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 months endedMarch 31, 2022 (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, 2021 filed with theSecurities and Exchange Commission (the "SEC") onMarch 31, 2022 (the "2021 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 2021 Form 10-K, and under the section entitled "Risk Factors" in this Form 10-Q, including, but not limited to, the following:
? changes in interest rates, including the recent significant increases in
market interest rates;
? risks associated with the uncertain inflationary outlook in
and our market areas;
? the potential for a recession and the negative and adverse impact a recession
would have on our earnings, capital and financial position resulting from
higher losses on the Bank's loan and factored receivables portfolios; a
decline in the equity and fixed income markets that would reduce assets under
management and capital markets activity, thereby reducing the earnings at
the Bank;
? changes in the economy generally and the regulatory response thereto;
? changes in the economy of the State of Texas , our primary market;
? risks associated with the COVID-19 global pandemic ("COVID-19"), or anycurrent or future variants 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, or any current or future variants thereof, and our participation in
COVID-19-related government programs such as the Paycheck Protection Program
(the "PPP") administered by the
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;
? 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;
? our ability to maintain a strong core deposit base or other low-cost funding
sources;
? our ability to manage our credit risk;
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? 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;
? 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 COVID-19, or any
current or future variants thereof;
? the effects of terrorism and acts of war or threat thereof, including the
current conflict in Ukraine , and efforts by the U.S. 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.
In addition, financial markets and global supply chains may be adversely
affected by the current or anticipated impact of military conflict, including
the current Russian invasion of
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. 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 . 30
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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.
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, third party administration, qualified plan recordkeeping and insurance services to individuals, small businesses and institutions acrossthe United States . The following discussion and analysis presents our consolidated financial condition as of Mach 31, 2022 andDecember 31, 2021 , and our consolidated results of operations for the three months endedMarch 31, 2022 and 2021. 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 2021 Form 10-K. 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 2021 Form 10-K for additional information regarding critical accounting policies. Performance Summary Net income available to common shareholders decreased$13,000 , or 0.3%, to$3.9 million for the three months endedMarch 31, 2022 , compared to the three months endedMarch 31, 2021 . Earnings per diluted common share were$0.53 and$0.59 for the three months endedMarch 31, 2022 and 2021, respectively. 31
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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. For the three months endedMarch 31, 2022 , annual return on average assets was 2.97%, compared to 3.38% for the same period in the prior year, and annual return on average tangible common equity was 34.28%, compared to 49.85% for the same period in the prior year. The lower annual return ratios for the three months endedMarch 31, 2022 were due to a slight decrease in income which was outpaced by 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 shares of Company common stock issued for the Company's acquisition ofIntegra Funding Solutions, LLC , aTexas limited liability company ("Integra"), onJuly 1, 2021 , and earnings, net of preferred stock and common stock dividends paid, fromMarch 31, 2021 toMarch 31, 2022 . The growth in average assets is primarily attributable to growth in loans and to assets acquired from the Company's acquisition of Integra.
The following table presents non-GAAP reconciliations of annual return on average tangible common equity:
As of and As of and
for the for the
Three Months Three Months
Ended March Ended March
(Dollars in thousands, except percentages) 31, 2022 31, 2021
Income available to common shareholders $ 3,897 $ 3,910
Average shareholders' equity $ 85,553 $ 60,716
Less: average goodwill 21,440 10,729
Less: average core deposit intangible 760 928
Less: average preferred stock 17,250 17,250
Average tangible common equity$ 46,103 $ 31,809 Annual return on average tangible common equity 34.28 % 49.85 % Total assets decreased$17.6 million , or 3.0%, to$567.4 million as ofMarch 31, 2022 , from$585.0 million as ofDecember 31, 2021 . This decrease was primarily due to a decrease of$8.3 million for loans held for sale, the forgiveness of$24.0 million of PPP loans by the SBA during the period and a decrease of$6.6 million for cash and due from banks, partly offset by an increase of$21.4 million for non-PPP SBA loans, net of allowance for loan losses. Substantially all loans outside of those made under the PPP are secured by specific collateral, including business assets, consumer assets, and commercial real estate. Shareholders' equity increased$2.5 million , or 3.0%, to$87.3 million as ofMarch 31, 2022 , from$84.8 million as ofDecember 31, 2021 . See analysis of shareholders' equity in the section captioned "Capital Resources and Regulatory Capital Requirements" included elsewhere in this discussion.
Results of Operations for the Three Months Ended
Details of the changes in the various components of net income are discussed below.
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Table of Contents Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The effective federal funds rate was at zero to 0.25% throughout 2021, and was raised by 0.25% duringMarch 2022 , to an effective rate of 0.25% to 0.50% as ofMarch 31, 2022 . The following tables present 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.
Three Months Ended
Three Months Ended
March 31, 2022 vs March 31, 2021
Increase(Decrease) Due to Change in
Average
(In thousands) Rate Volume Total Interest-bearing deposits and federal funds sold $ 5 $ 12 $ 17 Securities 72 117 189 Loans, net of unearned discount (1) 815 214 1,029 Total earning assets 892 343 1,235 Savings and interest-bearing demand - 2 2 Money market deposit accounts (1 ) 25 24 Time deposits (111 ) 74 (37 ) FHLB and other borrowings 2 (49 ) (47 ) Total interest-bearing liabilities (110 ) 52 (58 ) Changes in net interest income$ 1,002 $ 291 $ 1,293 (1) Average loans include non-accrual. Net interest income increased$1.3 million , or 24.1%, from$5.4 million for the three months endedMarch 31, 2021 to$6.7 million for the three months endedMarch 31, 2022 . Net interest margin for the three months endedMarch 31, 2022 and 2021 was 5.00% and 4.47%, respectively, an increase of 53 basis points. The increase in net interest income and margin was primarily due to the increase in the average yield in interest-earning assets attributable to the factored receivables acquired in the Integra acquisition and increase in SBA loan volume, which was partly offset by a decrease of the recognition of PPP-related SBA fees. Other changes included a decrease in average rates paid on interest-bearing deposits and an increase in average volume of interest-bearing deposits, which replaced the Paycheck Protection Program Liquidity Facility ("PPPLF") borrowings as PPP loans have been forgiven by the SBA and paid off. 33
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The average volume of interest-earning assets increased$52.3 million , or 10.7%, from$487.2 million for the three months endedMarch 31, 2021 to$539.5 million for the three months endedMarch 31, 2022 . The average volume of loans increased$13.5 million , or 3.1%, from$438.8 million for the three months endedMarch 31, 2021 to$452.2 million for the three months endedMarch 31, 2022 . The increase in the average volume of loans included increases of$56.4 million for organic loan growth and$37.0 million for factored receivables related to the Integra acquisition during the third quarter of 2021, partly offset by an$80.0 million decrease of PPP loans. The average yield for loans increased 75 basis points from 5.70% for the three months endedMarch 31, 2021 to 6.45% for the three months endedMarch 31, 2022 . During the three months endedMarch 31, 2022 , we recognized$2.0 million of interest income related to the factored receivables, with an average yield of 22.0%. Total average volume of PPP loans was$23.3 million and$103.3 million for the three months endedMarch 31, 2022 and 2021, respectively. During the three months endedMarch 31, 2022 , we recognized$172,000 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 a decrease of$1.5 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 decreased to 4.0% during the three months endedMarch 31, 2022 , from 7.4% for the same period in the prior year. The average volume of interest-bearing deposits held at theFederal Reserve Bank of Dallas ("FRB") increased$24.8 million as a result of the increase in non-interest-bearing deposits during the current and prior quarters. The average volume of securities increased$14.0 million due to the purchase ofPublic Improvement District/Tax Increment Reinvestment Zone ("PID/TIRZ") investments during the second quarter of 2021. The average yield on securities increased 112 basis points from 2.28% for the three months endedMarch 31, 2021 to 3.40% for the three months endedMarch 31, 2022 . The average volume of interest-bearing liabilities increased$3.7 million , or 0.9%, from$390.3 million for the three months endedMarch 31, 2021 to$393.9 million for the three months endedMarch 31, 2022 . The average volume of interest-bearing deposits increased$59.7 million , and the average interest rate paid on interest-bearing deposits decreased 17 basis points from 0.91% for the three months endedMarch 31, 2021 to 0.74% for the three months endedMarch 31, 2022 . The average volume of non-interest bearing deposits increased$40.4 million , or 72.1%, from$56.0 million for the three months endedMarch 31, 2021 to$96.5 million for the three months endedMarch 31, 2022 . The average cost of deposits during the three months endedMarch 31, 2021 was impacted by decreases in interest rates paid on time deposits. The average volume of FHLB and other borrowings decreased$56.1 million , or 68.3%, from$82.1 million for the three months endedMarch 31, 2021 to$26.1 million for the three months endedMarch 31, 2022 , consisting mostly of funding from the PPPLF, at an interest rate of 0.35%, used to fund the PPP loans. The following table sets forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin, for the three months endedMarch 31, 2022 and 2021. Three Months Ended March 31, 2022 2021 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 47,292 $ 22 0.19 %$ 22,468 $ 5 0.09 % Securities 39,948 335 3.40 25,939 146 2.28 Loans, net of unearned discount (1) 452,237 7,192 6.45 438,784 6,163 5.70 Total earning assets 539,477 7,549 5.68 487,191 6,314 5.26 Cash and other assets 50,081 31,128 Allowance for loan losses (4,129 ) (2,945 ) Total assets$ 585,429 $ 515,374 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 14,579 9 0.25 %$ 12,091 7 0.23 % Money market deposit accounts 135,106 122 0.37 107,089 98 0.37 Time deposits 206,182 519 1.02 176,968 556 1.27 Total interest-bearing deposits 355,867 650 0.74 296,148 661 0.91 FHLB and other borrowings 26,059 23 0.36 82,113 70 0.35 Subordinated notes 12,000 219 7.40 12,000 219 7.40 Total interest-bearing liabilities 393,926 892 0.92 390,261 950 0.99 Non-interest-bearing deposits 96,467 56,044 Other liabilities 9,483 8,353 Total liabilities 499,876 454,689 Shareholders' equity 85,553 60,716 Total liabilities and shareholders' equity$ 585,429 $ 515,374 Net interest income$ 6,657 $ 5,364 Net interest spread 4.76 % 4.27 % Net interest margin 5.00 % 4.47 % (1) Includes non-accrual loans. 34
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Table of Contents Provision for Loan Losses For the three months endedMarch 31, 2022 , the provision for loan losses totaled$327,000 , compared to$428,000 for the three months endedMarch 31, 2021 . 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.
Non-Interest Income
The components of non-interest income were as follows:
Three Months Ended March 31,
(In thousands) 2022 2021
Trust income $ 1,598 $ 1,440
Advisory income 3,574 3,017
Brokerage income 2,471 2,564
Service fees and other income 2,216 2,306
Rental income 100 88
Total $ 9,959 $ 9,415 Total non-interest income for the three months ended
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 months endedMarch 31, 2022 increased$158,000 , or 11.0%, compared to the same period in the prior year. The increase in trust income between the periods is due to an increase in the average market value of the trust assets for the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 . During the three months endedMarch 31, 2021 , there was continued uncertainty related to the economic impacts of the ongoing COVID-19 pandemic, which led to volatility in asset values. In addition, there was an increase in net flows to assets held in custody during 2021, as shown in the rollforward of client assets below, which increased the value of our assets during the three months endedMarch 31, 2022 over the values during the three months endedMarch 31, 2021 . Volatility related to impacts of geo-political instability related to the war inUkraine , regulatory action, including increases in market interest rates by theFederal Reserve aimed at tempering inflation, or continuing effects of the COVID-19 pandemic, including supply-chain disruptions, all of which are likely to impact the bond and equity markets, or other factors, could result in future net decreases in the average values of our assets held in custody, and/or in a decrease in net flows to our assets held in custody, decreasing our trust income. 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 months endedMarch 31, 2022 , advisory income increased$557,000 , or 18.5%, compared to the same period 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 for the three months endedMarch 31, 2022 as compared to the same period 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. Net inflows to our assets under management throughout 2021, as well as market appreciation, in part from a decrease in volatility related to decreased uncertainty as to the effects of the ongoing COVID-19 pandemic between the two periods, resulted in an increase in asset values, and an increase in our advisory income. Volatility related to regulatory action, including the effects of inflation and of increases in market interest rates by theFederal Reserve aimed at tempering inflation, as well as supply chain disruptions related to geo-political instability, including the war inUkraine , and/or disruptions related to continuing world-wide effects of the COVID-19 pandemic, are likely to impact the financial markets and the value of and/or net inflows to our assets under management, potentially decreasing our advisory income. 35
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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 months endedMarch 31, 2022 decreased$93,000 , or 3.6%, compared to the same period in the prior year. The majority of the decrease was related to a decrease of$710,000 in commission income from general over-the-counter trading during the three months endedMarch 31, 2022 over the same period in the prior year, which were offset by increases in commissions from syndicated offering activity of$520,000 and an increase in income from margin lending of$145,000 , as well as other immaterial changes in brokerage income. These fluctuations were primarily the result of normal variances in general trading activity related to changing market conditions, with the increase in income from margin lending being influenced by an increase in interest rates on margin lending. Private offering and syndicated public offering activity did recover somewhat during 2021, but expectations of economic disruption related to geo-political factors and increases in market interest rates by theFederal Reserve , among other factors, are expected to lead to economic uncertainty and volatility, which is likely to decrease offering activity given price uncertainty in the face of volatile markets. The table below reflects a rollforward of our client assets fromMarch 31, 2021 throughMarch 31, 2022 , which includes both advisory and brokerage assets, and the inflows and outflows and net market appreciation fromDecember 31, 2020 throughMarch 31, 2022 . Our brokerage and advisory assets experienced an increase of approximately$725.7 million , or 14.7%, betweenMarch 31, 2021 andMarch 31, 2022 , related to positive net flows and market appreciation. (In thousands) Client Assets As of December 31, 2020$ 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 2,123,450 Client outflows (1,765,995 ) Net flows 357,455 Market appreciation 310,182 As of December 31, 2021$ 5,609,312 Client inflows 865,781 Client outflows (581,614 ) Net flows 284,167 Market depreciation (226,134 ) As of March 31, 2022$ 5,667,345 Service fees and other income. Service fees includes fees for deposit-related services, loan servicing, third-party administration fees, and other income. Service fees and other income for the three months endedMarch 31, 2022 decreased$90,000 , or 3.9%, compared to the same period in the prior year. The decrease was the result of decreases in income distributions from an interest in securities not readily marketable of$85,000 and a decrease in income from loan servicing fees related to the Bank's loan servicing fees and rights of$105,000 , as well as a decrease in pension administration fees of$33,000 and a decrease in other income from errors at Sanders Morris of$32,000 . These decreases were offset by an increase in service fees from the Bank's Integra factoring division of$154,000 , which was acquired effectiveJuly 1, 2021 , and other immaterial fluctuations netting to an increase of$11,000 . The decrease in third-party administration fees was primarily due to timing differences in completion of plan administration work between the two periods, pushing a larger portion of the work and related revenue into later quarters in the current year, compared to 2021. Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three months endedMarch 31, 2022 increased$12,000 , or 13.6%, compared to the same period in the prior year. The increase was primarily due to a new tenant moving into vacant space during the second quarter 2021. 36
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Table of Contents Non-Interest Expense
The components of non-interest expense were as follows:
Three Months Ended March 31,
(In thousands) 2022 2021
Salaries and employee benefits $ 7,456
450 427
Trust expenses 598 564
Brokerage and advisory direct costs 528 506
Professional fees 401 450
Data processing 169 205
Other 1,357 775
Total $ 10,959 $ 8,793
Total non-interest expense for the three months ended March 31, 2022 increased
$2.2 million , or 24.6%, compared to the same period in the prior year, due to
increases in salaries and employee benefits, occupancy expense, trust expenses,
and other expenses, which were partially offset by decreases brokerage and
advisory direct costs, professional fees, and data processing expense. Material
changes in the various components of non-interest income are discussed below.
Salaries and employee benefits. Salaries and employee benefits for the three
months ended March 31, 2022 increased $1.6 million , or 27.1%, compared to the
same period in the prior year. The increase was primarily due to increases in
bonuses, salaries, and related payroll expenses in our Banking segment, and in
our Other Financial Services segment, primarily within the Bank's Nolan
division, as well as increases at Tectonic Advisors and Sanders Morris. In
addition, health insurance and other employee benefits costs increased for the
three months ended March 31, 2022 across the Company by $104,000 , compared to
the same period in the prior year due primarily to increases in headcount and
rate increases. The increases in salary, bonus, and other related payroll costs
during the three months ended March 31, 2022 relate primarily to an increase in
salary and bonus expenses in our Banking segment of $954,000 , $508,000 of which
is related to the acquisition of the Bank's Integra division in July 2021 , and
the remainder of which is related to merit increases in salaries and an increase
in headcount, including in the Bank's SBA division. Salaries and bonuses in our
Other Financial Services segment increased $483,000 , of which $303,000 is
related to the Bank's Nolan division, related to increases in headcount in
response to growth in plan administration work in 2022, as well as increases in
salaries at Tectonic Advisors of $98,000 due to merit increases and additional
headcount in our investment operations team resulting from increases in our
assets under management, and an increase in salary, commission, earnouts and
incentive bonuses at Sanders Morris totaling $72,000 , and an increase in stock
compensation expense of $17,000 , and an increase in salary and bonus expense at
the Bank's trust division of $11,000 over the same period in the prior year.
Occupancy and equipment expense. Occupancy and equipment expense for the three
months ended March 31, 2022 increased $23,000 , or 5.4%, compared to the same
period in the prior year. The increase was related to increases totaling $71,000
at our Banking segment, offset by a decrease of $48,000 in our Other Financial
Services segment. The increase of $71,000 at our Banking segment included an
increase of $50,000 related to the acquisition of the Bank's Integra division in
July 2021 , as well as increases in the Bank's facilities expense of $21,000 . The
decrease of $47,000 in our Other Financial Services segment included decreases
in depreciation expense of $23,000 , facilities expense of $12,000 , utilities and
common area maintenance expense of $9,000 , and in repairs expense of $7,000 ,
partially offset by immaterial net increases of $3,000 .
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 for the three months ended March 31, 2022
increased $34,000 , or 6.0%, compared to the same period in the prior year due to
an increase in the value of trust assets for the three months ended March 31,
2022 over the value during the same period in the prior year.
Brokerage and advisory direct costs. Brokerage and advisory direct costs for the
three months ended March 31, 2022 increased $22,000 , or 4.3%, compared to the
same period in the prior year. The increase for the three months ended March 31,
2022 related primarily to increases in information and other service fees at
Tectonic Advisors of $34,000 and at Sanders Morris of $6,000 , and an increase in
fees related to advisory assets at Sanders Morris of $17,000 and in execution
charges on brokerage transactions of $4,000 , offset by decreases in brokerage
and exchange clearing fees at Sanders Morris of approximately $21,000 , and
decreases in referral fees of $18,000 , compared to the same period in the prior
year.
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Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three months endedMarch 31, 2022 decreased$49,000 , or 10.9%, compared the same period in the prior year. The decreases were the result of decreases of$80,000 and$6,000 in ourOther Financial Services andHoldco segments, respectively, offset by an increase of$37,000 in our Banking segment. The decrease in ourOther Financial Services segment was primarily due to a decrease of$102,000 at the Bank's trust department, which was primarily due to a decrease in consulting fees related to our participant directed plan services team, where staff increases have allowed us to reduce our reliance on consultants. This decrease was offset by an increase at the Bank's Nolan division of$17,000 and legal fees atTectonic Advisors of$4,000 . The increase of$37,000 in our Banking segment for the three months endedMarch 31, 2022 , which included an increase of$10,000 related to the Bank's Integra division, was related to an increase in audit and tax consulting fees of$49,000 , offset by a net decrease in legal and professional fees of$12,000 . Data processing. Data processing includes costs related to the Company's operating systems. Data processing expense for the three months endedMarch 31, 2022 decreased$36,000 , or 17.6%, compared to the same period in the prior year. The decrease was the result of a decrease of$42,000 in our Banking segment, offset by an increase of$6,000 in ourOther Financial Services segment. The decrease in our Banking segment was primarily related to the conversion of the Bank's core accounting system during the three months endedMarch 31, 2021 , which increased expense during that earlier period. The increase in ourOther Financial Services segment was related to an increase in costs at the Bank's trust division of$11,000 , offset by a decrease at the Bank's Nolan division of$5,000 . 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 the three months endedMarch 31, 2022 increased$582,000 , or 75.1%, compared to the same period in the prior year. The increase included increases of$339,000 and$161,000 in our Banking andOther Financial Services segments, respectively, and an increase in ourHoldco segment of$82,000 . The increase of$339,000 in our Banking segment included an increase of$124,000 related to other expenses at the Bank's Integra division which was acquired inJuly 2021 and includes increases in marketing and advertising costs of$39,000 , bank charges of$32,000 , software costs of$12,000 , and other operating costs of$41,000 . Other increases in our Banking segment included an increase of$88,000 in software licenses, an increase of$36,000 in employee recruitment related primarily to growth, an increase in business insurance expense of$19,000 , and an increase in bank service charges of$20,000 , and other individually immaterial increases. The increase of$161,000 in ourOther Financial Services segment was related to an increase in our marketing, advertising and public relations costs of$89,000 , which includes marketing initiatives atTectonic Advisors related to assets under management attributable toCain Watters clients, and other marketing initiatives across the Company, as well as increases in travel, meals, and lodging of$25,000 , and a net increase of$19,000 in software, licenses, and computer services related to technology initiatives across the company, and other individually smaller fluctuations which increased other expenses by$28,000 . The increase of$82,000 in ourHoldco segment was primarily the result of an increase of$67,000 in marketing and public relations initiatives across the Company, as well as other immaterial fluctuations netting to a$15,000 increase compared to the same period in the prior year. Income Taxes Income tax expense for the three months endedMarch 31, 2022 was approximately$1.0 million , compared to$1.3 million for the same period in the prior year. The effective income tax rate was 19.6% for the three months endedMarch 31, 2022 , compared to 22.7% for the same period 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. Our other 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. 38
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A third operating segment,
The following table presents key metrics related to our segments:
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