Tectonic Financial, Inc. (NASDAQ: TECTP) is a Texas-based financial holding company that offers a wide array of banking, trust, investment advisory, securities brokerage, third-party administration, and insurance services to individuals, small businesses, and institutions across the United States. With a strong presence in the Dallas/Fort Worth Metroplex and a growing national footprint, Tectonic Financial has established itself as a diversified financial services powerhouse, well-positioned for continued growth and success.

Business Overview

Tectonic Financial operates through four main subsidiaries: T Bancshares, Inc. (the bank holding company), Sanders Morris LLC (a registered broker-dealer and investment advisor), Tectonic Advisors, LLC (a registered investment advisor), and HWG Insurance Agency LLC (an insurance agency). The company's banking subsidiary, T Bank, N.A., offers a broad range of commercial and consumer banking services, including lending, deposit-taking, and trust services, primarily to small- and medium-sized businesses and their employees, as well as other institutions. The bank's technological capabilities, including worldwide free ATM withdrawals, sophisticated online banking, electronic funds transfer, and remote deposit solutions, allow it to serve customers regardless of their geographic location.

In addition to its traditional banking operations, Tectonic Financial's other subsidiaries provide a diverse array of financial services. Sanders Morris offers managed and directed brokerage, investment advisory, and related trust company operations, while Tectonic Advisors focuses on managing money for relatively large, affiliated institutions. HWG Insurance Agency provides life and disability insurance brokerage services to both individuals and businesses.

Financials

For the fiscal year ended December 31, 2023, Tectonic Financial reported annual net income of $13,667,000 and annual revenue of $65,876,999. The company's annual operating cash flow was -$33,186,000, and its annual free cash flow was -$33,562,000.

In the latest quarter, the three months ended March 31, 2024, Tectonic Financial reported net income of $3,061,000, a decrease of 37.2% compared to the same period in the prior year. Revenue for the quarter was $17,600,000, a slight decrease of 0.8% year-over-year. The company's operating cash flow for the quarter was -$3,163,000, and its free cash flow was -$3,551,000.

The decrease in net income for the quarter was primarily due to a $1.1 million increase in non-interest expense, an $839,000 increase in the provision for credit losses, and a $203,000 decrease in non-interest income, partially offset by a $59,000 increase in net interest income and a $436,000 decrease in income tax expense.

Segmental Performance

Tectonic Financial's business is divided into three operating segments: Banking, Other Financial Services, and HoldCo. The Banking segment, which includes the company's commercial and consumer banking operations, as well as its factoring services, reported a 55.1% decrease in income before taxes for the three months ended March 31, 2024, compared to the same period in the prior year. This was primarily due to the increase in non-interest expense, provision for credit losses, and decrease in non-interest income.

The Other Financial Services segment, which encompasses the company's wealth management, brokerage, and insurance activities, reported a 25.4% increase in income before taxes for the three months ended March 31, 2024, compared to the same period in the prior year. This was driven by an increase in non-interest income, primarily from trust and advisory fees, as well as a decrease in non-interest expense.

The HoldCo segment, which includes the operations and subordinated debt held at the bank's immediate parent, as well as the activities of the financial holding company, reported a 67.1% increase in loss before taxes for the three months ended March 31, 2024, compared to the same period in the prior year. This was due to increases in interest expense, salaries and employee benefits, occupancy and equipment expense, and other expenses.

Geographical Breakdown

Tectonic Financial's primary geographic market is the Dallas/Fort Worth Metroplex, which encompasses Dallas, Tarrant, Denton, Collin, and Rockwall counties in Texas. The company also serves the dental and other health professional industries through a centralized loan and deposit platform, as well as the small business community by offering loans guaranteed by the U.S. Small Business Administration (SBA) and the U.S. Department of Agriculture (USDA).

As of March 31, 2024, the company's loan portfolio included $76.8 million, or approximately 14.3%, of total funded loans to the dental industry, compared to $78.2 million, or 15.6% of total funded loans, as of December 31, 2023.

Revenue Breakdown and Trends

Tectonic Financial's revenue is primarily generated from its banking, wealth management, brokerage, and insurance activities. For the three months ended March 31, 2024, the company reported the following revenue breakdown:

• Net interest income: $7,102,000 (40.4% of total revenue)

• Non-interest income: $10,498,000 (59.6% of total revenue)

The decrease in total revenue for the three months ended March 31, 2024, compared to the same period in the prior year, was primarily due to a $581,000 decrease in gain on sale of loans, a $108,000 decrease in brokerage income, and a $266,000 decrease in service fees and other income, partially offset by a $226,000 increase in trust income and a $487,000 increase in advisory income.

The decrease in gain on sale of loans was due to the fact that there were no loan sales during the three months ended March 31, 2024, compared to the sale of $5.8 million of USDA loans in the same period of the prior year. The decrease in brokerage income was primarily related to a decrease in margin lending income, insurance commissions, and other brokerage commissions, partially offset by increases in general over-the-counter trading fees and private placement commissions. The decrease in service fees and other income was mainly due to a decrease in the recovery of unclaimed funds at Sanders Morris, as well as decreases in pension administration fees, loan service fees, and consulting fees.

The increase in trust income was due to an increase in the value of trust assets, while the increase in advisory income was driven by increases in advisory assets from net inflows and market appreciation.

Liquidity

As of March 31, 2024, Tectonic Financial had total assets of $777.6 million, an increase of 14.8% from $677.3 million as of December 31, 2023. The company's shareholders' equity increased by 1.5% to $108.5 million during the same period.

The company's primary sources of funds are retail, small business, custodial, and wholesale commercial deposits, loan repayments, maturity of investment securities, other short-term borrowings, and funds provided by operations. As of March 31, 2024, the company had approximately $118.8 million held in an interest-bearing account at the Federal Reserve Bank, as well as the ability to borrow funds as members of the Federal Home Loan Bank and the Federal Reserve Bank.

Capital Resources

Tectonic Financial and its bank subsidiary, T Bank, N.A., meet all capital adequacy requirements and are considered "well-capitalized" under the applicable regulations of the Federal Reserve and the FDIC. As of March 31, 2024, the company's total risk-based capital ratio was 20.18%, its tier 1 risk-based capital ratio was 18.92%, and its tier 1 leverage ratio was 12.39%.

Risks and Challenges

Tectonic Financial faces several risks and challenges, including potential recession in the United States and its market areas, the impacts related to or resulting from recent bank failures and any continuation of uncertainty in the banking industry, increased competition for deposits and related changes in deposit customer behavior, changes in market interest rates, the persistence of the current inflationary environment, and the need to maintain public confidence to preserve a steady flow of funds.

The company also faces risks specific to its commercial loan portfolio, particularly its dental and SBA loan segments, as well as risks associated with having one referral source, Cain Watters & Associates, LLC, comprise a substantial part of its business. Additionally, the company is subject to various regulatory requirements and scrutiny, which could have a direct material effect on its business, results of operations, and financial condition.

Outlook

Tectonic Financial has not provided any specific financial guidance for the upcoming fiscal year. However, the company's management has stated that they continue to closely monitor for credit changes resulting from the uncertain forecasted economic conditions, the continued rising interest rate environment, and the persistent high inflation levels in the United States and its market areas, as well as the potential for a recession. The company has indicated that additional provisions for credit losses may be necessary in future periods.

Conclusion

Tectonic Financial, Inc. (NASDAQ: TECTP) is a diversified financial services powerhouse with a strong presence in the Dallas/Fort Worth Metroplex and a growing national footprint. The company's four main subsidiaries – T Bank, N.A., Sanders Morris LLC, Tectonic Advisors, LLC, and HWG Insurance Agency LLC – provide a wide array of banking, wealth management, brokerage, and insurance services to individuals, small businesses, and institutions across the United States.

Despite facing various risks and challenges, including the potential for a recession, increased competition, and regulatory scrutiny, Tectonic Financial has demonstrated its ability to navigate the evolving financial landscape and deliver solid financial performance. With its diversified business model, technological capabilities, and experienced management team, the company appears well-positioned for continued growth and success in the years to come.