10-K: Tectonic Financial, Inc. Reports 2023 Annual Results, Cites Growth in Assets and Net Income

Tectonic Financial, Inc. reports a net income of $15.2 million for the year ended December 31, 2023, with total assets reaching $677.3 million.

Summary

• Tectonic Financial, Inc., a financial holding company, released its annual report for the year ended December 31, 2023.
• The company reported total assets of $677.3 million, total loans held for investment of $494.8 million, and total deposits of $526.9 million.
• Net income for the year was $15.2 million, and shareholders equity totaled $106.9 million.
• The company operates through three segments: Banking, Other Financial Services, and HoldCo operations.
• The Banking segment includes traditional community banking services and factoring services.
• The Other Financial Services segment includes investment advisory, securities brokerage, and insurance services.
• Tectonic Advisors had approximately $3.6 billion in client assets under management, while Sanders Morris had approximately $3.2 billion in client assets.
• The Bank's lending services include SBA and USDA loans, dental and other professional loans, and traditional community banking loans.
• The Bank also offers factoring services through its Integra Division.
• The Bank's deposits included $31.3 million available from the funds of trust clients.
• The company had $21.0 million borrowed under the Bank Term Funding Program (BTFP) and $12.0 million in subordinated notes.

Sentiment

Score: 5

Explanation: The document presents a mixed picture. While there is growth in assets and client assets under management, there are also concerns about profitability, competition, and reliance on wholesale funding. The decrease in net income and increase in expenses are negative indicators, while the growth in assets and client assets under management are positive. The overall sentiment is neutral to slightly negative.

Positives

• The company experienced growth in total assets, loans, and deposits.
• Tectonic Advisors and Sanders Morris have significant client assets under management.
• The company has a diversified lending portfolio, including SBA, USDA, dental, and traditional commercial loans.
• The company offers a wide range of deposit services, including online options.
• The company has access to various funding sources, including the FHLB and BTFP.

Negatives

• The company's cost of funds is higher due to reliance on wholesale funding sources.
• The company faces increased competition for deposits.
• The company is subject to interest rate risk, which could affect net interest margins.
• The company's securities portfolio is subject to market fluctuations.
• The company relies heavily on a single referral source, Cain Watters.
• The company faces intense competition from larger banks and financial institutions.

Risks

• Liquidity risk, including the ability to maintain the deposit base, could affect the company's ability to fund operations.
• The company is subject to interest rate risk, which could affect net interest margins and the value of assets.
• The company's securities portfolio is subject to risk of loss due to market fluctuations.
• The company's reliance on Cain Watters for referrals poses a risk to its business.
• The company faces competition from larger banks and financial institutions.
• Cybersecurity attacks and breaches of information security could disrupt business and cause losses.
• The company is subject to extensive government regulation and supervision.
• Recent bank failures and the related negative impact on customer confidence in the safety and soundness of the banking industry may adversely affect our business, earnings and financial condition.
• The company is subject to numerous laws designed to protect consumers and failure to comply with these laws could lead to a wide variety of sanctions.
• The company faces a risk of noncompliance and enforcement action with the BSA and other anti-money laundering laws.

Future Outlook

The company intends to continue to grow its deposit base and reduce reliance on wholesale funding sources. The company also plans to pursue acquisition opportunities that complement its activities and enhance profitability.

Management Comments

• The Bank strives to generate an attractive risk-adjusted return on assets and capital by providing niche lending services and generating significant non-interest income through its factoring and trust services.
• We believe our lending products provide an important diversity of risk and opportunity, which differentiates us from most community banks our size.
• We believe that offering TPA services allows us to serve our clients more fully and to attract new clients to our trust platform.
• By providing our clients with a broad array of investment products and services, we believe that we can attract clients seeking differentiated investment solutions and retain them over a longer period of time.

Industry Context

The financial services industry is rapidly changing and intensely competitive. The company faces competition from a wide range of financial institutions, including local, regional, and national banks, as well as online and discount brokers, and financial technology companies. The company believes its regional focus and long-standing client relationships provide a competitive advantage.

Comparison to Industry Standards

• The company's loan portfolio is diversified across various sectors, including SBA, USDA, dental, and traditional commercial loans, which is a common strategy for community banks to mitigate risk.
• The company's reliance on wholesale funding sources is a common practice for smaller banks, but it can lead to higher costs of funds compared to larger institutions with more stable deposit bases.
• The company's investment advisory and brokerage business faces intense competition from larger firms with greater resources, which is a typical challenge for smaller players in the wealth management industry.
• The company's focus on niche lending services, such as dental practices, is a strategy used by some community banks to differentiate themselves from larger competitors.
• The company's use of technology, including online banking and mobile devices, is consistent with industry trends to enhance customer experience and efficiency.

Corporate Governance

Legal Proceedings

• The company is involved in various legal actions arising in the normal course of business, but management believes the ultimate outcome will not have a material adverse effect on the company's financial condition or results of operations.

Related Party Transactions

• The company has a services agreement with Cain Watters, a related party, for due diligence and research services.
• Tectonic Advisors has a fee allocation agreement with Cain Watters related to its advisory agreement with the Bank.
• Certain officers, directors, and their affiliated companies have depository accounts with the Bank.
• The company has a support services agreement with Cain Watters, where Tectonic Advisors provides financial advisory and research services to CWA.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the potential for dilution from future capital raises.
• Employees may be affected by changes in compensation and benefits.
• Customers may be impacted by changes in interest rates and deposit options.
• Suppliers and creditors may be affected by the company's financial performance and liquidity.

Next Steps

• The company intends to increase its efforts to reduce reliance on wholesale funding sources.
• The company plans to continue to grow its deposit base and retain trust clients.
• The company intends to pursue acquisition opportunities that complement its activities and enhance profitability.

Key Dates

Keywords

financial holding company, banking, investment advisory, securities brokerage, trust services, SBA loans, USDA loans, factoring, deposits, asset management