TECTONIC FINANCI(US:TECTP)2025-08-14 16:02PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements of Tectonic Financial, Inc. for the periods ended June 30, 2025, and December 31, 2024, including balance sheets, income statements, comprehensive income, changes in shareholders' equity, and cash flows, along with detailed notes explaining the company's organization, accounting policies, and specific financial line items Consolidated Balance Sheets The consolidated balance sheets show Tectonic Financial, Inc.'s financial position at June 30, 2025, and December 31, 2024, with total assets increasing by $133.6 million (15.5%) to $997.0 million, driven primarily by increases in loans and interest-bearing deposits | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total assets | $997,020 | $863,380 | $133,640 | 15.5% | | Loans, net | $744,090 | $660,184 | $83,906 | 12.7% | | Interest-bearing deposits | $94,894 | $55,864 | $39,030 | 69.9% | | Loans held for sale | $57,531 | $46,980 | $10,551 | 22.5% | | Total cash and cash equivalents | $103,735 | $63,723 | $40,012 | 62.8% | | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total liabilities | $882,435 | $749,951 | $132,484 | 17.7% | | Total deposits | $853,082 | $711,147 | $141,935 | 20.0% | | Borrowed funds | $0 | $10,000 | $(10,000) | -100.0% | | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total shareholders' equity | $114,585 | $113,429 | $1,156 | 1.0% | Consolidated Statements of Income Net income available to common stockholders increased significantly for both the three and six months ended June 30, 2025, driven by higher net interest income and non-interest income, despite increases in non-interest expenses and provision for credit losses | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net income available to common stockholders | $3,800 | $2,758 | $1,042 | 37.8% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net income available to common stockholders | $7,729 | $5,431 | $2,298 | 42.3% | | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :----------------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Diluted EPS | $0.55 | $0.38 | $0.17 | 44.7% | | Weighted average diluted shares outstanding | 6,875,416 | 7,242,663 | (367,247) | -5.1% | | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :----------------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Diluted EPS | $1.12 | $0.75 | $0.37 | 49.3% | | Weighted average diluted shares outstanding | 6,897,215 | 7,252,424 | (355,209) | -4.9% | Consolidated Statements of Comprehensive Income Comprehensive income increased for both the three and six months ended June 30, 2025, primarily due to higher net income and a significant increase in other comprehensive income from changes in unrealized gains on securities available for sale | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Comprehensive Income | $4,389 | $3,290 | $1,099 | 33.4% | | Net Income | $4,271 | $3,146 | $1,125 | 35.8% | | Other comprehensive income | $118 | $144 | $(26) | -18.1% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Comprehensive Income | $9,156 | $6,211 | $2,945 | 47.4% | | Net Income | $8,724 | $6,207 | $2,517 | 40.6% | | Other comprehensive income | $432 | $4 | $428 | 10700.0% | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased by $1.2 million to $114.6 million as of June 30, 2025, primarily due to net income and other comprehensive income, partially offset by significant treasury stock repurchases and dividend payments | Metric | June 30, 2025 (in thousands) | June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :----------------------------- | :----------------------------- | :-------------------- | :------- | | Total Shareholders' Equity | $114,585 | $110,417 | $4,168 | 3.8% | - Key changes in shareholders' equity for the six months ended June 30, 2025, include net income of $8,724 thousand, stock-based compensation of $55 thousand, and other comprehensive income of $432 thousand, partially offset by treasury stock purchases of $(5,705) thousand and dividends paid on preferred and common stock totaling $(995) thousand and $(1,355) thousand, respectively15256 Consolidated Statements of Cash Flows Net cash provided by financing activities significantly increased, leading to a substantial rise in cash and cash equivalents, despite net cash used in operating and investing activities | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net change in cash and cash equivalents | $40,012 | $9,493 | $30,519 | 321.5% | | Cash and cash equivalents at end of period | $103,735 | $68,260 | $35,475 | 51.9% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net cash used in operating activities | $(68,111) | $(33,864) | $(34,247) | 101.1% | | Net cash used in investing activities | $(15,757) | $(45,141) | $29,384 | -65.1% | | Net cash provided by financing activities | $123,880 | $88,498 | $35,382 | 40.0% | Notes to Consolidated Financial Statements These notes provide detailed information on Tectonic Financial, Inc.'s organization, significant accounting policies, and specific financial statement line items, including securities, loans, leases, goodwill, deposits, borrowings, benefit plans, income taxes, stock compensation, commitments, related parties, regulatory matters, operating segments, fair value measurements, and recent accounting pronouncements Note 1. Organization and Significant Accounting Policies Tectonic Financial, Inc. is a Texas-based financial holding company offering banking, trust, investment advisory, securities brokerage, factoring, TPA, recordkeeping, and insurance services through its subsidiaries: T Bancshares, Inc. (TBI), Sanders Morris LLC, Tectonic Advisors, LLC, and HWG Insurance Agency LLC - Tectonic Financial, Inc. is a Texas corporation and registered financial holding company providing banking and other financial services across the U.S18 - T Bancshares, Inc. (TBI) for T Bank, N.A. (banking) - Sanders Morris LLC (broker-dealer, investment advisor) - Tectonic Advisors, LLC (investment advisor) - HWG Insurance Agency LLC (insurance agency) - Banking (commercial & consumer banking, factoring) - Other Financial Services (trust, retirement, financial management, investment advisory, brokerage) - HoldCo and Other (T Bancshares, financial holding company operations) | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Diluted earnings per share | $0.55 | $0.38 | $1.12 | $0.75 | Note 2. Securities The company's securities portfolio includes available-for-sale (U.S. government agencies, mortgage-backed) and held-to-maturity (PACE, PID/TIRZ) securities, along with restricted securities (FRB, FHLB stock) | Type of Security | Amortized Cost (in thousands) | Fair Value (in thousands) | | :--------------------------- | :---------------------------- | :------------------------ | | Securities available for sale | $24,175 | $22,646 | | Securities held to maturity | $22,504 | $20,576 | | Securities, restricted | $2,593 | $2,593 | - As of June 30, 2025, total unrealized losses on available-for-sale securities were $1,534 thousand, primarily from U.S. government agencies ($1,299 thousand) and mortgage-backed securities ($235 thousand)3135 - No allowance for credit losses recognized on available-for-sale and held-to-maturity securities in unrealized loss positions, as management believes losses are due to non-credit related factors (market interest rates) and does not intend to sell37 Note 3. Loans and Allowance for Credit Losses The loan portfolio increased significantly, primarily driven by SBA loans, with non-accrual and past due loans also increasing, particularly in real estate construction/land and SBA categories | Loan Type | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Gross loans | $754,838 | $669,367 | $85,471 | 12.8% | | SBA 7(a) guaranteed | $273,046 | $231,931 | $41,115 | 17.7% | | SBA 7(a) unguaranteed | $114,610 | $96,466 | $18,144 | 18.8% | | SBA 504 | $94,400 | $83,520 | $10,880 | 13.0% | | Real estate – construction and land | $65,743 | $53,844 | $11,899 | 22.1% | - Loans held for sale totaled $57.5 million at June 30, 2025, up from $47.0 million at December 31, 2024, primarily consisting of SBA and USDA loans. For the six months ended June 30, 2025, $71.1 million of SBA 7(a) loans held for sale were reclassified to loans held for investment43 | Loan Type | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Total Non-Accrual | $29,501 | $15,908 | $13,593 | 85.5% | | Real estate – construction/land | $12,039 | $0 | $12,039 | N/A | | SBA guaranteed | $9,074 | $11,374 | $(2,300) | -20.2% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | | :-------------------------- | :------------------------------------------ | | Beginning Balance | $9,183 | | Provision for credit losses | $2,939 | | Total charge-offs | $(1,651) | | Total recoveries | $277 | | Ending balance | $10,748 | Note 4. Leases The Company leases office facilities and equipment under operating leases, recognizing right-of-use assets and lease liabilities on its balance sheet, with both totaling $1.6 million as of June 30, 2025 - Right-of-use assets totaled $1.6 million at June 30, 2025, down from $1.9 million at December 31, 202483 - Lease liabilities totaled $1.6 million at June 30, 2025, down from $2.0 million at December 31, 202483 - Weighted average remaining lease term: 59 months - Weighted average discount rate: 4.03% | (In thousands) | Amount | | :------------- | :----- | | Total minimum rental payments (Company as lessee) | $1,826 | | Total minimum rental payments (Company as lessor) | $1,007 | Note 5. Goodwill and Core Deposit Intangible Goodwill remained stable at $21.44 million, while the net carrying amount of core deposit intangible decreased to $44 thousand as of June 30, 2025, due to amortization, with the remaining balance to be fully amortized in 2025 | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Goodwill | $21,440 | $21,440 | | Core deposit intangible, net | $44 | $149 | | Metric | 3 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | | Core deposit intangible amortization | $53 | $105 | - The remaining balance of $44 thousand for core deposit intangible will be fully amortized in 202586 Note 6. Deposits Total deposits increased by 20.0% to $853.1 million as of June 30, 2025, primarily driven by a significant increase in time deposits, which now constitute 71% of total deposits | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Total deposits | $853,082 | $711,147 | $141,935 | 20.0% | | Deposit Type | Balance (in thousands) | % of Total | | :------------------------ | :--------------------- | :--------- | | Non-interest-bearing demand | $60,228 | 7% | | Interest-bearing demand | $4,767 | 1% | | Money market accounts | $171,110 | 20% | | Savings accounts | $6,811 | 1% | | Time deposits | $610,166 | 71% | - Time deposits increased by $127.1 million (26.3%) from December 31, 2024, to June 30, 2025987 Note 7. Borrowed Funds and Subordinated Notes The Company had no FHLB or FRB borrowings as of June 30, 2025, having repaid $10.0 million in FHLB borrowings in January 2025, while subordinated notes totaling $12.0 million remained outstanding with slightly decreased interest rates | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Total Borrowed Funds | $12,000 | $22,000 | | FHLB borrowings | $0 | $10,000 | | FRB borrowings | $0 | $0 | - Subordinated notes totaling $12.0 million remained outstanding at both June 30, 2025, and December 31, 202490254 - 2017 Notes interest rate: 9.76% at June 30, 2025 (vs. 10.03% at Dec 31, 2024) - 2018 Note interest rate: 8.89% at June 30, 2025 (vs. 9.26% at Dec 31, 2024) Note 8. Benefit Plans The Company offers two 401(k) plans with employer matching contributions (100% on the first 1% and 50% on the next 5% of employee contributions), and employer contributions charged to expense increased for the six months ended June 30, 2025 - The Company operates two 401(k) plans covering substantially all employees of the Bank, Sanders Morris, and Tectonic Advisors91 - Employer contributions match 100% of the first 1% of employee compensation and 50% of the next 5% of employee compensation92 | Period | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :----- | :------------------ | :------------------ | :-------------------- | :------- | | 3 Months | $215 | $228 | $(13) | -5.7% | | 6 Months | $504 | $460 | $44 | 9.6% | Note 9. Income Taxes Income tax expense increased for both the three and six months ended June 30, 2025, resulting in higher effective income tax rates compared to the prior year, influenced by non-deductible expenses, while net deferred tax assets remained stable | Period | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :----- | :------------------ | :------------------ | :-------------------- | :------- | | 3 Months | $1,324 | $853 | $471 | 55.2% | | 6 Months | $2,553 | $1,701 | $852 | 50.1% | | Period | 2025 | 2024 | Change (pp) | | :----- | :---- | :---- | :---------- | | 3 Months | 23.7% | 21.3% | 2.4 | | 6 Months | 22.6% | 21.5% | 1.1 | - Net deferred tax assets totaled $1.4 million at both June 30, 2025, and December 31, 202497 Note 10. Stock Compensation Plans The Company's 2017 Equity Incentive Plan authorizes various equity grants, with 365,000 shares remaining available for future grants as of June 30, 2025, and compensation expense recorded for restricted stock units - The 2017 Equity Incentive Plan had 365,000 authorized shares of common stock remaining available for future grants as of June 30, 202599 - As of June 30, 2025, all 67,500 outstanding stock options were vested, with a weighted average exercise price of $5.23 and no remaining unrecognized compensation cost102103 - 89,000 awarded units of restricted stock were outstanding as of June 30, 2025, with compensation expense of $28 thousand and $55 thousand recorded for the three and six months ended June 30, 2025, respectively105 Note 11. Commitments and Contingencies The Company has off-balance sheet financial instruments, including undisbursed loan commitments and standby letters of credit, which decreased significantly, and is involved in legal proceedings not expected to have a material adverse effect | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Undisbursed loan commitments | $39,200 | $72,343 | $(33,143) | -45.8% | | Standby letters of credit | $135 | $162 | $(27) | -16.7% | | Total | $39,335 | $72,505 | $(33,170) | -45.8% | | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :----- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Provision (reversal) for off-balance sheet credit losses | $(93) | $38 | $(247) | $182 | | Ending balance (June 30) | $211 | $374 | $211 | $374 | - Management believes the ultimate outcome of legal proceedings will not have a material adverse effect on the Company's financial condition or results of operations111278 Note 12. Related Parties The Company has service agreements with Cain Watters, whose owners hold a significant stake, and maintains depository accounts with the Bank for officers, directors, and affiliates totaling $4.3 million at June 30, 2025 - Owners of Cain Watters & Associates, LLC hold approximately 29.5% ownership in Tectonic Financial, Inc113 | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Expense recognized under Tectonic Advisors-CWA Services Agreement | $117 | $75 | $11 | $121 | - Depository accounts with the Bank held by officers, directors, and affiliated companies totaled approximately $4.3 million at June 30, 2025 (down from $7.0 million at December 31, 2024), with no loans outstanding to these parties115 Note 13. Regulatory Matters Both the Company and its Bank subsidiary were "well-capitalized" as of June 30, 2025, exceeding all minimum capital ratios and conservation buffers under federal banking agency capital requirements - Both Tectonic Financial, Inc. (consolidated) and T Bank, N.A. (bank-only) met the definition of "well-capitalized" as of June 30, 2025, exceeding all Basel III and prompt corrective action capital ratios119257 | Ratio | Tectonic Financial, Inc. (Consolidated) | T Bank, N.A. (Bank Only) | Basel III Minimum (with buffer) | Well-Capitalized Threshold | | :---------------------------------- | :-------------------------------------- | :----------------------- | :------------------------------ | :------------------------- | | Total Capital (to Risk Weighted Assets) | 16.54% | 16.95% | 10.50% | 10.00% | | Tier 1 Capital (to Risk Weighted Assets) | 15.29% | 15.69% | 8.50% | 8.00% | | Common Equity Tier 1 (to Risk Weighted Assets) | 12.49% | 15.69% | 7.00% | 6.50% | | Tier 1 Leverage Ratio (to Average Assets) | 10.12% | 10.39% | 4.00% | 5.00% | - Approximately $19.9 million was available for the declaration of dividends by the Bank to the Company without prior regulatory approval as of June 30, 2025120 Note 14. Operating Segments The Company operates through two primary reportable segments: Banking and Other Financial Services, with a third category, "HoldCo and Other," for holding company activities and shared services, used by the chief operating decision maker to evaluate performance - Banking segment: Full-service banking operations, including depository, lending, and factoring services - Other Financial Services segment: Fee-based services in trust, retirement, financial management, investment advisory, and securities brokerage - HoldCo and Other category: Includes T Bancshares and financial holding company operations, with principal revenue from subsidiary dividends and allocated shared service expenses | Segment | Net Income (6 Months Ended June 30, 2025, in thousands) | | :------------------------ | :---------------------------------------------------- | | Banking | $4,269 | | Other Financial Services | $7,527 | | HoldCo and Other | $(3,072) | | Consolidated Net Income | $8,724 | Note 15. Fair Value of Financial Instruments The Company measures financial instruments at fair value using a hierarchy (Level 1, 2, 3 inputs), with securities available for sale classified as Level 2, and securities held to maturity and loans primarily as Level 3 - Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities - Level 2 Inputs: Observable inputs other than Level 1 quoted prices, either directly or indirectly - Level 3 Inputs: Unobservable inputs reflecting an entity's own assumptions about market participant assumptions | Financial Instrument | Fair Value Hierarchy Level (June 30, 2025) | | :-------------------------- | :----------------------------------------- | | Cash and cash equivalents | Level 1 | | Securities available for sale | Level 2 | | Securities, restricted | Level 2 | | Loans held for sale | Level 2 | | Accrued interest receivable | Level 2 | | Securities held to maturity | Level 3 | | Loans, net | Level 3 | | Servicing asset | Level 3 | | Non-interest bearing deposits | Level 1 | | Interest bearing deposits | Level 2 | | Borrowed funds and subordinated debt | Level 2 | | Accrued interest payable | Level 2 | - Financial assets measured at fair value on a non-recurring basis include impaired loans and loans held for sale. Non-financial assets measured at fair value on a non-recurring basis include other real estate owned132137 Note 16. Recent Accounting Pronouncements The Company is evaluating two new accounting pronouncements: ASU 2023-09 (Improvements to Income Tax Disclosures), effective in 2025, and ASU 2024-03 (Disaggregation of Income Statement Expenses), effective in 2027/2028, with the latter not expected to significantly impact consolidated financial statements - ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," is effective for the Company in 2025 and will require additional categories and details in the rate reconciliation table and disaggregation of income taxes paid148 - ASU No. 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses," is effective for the Company in 2027 (annual periods) and 2028 (interim periods) and is not expected to have a significant impact on consolidated financial statements149150 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive review of Tectonic Financial, Inc.'s financial condition and operating results for the three and six months ended June 30, 2025, compared to the prior year, highlighting significant increases in net income, net interest income, and total assets Cautionary Notice Regarding Forward-Looking Statements This section warns readers that the report contains forward-looking statements subject to various risks, assumptions, estimates, and uncertainties that could cause actual results to differ materially, advising against undue reliance - Statements in the report that are not purely historical are forward-looking and subject to risks, assumptions, estimates, and uncertainties that are difficult to predict152 - Potential recession in the U.S. and market areas, impacting borrowers (especially SBA) - Risks associated with generating most loan growth and portfolio in SBA loans (higher default rates) - Impacts related to uncertainty in the banking industry as a whole - Liquidity risks, including meeting depositor demands - Risks associated with higher cost deposits and their impact on net interest margin and profits - Changes in market interest rates, inflation, and their effects on the economy and credit quality - Competition from other financial institutions and wealth management firms - Readers are cautioned not to place undue reliance on forward-looking statements, and the Company does not undertake any obligation to update them, except as required by applicable law154 Other Available Information The Company files various reports with the SEC (10-K, 10-Q, 8-K) which are publicly available on the SEC's website and the Company's own website, used for disclosing material non-public information in compliance with Regulation FD - The Company files annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K with the SEC155 - Electronic copies of SEC filings are available at www.sec.gov and the Company's website, **www.t.financial**[155](index=155&type=chunk) - The Company intends to use its website (www.t.financial) as a means of disclosing material non-public information and for complying with SEC Regulation FD (Fair Disclosure)156 General Tectonic Financial, Inc. is a Texas-based financial holding company offering a broad range of financial products and services through its subsidiaries: T Bancshares, Inc. (TBI), Sanders Morris LLC, Tectonic Advisors, LLC, and HWG Insurance Agency LLC - Tectonic Financial, Inc. is a Texas corporation and registered financial holding company headquartered in Dallas, Texas, providing a wide array of financial products and services160 - T Bancshares, Inc. (TBI) for T Bank, N.A. (banking) - Sanders Morris LLC (broker-dealer, investment advisor) - Tectonic Advisors, LLC (investment advisor) - HWG Insurance Agency LLC (insurance agency) - Banking (commercial & consumer banking, factoring) - Other Financial Services (trust, retirement, financial management, investment advisory, brokerage) - HoldCo and Other (T Bancshares, financial holding company operations) Recent Events The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, introducing tax reform provisions, but the Company does not anticipate a material impact on its consolidated financial statements for the period ended June 30, 2025 - The One Big Beautiful Bill Act (OBBBA), including broad tax reform provisions, was signed into law on July 4, 2025164 - The Company does not anticipate a material impact on its consolidated financial statements for the three and six months ended June 30, 2025, as the legislation was signed after the close of the second quarter164 Critical Accounting Policies and Estimates The Company's financial statements are prepared under GAAP, requiring management to make estimates and assumptions that affect reported amounts, with critical estimates being those highly uncertain or likely to materially impact financial statements - Consolidated financial statements are prepared based on accounting principles generally accepted in the United States (GAAP)165 - Management makes estimates and assumptions that affect the amounts reported in the financial statements165 - Critical accounting estimates are those requiring highly uncertain assumptions or where different estimates could have a material impact on financial statements166 Performance Summary Tectonic Financial, Inc. reported significant increases in net income available to common shareholders and diluted EPS for both the three and six months ended June 30, 2025, driven by higher net interest income and non-interest income | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net income available to common shareholders | $3,800 | $2,758 | $1,042 | 37.8% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net income available to common shareholders | $7,729 | $5,431 | $2,298 | 42.3% | | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | Change | % Change | | :----------------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Diluted EPS | $0.55 | $0.38 | $0.17 | 44.7% | | Weighted average diluted shares outstanding | 6,875,416 | 7,242,663 | (367,247) | -5.1% | | Metric | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | Change | % Change | | :----------------------------- | :--------------------------- | :--------------------------- | :----- | :------- | | Diluted EPS | $1.12 | $0.75 | $0.37 | 49.3% | | Weighted average diluted shares outstanding | 6,897,215 | 7,252,424 | (355,209) | -4.9% | | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :----------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Annual return on average assets | 1.82% | 1.61% | 1.82% | 1.64% | | Annual return on average equity | 15.40% | 11.59% | 15.40% | 11.57% | Net Interest Income Net interest income significantly increased for both the three and six months ended June 30, 2025, primarily driven by a substantial increase in the average volume of loans and a decrease in the average cost of interest-bearing liabilities, expanding the net interest margin | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :---------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net interest income | $10,216 | $7,832 | $2,384 | 30.4% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :---------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Net interest income | $19,181 | $14,934 | $4,247 | 28.4% | | Metric | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :---------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net interest margin | 4.50% | 4.22% | 4.36% | 4.18% | - For the three months ended June 30, 2025, the average volume of interest-earning assets increased by $165.3 million (22.2%) to $911.4 million, primarily due to a $215.1 million (36.8%) increase in average loan volume. The average yield on interest-earning assets decreased by 17 basis points to 8.25%177178 - For the three months ended June 30, 2025, the average volume of interest-bearing liabilities increased by $158.0 million (26.6%) to $752.5 million, mainly from a $177.1 million (31.6%) increase in average interest-bearing deposits. The average rate paid on interest-bearing liabilities decreased by 72 basis points to 4.55%179 Provision for Credit Losses The provision for credit losses increased for both the three and six months ended June 30, 2025, primarily due to increased loan volume and required specific reserves, reflecting ongoing monitoring of asset quality and economic uncertainties | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total Provision for Credit Losses | $1,836 | $1,660 | $176 | 10.6% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total Provision for Credit Losses | $2,691 | $2,577 | $114 | 4.4% | - The increase in provision expense was driven by increased loan volume and required specific reserves191 - Management continues to monitor for credit quality changes due to ongoing economic uncertainty, including the prolonged elevated interest rate environment and persistent inflationary pressures, which may necessitate additional provisions190 Non-Interest Income Total non-interest income increased for both the three and six months ended June 30, 2025, primarily driven by significant growth in brokerage and advisory income, and a modest increase in trust income, reflecting positive market conditions and asset inflows | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total non-interest income | $11,401 | $10,742 | $659 | 6.1% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total non-interest income | $24,269 | $21,240 | $3,029 | 14.3% | | Income Type | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Advisory income | $4,542 | $4,120 | $422 | 10.2% | | Brokerage income | $2,513 | $2,128 | $385 | 18.1% | | Trust income | $1,955 | $1,843 | $112 | 6.1% | | Income Type | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Advisory income | $8,941 | $8,058 | $883 | 11.0% | | Brokerage income | $5,676 | $3,910 | $1,766 | 45.2% | | Trust income | $3,919 | $3,582 | $337 | 9.4% | - Brokerage and advisory assets increased by approximately $998 million (13.7%) between June 30, 2024, and June 30, 2025, driven by positive net flows and market appreciation198 Non-Interest Expense Total non-interest expense increased for both the three and six months ended June 30, 2025, primarily driven by higher salaries and employee benefits, occupancy and equipment, trust expenses, brokerage and advisory direct costs, and data processing | Metric | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total non-interest expense | $14,186 | $12,915 | $1,271 | 9.8% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Total non-interest expense | $29,481 | $25,689 | $3,792 | 14.8% | | Expense Type | 3 Months Ended June 30, 2025 (in thousands) | 3 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :---------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Salaries and employee benefits | $9,456 | $8,891 | $565 | 6.4% | | Brokerage and advisory direct costs | $647 | $517 | $130 | 25.1% | | Data processing | $381 | $289 | $92 | 31.8% | | Expense Type | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | Change (in thousands) | % Change | | :---------------------------- | :------------------------------------------ | :------------------------------------------ | :-------------------- | :------- | | Salaries and employee benefits | $19,805 | $17,533 | $2,272 | 13.0% | | Brokerage and advisory direct costs | $1,285 | $1,037 | $248 | 23.9% | | Data processing | $703 | $571 | $132 | 23.1% | Income Taxes Income tax expense increased significantly for both the three and six months ended June 30, 2025, leading to higher effective tax rates, influenced by non-deductible expenses related to credit losses and stock options | Period | 2025 (in thousands) | 2024 (in thousands) | Change (in thousands) | % Change | | :----- | :------------------ | :------------------ | :-------------------- | :------- | | 3 Months | $1,324 | $853 | $471 | 55.2% | | 6 Months | $2,553 | $1,701 | $852 | 50.1% | | Period | 2025 | 2024 | Change (pp) | | :----- | :---- | :---- | :---------- | | 3 Months | 23.7% | 21.3% | 2.4 | | 6 Months | 22.6% | 21.5% | 1.1 | - The effective tax rate is affected by income tax effects of nondeductible expenses related to stock options and differences in depreciation and amortization for tax purposes, among other things212 Segment Reporting The Company's segment reporting details the performance of its Banking, Other Financial Services, and HoldCo and Other categories, with both Banking and Other Financial Services segments showing increased income before taxes | Segment | Income Before Taxes (3 Months Ended June 30, 2025, in thousands) | | :------------------------ | :------------------------------------------------------------- | | Banking | $3,237 | | Other Financial Services | $4,073 | | HoldCo and Other | $(1,715) | | Segment | Income Before Taxes (6 Months Ended June 30, 2025, in thousands) | | :------------------------ | :------------------------------------------------------------- | | Banking | $6,048 | | Other Financial Services | $8,795 | | HoldCo and Other | $(3,566) | - Banking segment income before taxes increased by 94.5% for the three months and 74.5% for the six months ended June 30, 2025, primarily due to increased net interest income217 - Other Financial Services segment income before taxes increased by 5.8% for the three months and 17.5% for the six months ended June 30, 2025, driven by increases in non-interest income222 - The HoldCo and Other category's loss before taxes increased by 13.1% for the three months and 17.3% for the six months ended June 30, 2025, mainly due to higher non-interest expenses, particularly salaries and employee benefits225 Financial Condition This section details the Company's investment securities, loan portfolio, non-performing assets, allowance for credit losses, and sources of funds, highlighting growth in the loan portfolio and non-performing assets while meeting regulatory capital requirements Investment Securities The Company's investment portfolio includes available-for-sale (U.S. government agencies, mortgage-backed) and held-to-maturity (PACE, PID/TIRZ) securities, along with restricted FRB and FHLB stock, with unrealized losses not considered credit-related | Type | Amortized Cost (in thousands) | Fair Value (in thousands) | | :------------------------ | :---------------------------- | :------------------------ | | U.S. government agencies | $15,562 | $14,263 | | Mortgage-backed securities | $8,613 | $8,383 | | Total available for sale | $24,175 | $22,646 | | Type | Amortized Cost (in thousands) | Fair Value (in thousands) | | :-------- | :---------------------------- | :------------------------ | | PACE | $895 | $814 | | PID/TIRZ | $21,609 | $19,762 | | Total held to maturity | $22,504 | $20,576 | - Unrealized losses on available-for-sale securities are due to increases in market interest rates, not credit factors, and no allowance for credit losses was recognized231 Loan Portfolio Composition The total loan portfolio, excluding allowance for credit losses, increased by $85.4 million to $754.8 million at June 30, 2025, primarily driven by SBA loans, which constitute 63.9% of the total portfolio | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Total Loans | $754,838 | $669,367 | $85,471 | 12.8% | | Loan Type | June 30, 2025 (in thousands) | % of Total Loans | | :----------------------------- | :--------------------------- | :--------------- | | SBA 7(a) guaranteed | $273,046 | 36.2% | | SBA 7(a) unguaranteed | $114,610 | 15.2% | | SBA 504 | $94,400 | 12.5% | | Commercial and industrial | $87,520 | 11.6% | | Real estate – commercial | $66,892 | 8.8% | | Real estate – construction and land | $65,743 | 8.7% | - SBA loans comprise the largest group, totaling $482.1 million or 63.9% of total loans at June 30, 2025, up from $411.9 million or 61.5% at December 31, 2024234 Non-performing Assets Non-performing assets significantly increased to $31.0 million at June 30, 2025, from $15.9 million at December 31, 2024, primarily due to a substantial increase in non-accrual loans, particularly in real estate construction/land and SBA categories | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :-------------------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Total non-performing assets | $30,962 | $15,938 | $15,024 | 94.3% | | Total non-accrual loans | $29,501 | $15,908 | $13,593 | 85.5% | | Non-Accrual Loan Type | June 30, 2025 (in thousands) | % of Total Loans | | :---------------------------- | :--------------------------- | :--------------- | | Real estate – construction/land | $12,039 | 1.59% | | SBA guaranteed | $10,105 | 1.34% | | SBA 504 | $4,958 | 0.66% | - There were no foreclosed assets as of June 30, 2025, and December 31, 2024138238 Allowance for Credit Losses The allowance for credit losses (ACL) increased to $10.7 million at June 30, 2025, from $9.2 million at December 31, 2024, reflecting management's estimate of expected credit losses under the CECL methodology, with the ACL to loans ratio remaining stable at 1.42% | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Allowance for credit losses | $10,748 | $9,183 | | Metric | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Ratio of allowance for loans to end of period loans | 1.42% | 1.44% | | Metric | 6 Months Ended June 30, 2025 (in thousands) | 6 Months Ended June 30, 2024 (in thousands) | | :---------------- | :------------------------------------------ | :------------------------------------------ | | Net charge-offs | $1,374 | $427 | - The Company uses the open pool life method to estimate expected losses for all loan pools, with qualitative adjustments (Q-Factors) for risk factors such as lending policies, management experience, past due loans, and economic conditions241246 Sources of Funds The Company's primary sources of funds are deposits, loan and investment security repayments, and cash flows from operations, with total deposits increasing by 20.0% to $853.1 million at June 30, 2025, and time deposits being the largest component - Primary sources of funds include deposits, loan and investment security repayments, and cash flows generated from operations249263 | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | % Change | | :------------- | :--------------------------- | :------------------------------- | :-------------------- | :------- | | Total deposits | $853,082 | $711,147 | $141,935 | 20.0% | | Deposit Type | Average Balance (6 Months Ended June 30, 2025, in thousands) | Percent of Total Deposits | | :------------------------ | :----------------------------------------------------------- | :------------------------ | | Time deposits | $532,669 | 63.1% | | Money market accounts | $171,769 | 24.2% | | Non-interest-bearing deposits | $66,639 | 11.0% | - The estimated amount of uninsured deposits was approximately $57.9 million, or 6.8% of total deposits, as of June 30, 2025251 Borrowings The Company had no FHLB or FRB borrowings as of June 30, 2025, having repaid $10.0 million in FHLB borrowings in January 2025, while subordinated notes totaling $12.0 million remained outstanding with slightly decreased interest rates | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------- | :----------------------------- | :------------------------------- | | Total Borrowings | $12,000 | $22,000 | | FHLB borrowings | $0 | $10,000 | | FRB borrowings | $0 | $0 | - Subordinated notes totaling $12.0 million remained outstanding at both June 30, 2025, and December 31, 2024254 - 2017 Notes interest rate: 9.66640% at June 30, 2025 (vs. 10.03406% at Dec 31, 2024) - 2018 Note interest rate: 8.88940% at June 30, 2025 (vs. 9.25706% at Dec 31, 2024) Capital Resources and Regulatory Capital Requirements Shareholders' equity increased to $114.6 million at June 30, 2025, driven by net income and other comprehensive income, partially offset by treasury stock repurchases and dividends, with both the Company and its Bank subsidiary maintaining "well-capitalized" status - Shareholders' equity increased by $1.2 million (1.0%) to $114.6 million as of June 30, 2025256 - The Company and the Bank met the definition of "well-capitalized" under applicable regulations as of June 30, 2025, exceeding all capital adequacy requirements257 | Ratio | Actual Ratio (June 30, 2025, Consolidated) | Required – Basel III | Required to be Well Capitalized | | :---------------------------------- | :----------------------------------------- | :------------------- | :------------------------------ | | Total Capital (to Risk Weighted Assets) | 16.54% | 10.50% | 10.00% | | Tier 1 Capital (to Risk Weighted Assets) | 15.29% | 8.50% | 8.00% | | Common Equity Tier 1 (to Risk Weighted Assets) | 12.49% | 7.00% | 6.50% | | Tier 1 Capital (to Average Assets) | 10.12% | 4.00% | 5.00% | Liquidity The Company manages liquidity to meet operational and unexpected demands, relying primarily on deposits, loan repayments, and investment maturities, maintaining significant cash at the FRB and substantial unutilized borrowing capacity with the FHLB and FRB - The Company's primary sourc