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TECTONIC FINANCIAL, INC.  – 10-K
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 Dallas, TX. We provide a
wide range of financial products and services, including banking, fiduciary,
investment advice, securities brokerage, factoring, third parties
qualified plan administration, record keeping and insurance services
individuals, small businesses and institutions across United States.



We operate through four main direct and indirect subsidiaries: (i) T Bancshares,
Inc. ("T Bancshares") which was incorporated under the laws of the State of
Texas on December 23, 2002 to serve as the bank holding company for the Bank,
(ii) Sanders Morris Harris LLC ("Sanders Morris"), a registered broker-dealer
with FINRA, and registered investment advisor with the SEC, (iii) Tectonic
Advisors, LLC ("Tectonic Advisors") a registered investment advisor registered
with the SEC focused generally on managing money for relatively large,
affiliated institutions and investment advisors, as well as for their clients,
and (iv) HWG Insurance Agency LLC ("HWG"), an insurance agency registered with
the Texas 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 of Cain 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 in Overland Park, Kansas as a
division within the Bank, offers third party administration ("TPA") services,
and Integra Funding Solutions, LLC ("Integra"), operating from its Fort 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 includes Dallas, Tarrant, Denton, Collin and Rockwall
counties which encompass an area commonly referred to as the Dallas/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 in Dallas, Texas. In addition, the Bank
serves the small business community by offering loans guaranteed by the Small
Business Administration ("SBA") and the U.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
includes Texas, with a concentration of clients in the Houston, Texas metroplex
area, as well as clients across the 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 and HoldCo.
Our banking operating segment encompasses both commercial and consumer banking
services, as well as factoring services. Our Other Financial Services segment
includes the activities of Tectonic Advisors, Sanders Morris, the Bank's Trust
Division, which includes Nolan, and HWG. Our HoldCo 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.



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Recent developments related to the COVID-19 pandemic



The Company has been, and may continue to be, impacted by the ongoing outbreak
of the COVID-19 pandemic. In March 2020, COVID-19 was declared a pandemic by the
World Health Organization and a national emergency by the President of the
United States. Efforts to limit the spread of COVID-19 have included
shelter-in-place orders, the closure of non-essential businesses, travel
restrictions, supply chain disruptions and prohibitions on public gatherings,
among other things, throughout many parts of the United States and, in
particular, the markets in which we operate. Throughout 2021, the spread of the
Delta and Omicron variants of COVID-19 resulted in increased infection rates,
fueling fears of a virus resurgence. As a result, significant uncertainty
remains about the duration of the pandemic as well as the timing and extent of
the economic recovery. We continue to evaluate protocols and processes in place
to execute our business continuity plans and help promote the health and safety
of our employees and customers, including restricting employee travel,
encouraging employees to work from home where possible, continuing drive-thru
only service at our bank location with specific needs facilitated by
appointment, and implementing social distancing guidelines within our offices.
Many of these measures remain in place due to the continued prevalence of the
virus.



While all industries could experience adverse effects related to the COVID-19
pandemic, our loan portfolio includes customers in industries such as dental,
travel, hotel, leisure, retail, convenience store, restaurant and entertainment,
which industries have all been adversely impacted by the COVID-19 pandemic.
While the Company has not experienced any material losses related to such
industries in the portfolio, management recognizes that these industries may
take longer to recover and continues to monitor these customers closely. The
commercial credit area continues to communicate regularly with the borrowers and
monitors their activity closely. This information is used to analyze the
performance of these loans and to anticipate any potential issues that these
loans may develop so that risk ratings may be appropriately adjusted in a timely
manner. See the section captioned "Allowance for Loan Losses" included elsewhere
in this discussion for further analysis of the provision for loan losses.



Actions were taken by the federal government, the President, and the Federal
Reserve to mitigate the economic effects of COVID-19. On March 27, 2020, the
CARES Act was signed into law. It contains substantial tax and spending
provisions intended to address the impact of the COVID-19 pandemic. The CARES
Act included the PPP, a program administered by the SBA, designed to aid small-
and medium-sized businesses, sole proprietors and other self-employed persons
for payroll and certain other permitted expenses, through federally guaranteed
loans distributed through banks. On December 27, 2020, the Coronavirus Response
and Relief Supplemental Appropriations Act ("Coronavirus Relief Act") was signed
into law and extended the authority of lenders to make PPP loans through March
31, 2021. The PPP application period was later extended to the earlier of May
31, 2021, or such date when all PPP funds are exhausted. As an SBA Preferred
Lender, we originated 922 PPP loans totaling $98.3 million during 2020 and 694
PPP loans totaling $66.2 million during 2021, to both existing and new
customers. As of December 31, 2021, the Bank had outstanding PPP loans totaling
$34.1 million in its loan portfolio.



As a result of the COVID-19 pandemic, we also implemented a short-term loan
modification program to provide temporary payment relief to certain of our
borrowers by deferring loan payments. For borrowers requiring a longer-term
modification following the short-term loan modification program, we worked with
eligible borrowers to modify such loans under Section 4013 of the CARES Act. As
of December 31, 2021, there were two loans in the COVID-19 related deferment
with an aggregate balance of approximately $679,000, down from 11 loans with an
aggregate balance of approximately $4.3 million as of December 31, 2020.



We believe our response to the pandemic has allowed and continues to allow us to
appropriately support our associates and clients and their communities. Despite
the overall improvements in the economic and public health outlooks in the
United States during 2021, the financial markets remain reactionary, in part due
to the lingering effects of the pandemic, and the emergence of the Delta variant
during the second quarter and the Omicron variant during the fourth quarter. The
result of this is continuing uncertainty about the future impact of the pandemic
on our business, results of operations and financial condition.



Significant Accounting Policies and Estimates

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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.



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.



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Estimated 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. Given the level of economic disruption and
uncertainty within the State of Texas and the nation as a whole, arising from
the COVID-19 pandemic and volatility, the Company qualitatively adjusted the
analysis for the allowance for loan losses for these and other risk factors as
discussed in the section captioned "Risk Factors" of this Form 10-K. Based on an
analysis performed by management at December 31, 2020, 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



On July 1, 2021, we, through our wholly-owned subsidiary T Bancshares, acquired
Integra through the merger of Integra with and into T Bancshares, with T
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 across the United States principally by
purchasing their accounts receivable at a discount and then collecting such
receivables at face value. We believe that the addition of this small business
lending vertical will provide the Bank with additional breadth in its lending
platform and enable the Bank to continue to prudently grow its balance sheet and
generate relatively attractive returns on its assets.



Pursuant to the terms of and subject to the conditions set forth in the
Agreement and Plan of Merger by and between the Company and Integra (the "Merger
Agreement"), the transaction provided for the payment to the members of Integra
of (a) an amount of cash equal to (i) approximately $2.5 million, subject to
certain adjustments described in the Merger Agreement which totaled $726,721,
and (b) 453,203 shares of the Company's common stock. In addition, the Company
incurred $115,726 related to the acquisition of Integra, which is reported in
non-interest expense on our consolidated statements of income.



Performance Summary



Net income available to common shareholders totaled $15.5 million, or $2.21 per
diluted common share for the year ended December 31, 2021, compared to $9.4
million, or $1.42 per diluted common share for the year ended December 31, 2020,
an increase of $6.1 million or 64.9%. The increase in net income available to
common shareholders for the year ended December 31, 2021 was the result of a
$10.1 million increase in net interest income and a $2.9 million increase in
non-interest income, offset by a $4.6 million increase in non-interest expense,
a $505,000 increase in the provision for loan losses and a $1.8 million increase
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.



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For the year ended December 31, 2021, annual return on average assets was 3.06%,
compared to 2.31% for the prior year, and annual return on average tangible
common equity was 45.68%, compared to 37.68% for the prior year. The higher
returns on average assets and average tangible common equity for the year ended
December 31, 2021 was due to increases in income, primarily from increases in
net interest income related to acquisition of factored receivables, increases in
SBA loans, including PPP loans, and non-interest income, partially offset by
increases in non-interest expense.



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, 2021       December 31, 2020
Income available to common shareholders             $            15,482     $             9,373

Average shareholders' equity                        $            68,156     $            53,938
Less: average goodwill                                           16,129                  10,729
Less: average core deposit intangible                               885                   1,086
Less: average preferred stock                                    17,250                  17,250
Average tangible common equity                      $            33,892     $            24,873
Return on average tangible common equity                          45.68 %                 37.68 %




Total assets grew by $71.6 million, or 13.9%, to $585.0 million as of December
31, 2021, from $513.4 million as of December 31, 2020. This increase primarily
included the addition of $38.7 million of factored receivables and $10.7 million
for goodwill, both resulting from the acquisition of Integra on July 1, 2021,
along with increases of $27.2 million for non-PPP SBA loans, $8.1 million for
non-SBA loans, $18.9 million for loans held for sale, $13.9 million for
investments, and $1.0 million for other real estate owned. The increases were
partly offset by decreases of $48.4 million for PPP loans.



Shareholders' equity increased $24.8 million, or 41.3%, to $84.8 million as of
December 31, 2021, from $60.0 million as of December 31, 2020. See analysis of
shareholders' equity in the section captioned "Capital Resources and Regulatory
Capital Requirements" included elsewhere in this discussion.



Results of Operations


The details of the evolution of the different components of net income are discussed
below.



Net Interest Income



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



The Federal 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 of
the United States government, its agencies and various other governmental
regulatory authorities. The Federal Reserve lowered the target range for federal
funds two times in 2020, and none during 2021. During 2020, the effective
federal funds rate decreased 150 basis points during March 2020 (50 basis points
on March 3, 2020 and 100 basis points on March 15, 2020) to zero to 0.25%, where
it remained through December 31, 2021.



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The following tables 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.



                                                                     2021 vs 2020
                                                         Increase (Decrease) Due to Change in
                                                                        Average
(In thousands)                                         Rate              Volume             Total

Interest-bearing deposits and federal funds sold $ (43 ) $

    (10 )     $       (53 )
Securities                                                 (134 )              250               116
Loans, net of unearned discount (1)                       3,840              4,603             8,443
Total earning assets                                      3,663              4,843             8,506

Savings and interest-bearing demand                          (6 )               10                 4
Money market deposit accounts                              (154 )               81               (73 )
Time deposits                                            (1,532 )             (140 )          (1,672 )
FHLB and other borrowings                                   (10 )              109                99
Subordinated notes                                            -                  -                 -
Total interest-bearing liabilities                       (1,702 )               60            (1,642 )

Changes in net interest income                     $      5,365       $      4,783       $    10,148



(1) Includes outstanding loans.




Net interest income increased $10.1 million, or 65.0% to $25.8 million for year
ended December 31, 2021. Net interest margin for the year ended December 31,
2021 and 2020 was 4.96% and 3.50%, respectively, an increase of 146 basis
points. The increase in net interest income and margin was primarily due to the
increase in interest-earning assets attributable to the factored receivables
acquired in the Integra acquisition, and the timing of recognition of
PPP-related SBA fees. Other changes included a decrease in average rates paid on
interest-bearing deposits and decrease in average volume of interest-bearing
deposits which were replaced by non-interest-bearing deposits and Paycheck
Protection Program Liquidity Facility ("PPPLF") borrowings.



The average volume of interest-earning assets increased $72.8 million, or 16.3%,
from $446.4 million for the year ended December 31, 2020 to $519.2 million for
the year ended December 31, 2021. The average volume of loans increased $72.2
million, or 19.2%, from $376.1 million for the year ended December 31, 2020 to
$448.3 million for the year ended December 31, 2021. The increase in the average
volume of loans included increases of $41.4 million for organic loan growth,
$12.6 million increase of PPP loans, and also the acquired portfolio at July 1,
2021 of $18.3 million for factored receivables purchased. The average yield for
loans increased 103 basis points from 5.30% for the year ended December 31, 2020
to 6.33% for the year ended December 31, 2021. In April 2020, we began
originating loans to qualified small businesses under the PPP administered by
the SBA under the provisions of the CARES Act. In 2020, we funded $98.3 million
of PPP loans, all during the second quarter of 2020. As of December 31, 2021,
the entire amount of PPP loans originated in 2020 have been forgiven by the SBA
and were paid off or repaid by the borrower. During the year ended December 31,
2021, we funded an additional $66.2 million of PPP loans, of which $32.1 million
have been forgiven by the SBA and were paid off or repaid by the borrower. Total
outstanding PPP loans were $34.1 million as of December 31, 2021. During the
year ended December 31, 2021, we recognized $4.8 million in PPP loan 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 an increase of $3.0 million from the same period in the prior year. As a
result of the inclusion of these net fees in interest income, the average yield
on PPP loans was 7.3% during the year ended December 31, 2021. During the year
ended December 31, 2021, we recognized $4.7 million of interest income related
to the factored receivables purchased, with an average yield of 25.5%. Of this
amount, $492,000 was related to the discount applicable to the fair value of the
factored receivables purchased. Without this discount, the average yield was
22.8%.



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The average volume of interest-bearing liabilities increased $42.0 million, or
11.6%, from $362.1 million for the year ended December 31, 2020 to $404.1
million for the year ended December 31, 2021. The average volume of
interest-bearing deposits increased $12.4 million, or 4.0%, from $306.7 million
for the year ended December 31, 2020 to $319.1 million for the year ended
December 31, 2021, and the average interest rate paid on interest-bearing
deposits decreased 60 basis points from 1.38% for the year ended December 31,
2020 to 0.78% for the year ended December 31, 2021. The average volume of
non-interest bearing deposits increased $25.1 million, or 49.0%, from $51.2
million for the year ended December 31, 2020 to $76.3 million for the year ended
December 31, 2021. The average cost of deposits during the year ended December
31, 2021 was impacted by decreases in interest rates paid on money market and
time deposits as a result of the aforementioned decrease in market interest
rates. The average volume of FHLB and other borrowings increased $29.6 million,
or 68.2%, from $43.4 million for the year ended December 31, 2020 to $73.0
million for the year ended December 31, 2021, consisting mostly of funding from
the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. The average
cost of FHLB and other borrowings decreased 2 basis points from 0.39% for the
year ended December 31, 2020 to 0.37% for the year ended December 31, 2021.



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 ended December 31, 2021 and 2020.



                                                               Year Ended December 31,
                                                   2021                                      2020
(In thousands, except               Average                     Average       Average                     Average
percentages)                        Balance      Interest        Yield        Balance      Interest        Yield
Assets
Interest-bearing deposits and
federal funds sold                 $  38,634     $      50          0.13 %   $  46,395     $     103          0.22 %
Securities                            32,292           955          2.96        23,868           839          3.52
Loans, net of unearned discount
(1)                                  448,284        28,379          6.33       376,088        19,936          5.30
Total earning assets                 519,210        29,384          5.66       446,351        20,878          4.68
Cash and other assets                 41,652                                    29,395
Allowance for loan losses             (3,344 )                                  (2,285 )
Total assets                       $ 557,518                                 $ 473,461
Liabilities and Shareholders'
Equity
Savings and interest-bearing
demand                             $  13,907            35          0.25 %   $   9,977            31          0.31 %
Money market deposit accounts        118,577           432          0.36        96,582           505          0.52
Time deposits                        186,647         2,015          1.08       200,159         3,687          1.84
Total interest-bearing deposits      319,131         2,482          0.78       306,718         4,223          1.38
FHLB and other borrowings             73,015           270          0.37        43,411           171          0.39
Subordinated notes                    12,000           875          7.29        12,000           875          7.29
Total interest-bearing
liabilities                          404,146         3,627          0.90       362,129         5,269          1.46
Non-interest-bearing deposits         76,328                                    51,168
Other liabilities                      8,888                                     6,226
Total liabilities                    489,362                                   419,523
Shareholders' equity                  68,156                                    53,938
Total liabilities and
shareholders' equity               $ 557,518                                 $ 473,461

Net interest income                              $  25,757                                 $  15,609
Net interest spread                                                 4,76 %                                    3.22 %
Net interest margin                                                 4.96 %                                    3.50 %



(1) Includes outstanding loans.


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.



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For the years ended December 31, 2021 and 2020, the provision for loan losses
totaled $2.2 million and $1.7 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)                      2021             2020
Trust income                    $      6,252       $   5,118
Gain on sale of loans                    101             722
Advisory income                       13,472          14,054
Brokerage income                       9,644           7,676
Service fees and other income          6,790           5,832
Rental income                            365             319
Total                           $     36,624       $  33,721




Total non-interest income for the year ended December 31, 2021 increased $2.9
million, or 8.6%, as compared to the year ended December 31, 2020. Changes in
the various components of non-interest income are discussed below.



Trust Income. Trust income is earned for trust services on the value of managed
and non-managed assets held in custody. 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, 2021 increased $1.1 million, or 22.2%,
compared to the year ended December 31, 2020. The fee income increased between
the two years due to an increase in the average market value of the trust assets
over the year ended December 31, 2020, due to both asset inflows and increases
in asset values.



Gain on sale of loans. 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 $621,000, or 86.0%,
for the year ended December 31, 2021, compared to the year ended December 31,
2020. A strategic decision on the part of management was made during 2017 to
retain more of the guaranteed portion of SBA 7(a) and USDA loans originated to
increase interest income over time. We have followed this strategy, and the
guaranteed portion of fewer SBA and USDA loans were sold after such date, though
we will likely continue to sell the guaranteed portion of certain loans from
time to time. During the year ended December 31, 2020, there were loan sales
resulting in $722,000 of gain on sale of loans. For the year ended December 31,
2021, sales of loans decreased, generating only $101,000.



Advisory income. Advisory fees are typically based on a percentage of the
underlying average asset values for a given period, where each percentage point
represents 100 basis points. These revenues are of a recurring nature but are
directly affected by increases and decreases in the values of the underlying
assets. 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, 2021, advisory
income decreased $582,000, or 4.1%, compared to the year ended December 31,
2020. This decrease during the year ended December 31, 2021 was primarily due to
a decrease in performance based advisory fees at Sanders Morris totaling $3.5
million, which was partially offset by an increase in advisory fees based on a
percentage of the underlying assets at Tectonic Advisors and Sanders Morris
totaling $2.9 million.



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, 2021 increased $2.0
million, or 25.6%, compared to the year ended December 31, 2020. This increase
is primarily due to a recovery in private placement and syndicated offering
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 of December 31, 2021 and 2020, and the inflows
and outflows and market appreciation during the years then ended. Our brokerage
and advisory assets experienced an increase of approximately $1.1 billion, or
24.0%, and $479.2 million, or 11.8%, during the years ended December 31, 2021
and 2020, respectively, related to positive net flows and market appreciation.



(In thousands)             Tectonic Advisors       Sanders Morris         Total
As of January 1, 2020     $         2,057,570     $      1,987,648     $ 4,045,2181
Client inflows                        491,411              951,841        1,443,252
Client outflows                      (430,773 )           (866,166 )     (1,296,939 )
Net flows                              60,638               85,675          146,313
Market appreciation                   215,829              117,016          332,844
As of December 31, 2020             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




Service fees and other income. Service fees includes fees for deposit-related
services, and third party administrative fees related to the acquisition of
Nolan. Service fees and other income for the year ended December 31, 2021
increased $958,000, or 16.4%, compared to the year ended December 31, 2020,
which was primarily due to an increase in the administrative fees recorded for
services provided by Nolan of $755,000, increase in factoring service fees from
the Bank's Integra factoring division of $249,000, an increase in income
distributions from an interest in securities not readily marketable carried at
cost basis totaling $183,000, an increase in consulting fees earned by Sanders
Morris' Dallas branch of $76,000, as well as individually immaterial increases
in other bank service fees totaling $28,000. These increases were offset by a
decrease in net loan servicing fees of $132,000, primarily due to reversal of
the servicing asset valuation allowance during the year ended December 31, 2020,
a decrease in other income of approximately $71,000 related to a non-recurring
referral fee for a loan conversion during 2020, and other individually
immaterial decreases in other income and gains and losses on marketable
securities at Sanders Morris totaling $38,000.



Rental income. The Company receives monthly rental income from tenants leasing
space in the Bank building. Rental income for the year ended December 31, 2021
increased $46,000, or 14.4%, compared to the year ended December 31, 2020 due to
the granting of rent abatements related to the COVID-19 pandemic during 2020,
and an increase in occupancy in 2021 compared to 2020.



Non-Interest Expense


The components of non-interest expense were as follows:



                                        Year Ended December 31,
(In thousands)                            2021             2020

Salaries and benefits $24,947 $22,231
Occupancy and equipment

                      1,837           1,919
Trust expenses                               2,416           1,994
Brokerage and advisory direct costs          2,051           2,048
Professional fees                            1,539           1,345
Data processing                                964             774
Other expense                                4,576           3,388
Total                                 $     38,330       $  33,699




Total non-interest expense for the year ended December 31, 2021 increased $4.6
million, or 13.7%, compared to the year ended December 31, 2020. Changes in the
various components of non-interest income are discussed below.



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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 $2.7 million, or 12.2%,
from $22.2 million for the year ended December 31, 2020 to $24.9 million for the
year ended December 31, 2021. In our other financial services segment, salaries
and employee benefits decreased $133,000. The decrease was primarily from a
decrease in commissions paid at Sanders Morris primarily from a sharp decrease
in performance-based advisory fees discussed above under advisory income within
non-interest income accounted of $2.7 million, partially offset by increases in
incentive bonuses at Sanders Morris related to traditional brokerage, private
placement, and syndicated offerings activity of $1.1 million and an increase in
salaries, payroll taxes, and other benefits of $126,000 at Tectonic Advisors and
$472,000 at Sanders Morris. Salaries, bonuses and payroll taxes at the Bank's
Nolan division increased $599,000 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 $63,000. Salaries and employee benefits in our banking segment
increased $2.6 million, primarily for annual merit increases, increases in staff
including the addition of Integra, and incentive bonuses. Stock-based
compensation increased $179,000, and salaries, taxes and other benefits
increased $118,000. Health insurance related benefits overall increased
approximately $232,000, primarily due to increases in headcount, including the
addition of the Bank's Integra factoring division. Workers' compensation
coverage increased by $11,000.



Occupancy and equipment expense. Occupancy and equipment expense includes
building, furniture, fixtures and equipment depreciation and maintenance costs.
Occupancy and equipment expense decreased $82,000, or 4.2%, from $1.9 million
for the year ended December 31, 2020 to $1.8 million for the year ended December
31, 2021. The decrease is primarily due to a decrease occupancy and equipment
expense in our other financial services division of $197,000, led by a decrease
in rental and common area maintenance expense of $147,000 driven by lower costs
related to the COVID-19 pandemic, and depreciation expense of $100,000 from
certain fixed assets and software costs that reached full
depreciation/amortization early in the second quarter 2020. This was partially
offset by increases in parking, repairs and maintenance, and facilities expenses
totaling $50,000. Rent expense in our banking segment increased $115,000,
primarily from the addition of the Bank's Integra factoring division, where we
incurred $82,000 in rent expense and an additional $16,000 in facilities and
depreciation expense, and an increase in facilities and depreciation expense in
our Bank facility of $17,000.



Trust expenses. Trust expenses are incurred in our other financial services
segment, and include advisory fees paid on the common trust funds managed by the
Company based on the value of the assets held in custody. 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 increased by $422,000 for the year ended
December 31, 2021 as compared to the year ended December 31, 2020 based on
increases in asset values of the Bank's common trust funds from both net cash
inflows and increases in asset values.



Brokerage and advisory direct costs. Brokerage and advisory direct costs
increased $3,000, or less than 1.0%, and were approximately $2.0 million for
each the year ended December 31, 2020 and December 31, 2021. 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 at Tectonic
Advisors and HWG increased $43,000 and $10,000, respectively, related to
increases in information services and other service fees, which were offset by
decreases in referral fees. The increase was offset by a decrease in brokerage
and advisory direct costs at Sanders Morris of $50,000, related to a decrease in
clearing firm service fees and fees on advisory assets of $71,000, offset by an
increase in service fees and referral fees of $21,000.



Professional fees. Professional fees, which include legal, consulting, audit and
tax fees, increased $194,000, or 14.4%, from $1.3 million for the year ended
December 31, 2020 to $1.5 million for the year ended December 31, 2021. The
increase included an increase in legal fees of $103,000, which was made up of an
increase of $107,000 and $5,000 in our banking and other financial services
segments, respectively, partly offset by a decrease of $9,000 in our Holdco
segment. These increases were primarily related to costs incurred in 2021
related to the acquisition of Integra, and other legal and regulatory matters at
Tectonic Advisors. Audit and tax consulting expense decreased $28,000, due
primarily to the leveling off of accounting and tax fees following our 2019
initial registration, which increased expenses into 2020. Professional
consulting fees expense increased $119,000, which includes $20,000 within the
banking segment for the Integra acquisition, and an increase of $65,000 at our
Holdco segment related to the acquisition of Integra and increases in general
consulting expenses, which were partially offset by a decrease in professional
fees of $47,000 in our other financial services segment, where fees at the bank
related to consulting on our participant direction initiative decreased by
$185,000, which was offset by increases in consulting expense related to
initiatives at the bank's Nolan Company division of $133,000, and other
individual immaterial increases totaling $5,000.



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Data processing. Data processing includes costs related to the Company's
operating systems. Data processing expense increased $190,000, or 24.5%, from
$774,000 for the year ended December 31, 2020, to $964,000 for the year ended
December 31, 2021. The increase was due to increases in data processing expense
within the Banking segment of $145,000, which included costs at Integra of
$47,000 and banking core system conversion costs at the Bank's Nolan division of
$41,000, the Bank's trust department of $4,000, and within the Bank's deposit
and lending divisions of $53,000.



Other expense. Other expenses include costs for insurance, Federal Deposit
Insurance Corporation ("FDIC") and Office 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 expense increased $1.2 million, or 35.1%, from $3.4 million for
the year ended December 31, 2020 to $4.6 million for the year ended December 31,
2021. The increase includes increases in software costs and licensing primarily
at the Bank, including its Nolan and banking divisions, of $415,000, advertising
and marketing expense across all segments of the Company of $330,000, including
the initiative at Tectonic Advisors where we are investing in marketing costs
related to assets under management associated with Cain Watters above $2.5
billion, increases in loan and other real estate operating costs at the Bank of
$158,000, increases in bank fees to correspondent banks incurred within the
Bank's Integra division of $97,000, increases in business insurance coverage,
including directors and officers coverage, of $89,000, increases in travel,
meals and entertainment expense of $81,000, and other individually immaterial
increases.



Income Taxes



The income tax expense for the years ended December 31, 2021 and 2020 was $4.8
million and $3.0 million, respectively. The effective income tax rate was 22.0%
and 21.5% for the years ended December 31, 2021 and 2020, respectively.



Segment Reporting


We have three operating segments: Banking, Other financial services and HoldCo.
Our main operating segments are Banking and Other financial services.

Our Banking business segment includes both corporate banking and personal banking
services. Commercial banking services are provided primarily to small and
medium-sized businesses and their employees, which includes a wide range of
credit and cash management products. Consumer banking services include loans
and deposit services.



Our Other Financial Services segment includes Tectonic 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 operational sector, HoldCoincludes the immediate parent of the Bank and
the related subordinated debts, as well as the operations of the financial holding company
parent company of the entire group. Our main source of
revenues are dividends from our subsidiaries.

The following table presents the key indicators related to our segments:


                                                           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




                                                           Year Ended December 31, 2020
                                                             Other
                                                           Financial
(In thousands)                              Banking        Services         HoldCo        Consolidated
Revenue(1)                                 $  17,976     $      32,207     $    (853 )   $       49,330
Net income (loss) before taxes             $   8,032     $       7,808     $  (1,918 )   $       13,922



(1) Net interest income plus non-interest income

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Banking



Income before taxes for the year ended December 31, 2021 increased $5.6 million,
or 69.4%, compared to the year ended December 31, 2020. The increase was
primarily the result of a $10.2 million increase in net interest income, partly
offset by a $501,000 decrease in non-interest income, a $505,000 increase in the
provision for loan losses and a $3.6 million increase in non-interest expense.



Net interest income for the year ended December 31, 2021 increased $10.2
million, or 61.7%, compared to the year ended December 31, 2020, primarily due
to the increase in interest-earning assets attributable to the factored
receivables acquired in the Integra acquisition, and the timing of recognition
of PPP-related SBA fees. Other changes included a decrease in average rates paid
on interest-bearing deposits and decrease in average volume of interest-bearing
deposits which were replaced by non-interest-bearing deposits and Paycheck
Protection Program Liquidity Facility ("PPPLF") borrowings. 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 ended December 31, 2021 increased
$505,000, or 29.5%, to $2.2 million, compared to $1.6 million for the year ended
December 31, 2020. See "Allowance for Loan Losses" included elsewhere in this
discussion.



Non-interest income for the year ended December 31, 2021 decreased $501,000, or
33.6%, compared to the year ended December 31, 2020, which was primarily due to
a $621,000 decrease in gain on sale of loans and a $132,000 decrease in net loan
servicing income (which included a $199,000 credit allowance provision to the
valuation of servicing assets recorded in the prior year, a $67,000 decrease in
loan servicing fee, partly offset by a $134,000 decrease in servicing asset
amortization) and a $71,000 decrease related to a non-recurring referral fee for
a loan conversion during 2020. The decreases were partly offset by the recording
of $249,000 for factoring servicing fees related to the Integra acquisition
during 2021, a $46,000 increase in rental income and a $29,000 increase in other
servicing fee income. 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 ended December 31, 2021 increased $3.6
million, or 43.5%, compared to the year ended December 31, 2020. The increase
was primarily related to a $2.6 million increase in salaries and employee
benefits for annual merit increases, increases in staff including the addition
of Integra, and incentive bonuses, a $115,000 increase in occupancy and
equipment expense, a $163,000 increase in professional fees (includes $105,000
legal fees for the Integra acquisition), a $145,000 increase in data processing
(related to banking core system conversion costs and expenses for the operations
of Integra), and a $569,000 increase in other expenses, primarily $266,000 for
software development and $225,000 for operations of Integra, along with 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 ended December 31, 2021 increased $2.7 million,
or 35.1%, compared to the year ended December 31, 2020. The increase was
primarily the result of a $3.2 million increase in non-interest income partly
offset by a $482,000 increase in non-interest expense.



Non-interest income for the year ended December 31, 2021 increased $3.2 million,
or 10.0%, compared to the year ended December 31, 2020. The increase was due to
increases in brokerage income of $2.0 million, primarily from increases in
private placement and syndicated offering activity at Sanders Morris, trust
income of $1.1 million, resulting from increases in assets under management, and
service fees of $701,000, from increases in the Bank's Nolan division. These
increases were offset by a decrease in advisory fees of $582,000, which was the
result of a decrease in performance based advisory fees of $3.5 million at
Sanders Morris, which was partially offset by an increase in advisory fees based
on a percentage of the underlying assets at Tectonic Advisors and Sanders Morris
totaling $2.9 million. See the analysis of non-interest income included in the
section captioned "Non-Interest Income" above in this discussion.



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Non-interest expense for the year ended December 31, 2021 increased $482,000, or
2.0%, compared to the year ended December 31, 2020. The increase was primarily
from an increase in trust expense of $422,000 due to an increase in the Bank's
advisory assets under management on which this expense is based, and an increase
in other expenses of $368,000, driven by increases in software licenses of
$149,000 related to technology initiatives across the Company, an increase in
other operating costs at the Bank's trust department and its Nolan division
totaling $86,000, an increase in business travel, meals and entertainment of
$69,000, increases in marketing and advertising of $76,000, and an increase in
employee recruitment expense of $61,000, which were offset by a decrease in
computer services of $28,000 and in insurance, errors and omissions at Sanders
Morris totaling $80,000, and other individually immaterial fluctuations netting
to an increase of $35,000. In addition, data processing expense increased
$45,000, and brokerage and advisory direct costs increased $3,000. These
increases were partially offset by decreases in occupancy and equipment of
$197,000, related to decreases in depreciation, and in salaries and employee
benefits of $152,000, related to a decrease in commissions and bonus expense at
Sanders Morris related to the decrease in performance-based advisory fees on
which bonuses were determined, partially offset by increases elsewhere in our
other financial services segment related to merit increases and bonuses and
staff additions, and an immaterial decrease of $7,000 in our professional fees.
See also the analysis of non-interest income included in the section captioned
"Non-Interest Expense" included elsewhere in this discussion.



HoldCo



The net loss before taxes at the HoldCo operating segment increased by $397,000
during the year ended December 31, 2021 compared to the year ended December 31,
2020. The increase is the result of an increase in salaries and employee
benefits of $275,000, which includes an increase in stock-based compensation of
$155,000, an increase in other expenses of $251,000, which includes increases in
computer expense of $43,000, directors and officers coverage of $61,000, and
marketing and advertising of $161,000, partly offset by a net decrease of
$14,000 of various other expenses, an increase in professional fees of $38,000,
and an increase in interest expense of $16,000. The increase in expenses were
partly offset by an increase in service fees and other income of $183,000.



Financial Condition



Investment Securities



The primary purpose of the Company's investment portfolio is to provide a source
of earnings for liquidity management purposes, to provide collateral to pledge
against borrowings, and to control interest rate risk. In managing the
portfolio, the Company seeks to attain the objectives of safety of principal,
liquidity, diversification, and maximized return on investment. 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 of December 31, 2021 and 2020, securities available for sale consisted of
U.S. government agency securities and mortgage-backed securities guaranteed by
U.S. government agencies. Securities held to maturity consist of Property
Assessed Clean Energy ("PACE") and Public Improvement District/Tax Increment
Reinvestment Zone ("PID/TIRZ") investments. These investment contracts or bonds
located in Texas, California and Florida, originate under a contractual
obligation between the property owners, the local county or city administration,
and a third-party administrator and sponsor. PACE assessments are created to
fund the purchase and installation of energy saving improvements to the property
such as solar panels. PID/TIRZ assessments are used to pay for the development
costs of a residential subdivision. Generally, as a property assessment, the
total assessment is repaid in installments over a period of 5 to 32 years by the
then current property owner(s). Each installment is collected by the County or
City Tax Collector where the property is located. The assessments are an
obligation of the property.



Restricted securities consisted of FRB stock, having an amortized cost and fair
value of $1.2 million as of December 31, 2021 and 2020, and FHLB stock, having
an amortized cost and fair value of $1.3 million as of December 31, 2021 and
2020.


Securities that are not readily marketable consist of an income interest in a private company
investment.



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The following table presents the amortized cost and the fair values ​​of the securities
portfolio on the dates indicated:


                                               As of December 31, 2021             As of December 31, 2020
                                            Amortized          Estimated        Amortized          Estimated
(In thousands)                                 Cost            Fair Value          Cost            Fair Value
Securities available for sale:
U.S. government agencies                   $     15,847       $     15,402     $     14,936       $     14,949
Mortgage-backed securities                        1,724              1,754            2,373              2,447

Total securities available for sale $17,571 $17,156

$17,309 $17,396

Securities held to maturity:
Property assessed clean energy             $      2,731       $      2,731     $      5,776       $      5,776
Public Improvement District & TIRZ               16,942             16,942                -                  -

Total securities held to maturity $19,673 $19,673

   $      5,776       $      5,776

Securities, restricted:
Other                                      $      2,432       $      2,432     $      2,431       $      2,431

Securities that are difficult to trade $100 $100

   $        100       $        100




The following table summarizes the maturity distribution schedule with
corresponding weighted-average yields of securities available for sale and
securities held to maturity as of December 31, 2021. 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. government
agencies             $      -            - %   $  2,016       0.55 %   $  

10,157 1.07% $3,674 0.83% $15,847 0.95%
backed by a mortgage
securities

                  -            -          988       3.14          

– – 736 2.32 1,724 2.79
Total

                $      -            - %   $  3,004       1.40 %   $   10,157       1.07 %   $  4,410       1.08 %   $ 17,571       1.13 %
Securities held to
maturity:
Property assessed
clean energy         $      -            - %   $      -          - %   $    

– – % $2,731 7.32% $2,731 7.32%
Public improvement
District & TIRZ

             -            -        2,707       4.12              -          -       14,235       6.02       16,942       5.71
Total                $      -            - %   $  2,707       4.12 %   $        -          - %   $ 16,966       6.23 %   $ 19,673       5.94 %
Securities,
restricted:
Other                $      -            - %   $      -          - %   $        -          - %   $      -          - %   $  2,432          - %
Securities not
readily marketable   $      -            - %   $      -          - %   $        -          - %   $      -          - %   $    100          - %




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Loan Portfolio Composition



Total loans excluding allowance for loan losses, increased $28.2 million, or
7.0%, to $428.7 million at December 31, 2021, compared to $400.5 million at
December 31, 2020. The increase includes $29.8 million for non-PPP SBA loans,
$8.1 million for non-SBA loans and $38.7 million for factored receivables
related to the Integra acquisition in July of 2021. The increases were partly
offset by $48.4 million decrease in the SBA PPP loans. Excluding the decrease of
PPP loans, total loans would have otherwise increased $76.6 million, or 24.1%,
from December 31, 2020. SBA loans comprise the largest group of loans in our
portfolio totaling $233.9 million, or 54.5% (50.6% excluding PPP) of the total
loans at December 31, 2021, compared to $252.4 million, or 63.0% (53.4%
excluding PPP) at December 31, 2020. The SBA PPP loans decreased $48.4 million,
or 58.7%, from $82.5 million at December 31, 2020 to $34.1 million at December
31, 2021. Commercial and industrial loans totaled $83.3 million, or 19.4% (21.1%
excluding PPP) of the total loans at December 31, 2021, compared to $79.9
million, or 19.9%, at December 31, 2020 (25.1% excluding PPP). Commercial and
construction real estate loans totaled $65.6 million, or 15.3% (16.6% excluding
PPP), of the total loans at December 31, 2021, compared to $52.9 million, or
13.2% (16.6% excluding PPP), at December 31, 2020.



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



(In thousands)                                2021          2020          2019          2018          2017
Loans held for investment at December 31,
Commercial and industrial                   $  83,348     $  79,864     $  85,476     $  88,915     $  86,552
Consumer installment                            1,099        10,259         3,409         3,636         4,483
Real estate - residential                       5,452         4,319         5,232         7,488         6,826
Real estate - commercial                       62,966        44,484        46,981        35,221        19,203
Real estate - construction and land             2,585         8,396         7,865         4,653         8,477
SBA 7(a) guaranteed                           145,983       164,687        69,963        33,884        11,826
SBA 7(a) unguaranteed                          52,524        52,179        47,132        44,326        41,373
SBA 504                                        35,348        35,553        22,591        13,400        17,109
USDA                                              806           801         2,430         3,367         3,415
Factored receivables                           38,636             -             -             -             -
Other                                               -             -             -            17             2
Total loans                                 $ 428,747     $ 400,542     $ 291,079     $ 234,907     $ 199,266




The Company initially records the guaranteed portion of the SBA 7(a) and USDA
loans as held for sale at the lower of cost or fair value. Loans held for sale
totaled $33.8 million and $14.9 million at December 31, 2021 and 2020,
respectively. During the year ended December 31, 2021, the Company elected to
reclassify $42.8 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 a
Certified Development Company ("CDC").



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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 services and
liquidation authority of 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 types of loans, the Company establishes guidelines for its underwriting
criteria, including collateral coverage ratios, overall debt service coverage
ratios and maximum loan amortization or maturity periods.



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 of December 31, 2021, our
loan portfolio included $67.3 million of loans, approximately 15.7% (17.1%
excluding PPP) of our total funded loans, to the dental industry, compared to
$67.2 million of loans, approximately 16.8% (21.1% excluding PPP), as of
December 31, 2020. We believe that these loans are to credit worthy borrowers
and are diversified geographically.



Paycheck Protection Program



In April 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. Terms of the
PPP loans include the following (i) maximum amount limited to the lesser of $10
million or an amount calculated using a payroll-based formula, (ii) maximum loan
term of two or five years, depending on the date of origination, (iii) interest
rate of 1.00%, (iv) no collateral or personal guarantees are required, (v) no
payments are required for six months following the loan disbursement date and
(vi) loan forgiveness up to the full principal amount of the loan and any
accrued interest, subject to certain requirements including that no more than
40% of the loan forgiveness amount may be attributable to non-payroll costs. In
return for processing and booking the loan, the SBA will pay the lender a
processing fee tiered by the size of the loan (5% for loans of not more than
$350 thousand; 3% for loans more than $350 thousand and less than $2 million;
and 1% for loans of at least $2 million). During the year ended December 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 of December 31, 2021. The
Consolidated Appropriations Act, 2021, which was signed into law on December 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 to March 31, 2021. The PPP
application period was later extended to the earlier of May 31, 2021, or such
date when all PPP funds are exhausted. During the year ended December 31, 2021,
we originated $66.2 million of PPP loans. As of December 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 of December 31, 2021.



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We also participated in the PPPLF which, through June 30, 2021, extended loans
to banks who are loaning money to small businesses under the PPP. The total
amount borrowed under the PPPLF as of December 31, 2021 was $34.5 million and is
non-recourse and secured by an equal amount of the PPP loans we originated. The
maturity date of a borrowing under the PPPLF is equal to the maturity date of
the PPP loan pledged to secure the borrowing and would be accelerated (i) if the
underlying PPP loan goes into default and is sold to the SBA to realize on the
SBA guarantee or (ii) to the extent that any loan forgiveness reimbursement is
received from the SBA. Borrowings under the PPPLF will bear interest at a rate
of 0.35%.



Federal bank regulatory agencies have issued an interim final rule that permits
banks to neutralize the regulatory capital effects of participating in the PPP
and, if applicable, the PPPLF. Specifically, all PPP loans have a zero percent
risk weight under applicable risk-based capital rules. Additionally, a bank may
exclude all PPP loans pledged as collateral to the PPPLF from its average total
consolidated assets for the purposes of calculating its leverage ratio, while
PPP loans that are not pledged as collateral to the PPPLF will be included.



As of December 31, 2021, 52.9% of the loan portfolio, or $226.6 million, matured
or re-priced within one year or less. The following table presents the
contractual maturity ranges for loans outstanding as of December 31, 2021, 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 

Breakdown of loan portfolio

                                                       Over One         Over Five           Over
                                       One Year      Year Through     Years Through        Fifteen        Total Loans
(In thousands)                         or Less        Five Years      Fifteen Years         Years         Receivable
Commercial and industrial             $   12,430     $     11,047     $       59,730     $       141     $      83,348
Consumer installment                         109              990                  -               -             1,099
Real estate - residential                    211            5,241                  -               -             5,452
Real estate - commercial                  10,411           34,651             16,325           1,579            62,966
Real estate - construction and land        1,178              677                730               -             2,585
SBA 7(a) guaranteed                       98,524           47,024                435               -           145,983
SBA 7(a) unguaranteed                     47,460            4,659                177             228            52,524
SBA 504                                   16,880           14,786              3,682               -            35,348
USDA                                         806                -                  -               -               806
Factored Receivables                      38,636                -                  -               -            38,636
Total                                 $  226,645     $    119,075     $       81,079     $     1,948     $     428,747




                                                          Loans Due After One Year
                                                                 Floating or
                                                                  Adjustable
(In thousands)                                  Fixed Rate           Rate             Total

Commercial and industrial                      $     69,707     $        1,211     $    70,918
Consumer installment                                    990                  -             990
Real estate - residential                             5,241                  -           5,241
Real estate - commercial                             10,191             42,364          52,555
Real estate - construction and land                   1,407                  -           1,407
SBA 7(a) guaranteed                                  35,278             12,181          47,459
SBA 7(a) unguaranteed                                   730              4,334           5,064
SBA 504                                                   -             18,468          18,468
USDA                                                      -                  -               -
Factored Receivables                                      -                  -               -
Total                                          $    123,544     $       78,558     $   202,102



The contractually scheduled loan principal repayments do not reflect the
life of these assets. The average life of loans is lower than their average
contractual conditions due to down payments.

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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 $3.7
million as of December 31, 2021, compared to $1.8 million as of December 31,
2020. As of December 31, 2021, non-performing assets consisted of SBA
non-accrual loans totaling $2.0 million, all of which was guaranteed by the SBA,
and commercial real estate loans totaling $149,000. As of December 31, 2020,
non-performing assets consisted of SBA non-accrual loans totaling $1.6 million,
of which $1.1 million was guaranteed by the SBA, and commercial real estate
loans of $158,000.



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
$400,000 as of December 31, 2021, which solely included factored receivables.
There were no loans past due 90 days or more and still accruing interest at
December 31, 2020.



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. Foreclosed assets as of December 31, 2021 totaled
$1.1 million, which included two SBA loans that were foreclosed on during the
year ended December 31, 2021. There were no foreclosed assets as of December 31,
2020.


The following table presents certain information concerning the
assets and loans restructured by type, including the ratios of these loans to the total
active on the dates indicated:



                                                            At December 31,

(In thousands, except percentages) 2021 2020 2019

 2018        2017
Non-accrual loans:
Commercial and industrial               $     -     $     -     $    60     $     -     $     -
Real estate - commercial                    149         158
SBA guaranteed                            2,039       1,118       4,892       2,252       2,186
SBA unguaranteed                              -         517       1,039         293         124
Total non-accrual loans                   2,188       1,793       5,991       2,545       2,310
Factored receivables past due 90 days       400           -           -           -           -
Foreclosed assets                         1,079           -           -           -           -
Total non-performing assets             $ 3,667     $ 1,793     $ 5,991     $ 2,545     $ 2,310
As a % of total loans                      0.86 %      0.45 %      2.06 %      1.08 %      1.16 %
As a % of total assets                     0.63        0.35        1.64        0.82        0.84




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 of December 31, 2021 and
2020, we had no loans considered to be a troubled debt restructuring.



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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. As of December 31, 2021, the Company had granted
principal and interest payment deferrals related to COVID-19 to two borrowers
representing approximately $679,000. Both loans remain accruing. At December 31,
2020, there were 11 loans in COVID-19-related deferment with an aggregate
outstanding balance of approximately $4.3 million.



We lend to customers operating in certain industries that have been, and are
expected to be, more significantly impacted by the effects of the COVID-19
pandemic. These include the dental, hotel/lodging, automobile wash, and child
care industries, among others. We are continuing to monitor these industries and
the respective borrowers closely given the general decrease in business activity
and the effects of the efforts to limit the spread of COVID-19.



Allowance for losses on loans and leases



Loans are reported net of the allowance for loan losses on our balance sheet.
The allowance for loan losses totaled $4.2 million and $2.9 million, at December
31, 2021 and 2020, respectively. During the year ended December 31, 2021, the
Company had charge-offs of $1.1 million and recoveries of $117,000. During the
year ended December 31, 2020, the Company had charge-offs of $218,000 and
recoveries of $42,000.



Based on an analysis performed by management at December 31, 2021, 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 provides a summary of the Company’s net loan losses and
provisions to the ALLL for the period indicated:



(In thousands, except percentages)           2021          2020          2019          2018          2017
Balance at January 1,                      $   2,941     $   1,408     $     874     $     386     $   1,695
Charge-offs:
Commercial and industrial                          -             -           214             1             9
Consumer installment                               -             -             -             -             -
SBA 7(a)                                         952           218           858           266           360
Factored receivables                             168             -             -             -             -
Total charge-offs                              1,120           218         1,072           267           369
Recoveries:
Commercial and industrial                         37            33            30             -             8
Consumer installment                               -             -             -             -             -
Real estate - construction and land                -             -             -             -             -
SBA 7(a)                                          20             9            21            30             1
Factored receivables                              60             -             -             -             -
Total recoveries                                 117            42            51            30             9
Net charge-offs                                1,003           176         1,021           237           360
Provision for loan losses                      2,214         1,709         1,555           725           736
Reduction related to acquisition of
predecessor                                        -             -             -             -        (1,685 )
Balance at December 31,                    $   4,152     $   2,941     $   1,408     $     874     $     386
Loans at year-end                          $ 428,747     $ 400,542     $ 291,079     $ 234,907     $ 199,266
Average loans                                448,284       376,088       275,025       231,385       193,482
Net charge-offs/average loans                   0.22 %        0.05 %        0.37 %        0.10 %        0.19 %
Allowance for loan losses/year-end loans        0.97          0.73          0.48          0.37          0.19
Total provision for loan losses/average
loans                                           0.49          0.45          0.57          0.31          0.38




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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,
                                          2021             2020             2019               2018                  2017
                                       Allowance        Allowance        Allowance
(In thousands, except percentages)       Amount           Amount           

Amount Allowance Amount Allowance Amount
Commercial and industrial

             $      1,154     $        928     $        501     $             419     $             237
Consumer installment                            15               91               27                    27                    13
Real estate - residential                       76               52               22                    27                    16
Real estate - commercial                       869              527              347                   210                    25
Real estate - construction and land             40              100               76                    34                    27
SBA                                          1,324            1,225              435                   157                    68
USDA                                            20               18                -                     -                     -
Factored receivables                           654                -                -                     -                     -

Total allowance for loan losses $4,152 $2,941 $

    1,408     $             874     $             386




                                       2021       2020       2019       2018       2017
                                       %(1)       %(1)       %(1)       %(1)       %(1)
Commercial and industrial               19.4 %     19.9 %     29.4 %     37.9 %     43.4 %
Consumer installment                     0.3        2.6        1.2        1.5        2.3
Real estate - residential                1.3        1.1        1.8        3.2        3.4
Real estate - commercial                14.7       11.1       16.1       15.0        9.6
Real estate - construction and land      0.6        2.1        2.7        2.0        4.3
SBA                                     54.5       63.0       48.0       39.0       35.3
USDA                                     0.2        0.2        0.8        1.4        1.7
Factored receivables                     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 ICS
One-Way Buy agreement to provide liquidity to fund PPP loan originations. This
brokered deposit is included in our money market accounts as of December 31,
2021.



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Total deposits increased $96.2 million, or 27.6%, to $444.2 million as of
December 31, 2021, from $348.0 million as of December 31, 2020. 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 Ended December 31,                       Year Ended December 31,
                                           2021                                          2020

(In thousands, except Average Percentage of average Average Percentage of average
percentages)

              Balance        Deposits          Rate         Balance        Deposits          Rate
Non-interest-bearing
deposits                 $  76,328             19.3 %         0.00 %   $  51,168             14.3 %         0.00 %
Savings and
interest-bearing
demand                      13,907              3.5           0.25         9,977              2.8           0.31
Money market accounts      118,577             30.0           0.36        96,582             27.0           0.52
Time deposits              186,647             47.2           1.08       200,159             55.9           1.84
Total deposits           $ 395,459            100.0 %         0.63 %   $ 357,886            100.0 %         1.18 %




The following table provides information on the maturity distribution of the
insured time deposits and the time deposits exceeding the FDIC insurance limit
as of December 31, 2021:



(In thousands)                     Insured       Uninsured        Total

Maturing
Three months or less              $  24,544     $    20,050     $  44,594
Over three months to six months      13,569          18,503        32,072
Over six months to 12 months         62,922          27,081        90,003
Over 12 months                       33,155           7,560        40,715
Total                             $ 134,190     $    73,194     $ 207,384




Borrowings



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



                          December 31,       December 31,
(In thousands)                2021               2020
Borrowings:
FHLB borrowings          $            -     $            -
FRB borrowings (PPPLF)           34,521             83,690
Subordinated notes               12,000             12,000
                         $       46,521     $       95,690




The Company has a credit line with the FHLB with borrowing capacity of $52.5
million secured by commercial loans. The Company determines its borrowing needs
and renews the advances accordingly at varying terms. The Company had no
borrowings with FHLB as of December 31, 2021 and 2020.



The Company also has a line of credit with the FRB with a borrowing capacity of $19.1
million
, which is secured by commercial loans. There was no outstanding
borrowings on the FRB line of credit at December 31, 2021 and 2020.



In connection with the Federal Reserve PPPLF program, the Company had $34.5
million pledged to the Federal Reserve and borrowed as of December 31, 2021. The
amount outstanding at December 31, 2021 is non-recourse and secured by the
amount of the PPP loans still outstanding. The maturity date of a borrowing
under the PPPLF is equal to the maturity date of the PPP loan pledged to secure
the borrowing and would be accelerated (i) if the underlying PPP loan goes into
default and is sold to the SBA to realize on the SBA guarantee or (ii) to the
extent that any loan forgiveness reimbursement is received from the SBA.
Borrowings under the PPPLF are included under borrowed funds on the Company's
consolidated balance sheet and bear interest at a rate of 0.35%.



As of December 31, 2021 and 2020, the Company also had subordinated notes
totaling $12.0 million, consisting of $8.0 million issued in 2017 bearing an
interest rate of 7.125%, payable semi-annually and maturing on July 20, 2027,
and $4.0 million issued in 2018 bearing an interest rate of 7.125%, payable
semi-annually and maturing on March 31, 2028. The subordinated notes are
unsecured and subordinated in right of payment to the payment of our existing
and future senior indebtedness and structurally subordinated to all existing and
future indebtedness of our subsidiaries.



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Capital resources and regulatory capital requirements



Shareholders' equity increased $24.8 million, or 41.3%, to $84.8 million as of
December 31, 2021, from $60.0 million as of December 31, 2020. The increase
included net income of $17.0 million, $396,000 net after-tax decrease in other
comprehensive income related to the market value of the securities available for
sale, and $330,000 related to stock compensation expense. In addition, shares of
Company common stock in the amount of $10.7 million were issued as part of the
consideration paid for the acquisition of Integra. Use of capital during the
year ended December 31 ,2021 included $1.6 million of dividends paid on the
Series B preferred stock and $1.3 million of dividends paid on the common stock.



Together with the Bank, the Company is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's and, accordingly, the Company's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
As of December 31, 2021, the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 2021, the Bank
qualified as "well capitalized" under the prompt corrective action regulations
of Basel III and the OCC.



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, on the dates indicated:


(In thousands)                                December 31, 2021            December 31, 2020
                                             Amount         Ratio         Amount         Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average Assets)         $   63,794         11.82 %   $   48,046         11.66 %
Common Equity Tier 1 (to Risk Weighted
Assets)                                        45,544         12.62         30,796         11.01
Tier 1 Capital (to Risk Weighted Assets)       62,794         17.40         48,046         17.17
Total Capital (to Risk Weighted Assets)        66,946         18.55         50,987         18.22

T Bank, N.A.
Tier 1 Capital (to Average Assets)         $   63,302         12.06 %   $   47,071         11.58 %
Common Equity Tier 1 (to Risk Weighted
Assets)                                        63,302         17.70         47,071         17.17
Tier 1 Capital (to Risk Weighted Assets)       63,302         17.70         47,071         17.17
Total Capital (to Risk Weighted Assets)        67,454         18.87         50,012         18.25




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, 2021, 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.



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The Company's primary sources of funds are retail, small business, custodial,
wholesale commercial deposits, loan repayments, maturity of investment
securities, other short-term borrowings, and other funds provided by operations.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and loan prepayments are more influenced by interest
rates, general economic conditions, and competition. The Company will maintain
investments in liquid assets based upon management's assessment of (1) the need
for funds, (2) expected deposit flows, (3) yields available on short-term liquid
assets, and (4) objectives of the asset/liability management program.



The Company had cash and cash equivalents of $46.0 million, or 7.9% of total
assets, as of December 31, 2021. 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, 2021, the Company's borrowing capacity with the FHLB was $52.5 million, or
9.0% of assets, none of which was utilized. The borrowing capacity with the FRB
was $19.1 million, or 3.3% of assets, of which none was utilized or outstanding
as of December 31, 2021. In addition, as of December 31, 2021, the Company had
approximately $112.1 million of SBA guaranteed loans held for investment that
could be sold to investors


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 the future contractual obligations to render
payments, excluding interest, for the periods indicated:


                                                             As of December 31, 2021
                                  Less than         One to          Over Three to       Over Five
(In thousands)                     One Year       Three Years        Five Years           Years          Total
FHLB borrowings                   $        -     $           -     $             -     $         -     $       -
FRB borrowings                            83                 -              34,438               -        34,521
Subordinated notes                         -                 -                   -          12,000        12,000
Time deposits                        166,669            34,358               6,357               -       207,384
Minimum lease payments                   549               482                 411              54         1,496
Total                             $  167,301     $      34,840     $        41,206     $    12,054     $ 255,401




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, 2021
                                   Less than         One to          Over Three to       Over Five
(In thousands)                     One Year        Three Years        Five Years           Years          Total

Undisbursed loan commitments $10,589 $383

    106     $    22,626     $  33,704
Standby letters of credit                 282                 -                   -               -           282




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