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, Texas. We provide a
wide array of financial products and services including banking, trust,
investment advisory, securities brokerage, third party administration,
recordkeeping and insurance to individuals, small businesses and institutions in
all 50 states.



In January 2019, the Bank acquired Nolan, a TPA based in Overland Park, Kansas.
Founded in 1979, Nolan provides clients with retirement plan design and
administrative services, specializing in ministerial recordkeeping,
administration, actuarial and design services for retirement plans of small
businesses and professional practices. Nolan has clients in 50 states and is the
administrator for over 900 retirement plans, 649 of which are also clients of
the Bank, which is over 57% of the retirement plans we service in our trust
department. We believe that the addition of TPA services allows us to serve our
clients more fully and to attract new clients to our trust platform. Please see
Note 18, Nolan Acquisition, to consolidated financial statements included in the
Form 10-K for more information.



On May 13, 2019, we completed a merger with Tectonic Holdings, through which we
expanded our financial services to include investment advisory, securities
brokerage and insurance services. Pursuant to the merger agreement, as amended
and restated, dated March 28, 2019, by and between the Company and Tectonic
Holdings, Tectonic Holdings merged with and into the Company, with the Company
as the surviving institution. Immediately after the completion of the Tectonic
Merger, the Company completed a 1-for-2 reverse stock split with respect to the
outstanding shares of its common stock. The computations of all share and per
share amounts in this Form 10-Q have been adjusted retroactively to reflect the
reverse stock split.



Following the Tectonic Merger, we operate through four main direct and indirect
subsidiaries: (i) 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, a registered broker-dealer with FINRA, and registered
investment advisor with the SEC, (iii) Tectonic Advisors, a registered
investment advisor registered with the SEC focused generally on managing money
for relatively large, affiliated institutions, and (iv) HWG, an insurance agency
registered with the TDI.



The Company completed the underwritten initial public offering of its Series B
preferred stock on May 14, 2019. In connection with the initial public offering,
the Company issued and sold 1,725,000 shares of its Series B preferred stock,
including 225,000 shares sold pursuant to the underwriters' full exercise of
their option to purchase additional shares, at an offering price of $10.00 per
share, for aggregate gross proceeds of $17.25 million before deducting
underwriting discounts and offering expenses, and aggregate net proceeds of
$15.5 million after deducting underwriting discounts and offering expenses.



Prior to the Tectonic Merger, Sanders Morris and Tectonic Advisors were wholly
owned subsidiaries of Tectonic Holdings, which was under common control with the
Company. The Tectonic Merger has been accounted for as a combination of
businesses under common control in accordance with ASC Topic 805. Under Topic
805, all the assets and liabilities of Tectonic Holdings are carried over to the
books of the Company at their then current carrying amounts, and the
consolidated financial statements have been retrospectively adjusted to reflect
the acquisition of Sanders Morris, HWG and Tectonic Advisors for all periods
subsequent to the date at which the entities were under common control, May 15,
2017. All intercompany transactions and balances are eliminated in
consolidation.



Critical Accounting Policies and Estimates





We prepare consolidated financial statements based on GAAP and to customary
practices within the financial services industry. These policies, in certain
areas, require management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. While we
base estimates on historical experience, current information and other factors
deemed to be relevant, actual results could differ from those estimates.



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We consider accounting estimates to be critical to reported financial results if
(i) the accounting estimate requires management to make assumptions about
matters that are highly uncertain at the time we make the accounting estimate
and (ii) different estimates that management reasonably could have used for the
accounting estimate in the current period, or changes in the accounting estimate
that are reasonably likely to occur from period to period, could have a material
impact on the financial statements. Accounting policies related to the allowance
for loan losses are considered to be critical as these policies involve
considerable subjective judgment and estimation by management. A discussion of
our allowance for loan losses is included in Note 1 to our Consolidated
Financial Statements.



Performance Summary



Net income available to common shareholders totaled $6.5 million, or $0.98 per
diluted common share for the year ended December 31, 2019, compared to $8.8
million, or $1.34 per diluted common share for the year ended December 31, 2018,
a decrease of $2.3 million or 26.1%. The decrease in net income available to
common shareholders for the year ended December 31, 2019 was the result of a
$6.0 million increase in non-interest expense, a $830,000 increase in the
provision for loan losses, a $891,000 increase in income tax expense and a
$618,000 increase in preferred stock dividends paid, partially offset by a $1.5
million increase in net interest income and a $4.5 million increase in
non-interest income.



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. Average tangible common equity is a non-GAAP
financial measure. The most directly comparable GAAP financial measure for
average tangible common equity is average total common equity.



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
(Dollars in thousands)                               December 31, 2019       December 31, 2018
Net income, as reported                             $             7,879     $             9,620
Income available to common shareholders                           6,458                   8,818
Average tangible common equity                                   18,555                  16,035
Return on average tangible common equity                          34.80 %                 54.99 %




For the year ended December 31, 2019, return on average assets was 2.33%,
compared to 3.33% for the prior year, and return on average tangible common
equity was 34.80%, compared to 54.99% for the prior year. The higher returns for
the year ended December 31, 2018 was primarily due to a $1.7 million gain on
bargain purchase related to the acquisition of Summer Wealth Management during
the three months ended March 31, 2018.



Total assets grew by $53.4 million, or 17.1%, to $365.1 million as of December
31, 2019, from $311.7 million as of December 31, 2018. This increase was
primarily due to an increase in SBA loans. Our loans held for investment, net of
allowance for loan losses increased $55.7 million, or 23.8%, to $289.7 million
as of December 31, 2019, from $234.0 million as of December 31, 2018.
Substantially all loans are secured by specific collateral, including business
assets, consumer assets, and commercial real estate.



Shareholders' equity increased $13.0 million, or 34.7%, to $50.5 million as of
December 31, 2019, from $37.5 million as of December 31, 2018. See analysis of
shareholders' equity in the section captioned "Capital Resources and Regulatory
Capital Requirements" included elsewhere in this discussion.



Results of Operations


Details of the changes in the various components of net income are discussed below.





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.



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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 increased the target rate four times
in 2018 and lowered the target rate three times during 2019. During 2018, the
effective federal funds rate increased 100 basis points (25 basis points in each
of March, June, September and December) to end the year at 2.50%. During 2019,
the effective federal funds rate decreased 50 basis points during the third
quarter of 2019 (25 basis points in each of August and September) and 25 basis
points in October 2019 to end the year at 1.75%.



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.



                                                                     2019 vs 2018
                                                         Increase (Decrease) Due to Change in
                                                                        Average
(In thousands)                                         Rate              Volume             Total

Interest-bearing deposits and federal funds sold $ 22 $

     56       $        78
Securities                                                  (25 )              (12 )             (37 )
Loans, net of unearned discount (1)                         528              2,730             3,258
Total earning assets                                        525              2,774             3,299

Savings and interest-bearing demand                          (1 )               (3 )              (4 )
Money market deposit accounts                               202                 46               248
Time deposits                                               856                796             1,652
FHLB and other borrowings                                    14               (124 )            (110 )
Subordinated notes                                            5                 51                56
Total interest-bearing liabilities                        1,076                766             1,842

Changes in net interest income                     $       (551 )     $      2,008       $     1,457

(1) Average loans include non-accrual.






Net interest income for years ended December 31, 2019 and 2018 was $12.1 million
and $10.6 million, respectively, an increase of $1.5 million, or 14.2%, due
primarily to an increase in the average volume of loans and average yields on
loans, partially offset by an increase in the average volume of interest-bearing
deposits and average rates paid on interest-bearing deposits. Net interest
margin for the years ended December 31, 2019 and 2018 was 3.90% and 4.03%,
respectively, a decrease of 13 basis points, due primarily to the increase in
average rates paid on interest-bearing deposits and borrowed funds, partially
offset by an increase in average yields on loans and interest-bearing deposits
and federal funds sold.



The average volume of loans increased $43.6 million, or 18.9%, from $231.4
million for the year ended December 31, 2018, to $275.0 million for the year
ended December 31, 2019, and the average yield on loans increased 23 basis
points from 6.03% for the year ended December 31, 2018 to 6.26% for the year
ended December 31, 2019. The average yield on loans was positively impacted by
the increases in market interest rates and increase in discount accretion. For
the year ended December 31, 2019, loan payoffs with associated net discounts
resulted in additional income of $458,000, compared to $614,000 for loan payoffs
with net discounts for the year ended December 31, 2018.



Average interest-bearing deposits increased $33.6 million for the year ended
December 31, 2019, compared to the same period in the prior year, which included
an increase in time deposits and money market deposit accounts of $31.4 million
and $3.0 million, respectively, offset by an $847,000 decrease in savings and
interest-bearing demand deposits. The average rate paid on interest-bearing
deposits increased 60 basis points from 1.62% for the year ended December 31,
2018 to 2.22% for the year ended December 31, 2019.



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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, 2019 and 2018.



                                                         Year Ended December 31,
                                             2019                                       2018
(In thousands, except        Average                      Average       Average                      Average
percentages)                 Balance       Interest        Yield        Balance       Interest        Yield
Assets
Interest-bearing deposits
and federal funds sold       $  12,434      $    270          2.17 %    $   9,861      $    192          1.95 %
Securities                      21,221           778          3.67 %       21,544           815          3.78 %
Loans, net of unearned
discount (1)                   275,025        17,205          6.26 %      231,385        13,947          6.03 %
Total earning assets           308,680        18,253          5.91 %      262,790        14,954          5.69 %
Cash and other assets           29,890                                     26,352
Allowance for loan losses       (1,089 )                                     (581 )
Total assets                $  337,481                                 $  288,561
Liabilities and
Shareholders' Equity
Savings and
interest-bearing demand     $    7,740            30          0.39 %   $    8,587            34          0.40 %
Money market deposit
accounts                        54,609           841          1.54 %       51,593           593          1.15 %
Time deposits                  164,007         4,151          2.53 %      132,575         2,499          1.88 %
Total interest-bearing
deposits                       226,356         5,022          2.22 %      192,755         3,126          1.62 %
FHLB and other borrowings       11,449           305          2.66 %       16,090           415          2.58 %
Subordinated notes              12,000           875          7.29 %       11,300           819          7.25 %
Total interest-bearing
liabilities                    249,805         6,202          2.48 %      220,145         4,360          1.98 %
Non-interest-bearing
deposits                        35,786                                     30,421
Other liabilities                6,336                                      4,060
Total liabilities              291,927                                    254,626
Shareholders' equity            45,554                                     33,935
Total liabilities and
shareholders' equity        $  337,481                                 $  288,561

Net interest income                        $  12,051                                  $  10,594
Net interest spread                                           3.43 %                                     3.71 %
Net interest margin                                           3.90 %                                     4.03 %



(1) Includes non-accrual 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.



For the years ended December 31, 2019 and 2018, the provision for loan losses
totaled $1.6 million and $725,000, respectively. See the section captioned
"Allowance for Loan Losses" included elsewhere in this discussion for further
analysis of the provision for loan losses.



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Non-Interest Income


The components of non-interest income were as follows:



                                  Year Ended December 31,
(In thousands)                      2019             2018
Trust income                    $      5,073       $   4,703
Gain on sale of loans                    427             183
Advisory income                        9,869           8,900
Brokerage income                       9,592           8,710
Service fees and other income          4,507           2,468
Rental income                            336             304
Total                           $     29,804       $  25,268




Total non-interest income for the year ended December 31, 2019 increased $4.5
million, or 18.0%, as compared to the year ended December 31, 2018. 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, 2019 increased $370,000, or 7.9%,
compared to the year ended December 31, 2018. 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, 2019, and fees for our participant directed
platform, which was implemented in the first quarter of 2019.



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 increased $244 thousand, or
133.3%, between the year ended December 31, 2019 and 2018. 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. This decision meant that the guaranteed portion of fewer SBA and USDA
loans were sold after such date, and accordingly, our gain on sale income
declined to $183 thousand for the year ended December 31, 2018. During the
fourth quarter 2019, sales of the guaranteed portion of SBA loans were resumed,
resulting in $427 thousand of gain on sale of loans for the year ended December
31, 2019.



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. For the year ended December 31, 2019, advisory income increased
$969,000, or 10.9%, compared to the year ended December 31, 2018. This increase
was due to an increase in market value of the assets on which Tectonic Advisors
earns advisory fees during the year ended December 31, 2019, combined with an
increase in advisory income at Sanders Morris, both from an increase in their
assets under management, and from increased performance based fees.



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, 2019 increased
$882,000, or 10.1%, compared to the year ended December 31, 2018. These
increases are primarily due to increased private placement activity and
increases in interest earned on margin lending, offset by the planned
termination of an agreement with a former affiliate to assist with transition of
its business and decreases in certain segments of traditional brokerage
activity.



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The chart below reflects our advisory and brokerage assets as of December 31,
2019 and 2018.



                                       December 31,       December 31,
(In thousands)                             2019               2018
Advisory assets
Tectonic Advisors                     $    2,057,570     $    1,736,637
Sanders Morris                               560,820            272,974
Total advisory assets                      2,618,390          2,009,611

Brokerage assets - Sanders Morris 1,426,828 1,303,240

Total advisory and brokerage assets $ 4,045,218 $ 3,312,851






Service fees and other income. Service fees includes fees for deposit-related
services, and beginning in January 2019, third party administrative fees related
to the acquisition of Nolan. For the year ended December 31, 2019, service fees
and other income increased $2.0 million, or 82.6%, compared to the year ended
December 31, 2018, which was primarily due to the administrative fees recorded
for services provided by Nolan of $4.3 million, offset by bargain purchase gain
of $1.7 million that occurred during the first quarter 2018. Net loan servicing
fees decreased $148,000, income from securities not readily marketable decreased
$150,000, and the remaining $302,000 decrease is attributable to decreases in
other income.



Rental income. The Company receives monthly rental income from tenants leasing
space in the Bank building. Rental income for the year ended December 31, 2019
increased $33,000, or 10.9%, compared to the year ended December 31, 2018.



Non-Interest Expense


The components of non-interest expense were as follows:





                                        Year Ended December 31,
(In thousands)                            2019             2018

Salaries and employee benefits $ 18,488 $ 14,473 Occupancy and equipment

                      2,684           1,927
Trust expenses                               2,004           1,979
Brokerage and advisory direct costs          1,765           1,559
Professional fees                            1,701           1,062
Data processing                                981             994
Other expense                                2,896           2,512
Total                                 $     30,519       $  24,506




Total non-interest expense for the year ended December 31, 2019 increased $6.0
million, or 24.5%, compared to the year ended December 31, 2018. Changes in the
various components of non-interest income are discussed below.



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 $4.0 million, or 27.7%,
from $14.5 million for the year ended December 31, 2018 to $18.5 million for the
year ended December 31, 2019. The acquisition of Nolan accounted for $3.0
million of this increase. The remaining increase was due to an increase in the
number of employees in loan production and operation support areas of the
Company, and in the trust area related to the addition of participant directed
plan services, combined with increases in commissions and incentive bonuses
related to increases in brokerage activity, the majority of which was related to
the increase private placement activity, and annual merit increases and rate
increases for medical benefits.



Occupancy and equipment expense. Occupancy and equipment expense include
building, furniture, fixtures and equipment depreciation and maintenance costs.
Occupancy and equipment expense increased $757,000, or 39.3%, from $1.9 million
for the year ended December 31, 2018 to $2.7 million for the year ended December
31, 2019. The acquisition of Nolan accounted for $349,000 of the increase. The
remaining increase is related to increased rent and utilities expense at
Tectonic Advisors and Sanders Morris, and an increase in depreciation expense
related to improvements to our Houston office.



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Trust expenses. Trust expenses 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 an
immaterial amount for the year ended December 31, 2019 as compared to the year
ended December 31, 2018.



Brokerage and advisory direct costs. Brokerage and advisory direct costs
increased $206,000, or 13.2%, from $1.6 million for the year ended December 31,
2018 to $1.8 million for the year ended December 31, 2019, related to increases
in brokerage activity and related clearing firm service fees, execution charges
and referral fees.



Professional fees. Professional fees, which include legal, consulting, audit and
professional fees, increased $639,000, or 60.2%, from $1.1 million for the year
ended December 31, 2018 to $1.7 million for the year ended December 31, 2019.
The increases included $312,000 related to the consulting arrangement with the
previous owner of Nolan (see Note 18, Nolan Acquisition, to the consolidated
financial statements included in this Form 10-K for more information), and other
consulting and professional expenses incurred at Nolan of $67,000, and an
increase of $193,000 for consulting expense related to the implementation of the
participant directed retirement plan platform for trust clients, which was
partially offset by a decrease in professional fees of $134,000 in other areas
in the business. Legal fees increased $135,000 related to legal and regulatory
matters at Sanders Morris, offset by a decrease of $40,000 in legal fees
elsewhere in the business. Audit and tax consulting fees increased by $105,000
during the year ended December 31, 2019 as compared to the year ended December
31, 2018 related to reviews of our public filings in 2019.



Data processing. Data processing includes costs related to the Company's
operating systems. Data processing expense decreased by an immaterial amount for
the year ended December 31, 2019 as compared to the year ended December 31,
2018. The decrease was due to lower trust data processing fees related to the
merger of ten common funds with other funds during 2018, partly offset by an
increase of $31,000 related to the acquisition of Nolan.



Other. 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 expenses increased $384,000, or 15.3%, from $2.5 million for the year
ended December 31, 2018 to $2.9 million for the year ended December 31, 2019.
The increases included $20,000 to reimburse losses to a Bank customer account
due to fraudulent activity by an employee of the customer during the first
quarter 2019, a $300,000 settlement fee related to a client matter at Sanders
Morris incurred during the third quarter of 2019, directors fees of $22,500, and
increases in donations of $34,000 related to the Bank's CRA programs and an
increase of $33,000 in our advertising and marketing expenses at Sanders Morris.
The remaining increases relate to increased staffing and activity, which
increased our expenses in business travel, internet charges, computer services,
supplies, and software licenses. These increases were partly offset by a
decrease of $103,000 for FDIC insurance premiums, a decrease of $29,000 for
employee recruiting expenses, and decreases in management fees, office expenses,
filing fees, and other general operating costs.



Income Taxes



The income tax expense for the years ended December 31, 2019 and 2018 was $1.9
million and $1.0 million, respectively. The effective income tax rate was 19.4%
and 9.5% for the years ended December 31, 2019 and 2018, respectively. The
effective income tax rate differed from the U.S. statutory rate of 21% primarily
due to Tectonic Advisors and Sanders Morris' tax status as partnerships for the
periods prior to May 13, 2019, the date the Tectonic Merger was completed.



Segment Reporting


We have three operating segments: Banking, Other Financial Services and HoldCo. Our primary operating segments are Banking and Other Financial Services.

Our Banking operating segment includes both commercial and consumer banking services. Commercial banking services are provided primarily to small- to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services.





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 operating segment, HoldCo, includes the Bank's immediate parent and related subordinated debt, as well as operations of the financial holding company that serves as parent for the group overall. Our principal source of revenue is dividends from our subsidiaries.


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The following table presents key metrics related to our segments:





                                                     Year Ended December 31, 2019
                                                       Other
                                                     Financial
(In thousands)                       Banking          Services          HoldCo         Consolidated
Revenue(1)                         $    13,829     $       28,924     $      (898 )   $       41,855
Net income (loss) before taxes     $     4,153     $        7,390     $    (1,762 )   $        9,781




                                                      Year Ended December 31, 2018
                                                       Other
                                                     Financial
(In thousands)                       Banking          Services           HoldCo         Consolidated
Revenue(1)                         $    12,269     $       22,697     $        896     $       35,862
Net income before taxes            $     4,003     $        6,272     $        356     $       10,631

(1) Net interest income plus non-interest income






Banking



Income before taxes for the year ended December 31, 2019 increased $150,000,
or 3.7%, compared to the year ended December 31, 2018. The increase was
primarily the result of a $1.4 million increase in net interest income and a
$136,000 increase in non-interest income, partly offset by an $830,000 increase
in the provision for loan losses and a $580,000 increase in non-interest
expense.



Net interest income for the year ended December 31, 2019 increased $1.4 million,
or 12.3%, compared to the year ended December 31, 2018, due primarily to an
increase in average volume of loans, partially offset by increase in average
volume of interest-bearing deposits and average rates paid on interest-bearing
deposits. 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, 2019 increased
$830,000, or 114.5%, to $1.6 million, compared to $725,000 for the year ended
December 31, 2018. See "Allowance for Loan Losses" included elsewhere in this
discussion.



Non-interest income for the year ended December 31, 2019 increased $136,000, or
18.8%, compared to the year ended December 31, 2018, which was primarily due to
a $244,000 increase in gain on sale of loans and a $32,000 increase in rental
income, partly offset by a $140,000 decrease in service fees, primarily the net
loan servicing fees. 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, 2019 increased $580,000, or
7.7%, compared to the year ended December 31, 2018. The increase was primarily
related to increases in salaries and employee benefits, occupancy and equipment
expense and data processing expense, partly offset be a decrease in 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, 2019 increased $1.1 million,
or 17.8%, compared to the year ended December 31, 2018. The increase was
primarily the result of a $6.2 million increase in non-interest income partly
offset by a $5.1 million increase in non-interest expense.



Non-interest income for the year ended December 31, 2019 increased $6.2 million,
or 27.4%, compared to the year ended December 31, 2018. The increase was
primarily due to increases in brokerage income of $882,000, related to increased
trading activity, including private placements, and increases in service fees
and other income of $4.0 million, which was primarily related to the Nolan
acquisition on January 2, 2019.  In addition, advisory and trust income
increased related to increases in the average market value of trust assets and
advisory assets under management by $1.3 million for the year ended December 31,
2019 as compared to the year ended December 31, 2018. 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, 2019 increased $5.1
million, or 31.1%, compared to the year ended December 31, 2018. The increases
were primarily related to increases in salaries and employee benefits, as well
as increases in occupancy and equipment costs and professional fees, related to
the acquisition of the Nolan business and other new business activity, as well
as annual merit increases.  Brokerage and advisory direct costs showed increases
primarily from increased brokerage activity, which led to increases in clearing
fees and execution charges. See the analysis of non-interest income included in
the section captioned "Non-Interest Expense" included elsewhere in this
discussion.



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HoldCo



The HoldCo operating segment had a loss before taxes of $1.8 million during
the year ended December 31, 2019, compared to income before taxes of $356,000
for the year ended December 31, 2018. The loss resulted from a decrease in other
income as compared to the year ended December 31, 2018, during which we
recognized a gain on bargain purchase of $1.7 million related to the acquisition
of Summer Wealth Management during the first quarter of 2018. In addition, there
were increases in salaries and compensation expense and professional fees for
the year ended December 31, 2019 as compared to the prior year, partly offset by
decreases in other expense and interest expense related to the payoff of the
bank stock loan in May 2019.



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, 2019 and 2018, 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 consisted of Property
Assessed Clean Energy investments. These investment contracts or bonds, located
in California and Florida, originate under a contractual obligation between the
property owners, the local county administration, and a third-party
administrator and sponsor. The assessments are created to fund the purchase and
installation of energy saving improvements to the property, such as solar
panels. Generally, as a property assessment, the total assessment is repaid in
installments over a period of 10 to 15 years by the then current property
owner(s). Each installment is collected by the County Tax Collector where the
property is located. The assessments are an obligation of the property. Each
assessment is equal in priority to the other property taxes and assessments
associated with the property, including local school, city, and county
ad-valorem taxes.



Restricted securities consisted of FRB stock, having an amortized cost and fair
value of $1.2 million and $980,000 as of December 31, 2019 and 2018,
respectively, and FHLB stock, having an amortized cost and fair value of $1.2
million and $946,000 as of December 31, 2019 and 2018, respectively.



Securities not readily marketable consists of an income interest in a private investment.

The following presents the amortized cost and fair values of the securities portfolio as of the dates indicated:





                                          As of December 31, 2019              As of December 31, 2018
                                       Amortized           Estimated        Amortized           Estimated
(In thousands)                            Cost            Fair Value           Cost            Fair Value
Securities available for sale:
U.S. government agencies              $     10,684       $      10,731     $      9,233       $       9,008
Mortgage-backed securities                   1,925               1,946            2,536               2,496

Total securities available for sale $ 12,609 $ 12,677 $ 11,769 $ 11,504



Securities held to maturity:
Property assessed clean energy        $      6,349       $       6,349     $      7,722       $       7,722

Securities, restricted:
Other                                 $      2,417       $       2,417     $      1,926       $       1,926

Securities not readily marketable $ 100 $ 100 $ 100 $ 100






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The following table summarizes the maturity distribution schedule with
corresponding weighted-average yields of securities available for sale and
securities held to maturity as of December 31, 2019. 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              $      -            - %   $  2,450       2.43 %   $    7,924       2.44 %   $   310       3.62 %   $ 10,684       2.47 %
Mortgage-backed
securities                   -            -          241       3.13            943       2.89         741       2.68        1,925       2.84
Total                 $      -            - %   $  2,691       2.49 %   $    8,867       2.49 %   $ 1,051       2.95 %   $ 12,609       2.53 %
Securities held to
maturity:
Property assessed
clean energy          $      -            - %   $    673       6.34 %   $    2,819       5.71 %   $ 2,857       7.32 %   $  6,349       6.50 %
Securities,
restricted:
Other                 $      -            - %   $      -          - %   $        -          - %   $     -          - %   $  2,417          - %
Securities not
readily marketable
                      $      -            - %   $      -          - %   $        -          - %   $     -          - %   $    100          - %




Loan Portfolio Composition



Total loans excluding allowance for loan losses, increased $56.2 million, or
23.9%, to $291.1 million at December 31, 2019, compared to $234.9 million at
December 31, 2018. SBA loans comprise the largest group of loans in our
portfolio totaling $139.7 million, or 48.0% of the total loans at December 31,
2019, compared to $91.6 million, or 39.0% at December 31, 2018. Commercial and
industrial loans totaled $85.5 million, or 29.4% of the total loans at December
31, 2019, compared to $88.9 million, or 37.8%, at December 31, 2018. Commercial
and construction real estate loans totaled $54.8 million, or 18.8%, of the total
loans at December 31, 2019, compared to $39.9 million, or 17.0%, at December 31,
2018.


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

(In

thousands, except percentages) 2019 2018 2017


  2016          2015
Loans held for investment at
December 31,
Commercial and industrial         $  85,476     $  88,915     $  86,552     $  81,945     $  71,562
Consumer installment                  3,409         3,636         4,483         3,749         2,049
Real estate - residential             5,232         7,488         6,826         6,531         6,851
Real estate - commercial             46,981        35,221        19,203        20,042        16,736
Real estate - construction and
land                                  7,865         4,653         8,477         6,335        10,322
SBA 7(a) guaranteed                  69,963        33,884        11,826             -             -
SBA 7(a) unguaranteed                47,132        44,326        41,373        29,859        22,596
SBA 504                              22,591        13,400        17,109         9,825         6,349
USDA                                  2,430         3,367         3,415         3,589         2,787
Other                                     -            17             2             6         1,542
Total Loans                       $ 291,079     $ 234,907     $ 199,266     $ 161,881     $ 140,794




The Company 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
$9.9 million and $16.3 million at December 31, 2019 and 2018, respectively.
During the year ended December 31, 2019, the Company elected to reclassify $36.5
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.



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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 7(a) loan guaranty program and
the 504 loan program in conjunction with junior lien financing from a Certified
Development Company ("CDC").



The 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 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 504 program is an economic development-financing program providing
long-term, low down payment loans to businesses. Typically, a 504 project
includes a loan secured from a private-sector lender with a senior lien, a loan
secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior
lien covering up to 40% of the total cost, and a contribution of at least 10%
equity from the borrower. Debenture limits are $5.0 million for regular 504
loans and $5.5 million for those 504 loans that meet a public policy goal.



The SBA has designated the Bank as a "Preferred Lender". As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority from the SBA.





The Company also offers Business & Industry ("B&I") program loans through the
USDA. These loans are similar to the SBA product, except they are guaranteed by
the USDA. The guaranteed amount is generally 80%. B&I loans are made to
businesses in designated rural areas and are generally larger loans to larger
businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be
sold into the secondary market. These loans can be utilized for rural commercial
real estate and equipment. The loans can have maturities up to 30 years and the
rates can be fixed or variable.



Construction and land development loans are evaluated based on the borrower's
and guarantor's credit worthiness, past experience in the industry, track record
and experience with the type of project being considered, and other factors.
Collateral value is determined generally by independent appraisal utilizing
multiple approaches to determine value based on property type.



For all loan types, the Company establishes guidelines for its underwriting criteria including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.





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, 2019, our
loan portfolio included $69.2 million of loans, approximately 23.8% of our total
funded loans, to the dental industry, compared to $76.2 million, or 32.4% of
total funded loans, as of December 31, 2018. We believe that these loans are to
credit worthy borrowers and are diversified geographically.



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As of December 31, 2019, 48.2% of the loan portfolio, or $140.2 million, matured
or re-priced within one year or less. The following table presents the
contractual maturity ranges for commercial, consumer and real estate loans
outstanding as of December 31, 2019 and 2018, and also presents for each
maturity range the portion of loans that have fixed interest rates or variable
interest rates over the life of the loan in accordance with changes in the
interest rate environment as represented by the base rate:



                                                                     As of December 31, 2019
                                                   Over 1 Year through 5 Years                  Over 5 Years
                                                                     Floating or                         Floating or
                              One Year or                             Adjustable                         Adjustable
(In thousands)                   Less            Fixed Rate              Rate           Fixed Rate          Rate            Total

Commercial and industrial $ 15,117 $ 7,060 $

  8,880     $     54,419     $           -     $   85,476
Consumer installment                 3,070                339                    -                -                 -          3,409
Real estate - residential            1,258              3,974                    -                -                 -          5,232
Real estate - commercial             4,602             12,974               21,287            1,998             6,120         46,981
Real estate - construction
and land                             4,121                 99                3,645                -                 -          7,865
SBA 7(a) guaranteed                 59,065                115               10,004              779                 -         69,963
SBA 7(a) unguaranteed               42,094                 38                4,498              502                 -         47,132
SBA 504                              8,456                  -               11,747                -             2,388         22,591
USDA                                 2,430                  -                    -                -                 -          2,430
Other                                    -                  -                    -                -                 -              -
Total                        $     140,213     $       24,599       $       60,061     $     57,698     $       8,508     $  291,079




                                                                     As of December 31, 2018
                                                   Over 1 Year through 5 Years                  Over 5 Years
                                                                     Floating or                         Floating or
                              One Year or                             Adjustable                         Adjustable
(In thousands)                   Less            Fixed Rate              Rate           Fixed Rate          Rate            Total

Commercial and industrial $ 9,471 $ 7,541 $ 16,400 $ 55,503 $

           -     $   88,915
Consumer installment                   728              2,288                    -              620                 -          3,636
Real estate - residential            1,641              5,041                  746               60                 -          7,488
Real estate - commercial             3,184              4,422               19,074            3,146             5,395         35,221
Real estate - construction
and land                             3,912                741                    -                -                 -          4,653
SBA 7(a) guaranteed                 29,082                141                4,091              570                 -         33,884
SBA 7(a) unguaranteed               39,947                 47                2,306              776             1,250         44,326
SBA 504                              4,226                  -                8,074                -             1,100         13,400
USDA                                 2,432                  -                  935                -                 -          3,367
Other                                   17                  -                    -                -                 -             17
Total                        $      94,640     $       20,221       $       51,626     $     60,675     $       7,745     $  234,907

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is less than their average contractual terms due to prepayments.





Loans acquired in acquisitions are initially recorded at fair value with no
carryover of the related allowance for credit losses. The fair value of the
loans is determined using market participant assumptions in estimating the
amount and timing of principal and interest cash flows initially expected to be
collected on the loans and discounting those cash flows at an appropriate market
rate of interest.


Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the "accretable yield," is accreted into interest income over the life of the loans.





Non-performing Assets



Non-performing assets include non-accrual loans, loans 90 days or more past due
and still accruing, and foreclosed assets. Non-performing assets totaled $6.0
million as of December 31, 2019, compared to $2.5 million as of December 31,
2018. As of December 31, 2019, non-performing assets consisted of SBA
non-accrual loans totaling $6.0 million, of which $4.9 million was guaranteed by
the SBA, and one commercial and industrial loan of $60,000. As of December 31,
2018, non-performing assets consisted solely of SBA non-accrual loans totaling
$2.5 million, of which $2.3 million was guaranteed by the SBA.



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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. There were no loans past due 90 days or more and still accruing
interest as of December 31, 2019 and 2018.



Foreclosed assets represent property acquired as the result of borrower defaults
on loans. Foreclosed assets are recorded at estimated fair value, less estimated
selling costs, at the time of foreclosure. Write-downs occurring at foreclosure
are charged against the allowance for possible loan losses. On an ongoing basis,
properties are appraised as required by market indications and applicable
regulations. Write-downs are provided for subsequent declines in value and are
included in other non-interest expense along with other expenses related to
maintaining the properties. There were no foreclosed assets as of December 31,
2019 and 2018.


The following table sets forth certain information regarding non-performing assets and restructured loans by type, including ratios of such loans to total assets as of the dates indicated:





                                                           At December 31,

(In

thousands, except percentages) 2019 2018 2017


  2016          2015
Non-accrual loans:
Commercial and industrial         $      60     $       -     $       -     $      39     $     443
SBA guaranteed                        4,892         2,252         2,186             -           477
SBA unguaranteed                      1,039           293           124             -             -
Total non-accrual loans               5,991         2,545         2,310            39           920
Loans past due 90 days and
accruing                                  -             -             -             -             -
Foreclosed assets                         -             -             -             -             -
Total non-performing assets       $   5,991     $   2,545     $   2,310     $      39     $     920
As a % of total loans and
foreclosed assets                      2.06 %        1.08 %        1.16 %        0.02 %        0.66 %
As a % of total assets                 1.64          0.82          0.84          0.02          0.52




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, 2019 and
2018, we had no loans considered to be a troubled debt restructuring.



Allowance for Loan and Lease Losses





ALLL is a valuation allowance for credit losses in the loan portfolio.
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.

Senior management and the Directors' Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.





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Under accounting standards for business combinations, acquired loans are
recorded at fair value with no credit loss allowance on the date of acquisition.
A provision for credit losses is recorded in periods after the date of
acquisition for the emergence of new probable and estimable losses on
acquired non-credit impaired loans. As of December 31, 2019 and 2018, we had no
acquired loans requiring a credit loss allowance.



The entire loan portfolio acquired in the acquisition of T Bancshares on May 15,
2017 was initially recorded at fair value with no carryover of the related
allowance for credit losses. The allowance for loan losses represents the
calculated reserve for new loans originated since the acquisition, as well as
reserves assessed since the acquisition on acquired loans. The allowance for
loan losses totaled $1.4 million and $874,000, at December 31, 2019 and 2018,
respectively, based upon measured loan portfolio balances of $195.5 million and
$121.2 million, respectively. During the year ended December 31, 2019, the
Company had charge-offs of $1.1 million and recoveries of $51,000. For the year
ended December 31, 2018, the Company had charge-offs of $267,000, and recoveries
of $30,000. The total reserve percentage for loans originated post-Tectonic
Merger was 0.72% at December 31, 2019 and 2018. Loans acquired in the
acquisition in May 2017 were discounted to fair value. The discount balance is
compared to a calculated allowance for those loans, and as long as the discount
is higher, no allowance for loan loss is recognized. There was no allowance for
loan loss recognized as of December 31, 2019 and 2018 for the loans acquired.



Based on an analysis performed by management at December 31, 2019, the allowance
for loan losses is believed to be adequate to cover estimated loan losses in the
portfolio as of that date based on the loan loss methodology employed by
management. However, management's judgment is based upon a number of assumptions
about future events, which are believed to be reasonable, but which may or may
not prove valid. Thus, charge-offs in future periods may exceed the allowance
for loan losses or significant additional increases in the allowance for loan
losses may be required.


The table below presents a summary of the Company's net loan loss experience and provisions to the ALLL for the period indicated:

(In

thousands, except percentages) 2019 2018 2017


  2016          2015
Balance at January 1,             $     874     $     386     $   1,695     $   1,564     $   1,695
Charge-offs:
Commercial and industrial               214             1             9           391             -
Consumer installment                      -             -             -            97             -
SBA 7(a)                                858           266           360             -           159
Total charge-offs                     1,072           267           369           488           159
Recoveries:
Commercial and industrial                30             -             8            19            22
Consumer installment                      -             -             -             -             -
Real estate - construction and
land                                      -             -             -            10             6
SBA 7(a)                                 21            30             1             1             -
Total recoveries                         51            30             9            30            28
Net charge-offs                       1,020           237           360           458           131
Provision for loan losses             1,555           725           736           589             -
Reduction related to
acquisition of predecessor                -             -        (1,685 )           -             -
Balance at December 31,           $   1,408     $     874     $     386     $   1,695     $   1,564
Loans at year-end                 $ 291,079     $ 234,907     $ 199,266     $ 161,881     $ 140,794
Average loans                       275,025       231,385       193,482       163,580       143,005
Net charge-offs/average loans          0.37 %        0.10 %        0.19 %        0.28 %        0.09 %
Allowance for loan
losses/year-end loans                  0.48          0.37          0.19          1.05          1.11
Total provision for loan
losses/average loans                   0.57          0.31          0.38          0.36          0.00




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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,
                                          2019               2018                  2017                2016             2015
                                       Allowance                                                    Allowance        Allowance
(In thousands)                           Amount        Allowance Amount      Allowance Amount         Amount           Amount

Commercial and industrial             $        501     $             419     $             237     $        985     $        878
Consumer installment                            27                    27                    13               17               26
Real estate - residential                       22                    27                    16               79               86
Real estate - commercial                       347                   210                    25              241              210
Real estate - construction and land             76                    34                    27               77              130
SBA                                            435                   157                    68              296              214
USDA                                             -                     -                     -                -                -
Other                                            -                     -                     -                -               20
Total allowance for loan losses       $      1,408     $             874     $             386     $      1,695     $      1,564




                                       2019       2018       2017       2016       2015
                                      %(1)       %(1)       %(1)       %(1)       %(1)
Commercial and industrial               29.4 %     37.9 %     43.4 %     50.6 %     50.8 %
Consumer installment                     1.2        1.5        2.3        2.3        1.5
Real estate - residential                1.8        3.2        3.4        4.0        4.9
Real estate - commercial                16.1       15.0        9.6       12.4       11.9
Real estate - construction and land      2.7        2.0        4.3        3.9        7.3
SBA                                     48.0       39.0       35.3       24.6       20.5
USDA                                     0.8        1.4        1.7        2.2        2.0
Other                                      -          -          -         

- 1.1 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 primarily on customer service and long-standing relationships with
customers to attract and retain deposits; however, market interest rates and
rates offered by competing financial institutions significantly affect the
Company's ability to attract and retain deposits.



Total deposits increased $33.2 million, or 13.3%, to $283.6 million as of
December 31, 2019, from $250.4 million as of December 31, 2018. 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,
                                             2019                                          2018

(In thousands, except Average Percent of Average Average Percent of Average percentages)

                Balance        Deposits          Rate         Balance        Deposits          Rate
Non-interest-bearing
deposits                   $  35,786             13.7 %            - %   $  30,421             13.7 %            - %
NOW accounts                   3,533              1.4           0.24         3,606              1.6           0.28
Money market accounts         54,609             20.8           1.54        51,593             23.1           1.15
Savings accounts               4,207              1.6           0.50         4,981              2.2           0.50
Time deposits $100,000
and over                     158,154             60.3           2.54       128,283             57.5           1.90
Time deposits under
$100,000                       5,853              2.2           2.28         4,292              1.9           1.56
Total deposits             $ 262,142            100.0 %         2.22 %   $ 223,176            100.0 %         1.62 %




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The following table presents maturity of our time deposits of $100,000 or more at December 31, 2019 and 2018:





                                         December 31,
(In thousands)                               2019           December 31, 2018
Three months or less                    $       30,305     $            31,602
Over three months through six months            37,203                  

34,282


Over six months through twelve months           70,665                  50,127
Over twelve months                              39,831                  28,165
Total                                   $      178,004     $           144,176




Borrowings



The Company's FHLB borrowed funds totaled $12.0 million and $5.0 million as of
December 31, 2019 and 2018, respectively. The Company has a credit line with the
FHLB that requires certain loans and securities to be pledged as collateral for
any outstanding borrowings. The collateral pledged as of December 31, 2019
totaled $23.1 million. The Company determines its borrowing needs and renews the
advances accordingly at varying terms. As of December 31, 2019, the Company had
an overnight advance of $2.0 million with an interest rate of 1.45%. In
addition, the Company had a six-month fixed term advance of $10.0 million with
an interest rate of 2.18% and maturity date of January 27, 2020. At maturity,
the advance was rolled into the overnight advance. At December 31, 2018, the
Company had no overnight advances, and had a three month term advance of $5.0
million, with a fixed interest rate of 2.53% and maturity date of March 13,
2019. At maturity, the advance was paid off.



The Company also has a credit line with the Reserve Bank with borrowing capacity of $35.0 million, which is secured by commercial loans. There were no outstanding borrowings as of December 31, 2019 and December 31, 2018.





As of December 31, 2018, the Company had a $1.9 million bank stock loan with a
variable interest rate of prime plus 0.75% and maturity date of May 11, 2028.
The loan was paid in full on May 31, 2019 using the proceeds from our initial
public offering.



As of December 31, 2019 and 2018, 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.



Capital Resources and Regulatory Capital Requirements





Shareholders' equity increased $13.0 million to $50.5 million as of December 31,
2019, from $37.5 million as of December 31, 2018, after adjusting for the
Tectonic Merger. The Tectonic Merger has been accounted for as a combination of
businesses under common control in accordance with Topic 805. Under Topic 805,
all the assets and liabilities of Tectonic Holdings are carried over to the
books of the Company at their then current carrying amounts, and the
consolidated financial statements have been retrospectively adjusted to reflect
the Tectonic Merger for all periods subsequent to the date at which the entities
were under common control, May 15, 2017.



As of December 31, 2018, the Tectonic Merger had the effect of increasing
retained earnings and additional paid in capital by a total of $811,000, while
increasing Series A preferred stock by approximately $8.0 million, attributable
to preferred stock outstanding at Tectonic Holdings at the time of the Tectonic
Merger. The majority of the increase in shareholders' equity of $13.0 million is
attributable to the issuance of 1,725,000 shares of Series B preferred stock in
our initial public offering, which raised $15.5 million, net of issuance costs,
including underwriting discounts and offering expenses, partly offset by the
$8.0 million repurchase of the Series A preferred stock. The balance is related
to 2019 dividends paid on the Series A preferred stock of $640,000 and on Series
B preferred stock of $781,000, regular distributions made by Tectonic Holdings
to its limited liability company members prior to the date of the Tectonic
Merger of $1.3 million, a $263,000 net after-tax increase in the market value of
the securities available for sale, a $109,000 increase in additional paid-in
capital related to stock compensation expense, and net income of $7.9 million
for the year ended December 31, 2019.



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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, 2019, the Company and the Bank met all capital adequacy
requirements to which they were subject. As of December 31, 2019, 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, as of the dates indicated:





(In thousands)                          December 31, 2019                December 31, 2018
                                      Amount           Ratio           Amount           Ratio
Tectonic Financial, Inc.
Tier 1 Capital (to Average
Assets)                            $     38,301           11.20 %   $     27,193            9.40 %
Common Equity Tier 1 (to Risk
Weighted Assets)                         21,051            8.20           19,159            8.47
Tier 1 Capital (to Risk Weighted
Assets)                                  38,301           14.92           27,193           12.02
Total Capital (to Risk Weighted
Assets)                                  39,709           15.47           28,067           12.41

T Bank, N.A.
Tier 1 Capital (to Average
Assets)                            $     38,541           11.09 %   $     29,242           10.32 %
Common Equity Tier 1 (to Risk
Weighted Assets)                         38,541           15.16           29,242           13.06
Tier 1 Capital (to Risk Weighted
Assets)                                  38,541           15.16           29,242           13.06
Total Capital (to Risk Weighted
Assets)                                  39,949           15.71           30,116           13.45




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, 2019, 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.



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.



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The Company had cash and cash equivalents of $20.2 million, or 5.5% of total
assets, as of December 31, 2019. 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, 2019, the Company's borrowing capacity with the FHLB was $23.1 million, or
6.3% of assets, of which $12.0 million was utilized. The borrowing capacity with
the FRB was $35.0 million, or 9.6% of assets, of which none was utilized or
outstanding as of December 31, 2019. The Company's trust operations serve in a
fiduciary capacity for approximately $1.4 billion in total market value of
assets as of December 31, 2019. Some of these custody assets are invested in
cash. This cash is maintained either in a third-party money market mutual fund
(invested predominately in U.S. Treasury securities and other high grade
investments) or in a Bank money market account. Only cash which is fully insured
by the FDIC is maintained at the Bank. This cash can be moved readily between
the Bank and the third party money market mutual fund. As of December 31, 2019,
approximately $29.1 million of cash could be held at the Bank in deposit
accounts fully insured by the FDIC. As of December 31, 2019, deposits of $12.7
million were held at the Bank, leaving $16.4 million which is available to the
Bank. As of December 31, 2019, Sanders Morris and Tectonic Advisors held
approximately $5.0 million in their accounts at the Bank, which is eliminated on
the financial statements and in the cash and cash equivalents as stated above.



Off-Balance Sheet Arrangements and Contractual Obligations





We are a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the accompanying balance sheets. Our
exposure to credit loss in the event of non-performance by the other party to
the financial instruments for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. We
follow the same credit policies in making commitments and conditional
obligations as we do for on-balance sheet instruments.



Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The amount of credit extended is based on management's credit
evaluation of the customer and, if deemed necessary, may require collateral.



Standby letters of credit are conditional commitments issued by us to guarantee
the performance of a customer to a third party. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loans to customers.


The following table presents future contractual obligations to make future payments, excluding interest, for the periods indicated:





                                                             As of December 31, 2019
                                  Less than         One to          Over Three to       Over Five
(In thousands)                     One Year       Three Years        Five Years           Years          Total
FHLB                              $   12,000     $           -     $             -     $         -     $  12,000
Subordinated notes                         -                 -                   -          12,000        12,000
Time deposits                        141,778            36,361               6,213               -       184,352
Minimum lease payments                   776               603                  83               -         1,462
Total                             $  154,554     $      36,964     $         6,296     $    12,000     $ 209,814




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, 2019
                                   Less than         One to          Over Three to       Over Five
(In thousands)                     One Year        Three Years        Five Years           Years        Total

Undisbursed loan commitments      $    13,068     $         247     $         1,265     $    17,009     $  31,589
Standby letters of credit                 172                 -                   -               -           172




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