TECTONIC FINANCIAL, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q for the three and nine months endedSeptember 30, 2021 (this "Form 10-Q"), as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 filed with theSecurities and Exchange Commission (the "SEC") onMarch 31, 2021 and amended on Form 10-K/A onMay 5, 2021 (as amended, the "2020 Form 10-K").
Cautionary Notice Regarding Forward-Looking Statements
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including our expectations, intentions, beliefs, or strategies regarding the future. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," and similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled "Risk Factors," in our 2020 Form 10-K, and under the section entitled "Risk Factors" in this Form 10-Q, including, but not limited to, the following:
? risks associated with the ongoing COVID-19 global pandemic ("COVID-19") and
the Delta variant (or any other new variant of COVID-19), including, among
others, business disruption for our customers, customers' ability to fulfill
their financial obligations to the Company, our employees' ability to conduct
banking and other transactions, the response of governmental authorities to
the COVID-19 pandemic, and the emerging Delta variant, and our participation
in COVID-19-related government programs such as the Paycheck Protection
Program (the "PPP") administered by the
"SBA") and created under the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act");
? risks associated with implementing aspects of our expansion strategy, whether
through additional services and products or acquisitions;
? liquidity risks, including those related to having enough liquid assets to
meet depositor demands;
? the need to hold more capital in order to comply with consolidated capital
ratios;
? competition from other banks, financial institutions and wealth and investment
management firms and our ability to retain our clients;
? the adequacy of our allowance for loan losses;
? risks associated with generating deposits from retail sources without a branch
network so that we can fund our loan portfolio and growth;
? risks associated with higher cost deposits relative to our peer group, which
has an impact on our net interest margin and profits;
? risks associated with having one referral source,
LLC ("Cain Watters"), comprise a substantial part of our business;
? our reliance on key personnel and the ability to attract and retain the
personnel necessary to implement our business plan;
? changes in the economy generally and the regulatory response thereto;
? changes in the economy of the State of Texas , our primary market;
? risks specific to commercial loans and borrowers (particularly dental and SBA
loans);
? our ability to continue to originate loans (including SBA loans);
? impairment of our goodwill or other intangible assets;
? claims and litigation pertaining to our fiduciary responsibilities;
? generating investment returns for our wealth management, brokerage and other
customers that are satisfactory to them;
? changes in interest rates;
? our ability to maintain a strong core deposit base or other low-cost funding
sources;
? our ability to manage our credit risk;
? regulatory scrutiny related to our loan portfolio, including commercial real
estate;
? the earning capacity of our borrowers;
? fluctuation in the value of our investment securities;
? our inability to identify and address potential conflicts of interest;
? our ability to maintain effective internal control over financial reporting;
? the accuracy of estimates and assumptions;
? the development of an active, liquid market for the Series B preferred stock;
? fluctuations in the market price of the Series B preferred stock;
? our ability to raise additional capital, particularly during times of stress;
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? the soundness of other counterparty financial institutions and certain
securities brokerage firms;
? technological change in the banking, investment, brokerage and insurance
industry;
? our ability to protect against and manage fraudulent activity, breaches of our
information security, and cybersecurity attacks;
? our reliance on communications, information, operating and financial control
systems technology and related services from third-party service providers;
? natural disasters and epidemics and pandemics, such as the ongoing COVID-19
pandemic and the emerging Delta variant;
? the effects of terrorism and efforts to combat it;
? environmental liabilities;
? regulation of the financial services industry;
? legislative changes or the adoption of tax reform policies;
? political instability and changes in tariffs and trade barriers;
? compliance with laws and regulations, supervisory actions, the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Economic
Growth, Regulatory Relief and Consumer Protection Act ("EGRRCPA"), capital
requirements, the Bank Secrecy Act, anti-money laundering laws, consumer laws,
and other statutes and regulations;
? regulation of broker-dealers and investment advisors;
? the enactment of regulations relating to privacy, information security and
data protection;
? legal and regulatory examinations, proceedings, investigations and inquiries,
fines and sanctions;
? future issuances of preferred stock or debt securities and its impact on the
Series B preferred stock;
? our ability to manage our existing and future preferred stock and
indebtedness;
? our ability to pay dividends;
? the continuation of securities analysts coverage of the company;
? our management and board of directors have significant control over our
business;
? risks related to being a "controlled company" under NASDAQ rules;
? the costs and expenses of being a public company; and
? changes in the laws, rules, regulations, interpretations or policies relating
to financial institutions, accounting, tax, trade, monetary and fiscal
matters, including the policies of the
Reserve System ("Federal Reserve") and as a result of initiatives of the Biden
administration.
You should not place undue reliance on any such forward-looking statements. Any
forward-looking statement reflects only information known to us as of the date
on which it is made and we do not undertake any obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events, except as required by law. New factors emerge from time to
time, and it is not possible for us to predict which will arise. In addition, we
cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statement.
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Table of Contents Other Available Information We file or furnish with theSEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of ourSEC filings are available to the public at theSEC's website at https://www.sec.gov. In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Exchange Act are available through our website, www.t.financial, as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC . The Company routinely posts important information for investors on its website, www.t.financial. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company's website, in addition to following the Company's press releases,SEC filings, public conference calls, presentations and webcasts.
Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-Q.
COVID-19 Update The Company continues to actively monitor developments related to the COVID-19 pandemic including the progress of COVID-19 vaccines, the emergence of the so-called Delta variant (or any other variants of COVID-19), the effects of the CARES Act and the American Rescue Plan Act of 2021 and the prospects for additional fiscal stimulus programs; however, the extent to which each will impact our operations and financial results in 2021 remains uncertain. The Consolidated Appropriations Act, 2021, which was signed into law onDecember 27, 2020 , authorized additional funds under the CARES Act for the origination of PPP loans by financial institutions with a term of five years from the funding date. The Bank funded 694 PPP loans, for$66.2 million related to the second round of PPP. As ofSeptember 30, 2021 , the Bank had$49.2 million of total outstanding PPP loans in its loan portfolio. Management believes that the majority of these PPP loans will ultimately be forgiven by the SBA or repaid in accordance with the terms of the PPP over the coming quarters. While all industries could experience adverse effects related to the COVID-19 pandemic, the 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. AtSeptember 30, 2021 , there were six loans in COVID-19-related deferment with an aggregate outstanding balance of approximately$10.3 million . AtDecember 31, 2020 , there were 11 loans in the COVID-19-related deferment with an aggregate outstanding balance of approximately$4.3 million . The increase in the amount of loans with COVID-19-related deferrals is primarily in the SBA segment of the Bank's loan portfolio. For more information on the COVID-19 pandemic, see "Recent Developments Related to the COVID-19 Pandemic" in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 1A., "Risk Factors," in our 2020 Form 10-K.
The impact of the COVID-19 pandemic on the Company for the periods covered by this Form 10-Q is detailed in each applicable section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included below.
General We are a financial holding company headquartered inDallas, Texas . We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, factoring, third party administration, recordkeeping and insurance to individuals, small businesses and institutions in all 50 states. The following discussion and analysis presents our consolidated financial condition as ofSeptember 30, 2021 andDecember 31, 2020 , and our consolidated results of operations for the three and nine months endedSeptember 30, 2021 and 2020. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Form 10-Q and in the audited financial statements in our 2020 Form 10-K. 34
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We operate through four main direct and indirect subsidiaries: (i)T Bancshares, Inc. ("TBI"), which was incorporated under the laws of theState of Texas onDecember 23, 2002 to serve as the bank holding company forT Bank, N.A. a national banking association (the "Bank"), (ii)Sanders Morris Harris LLC ("Sanders Morris"), a registered broker-dealer with theFinancial Industry Regulatory Authority ("FINRA"), and registered investment advisor with theSEC , (iii)Tectonic Advisors, LLC ("Tectonic Advisors "), a registered investment advisor registered with theSEC focused generally on managing money for relatively large, affiliated institutions, and (iv)HWG Insurance Agency LLC ("HWG"), an insurance agency registered with theTexas Department of Insurance ("TDI").
Critical Accounting Policies and Estimates
We prepare consolidated financial statements based on accounting principles generally accepted inthe United States ("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. 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. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("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. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2020 Form 10-K for additional information regarding critical accounting policies. Performance Summary Net income available to common shareholders increased$2.3 million , or 89.7%, to$4.8 million for the three months endedSeptember 30, 2021 , compared to$2.5 million for the three months endedSeptember 30, 2020 . Earnings per diluted common share were$0.65 and$0.38 for the three months endedSeptember 30, 2021 and 2020, respectively. Net income available to common shareholders increased$5.8 million , or 92.0%, to$12.0 million for the nine months endedSeptember 30, 2021 , compared to$6.2 million for the nine months endedSeptember 30, 2020 . Earnings per diluted common share was$1.74 and$0.95 for the nine months endedSeptember 30, 2021 and 2020, respectively. The increase in earnings was primarily due to increased revenue in the Banking andOther Financial Services segments. Our accounting and reporting policies conform to GAAP and the prevailing practices in the banking industry. However, this Form 10-Q 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. We calculate average tangible common equity as average shareholders' equity less average goodwill, average core deposit intangible and average preferred stock. 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. 35
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For the three months endedSeptember 30, 2021 , annual return on average assets was 3.61%, compared to 2.27% for the same period in the prior year, and annual return on average tangible common equity was 60.94%, compared to 39.22% for the same period in the prior year. For the nine months endedSeptember 30, 2021 , annual return on average assets was 3.23%, compared to 2.15% for the same period in the prior year, and annual return on average tangible common equity was 49.58%, compared to 35.36% for the same period in the prior year. The higher annual return ratios for the three and nine months endedSeptember 30, 2021 was due to an increase in income which outpaced the increases in average assets and average tangible common equity compared to the same period in the prior year. The growth in average tangible common equity between the two periods is primarily related to earnings, net of preferred dividends paid, fromSeptember 30, 2020 toSeptember 30, 2021 . The growth in average assets is primarily attributable to growth in loans and to assets acquired from the Company's acquisition ofIntegra Funding Solutions, LLC , aTexas limited liability company ("Integra"), onJuly 1, 2021 .
The following table presents non-GAAP reconciliations of annual return on average tangible common equity:
As of and As of and As of and As of and
for the for the for the for the
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
(Dollars in thousands) 2021 2020 2021 2020
Income available to common
shareholders $ 4,761 $ 2,510 $
12,000
Average shareholders' equity
64,856 $ 52,697
Less: average goodwill 21,440 10,729 14,339 10,729
Less: average core deposit
intangible 861 1,062 910 1,112
Less: average preferred stock 17,250 17,250 17,250 17,250
Average tangible common equity
32,357 $ 23,606
Annual return on average
tangible common equity 60.94 % 39.22 % 49.58 % 35.36 %
Total assets grew by $61.2 million , or 11.9%, to $574.6 million as of September
30, 2021 from $513.4 million as of December 31, 2020 . This increase included the
addition of $39.0 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 $25.2 million for non-PPP SBA loans, net of allowance for loan
losses, $10.9 million for loans held for sale, $14.0 million for investments,
and $2.0 million for cash and due from banks. The increases were partly offset
by decreases of $33.3 million for PPP loans, $4.9 million for interest-bearing
deposits, and $2.8 million for other assets. Substantially all loans outside of
those made under the PPP are secured by specific collateral, including business
assets, consumer assets, and commercial real estate. We anticipate that as the
majority of PPP loans are forgiven or paid off, which we believe will occur
principally over the next three to six months, and as customers spend down their
PPP funds, this will result in a reduction in both loans and borrowings.
Shareholders' equity increased $21.9 million , or 36.5%, to $81.9 million as of
September 30, 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 for the Three and Nine Months Ended
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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TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The effective federal funds rate decreased 150 basis points duringMarch 2020 (50 basis points onMarch 3, 2020 and 100 basis points onMarch 15, 2020 ) to zero to 0.25%, where it remained throughSeptember 30, 2021 . The following tables present the changes in net interest income and identify 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.
Three Months Ended
Three Months Ended
September 30, 2021 vs September 30, 2020
Increase(Decrease) Due to Change in
Average
(In thousands) Rate Volume Total Interest-bearing deposits and federal funds sold $ 6 $ (5 ) $ 1 Securities 10 94 104 Loans, net of unearned discount (1) 2,592 777 3,369 Total earning assets 2,608 866 3,474 Savings and interest-bearing demand - 3 3 Money market deposit accounts (3 ) 12 9 Time deposits (324 ) (42 ) (366 ) FHLB and other borrowings 3 14 17 Subordinated notes 15 1 16 Total interest-bearing liabilities (309 ) (12 ) (321 ) Changes in net interest income$ 2,917 $ 878$ 3,795 (1) Average loans include non-accrual. Net interest income increased$3.8 million , or 92.7%, from$4.1 million for the three months endedSeptember 30, 2020 to$7.9 million for the three months endedSeptember 30, 2021 . Net interest margin for the three months endedSeptember 30, 2021 and 2020 was 5.98% and 3.37%, respectively, an increase of 261 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$41.4 million , or 8.6%, from$480.8 million for the three months endedSeptember 30, 2020 to$522.2 million for the three months endedSeptember 30, 2021 . The average volume of loans increased$40.7 million , or 9.9%, from$413.7 million for the three months endedSeptember 30, 2020 to$454.4 million for the three months endedSeptember 30, 2021 . The increase in the average volume of loans included increases of$39.4 million for organic loan growth and$33.1 million for factored receivables purchased during the three months endedSeptember 30, 2021 , partly offset by$32.1 million decrease of PPP loans. The average yield for loans increased 249 basis points from 4.94% for the three months endedSeptember 30, 2020 to 7.43% for the three months endedSeptember 30, 2021 . 37
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The increase in the average yield was the result of interest income recorded for the PPP loans and the factored receivables. InApril 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 ofSeptember 30, 2021 , approximately$97.3 million of the PPP loans originated in 2020 have been forgiven by the SBA and were paid off or repaid by the borrower. During the nine months endedSeptember 30, 2021 , we funded an additional$66.2 million of PPP loans, of which$17.9 million have been forgiven by the SBA and were paid off or repaid by the borrower. Total outstanding PPP loans were$49.2 million as ofSeptember 30, 2021 . During the three months endedSeptember 30, 2021 , we recognized$1.3 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$686,000 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 8.5% during the three months endedSeptember 30, 2021 . For the balance of PPP loans outstanding as ofSeptember 30, 2021 , we expect to recognize additional PPP loan related deferred fees (net of deferred origination costs) totaling approximately$868,000 , as a yield adjustment over the remaining expected lives of these loans, with the majority being recognized during the fourth quarter of 2021 and first quarter of 2022. During the three months endedSeptember 30, 2021 , we recognized$2.5 million of interest income related to the factored receivables purchased, with an average yield of 29.0%. 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 23.2%. The average volume of interest-bearing liabilities increased$15.9 million , or 4.1%, from$391.8 million for the three months endedSeptember 30, 2020 to$407.7 million for the three months endedSeptember 30, 2021 . The average volume of interest-bearing deposits slightly decreased$101,000 , and the average interest rate paid on interest-bearing deposits decreased 43 basis points from 1.19% for the three months endedSeptember 30, 2020 to 0.76% for the three months endedSeptember 30, 2021 . The average volume of non-interest bearing deposits increased$24.1 million , or 43.5%, from$55.4 million for the three months endedSeptember 30, 2020 to$79.5 million for the three months endedSeptember 30, 2021 . The average cost of deposits during the three months endedSeptember 30, 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$16.0 million , or 28.9%, from$55.2 million for the three months endedSeptember 30, 2020 to$71.2 million for the three months endedSeptember 30, 2021 , consisting entirely of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. There were no borrowings from the FHLB for the three months endedSeptember 30, 2021 and 2020.
Nine Months Ended
Nine Months Ended
September 30, 2021 vs September 30, 2020
Increase(Decrease) Due to Change in
Average
(In thousands) Rate Volume Total
Interest-bearing deposits and federal funds sold $ (49 ) $
(10 ) $ (59 )
Securities (192 ) 127 (65 )
Loans, net of unearned discount (1) 2,527 3,762 6,289
Total earning assets 2,286 3,879 6,165
Savings and interest-bearing demand (7 ) 8 1
Money market deposit accounts (151 ) 61 (90 )
Time deposits (1,214 ) (274 ) (1,488 )
FHLB and other borrowings (14 ) 150 136
Subordinated notes - - -
Total interest-bearing liabilities (1,386 ) (55 ) (1,441 )
Changes in net interest income $ 3,672 $ 3,934 $ 7,606
(1) Average loans include non-accrual.
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Net interest income increased$7.6 million , or 69.1%, from$11.0 million for the nine months endedSeptember 30, 2020 to$18.6 million for the nine months endedSeptember 30, 2021 . Net interest margin for the nine months endedSeptember 30, 2021 and 2020 was 4.87% and 3.37%, respectively, an increase of 150 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$75.6 million , or 17.4%, from$434.2 million for the nine months endedSeptember 30, 2020 to$509.8 million for the nine months endedSeptember 30, 2021 . The average volume of loans increased$80.3 million , or 22.1%, from$362.8 million for the nine months endedSeptember 30, 2020 to$443.1 million for the nine months endedSeptember 30, 2021 . The increase in the average volume of loans included increases of$35.4 million for organic loan growth,$33.8 million increase of PPP loans, and also the acquired portfolio atJuly 1, 2021 of$11.2 million for factored receivables purchased during the three months endedSeptember 30, 2021 . The average yield for loans increased 94 basis points from 5.29% for the nine months endedSeptember 30, 2020 to 6.23% for the nine months endedSeptember 30, 2021 . InApril 2020 , we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. See discussion above in the three months endedSeptember 30, 2021 and 2020. During the nine months endedSeptember 30, 2021 , we recognized$4.1 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$3.5 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 7.2% during the nine months endedSeptember 30, 2021 . During the nine months endedSeptember 30, 2021 , we recognized$2.5 million of interest income related to the factored receivables purchased, with an average yield of 29.0%. 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 23.2%. The average volume of interest-bearing liabilities increased$47.4 million , or 13.4%, from$353.9 million for the nine months endedSeptember 30, 2020 to$401.3 million for the nine months endedSeptember 30, 2021 . The average volume of interest-bearing deposits decreased$6.2 million , or 2.0%, from$313.0 million for the nine months endedSeptember 30, 2020 to$306.8 million for the nine months endedSeptember 30, 2021 , and the average interest rate paid on interest-bearing deposits decreased 66 basis points from 1.47% for the nine months endedSeptember 30, 2020 to 0.81% for the nine months endedSeptember 30, 2021 . The average volume of non-interest bearing deposits increased$20.9 million , or 43.1%, from$43.2 million for the nine months endedSeptember 30, 2020 to$69.3 million for the nine months endedSeptember 30, 2021 . The average cost of deposits during the nine months endedSeptember 30, 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$53.7 million , or 185.8%, from$28.9 million for the nine months endedSeptember 30, 2020 to$82.6 million for the nine months endedSeptember 30, 2021 , consisting mostly of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. The average cost of FHLB and other borrowings decreased 7 basis points from 0.44% for the nine months endedSeptember 30, 2020 to 0.37% for the nine months endedSeptember 30, 2021 . 39
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The following table sets forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin, for the three months endedSeptember 30, 2021 and 2020. Three Months Ended September 30, 2021 2020 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 31,343 $ 12 0.15 %$ 43,532 $ 11 0.10 % Securities 36,428 264 2.88 23,579 160 2.70 Loans, net of unearned discount (1) 454,407 8,508 7.43 413,661 5,139 4.94 Total earning assets 522,178 8,784 6.67 480,772 5,310 4.39 Cash and other assets 47,760 29,252 Allowance for loan losses (3,331 ) (2,553 ) Total assets$ 566,607 $ 507,471 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 14,443 10 0.27 %$ 10,372 7 0.27 % Money market deposit accounts 124,259 114 0.36 111,808 105 0.37 Time deposits 185,761 495 1.06 202,384 861 1.69 Total interest-bearing deposits 324,463 619 0.76 324,564 973 1.19 FHLB and other borrowings 71,216 78 0.43 55,230 45 0.32 Subordinated notes 12,000 219 7.24 12,000 219 7.26 Total interest-bearing liabilities 407,679 916 0.89 391,794 1,237 1.26 Non-interest-bearing deposits 79,533 55,388 Other liabilities 8,849 5,790 Total liabilities 496,061 452,972 Shareholders' equity 70,546 54,499 Total liabilities and shareholders' equity$ 566,607 $ 507,471 Net interest income$ 7,868 $ 4,073 Net interest spread 5.78 % 3.13 % Net interest margin 5.98 % 3.37 % (1) Includes non-accrual loans. 40
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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 nine months endedSeptember 30, 2021 and 2020. Nine Months Ended September 30, 2021 2020 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 37,451 $ 34 0.12 %$ 48,141 $ 93 0.26 % Securities 29,227 617 2.82 23,243 682 3.92 Loans, net of unearned discount (1) 443,128 20,663 6.23 362,806 14,374 5.29 Total earning assets 509,806 21,314 5.59 434,190 15,149 4.66 Cash and other assets 37,866 29,302 Allowance for loan losses (3,158 ) (2,066 ) Total assets$ 544,514 $ 461,426 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 13,977 26 0.25 %$ 9,890 25 0.34 % Money market deposit accounts 114,542 312 0.36 92,312 402 0.58 Time deposits 178,275 1,529 1.15 210,776 3,017 1.91 Total interest-bearing deposits 306,794 1,867 0.81 312,978 3,444 1.47 FHLB and other borrowings 82,555 231 0.37 28,935 95 0.44 Subordinated notes 12,000 656 7.31 12,000 656 7.30 Total interest-bearing liabilities 401,349 2,754 0.92 353,913 4,195 1.58 Non-interest-bearing deposits 69,340 48,441 Other liabilities 8,969 6,375 Total liabilities 479,658 408,729 Shareholders' equity 64,856 52,697 Total liabilities and shareholders' equity$ 544,514 $ 461,426 Net interest income$ 18,560 $ 10,954 Net interest spread 4.67 % 3.08 % Net interest margin 4.87 % 3.37 % (1) Includes non-accrual loans. Provision for Loan Losses For the three and nine months endedSeptember 30, 2021 , the provision for loan losses totaled$641,000 and$1.2 million , respectively, compared to$445,000 and$1.7 million for the three and nine months endedSeptember 30, 2020 , respectively. The provision of$641,000 for the three months endedSeptember 30, 2021 was for the factored receivables purchased in the Integra acquisition. 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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Table of Contents Non-Interest Income
The components of non-interest income were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2021 2020 2021 2020
Trust income $ 1,612 $ 1,391 $ 4,584 $ 3,863
Gain on sale of loans - 290 101 722
Advisory income 3,532 2,775 9,825 7,580
Brokerage income 2,485 1,387 6,846 5,248Service fees and other income 1,632 1,809 5,345
4,769 Rental income 88 85 264 232 Total$ 9,349 $ 7,737 $ 26,965 $ 22,414 Total non-interest income for the three and nine months endedSeptember 30, 2021 increased$1.6 million , or 20.8%, and$4.6 million , or 20.3%, compared to the same periods in the prior year. Material 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. Volatility in the bond and equity markets impacts the market value of trust assets and the related fees. Trust income for the three and nine months endedSeptember 30, 2021 increased$221,000 , or 15.9%, and increased$721,000 , or 18.7%, respectively, compared to the same periods in the prior year. The increase in the fee income between the periods is due to an increase in the average market value of the trust assets during the three and nine months endedSeptember 30, 2021 , compared to the three and nine months endedSeptember 30, 2020 . The expectation that the impacts of the ongoing COVID-19 pandemic are largely known and that economic recovery has begun has increased market values of trust assets over those experienced during the three and nine months endedSeptember 30, 2020 , when the impacts of the COVID-19 pandemic were uncertain, causing extreme volatility as markets reacted to each new development and in turn decreasing fees during the three and nine month periods in the prior year. Volatility related to worse than expected or currently unexpected impacts and/or renewed fears of resurgent strains of the COVID-19 virus potentially resistant to current vaccines could result in future net decreases in the average values of our assets held in custody, and/or continued volatility in asset values, potentially decreasing our trust income. Gain on sale of loans. Gain on sale of loans is generally gain on sales of the guaranteed portion of loans within our SBA loan portfolio. There was no gain on sale of loans during the three months endedSeptember 30, 2021 , compared to$290,000 of gain during the same period in the prior year, resulting in a 100% decrease in gain on sale of loans between the two periods. Gain on sale of loans decreased$621,000 , or 86.0%, for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year. Gain on sale of loans for the nine months endedSeptember 30, 2021 was$101,000 , resulting from the sale of$1.1 million of SBA loans during the second quarter 2021. 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 three and nine months endedSeptember 30, 2021 , advisory income increased$757,000 , or 27.3%, and$2.2 million , or 29.6%, compared to the same periods in the prior year. The increase in advisory income between the two periods is due to an increase in the average market value of the advisory assets during the three and nine months endedSeptember 30, 2021 as compared to the same periods in the prior year. Similar to our trust income, changes in the value of our assets under management will result in comparable changes in our advisory income. The expectation that the impacts of the ongoing COVID-19 pandemic are largely known and that economic recovery has begun has increased market values of our advisory assets, whereas the economic disruption caused by the start of the COVID-19 pandemic during the three and nine months endedSeptember 30, 2020 increased market volatility leading to lower advisory fees in the same periods in the prior year. Volatility related to currently unexpected impacts and/or resurgent strains of the COVID-19 virus potentially resistant to current vaccines could result in future net decreases in the average values of our assets under management, potentially decreasing our advisory income. 42
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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, and on private placement and syndication activity during the period, and in the case of margin lending, on interest rates. Brokerage income for the three and nine months endedSeptember 30, 2021 increased$1.1 million , or 79.2%, and$1.6 million , or 30.4%, compared to the same periods in the prior year. The economic disruption related to the COVID-19 pandemic led to a dramatic slowing of activity that began late in the first quarter 2020 and continued throughout the remainder of the year. This led to delays in the timing of private placements and syndicated public offerings, along with volatility in the volume of general trading activity. Private offering and syndicated public offering activity has begun to recover as the impacts of the COVID-19 pandemic are becoming better understood, however, economic uncertainty related to an uneven recovery or the potential for new variants of the COVID-19 virus could stall the recovery in private and syndicated public offering activity, and potentially in brokerage activity overall, decreasing brokerage income. The table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as ofSeptember 30, 2021 andDecember 31, 2020 , and the inflows and outflows and net market appreciation during the three and nine months endedSeptember 30, 2021 . Our brokerage and advisory assets experienced an increase of approximately$22.6 million , or 0.4%, during the three months endedSeptember 30, 2021 , related to positive net flows, which were partially offset by market depreciation, and increased$787.7 million , or 17.4%, during the nine months endedSeptember 30, 2021 , related to positive net flows and market appreciation. (In thousands) Client Assets As of December 31, 2020$ 4,524,376 Client inflows 519,177 Client outflows (437,760 ) Net flows 81,417 Market appreciation 335,882 As of March 31, 2021$ 4,941,675 Client inflows 995,914 Client outflows (861,884 ) Net flows 134,030 Market appreciation 213,754 As of June 30, 2021$ 5,289,459 Client inflows 538,398 Client outflows (459,684 ) Net flows 78,714 Market depreciation (56,146 ) As of September 30, 2021$ 5,312,027 Service fees and other income. Service fees includes fees for deposit-related services, loan servicing, and third-party administration fees. Service fees and other income for the three and nine months endedSeptember 30, 2021 decreased$177,000 , or 9.8%, and increased$576,000 , or 12.1%, respectively, compared to the same periods in the prior year. The decrease for the three months endedSeptember 30, 2021 is primarily the result of decreases in third party administration fees of$202,000 and in loan servicing fees of$164,000 compared to the same period in the prior year. The decrease in third-party administration fees was primarily due to timing differences in completion of plan administration work related to the COVID-19 pandemic, which resulted in a lag in information from plan sponsors in 2020, pushing a larger portion of the work and related revenue into the third quarter of 2020, compared to the flow of information in 2021, which resulted in more work being completed in earlier quarters. The decrease in loan servicing fees was primarily related to there being no change in the servicing rights allowance during the three months endedSeptember 30, 2021 , and a reduction in the servicing rights allowance during the same quarter in the prior year. These decreases were offset by an increase in loan service fees from the Bank's Integra factoring division of$130,000 , and an increase in miscellaneous income and a decrease in losses on errors totaling$54,000 , both at Sanders Morris, compared to the same period in the prior year. The remaining variance relates to immaterial fluctuations. The increase in service fees and other income of$576,000 for the nine months endedSeptember 30, 2021 compared to the same period in the prior year was primarily due to an increase in pension administration fees of$460,000 . In addition, loan service fees from the Integra factoring division at the Bank accounted for an increase of$130,000 and increases from miscellaneous income and a decrease in losses on errors totaling$118,000 at Sanders Morris, and income distributions from an interest in securities not readily marketable increased by$63,000 . These increases were offset by a decrease in other income of approximately$124,000 related to a non-recurring extinguishment of a retirement liability at Sanders Morris during the first quarter of 2020 and a decrease in income from loan servicing fees related to the Bank's loan servicing fees and rights of$67,000 . The remaining$4,000 variance relates to immaterial fluctuations. 43
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Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three and nine months endedSeptember 30, 2021 increased$3,000 , or 3.5% and$32,000 or 13.8%, respectively, compared to the same periods in the prior year. The increases were primarily due to a new tenant moving into vacant space during the second quarter 2021. Non-Interest Expense
The components of non-interest expense were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2021 2020 2021 2020
Salaries and employee benefits
$ 13,693 Occupancy and equipment 503 464 1,322 1,466 Trust expenses 623 533 1,782 1,460 Brokerage and advisory direct costs 509 517 1,506 1,563 Professional fees 429 367 1,211 1,009 Data processing 282 186 753 571 Other 1,333 926 2,941 2,458 Total$ 10,101 $ 7,734 $ 27,404 $ 22,220 Total non-interest expense for the three and nine months endedSeptember 30, 2021 increased$2.3 million , or 29.4%, and$5.2 million , or 23.3%, respectively, compared to the same periods in the prior year, due to increases in salaries and employee benefits, other expenses, trust expenses, and professional fees and data processing costs, which were partially offset by a decrease in depreciation expense within our occupancy and equipment expense and in brokerage and advisory direct costs. Material changes in the various components of non-interest income are discussed below. Salaries and employee benefits. Salaries and employee benefits for the three and nine months endedSeptember 30, 2021 increased$1.6 million , or 33.5%, and$4.2 million , or 30.6%, respectively, compared to the same period in the prior year. The increases were primarily due to increases in earnouts and incentive bonuses at Sanders Morris and at the Bank'sNolan division, as well as increases in bonuses, salaries, and related payroll expenses in our Banking segment. In addition, stock compensation expense increased in ourHoldCo segment, and our health insurance costs increased across the Company compared to the same periods in the prior year. The increases relate to an increase in earnouts and incentive bonuses at Sanders Morris totaling of$678,000 and$927,000 related to increases in brokerage commission activity during the three and nine months endedSeptember 30, 2021 compared to the same periods in the prior year, during which the COVID-19 pandemic had begun to suppress private placements and syndicated offerings, as well as certain trading activity on which Sanders Morris earns higher margins, which recovered somewhat during the three and nine months endedSeptember 30, 2021 . Also in ourOther Financial Services segment,$105,000 and$556,000 of the increase for the three and nine months endedSeptember 30, 2021 , respectively, related to merit increases in salaries and an increase in headcount, as well as increases in bonuses, related to growth in theNolan division, and$48,000 and$161,000 related to salary increases at Sanders Morris. In our Banking segment, increases in compensation expense of$606,000 and$1.7 million for the three and nine months endedSeptember 30, 2021 , respectively, related primarily to an increase in bonuses of$221,000 and$1.1 million driven primarily by increases in headcount and activity at the Bank's SBA lending division, some of which relates to the PPP loan program, and salaries at the Bank's Integra factoring division of$409,000 , which was acquiredJuly 1, 2021 . Stock compensation expense increased by$56,000 and$174,000 for the three and nine months endedSeptember 30, 2021 , respectively, related to stock grants made onSeptember 30, 2020 net of a decrease in expense related to options granted, and bonus expense in ourHoldco segment increased$13,000 and$38,000 , respectively, related to variations in bonus accrued compared to the same periods in the prior year. Increases in health insurance expense led increased benefit costs across the Company, which increased by$87,000 and$259,000 during the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, driven by both cost and headcount increases. Increases in related payroll taxes, as well as less material increases salaries atTectonic Advisors and the Bank's trust department, account for the remaining variances. 44
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Occupancy and equipment expense. Occupancy and equipment expense for three and nine months endedSeptember 30, 2021 increased$39,000 , or 8.4%, and decreased$144,000 , or 9.8%, respectively, compared to the same periods in the prior year. The increase for the three months endedSeptember 30, 2021 is primarily related to rent expense at the Bank's Integra factoring division of$66,000 , which was offset by a decrease at ourOther Financial Services segment of$19,000 , which included decreases atTectonic Advisors and Sanders Morris due to the expiration of leased space totaling$25,000 , and decreases at bothTectonic Advisors and Sanders Morris related to decreases in utilities and common area maintenance expenses from lessors due to decreased occupancy during COVID-19 totaling$5,000 , and a decrease in depreciation expense of$8,000 , offset by an increase in rent atNolan and the Bank's Trust department of$13,000 . The remaining offsetting increase relates to individually immaterial variances. The decrease of$144,000 for the nine months endedSeptember 30, 2021 is primarily related to a group of fixed assets and software costs in ourOther Financial Services division reaching full depreciation/amortization during the six months endedJune 30, 2020 accounting for$89,000 of the decrease, and decreases in rent, utilities and common area maintenance expenses in that segment of$116,000 , offset by the increase in rent in our Banking segment related to the Bank's Integra factoring division of$66,000 . The remaining variances are made up of other individually immaterial fluctuations. Trust expenses. Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company, and are based on the value of the assets held in custody. Volatility in 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$90,000 , or 16.9%, and$322,000 , or 22.1%, due to an increase in the value of trust assets for the three and nine months endedSeptember 30, 2021 over the value during the same periods in the prior year, which represents both an increase in trust assets from net flows into the Bank's trust department, and a recovery in asset values based on market expectations of an eventual recovery from the COVID-19 pandemic and other economic factors. Brokerage and advisory direct costs. Brokerage and advisory direct costs for three and nine months endedSeptember 30, 2021 decreased$8,000 , or 1.5%, and$57,000 , or 3.6%, respectively, compared to the same periods in the prior year. The decreases related primarily to decreases in brokerage and exchange clearing fees at Sanders Morris of approximately$57,000 and$84,000 , for the three and nine months endedSeptember 30, 2021 , respectively, offset by increases in information services and referral fees of$49,000 and$27,000 , respectively, compared to the same periods in the prior year. Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three and nine months endedSeptember 30, 2021 increased$62,000 , or 16.9%, and$202,000 , or 20.0%, compared to the same periods in the prior year. The increases were the result of increases of$122,000 and$178,000 in our Banking segment, for the three and nine months endedSeptember 30, 2021 , respectively. The increases included increases in legal and professional fees totaling$105,000 and$158,000 for the three and nine months endedSeptember 30, 2021 , respectively, related to attempts to recover amounts on liquidated loans in the Bank's SBA division, and to the acquisition by TBI of Integra, which was completed onJuly 1, 2021 . Please see Note 17. Acquisition within our financial statements elsewhere within this Form 10-Q for more information on Integra. In addition, professional fees in our banking segment increased$17,000 related to the operations of Integra. These increases for the three months endedSeptember 30, 2021 were partially offset by a decrease in ourOther Financial Services segment totaling$58,000 . This was primarily due to a decrease in consulting fees related to our participant directed plan services team of$89,000 , offset by increases in audit and tax consulting fees of$25,000 and an increase in legal fees of$4,000 . The remaining variance of$2,000 relates to a decrease in ourHoldCo segment. The increase for the nine months endedSeptember 30, 2021 also included an increase in professional fees in our banking segment of$53,000 , which was primarily due to$100,000 legal fees recorded for the Integra acquisition in the current quarter, partly offset by a$46,000 consulting fee paid during the nine months endedSeptember 30, 2020 for SBA PPP services. The increase was partly offset by a decrease in audit and tax consulting fees of$32,000 . In ourOther Financial Services segment, audit and tax consulting fees increased$23,000 driven by increases in costs related to internal control reviews at ourNolan division and the trust department, and legal fees increased$6,000 . These increases were partially offset by a decrease in professional fees of$19,000 , which was primarily related to a decrease in consulting fees in our participant directed plan services team of$96,000 , offset by an increase at ourNolan division of$73,000 due to an increase in third party actuarial fees related to our defined benefit pension plans.. In ourHoldCo segment, professional fees increased$49,000 , which were offset by decreases in legal and audit and tax consulting fees of$36,000 , for a net increase from ourHoldCo segment of$13,000 for the nine months endedSeptember 30, 2021 compared to the same period in the prior year. Data processing. Data processing includes costs related to the Company's operating systems. Data processing expense for three and nine months endedSeptember 30, 2021 increased$96,000 , or 51.6%, and$182,000 , or 31.9%, compared to the same periods in the prior year. The increases were the result of increases of$86,000 and$10,000 , and$139,000 and$43,000 in our banking and other financial services segments, respectively, for the three and nine months endedSeptember 30, 2021 , respectively. The increases in our banking segment were primarily related to the conversion of the Bank's core accounting system. The increases in our other financial services segment were primarily related to increased trust data processing fees, and discounts received during the three and nine months endedSeptember 30, 2020 , which decreased expense for those earlier periods. 45
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Other. Other expenses include costs for insurance,Federal Deposit Insurance Corporation ("FDIC") andOffice of the Comptroller of the Currency ("OCC") assessments, director fees, regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for three and nine months endedSeptember 30, 2021 increased$407,000 , or 44.0%, and$483,000 , or 19.7%, compared to the same periods in the prior year. The increases were primarily related to increases in computer software costs in our banking and other financial services segments totaling$87,000 and$202,000 , related to technology initiatives across the Company. Our marketing, advertising and public relations costs increased$129,000 and$133,000 for the three and nine months endedSeptember 30, 2021 , respectively, related to marketing and public relations initiatives across the Company. Future increases in assets under management will increase this cost. Other increases which were individually immaterial included payroll processing fees, increases in officers' and directors' coverage, and bank charges These increases were partially offset by a decrease in employee recruitment costs of$22,000 and$46,000 for the three and nine months endedSeptember 30, 2021 , and other individually immaterial decreases. Income Taxes Income tax expense for the three and nine months endedSeptember 30, 2021 was$1.4 million and$3.7 million , respectively, compared to$733,000 and$2.0 million for the same periods in the prior year. The effective income tax rate was 21.6% and 22.2% for the three and nine months endedSeptember 30, 2021 , respectively, compared to 20.2% and 21.5% for the same periods in the prior year. Segment Reporting
We have three operating segments: Banking,
Our Banking operating segment includes both commercial and consumer banking services, and factoring services through the Bank's Integra division. 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. Factoring services are provided primarily to small over-the-road trucking businesses. OurOther Financial Services segment includesTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes a TPA services unit and a participant directed recordkeeping team, 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,
The following table presents key metrics related to our segments:
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