDecember 31, 2022 , compared to$3.7 million as ofDecember 31, 2021 . As ofDecember 31, 2022 , non-performing assets consisted of SBA non-accrual loans totaling$2.4 million , of which all except$100,000 was guaranteed by the SBA, and commercial real estate loans totaling$138,000 . Loans are considered past due when principal and interest payments have not been received as of the date such payments are contractually due. Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan interest and generally when such loans are 90 days or more past due. Accrued interest is charged off and no further interest is accrued. Subsequent payments received on non-accrual loans are recorded as reductions of principal. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the original loan contract. Loans past due 90 days or more and still accruing interest totaled$206,000 in residential real estate and$132,000 in factored receivables as ofDecember 31, 2022 , compared to$400,000 as ofDecember 31, 2021 , which solely included factored receivables. Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties. There were no foreclosed assets as ofDecember 31, 2022 , compared to$1.1 million , which included two SBA loans that were foreclosed on during the year endedDecember 31, 2021 and subsequently sold during the year endedDecember 31, 2022 .
The following table sets forth certain information regarding non-performing
assets and restructured loans by type, including ratios of such loans to total
assets as of the dates indicated:
At December 31,
(In thousands, except
percentages) 2022 2021 2020 2019 2018
Non-accrual loans:
Commercial and industrial $ - $ - $ - $ 60 $ -
Real estate - commercial 138 149 158
SBA guaranteed 2,221 2,039 1,118 4,892 2,252
SBA unguaranteed 107 - 517 1,039 293
Total non-accrual loans 2,466 2,188 1,793 5,991 2,545
Real estate - residential past
due 90 days 206 - - - -
Factored receivables past due
90 days 132 400 - - -
Foreclosed assets - 1,079 - - -
Total non-performing assets $ 2,804 $ 3,667 $ 1,793 $ 5,991 $ 2,545
As a % of total loans 0.65 % 0.86 % 0.45 % 2.06 % 1.08 %
As a % of total assets 0.48 0.63 0.35 1.64 0.82
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Restructured loans are considered "troubled debt restructurings" if, due to the borrower's financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a troubled debt restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current market rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. As ofDecember 31, 2022 , there was one loan which was a SBA loan in the amount of$902,000 identified as TDR, of which$812,000 was guaranteed. The loan became a TDR during the three months endedDecember 31, 2022 . The modification was for interest rate reduction. There was no payment default. There were no other TDRs during the year. There were no TDRs during the year endedDecember 31, 2021 . As noted in Note 4, "Loans and Allowance for Loan Losses," Section 4013 of the CARES Act provides financial institutions the option to suspend TDR accounting under GAAP in certain circumstances and the Company has elected that option. The Company has worked proactively with customers experiencing financial challenges from the COVID-19 pandemic. AtDecember 31, 2022 , there were no loans in COVID-19-related deferment. As ofDecember 31, 2021 , the Company had granted principal and interest payment deferrals related to COVID-19 to two borrowers representing approximately$679,000 .
Allowance for Loan and Lease Losses
Loans are reported net of the allowance for loan losses on our balance sheet. The allowance for loan losses totaled$4.5 million and$4.2 million , atDecember 31, 2022 and 2021, respectively. During the year endedDecember 31, 2022 , the Company had charge-offs of$998,000 and recoveries of$94,000 . During the year endedDecember 31, 2021 , the Company had charge-offs of$1.1 million and recoveries of$117,000 . Based on an analysis performed by management atDecember 31, 2022 , the allowance for loan losses is believed to be adequate to cover estimated loan losses in the portfolio as of that date based on the loan loss methodology employed by management. However, management's judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required.
The table below presents a summary of the Company's net loan loss experience and
provisions to the ALLL for the period indicated:
(In thousands, except percentages) 2022 2021 2020 2019 2018 Balance at January 1,$ 4,152 $ 2,941 $ 1,408 $ 874 $ 386 Charge-offs: Commercial and industrial 337 - - 214 1 Consumer installment - - - - - SBA 7(a) 43 952 218 858 266 Factored receivables 617 168 - - - Total charge-offs 997 1,120 218 1,072 267 Recoveries: Commercial and industrial 31 37 33 30 - Consumer installment - - - - - Real estate - construction and land - - - - - SBA 7(a) 22 20 9 21 30 Factored receivables 41 60 - - - Total recoveries 94 117 42 51 30 Net charge-offs 903 1,003 176 1,021 237 Provision for loan losses 1,264 2,214 1,709 1,555 725 Balance at December 31,$ 4,513 $ 4,152 $ 2,941 $ 1,408 $ 874 Loans at year-end$ 450,332 $ 428,747 $ 400,542 $ 291,079 $ 234,907 Average loans 458,980 448,284 376,088 275,025 231,385 Net charge-offs/average loans 0.20 % 0.22 % 0.05 % 0.37 % 0.10 % Allowance for loan losses/year-end loans 1.00 0.97 0.73 0.48 0.37 Total provision for loan losses/average loans 0.28 0.49 0.45 0.57 0.31 76
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The following tables set forth the allocation of the allowance as of the date
indicated and the percentage of loans in each category to total gross loans as
of the date indicated:
At December 31,
2022 2021 2020 2019 2018
Allowance Allowance Allowance Allowance
(In thousands, except percentages) Amount Amount Amount Amount Allowance Amount
Commercial and industrial $ 1,301 $ 1,154 $ 928 $ 501 $ 419
Consumer installment 14 15 91 27 27
Real estate - residential 79 76 52 22 27
Real estate - commercial 899 869 527 347 210
Real estate - construction and land 55 40 100 76 34
SBA 1,505 1,324 1,225 435 157
USDA 52 20 18 - -
Factored receivables 608 654 - - -
Total allowance for loan losses
2,941$ 1,408 $ 874 2022 2021 2020 2019 2018 %(1) %(1) %(1) %(1) %(1) Commercial and industrial 20.6 % 19.4 % 19.9 % 29.4 % 37.9 % Consumer installment 0.2 0.3 2.6 1.2 1.5 Real estate - residential 1.2 1.3 1.1 1.8 3.2 Real estate - commercial 14.2 14.7 11.1 16.1 15.0 Real estate - construction and land 0.9 0.6 2.1 2.7 2.0 SBA 57.4 54.5 63.0 48.0 39.0 USDA 0.5 0.2 0.2 0.8 1.4 Factored receivables 5.0 9.0 -
- -
Total allowance for loan losses 100 % 100 % 100 % 100 % 100 %
(1) Percentage of loans in each category to total loans Deposits Deposits are attracted principally from our primary geographic market area with the exception of time deposits, which, due to the Company's attractive rates, are attracted from across the nation. The Company offers a broad selection of deposit products, including demand deposit accounts, NOW accounts, money market accounts, regular savings accounts, term certificates of deposit and retirement savings plans (such as IRAs). Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the associated interest rates. Management sets the deposit interest rates periodically based on a review of deposit flows and a survey of rates among competitors and other financial institutions. The Company relies on customer service and long-standing relationships with customers to attract and retain deposits, and also on CD listing services. During the second quarter of 2020, we received$40.0 million in brokered deposits through an Insured Cash Sweep One-Way Buy agreement to provide liquidity to fund PPP loan originations. This brokered deposit is included in our money market accounts as ofDecember 31, 2022 . Total deposits increased$48.9 million , or 11.0%, to$493.0 million as ofDecember 31, 2022 , from$444.2 million as ofDecember 31, 2021 The following table sets forth our average deposit account balances, the percentage of each type of deposit to total deposits, and average cost of funds for each category of deposits for the periods indicated: Year EndedDecember 31 , Year EndedDecember 31, 2022 2021
(In thousands, except Average Percent of Average Average Percent of Average
percentages)
Balance Deposits Rate Balance Deposits Rate Non-interest-bearing deposits$ 104,170 19.3 % 0.00 %$ 76,328 19.3 % 0.00 % Savings and interest-bearing demand 16,287 3.5 0.30 13,907 3.5 0.25 Money market accounts 129,972 30.0 1.26 118,577 30.0 0.36 Time deposits 216,196 47.2 1.50 186,647 47.2 1.08 Total deposits$ 466,625 100.0 % 1.06 %$ 395,459 100.0 % 0.63 % 77
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The following table provides information on the maturity distribution of the insured time deposits and the time deposits exceeding theFDIC insurance limit as ofDecember 31, 2022 : (In thousands) Insured Uninsured Total Maturing Three months or less$ 16,591 $ 10,671 $ 27,262 Over three months to six months 41,949 20,650 62,599 Over six months to 12 months 112,366 18,426 130,792 Over 12 months 37,399 3,638 41,037 Total$ 208,305 $ 53,385 $ 261,690 Borrowings The table below presents balances of each of the borrowing facilities as of the dates indicated: December 31, December 31, (In thousands) 2022 2021 Borrowings: FHLB borrowings $ - $ - FRB borrowings (PPPLF) - 34,521 Subordinated notes 12,000 12,000$ 12,000 $ 46,521 The Company has a credit line with the FHLB with borrowing capacity of$56.0 million secured by commercial loans. The Company determines its borrowing needs and renews the advances accordingly at varying terms. The Company had no borrowings with FHLB as ofDecember 31, 2022 and 2021. The Company also has a credit line with the FRB with borrowing capacity of$30.0 million , which is secured by commercial loans. The company had no borrowings from the FRB atDecember 31, 2022 and 2021 under this credit line. As part of the CARES act, the FRB offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility ("PPPLF"). DuringJune 2022 , the Bank repaid its PPPLF from the FRB and had no borrowings under the PPPLF as ofDecember 31, 2022 . As ofDecember 31, 2021 , the balance of PPPLF related borrowings was$34.5 million . As ofDecember 31, 2022 and 2021, the Company had subordinated notes totaling$12.0 million , consisting of$8.0 million issued in 2017 bearing an interest rate of three month LIBOR plus 5.125%, with interest payable quarterly and maturing onJuly 20, 2027 , at which all principal is due, and$4.0 million issued in 2018 bearing interest rate of 7.125% payable semi-annually up toJuly 17, 2023 , after which it converts to three month LIBOR plus 5.125%, with interest payable quarterly and maturing onMarch 31, 2028 , at which all principal is due. The subordinated notes are unsecured and subordinated in right of payment to the payment of our existing and future senior indebtedness and structurally subordinated to all existing and future indebtedness of our subsidiaries.
Capital Resources and Regulatory Capital Requirements
Shareholders' equity increased$11.7 million , or 13.8%, to$96.5 million as ofDecember 31, 2022 , from$84.8 million as ofDecember 31, 2021 . The increase included net income of$17.0 million ,$272,000 related to stock compensation expense and the issuance of common stock related to exercise of stock options in the amount of$97,000 . The increases were partly offset by a net after-tax other comprehensive loss of$2.0 million related to the decrease in market value of the securities available for sale due to the recent significant increases in market interest rates, the repurchase of common stock in the amount of$481,000 and dividends paid on the Series B Preferred stock and paid on the common stock in the amounts of$1.6 million and$1.8 million , respectively. Together with the Bank, the Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's and, accordingly, the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. As ofDecember 31, 2022 , the Company and the Bank met all capital adequacy requirements to which they were subject. As ofDecember 31, 2022 , the Bank qualified as "well capitalized" under the prompt corrective action regulations of Basel III and the OCC. 78
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Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).
The following table presents our regulatory capital ratios, as well as those of
the Bank, as of the dates indicated:
(In thousands) December 31, 2022 December 31, 2021
Amount Ratio Amount Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets) $ 76,805 13.27 % $ 62,794 11.82 %
Common Equity Tier 1 (to Risk Weighted
Assets) 59,555 14.80 45,544 12.62
Tier 1 Capital (to Risk Weighted Assets) 76,805 19.09 62,794 17.40
Total Capital (to Risk Weighted Assets) 81,317 20.21 66,946 18.55
T Bank, N.A.
Tier 1 Capital (to Average Assets) $ 76,767 13.47 % $ 63,302 12.06 %
Common Equity Tier 1 (to Risk Weighted
Assets) 76,767 19.29 63,302 17.70
Tier 1 Capital (to Risk Weighted Assets) 76,767 19.29 63,302 17.70
Total Capital (to Risk Weighted Assets) 81,279 20.42 67,454 18.87
In addition to the regulatory requirements of the federal banking agencies,
Sanders Morris is subject to the regulatory framework applicable to registered
investment advisors under the SEC's Division of Investment Management . Sanders
Morris is also regulated by FINRA , which, among other requirements, imposes
minimums on its net regulatory capital. As of December 31, 2022 , Sanders Morris
is in compliance with FINRA's net regulatory capital requirements.
Liquidity
Our liquidity relates to our ability to maintain a steady flow of funds to
support our ongoing operating, investing and financing activities. Our board of
directors establishes policies and analyzes and manages liquidity to ensure that
adequate funds are available to meet normal operating requirements in addition
to unexpected customer demands for funds, such as high levels of deposit
withdrawals or loan demand, in a timely and cost-effective manner. The most
important factor in the preservation of liquidity is maintaining public
confidence that facilitates the retention and growth of a large, stable supply
of core deposits and funds. Ultimately, public confidence is generated through
profitable operations, sound credit quality and a strong capital position.
Liquidity management is viewed from a long-term and a short-term perspective as
well as from an asset and liability perspective. We monitor liquidity through a
regular review of loan and deposit maturities and forecasts, incorporating this
information into a detailed projected cash flow model.
The Bank's liquidity is monitored by its management, the Asset-Liability
Committee and its board of directors who review historical funding requirements,
current liquidity position, sources and stability of funding, marketability of
assets, options for attracting additional funds, and anticipated future funding
needs, including the level of unfunded commitments. Liquid assets include cash,
interest-bearing deposits primarily maintained at the Federal Reserve Bank of
Dallas , federal funds sold and unpledged securities available for sale.
The Company's primary sources of funds are retail, small business, custodial,
commercial deposits, loan repayments, maturity of investment securities, other
short-term borrowings, and other funds provided by operations. Our liquidity
position is enhanced by our ability to raise additional funds as needed in the
wholesale markets. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and loan prepayments are more influenced
by interest rates, general economic conditions, and competition. The Company
will maintain investments in liquid assets based upon management's assessment of
(1) the need for funds, (2) expected deposit flows, (3) yields available on
short-term liquid assets, and (4) objectives of the asset/liability management
program.
The Company had cash and cash equivalents of $42.2 million , or 6.9% of total
assets, as of December 31, 2022 . In addition to the on balance sheet liquidity
available, the Company has lines of credit with the FHLB and the FRB, which
provide the Company with a source of off-balance sheet liquidity. As of December
31, 2022 , the Company's borrowing capacity with the FHLB was $56.0 million , or
9.2% of assets, none of which was utilized. The borrowing capacity with the FRB
was $30.0 million , or 4.9% of assets, of which none was utilized or outstanding
as of December 31, 2022 . In addition, as of December 31, 2022 , the Company had
approximately $145.0 million of SBA guaranteed loans held for investment that
could be sold to investors.
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Off-Balance Sheet Arrangements and Contractual Obligations
We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. We follow the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of credit extended is based on management's credit evaluation of the customer and, if deemed necessary, may require collateral. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.
The following table presents future contractual obligations to make future
payments, excluding interest, for the periods indicated:
As of December 31, 2022
Less than One to Over Three to Over Five
(In thousands) One Year Three Years Five Years Years Total
FHLB borrowings $ - $ - $ - $ - $ -
FRB borrowings - - - - -
Subordinated notes - - - 12,000 12,000
Time deposits 220,653 31,451 5,203 4,383 261,690
Minimum lease payments 275 1,124 393 - 1,792
Total $ 220,928 $ 32,575 $ 5,596 $ 16,383 $ 275,482
The following table presents contractual financial commitments for the periods
indicated, however some of these commitments may expire unused or only partially
used, so the total amounts do not necessarily reflect future cash requirements.
As of December 31, 2022
Less than One to Over Three to Over Five
(In thousands) One Year Three Years Five Years Years Total
Undisbursed loan commitments$ 10,934 $ 322 $ 783$ 31,388 $ 43,427 Standby letters of credit 161 - - - 161 80
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Underwriting Agreement – Form 8-K
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