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Tectonic Financial, Inc. (TECTP)·Q3 2019 Earnings Summary

Executive Summary

  • Mixed Q3: consolidated revenue rose to $10.85M, but provision for loan losses surged and non-accruals increased, driving net income down to $1.34M and EPS $0.14; net interest margin compressed to 3.81% as deposit costs rose .
  • Other Financial Services continued to power top-line growth (brokerage/private placements, advisory, and Nolan TPA), offset by higher compensation and professional fees and a $0.3M client settlement at Sanders Morris .
  • Banking segment felt credit normalization: provision jumped to $1.00M (vs $0.32M yr/yr; $0.40M q/q), SBA non‑accruals rose to $6.90M; SBA charge-offs were $0.58M in the quarter .
  • Capital remains sound (CET1 7.68% consolidated; bank well-capitalized), with Series B preferred issued in May and Series A preferred redeemed in July; assets grew 14.8% YTD to $357.7M, loans +21.7% YTD to $284.8M .

What Went Well and What Went Wrong

  • What Went Well

    • Diversified fee growth: Non-interest income rose 36% YoY to $7.82M, led by brokerage (+$0.88M YoY) and advisory/trust; Nolan TPA continued to contribute to service fees .
    • Segment momentum: Other Financial Services revenue reached $7.91M and pre-tax income $2.14M; consolidated “Revenue(1)” increased to $10.85M .
    • Balance sheet expansion: Loans net grew to $284.8M and assets to $357.7M by quarter-end, supporting longer-term earnings capacity .

  • What Went Wrong

    • Credit costs: Provision rose to $1.00M (vs $0.32M YoY; $0.40M QoQ); SBA non‑accrual loans increased to $6.90M; SBA net charge-offs were $0.57M in Q3 .
    • Margin pressure: Net interest margin compressed to 3.81% (from 4.04% YoY), as average deposit costs increased to 2.33% .
    • One-time expense: A $0.3M settlement at Sanders Morris related to unsatisfactory investment results increased “Other” non-interest expense .

Financial Results

MetricQ3 2018Q2 2019Q3 2019
Net Interest Income ($M)$2.72 $2.98 $3.04
Non-Interest Income ($M)$5.74 $7.79 $7.82
Total Revenue (“Revenue(1)”) ($M)$8.46 $10.77 $10.85
Provision for Loan Losses ($M)$0.32 $0.40 $1.00
Income Before Taxes ($M)$2.32 $2.60 $1.79
Net Income ($M)$2.04 $2.19 $1.34
Net Income to Common ($M)$1.84 $1.99 $0.95
Diluted EPS ($)$0.28 $0.30 $0.14
Net Interest Margin (%)4.04% 4.05% 3.81%
Consensus EPS (S&P Global)NA (unavailable via S&P Global at time of analysis)NA (unavailable)NA (unavailable)
Consensus Revenue (S&P Global)NA (unavailable via S&P Global at time of analysis)NA (unavailable)NA (unavailable)

Segment revenue (Net Interest Income + Non-Interest Income):

Segment Revenue ($M)Q3 2018Q2 2019Q3 2019
Banking$3.22 $3.30 $3.41
Other Financial Services$5.48 $7.70 $7.91
HoldCo$(0.25) $(0.22) $(0.46)
Consolidated$8.46 $10.77 $10.85

Key performance indicators:

KPIQ1 2019Q2 2019Q3 2019
Total Assets ($M)$310.6 $336.0 $357.7
Loans, Net ($M)$238.1 $253.0 $284.8
Total Deposits ($M)$256.8 $251.2 $273.2
Non‑Accrual Loans ($M)$1.36 $3.71 $6.90
CET1 Ratio (Consolidated)7.75% 8.29% 7.68%
Return on Avg Assets (%)1.75% 2.70% 1.57%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Company guidanceFY/Q4None disclosedNone disclosedMaintained (no formal guidance)
Dividend – Series B PreferredQuarterlyN/A (public since May 2019)$0.392M paid in Q3New run-rate post-IPO

Note: The company did not issue formal revenue/EPS guidance; only routine preferred dividends are observable in filings .

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2 and Q-1)Current Period (Q3)Trend
SBA strategy (sell vs hold)Reclassified $12.7M YTD to held-for-investment; no SBA sales in H1; $7.0M reclass in Q2 Reclassified $14.8M in Q3; still no SBA sales YTD Leaning to hold for risk-adjusted returns
Fee income growthBrokerage +$0.997M YoY (Q2); Nolan boosted service fees; advisory/trust up Brokerage +$0.881M YoY; service fees higher on Nolan; advisory/trust up Positive
Credit quality/provisionNon-accruals $3.71M (Q2); provision $0.40M; Q2 SBA impaired $4.66M Non‑accruals $6.90M; provision $1.00M; SBA charge-offs $0.58M Deteriorating
Funding costs/NIMAvg deposit cost 2.22% (Q2); NIM 4.05% Avg deposit cost 2.33%; NIM 3.81% Pressured
Capital/corporate actionsSeries B $15.5M net in May; Series A to be repurchased (subsequently done in July) Series A repurchased July; CET1 7.68% consolidated; bank well-capitalized Stable capital

Management Commentary

  • “Net income available to common shareholders totaled $948,000, or $0.14 per diluted common share… a decrease of $891,000, or 48.5% [YoY].”
  • “Total assets grew by $46.0 million, or 14.8%, to $357.7 million as of September 30, 2019… [Loans] increased $50.8 million, or 21.7%.”
  • “Total non-interest income… increased $2.1 million, or 36.2% [YoY],… primarily due to increases in brokerage income… and service fees related to [Nolan].”
  • “Other expenses… included a $300,000 settlement fee… related to unsatisfactory investment results in a client’s accounts over which Sanders Morris had a limited portion of attorney.”

Q&A Highlights

  • An earnings call was scheduled for Nov 26, 2019, but a transcript is not available in company filings; recording access was by email request. As such, Q&A detail is unavailable from primary sources .
  • Filing clarifications relevant to likely Q&A topics:
    • Credit: Non‑accrual SBA loans rose to $6.90M; allowance increased with a $1.00M provision; SBA net charge-offs $0.57M in Q3 .
    • Expenses: $0.3M settlement in “Other” and higher compensation/professional fees tied to growth and Nolan integration .
    • NIM/Deposits: Average interest-bearing deposit cost increased to 2.33%, compressing NIM to 3.81% .

Estimates Context

  • Wall Street consensus (S&P Global) for Q3 2019 EPS and revenue was unavailable due to data access limits at time of analysis; therefore, no beat/miss assessment vs consensus is provided (S&P Global data unavailable).

Key Takeaways for Investors

  • OFS-led fee growth remains the core upside driver; brokerage/private placements and advisory momentum, plus Nolan TPA, support diversified revenue independent of lending spreads .
  • Credit normalization is the key watch item: rising SBA non‑accruals and provision/charge-offs pressured earnings; monitor trends in SBA graded loans and specific reserves next quarter .
  • NIM headwinds persist with higher deposit costs; asset growth is robust but funding mix/pricing will dictate incremental spread returns (avg deposit cost 2.33%; NIM 3.81%) .
  • Capital remains adequate (CET1 7.68% consolidated; bank “well-capitalized”), providing flexibility, but consolidated CET1 dipped QoQ—watch trajectory amid loan growth .
  • One-time settlement ($0.3M) and elevated professional fees are largely non-recurring or growth-related; expense discipline will be important to translate fee momentum into operating leverage .
  • Balance sheet expansion (+$46M assets YTD; +$50.8M loans YTD) is a medium-term earnings tailwind if credit stabilizes and deposit costs peak .
  • Near-term stock reaction catalysts: updates on SBA credit metrics, margin trajectory vs deposit repricing, and sustained OFS fee strength.

Notes:

  • No separate Q3 2019 earnings press release beyond the Form 8‑K notice of 10‑Q filing and call details was posted in filings .
  • No call transcript was available in company documents; prior two quarters’ 10‑Qs were used for trend analysis .