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Tectonic Financial, Inc. (TECTP)·Q2 2019 Earnings Summary

Executive Summary

  • Q2 2019 delivered stronger profitability: net income rose to $2.19M and diluted EPS to $0.30, up from $1.91M and $0.26 in Q2 2018, driven by higher net interest income and a 44.5% surge in non‑interest income .
  • Net interest margin improved to 4.05% vs 3.91% YoY as loan yields benefited from discount accretion and higher rates; loan payoffs with associated net discounts added $261K in the quarter (vs $39K in Q2 2018) .
  • Fee businesses scaled meaningfully: Other Financial Services revenue climbed 47% YoY (Q2 2019: $7.70M vs $5.23M), supported by brokerage and advisory growth and the Nolan TPA acquisition; consolidated segment revenue rose to $10.77M vs $7.91M YoY .
  • Capital and liquidity strengthened post-IPO; subsequent to quarter-end, the company repurchased all Series A preferred for ~$8.0M (July 12), funded with Series B preferred proceeds—simplifying the capital stack and potentially supporting future flexibility .

What Went Well and What Went Wrong

What Went Well

  • EPS and profitability inflected: diluted EPS reached $0.30 (vs $0.26 in Q2 2018) as net income rose to $2.19M (vs $1.91M), reflecting operating leverage and fee growth .
  • Fee income expansion: non‑interest income increased 44.5% YoY (Q2 2019: $7.79M vs $5.39M) with strong brokerage (+52.6% YoY) and advisory (+20.9% YoY) contributions; Nolan TPA fees materially boosted “service fees & other” .
  • Margin improvement: net interest margin improved to 4.05% (vs 3.91% YoY) aided by discount accretion from loan payoffs ($261K in Q2) and higher loan yields (6.45% avg), offsetting deposit cost pressure .

What Went Wrong

  • Higher credit provisioning: provision for loan losses rose to $400K (vs $77K YoY), with SBA-related net charge‑offs of $232K, and non‑accrual loans increased to $3.71M (from $2.55M at year‑end) .
  • Elevated operating expenses: non‑interest expense climbed 36.3% YoY (Q2 2019: $7.77M vs $5.70M), driven by salaries/benefits (+46%) and professional fees (+119%) amid growth and integration costs (incl. Nolan) .
  • Deposit cost headwinds persisted: average rate on interest‑bearing deposits increased 71 bps YoY to 2.22%, pressuring spread despite loan yield gains .

Financial Results

Core P&L and Margin Comparisons

MetricQ2 2018Q1 2019Q2 2019
Total Interest Income ($000)$3,546 $4,108 $4,466
Total Non-Interest Income ($000)$5,390 $4,102 $7,787
Net Income ($000)$1,912 $1,352 $2,192
Diluted EPS ($)$0.26 $0.21 $0.30
Net Interest Margin (%)3.91% 3.81% 4.05%

Segment Revenue (Net Interest Income + Non-Interest Income)

SegmentQ2 2018 ($000)Q2 2019 ($000)
Banking$2,929 $3,296
Other Financial Services$5,230 $7,696
HoldCo($247) ($221)
Consolidated$7,911 $10,771

KPIs

KPIJun 30, 2018Dec 31, 2018Jun 30, 2019
Advisory AUM – Tectonic Advisors ($000)$1,762,994 $1,736,637 $1,959,392
Advisory AUM – Sanders Morris ($000)$262,694 $282,052 $400,972
Brokerage Assets – Sanders Morris ($000)$1,572,269 $1,297,264 $1,372,882
Total Advisory + Brokerage Assets ($000)$3,597,957 $3,315,953 $3,733,246
Non‑Performing Assets ($000)—$2,545 (Dec 31, 2018) $3,705 (Jun 30, 2019)
Loans Held for Investment, Net ($000)—$234,033 (Dec 31, 2018) $253,030 (Jun 30, 2019)

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Company GuidanceFY / Q2 2019Not disclosedNot disclosedMaintained (no formal guidance)
Preferred Dividends (Series B)OngoingFixed 9.00% until May 15, 2024 per termsNo changeMaintained (security terms)

Note: No explicit revenue/EPS/OpEx guidance ranges were provided in Q2 filings or the 8‑K; the 8‑K announced the call only .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q1 2019)Current Period (Q2 2019)Trend
Net Interest MarginNIM fell to 3.81% on higher deposit costs; loan yields up YoY NIM improved to 4.05%; discount accretion and higher loan yields supported margin Improving sequentially
Deposit CostsAvg rate on interest‑bearing deposits up 88 bps YoY to 2.19% Avg rate up 71 bps YoY to 2.22% Continued pressure
SBA/USDA LendingReclass $5.9M 7(a) from held for sale to held for investment; non‑accrual SBA $1.359M Loans reclassified ($7.0M in Q2); non‑accrual SBA $3.48M; SBA net charge‑offs & allowance build Growth with higher credit vigilance
Fee Income (Advisory/Brokerage)Non‑interest income +70.8% YoY (Q1) with Nolan contribution Non‑interest income +44.5% YoY; brokerage +52.6% YoY; advisory +20.9% YoY Strong momentum
TPA (Nolan) IntegrationAcquisition closed Jan 2019; Q1 non‑interest income uplift Service fees +417% YoY; occupancy and salaries increased with Nolan Scaling; cost absorption
Credit QualityNon‑accruals $1.359M (Mar 31); provision $83K Non‑performing assets $3.705M; provision $400K; SBA-specific reserve activity Deterioration from low base
Capital/RegulatoryWell‑capitalized; consolidated total capital 13.35% (Q1) Well‑capitalized; consolidated total capital 18.38% (Q2), leverage 14.58% Strengthened post-merger/IPO

Management Commentary

  • “Net income available to common shareholders totaled $2.0 million, or $0.30 per diluted common share for the three months ended June 30, 2019, and $1.7 million, or $0.26 per diluted common share, for the three months ended June 30, 2018” .
  • “In the second quarter of 2019, loan payoffs with associated net discounts resulted in additional income of $261,000, compared to $39,000… in the second quarter of 2018” .
  • “Other Financial Services revenue increased… primarily due to increases in brokerage income… increases in service fees and other income… related to the Nolan acquisition… and advisory income and trust income related to increased average market value of trust assets” .
  • “As of June 30, 2019, the Bank’s regulatory capital ratios are in excess of the capital conservation buffer and the levels established for ‘well capitalized’ institutions under the Basel III Rules” .

Q&A Highlights

  • The company announced a conference call for August 26, 2019 to discuss Q2 results; a transcript was not available in the document set reviewed .
  • No Q&A transcript could be sourced; no additional guidance clarifications are available from call materials .

Estimates Context

  • Wall Street consensus (S&P Global) EPS and revenue estimates for Q2 2019 were not available in our data pull; therefore, no beat/miss analysis vs consensus can be provided. Estimates comparisons should be revisited when S&P Global data access is available.

Key Takeaways for Investors

  • Fee engine accelerating: advisory, brokerage, and TPA together lifted non‑interest income 44.5% YoY in Q2; segment revenue in Other Financial Services grew 47% YoY—supporting diversified earnings beyond spread income .
  • Margins stabilized sequentially: NIM improved to 4.05% as loan yields and discount accretion offset deposit pricing pressure; watch deposit mix and cost trajectory into 2H .
  • Credit trends warrant monitoring: non‑performing assets rose to $3.7M (1.10% of assets), provision increased, and SBA‑related charge‑offs occurred—appropriate reserve build is underway .
  • Capital position strengthened: consolidated total capital 18.38% and leverage 14.58%; post‑quarter repurchase of Series A preferred simplifies capital and dividend priorities for the preferred stack .
  • Growth catalysts: Nolan integration (service fees), AUM expansion (Tectonic Advisors and Sanders Morris), and SBA/USDA lending scale—balanced against elevated OpEx from growth investments .
  • No formal guidance or consensus context: with no disclosed guidance and unavailable consensus estimates, focus on operating trends (margin, fee momentum, credit quality) and upcoming disclosures .
  • Near‑term strategy: prioritize low‑cost funding to protect spread, continue scaling fee platforms, and manage SBA credit exposures conservatively while preserving capital strength .