The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q for the three months endedMarch 31, 2021 (this "Form 10-Q"), as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 (as amended, the "2020 Form 10-K").
Cautionary Notice Regarding Forward-Looking Statements
Statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including our expectations, intentions, beliefs, or strategies regarding the future. These statements are often, but not always, made through the use of words or phrases such as "may," "should," "could," "predict," "potential," "believe," "will likely result," "expect," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would" and "outlook," and similar expressions. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled "Risk Factors," in our 2020 Form 10-K, and under the section entitled "Risk Factors" in this Form 10-Q, including, but not limited to, the following:
? risks associated with the COVID-19 global pandemic ("COVID-19"), including,
among others, business disruption for our customers, customers' ability to
fulfill their financial obligations to the Company, our employees' ability to
conduct banking and other transactions, the response of governmental
authorities to the COVID-19 pandemic and our participation in COVID-19-related
government programs such as the Paycheck Protection Program (the "PPP")
administered by the
under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES
Act");
? risks associated with implementing aspects of our expansion strategy, whether
through additional services and products or acquisitions;
? liquidity risks, including those related to having enough liquid assets to
meet depositor demands;
? the need to hold more capital in order to comply with consolidated capital
ratios;
? competition from other banks, financial institutions and wealth and investment
management firms and our ability to retain our clients; ? the adequacy of our allowance for loan losses;
? risks associated with generating deposits from retail sources without a branch
network so that we can fund our loan portfolio and growth;
? risks associated with higher cost deposits relative to our peer group, which
has an impact on our net interest margin and profits;
? risks associated with having one referral source,
LLC ("Cain Watters"), comprise a substantial part of our business; ? our reliance on key personnel and the ability to attract and retain the personnel necessary to implement our business plan; ? changes in the economy generally and the regulatory response thereto; ? changes in the economy of theState of Texas , our primary market;
? risks specific to commercial loans and borrowers (particularly dental and SBA
loans); ? our ability to continue to originate loans (including SBA loans); ? impairment of our goodwill or other intangible assets; ? claims and litigation pertaining to our fiduciary responsibilities;
? generating investment returns for our wealth management, brokerage and other
customers that are satisfactory to them; ? changes in interest rates;
? our ability to maintain a strong core deposit base or other low-cost funding
sources; ? our ability to manage our credit risk;
? regulatory scrutiny related to our loan portfolio, including commercial real
estate; ? the earning capacity of our borrowers; ? fluctuation in the value of our investment securities; ? our inability to identify and address potential conflicts of interest;
? our ability to maintain effective internal control over financial reporting;
? the accuracy of estimates and assumptions;
? the development of an active, liquid market for the Series B preferred stock;
? fluctuations in the market price of the Series B preferred stock; 28
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? our ability to raise additional capital, particularly during times of stress;
? the soundness of other counterparty financial institutions and certain securities brokerage firms;
? technological change in the banking, investment, brokerage and insurance
industry;
? our ability to protect against and manage fraudulent activity, breaches of our
information security, and cybersecurity attacks;
? our reliance on communications, information, operating and financial control
systems technology and related services from third-party service providers;
? natural disasters and epidemics and pandemics, such as COVID-19; ? the effects of terrorism and efforts to combat it; ? environmental liabilities; ? regulation of the financial services industry; ? legislative changes or the adoption of tax reform policies; ? political instability and changes in tariffs and trade barriers;
? compliance with laws and regulations, supervisory actions, the Dodd-Frank Wall
Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Economic
Growth, Regulatory Relief and Consumer Protection Act ("EGRRCPA"), capital
requirements, the Bank Secrecy Act, anti-money laundering laws, consumer laws,
and other statutes and regulations; ? regulation of broker-dealers and investment advisors;
? the enactment of regulations relating to privacy, information security and
data protection;
? legal and regulatory examinations, proceedings, investigations and inquiries,
fines and sanctions;
? future issuances of preferred stock or debt securities and its impact on the
Series B preferred stock; ? our ability to manage our existing and future preferred stock and indebtedness; ? our ability to pay dividends; ? the continuation of securities analysts coverage of the company; ? our management and board of directors have significant control over our business; ? risks related to being a "controlled company" under NASDAQ rules; ? the costs and expenses of being a public company; and
? changes in the laws, rules, regulations, interpretations or policies relating
to financial institutions, accounting, tax, trade, monetary and fiscal
matters, including the policies of the
Reserve System ("Federal Reserve") and as a result of initiatives of the Biden
administration. You should not place undue reliance on any such forward-looking statements. Any forward-looking statement reflects only information known to us as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Other Available Information We file or furnish with theSEC annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports required by Section 13(a) or 15(d) of the Exchange Act. Electronic copies of ourSEC filings are available to the public at theSEC's website at https://www.sec.gov. In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Exchange Act are available through our website, www.t.financial, as soon as reasonably practicable after we electronically file such material with, or furnish it to, theSEC . The Company routinely posts important information for investors on its website, www.t.financial. The Company intends to use its website as a means of disclosing material non-public information and for complying with its disclosure obligations under SEC Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Company's website, in addition to following the Company's press releases,SEC filings, public conference calls, presentations and webcasts.
Our website and the information contained on or accessible through our website is not incorporated by reference into, and is not a part of, this Form 10-Q.
COVID-19 Update The Company continues to actively monitor developments related to the COVID-19 pandemic including the progress of COVID-19 vaccines, the effects of the CARES Act and the American Rescue Plan Act of 2021 and the prospects for additional fiscal stimulus programs; however, the extent to which each will impact our operations and financial results in 2021 remains uncertain. 29
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The Consolidated Appropriations Act, 2021, which was signed into law onDecember 27, 2020 , allocated an additional$284 billion to the SBA to fund a second round of PPP and extended the application period for the PPP toMarch 31, 2021 . The application period was later extended to the earlier ofMay 31, 2021 , or such date when all PPP funds are exhausted. The Company is actively participating in the second round of the PPP and began submitting applications to the SBA for borrowers onJanuary 15, 2021 when the application window opened. The PPP was adjusted for the second round to allow applications from both first time borrowers and those that obtained loans during the first round of the PPP. The revised PPP, among other things, requires that borrowers demonstrate or certify that they experienced a 25% or greater reduction in gross receipts from a quarter in 2020 compared to the same quarter in 2019 and certify that current economic uncertainty makes the loan request necessary to support their ongoing operations. The Bank funded 622 PPP loans, for$64.2 million related to the second round of PPP during the three months endedMarch 31, 2021 , and as ofMarch 31, 2021 , the Bank had outstanding$102.1 million of PPP loans in its loan portfolio. Management believes that the majority of these PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the PPP over the coming quarters. While all industries could experience adverse effects related to the COVID-19 pandemic, the loan portfolio includes customers in industries such as dental, travel, hotel, leisure, retail, convenience store, restaurant and entertainment, which industries have all been adversely impacted by the COVID-19 pandemic. While the Company has not experienced any material losses related to such industries in the portfolio, management recognizes that these industries may take longer to recover and continues to monitor these customers closely. The commercial credit area continues to communicate regularly with the borrowers and monitors their activity closely. This information is used to analyze the performance of these loans and to anticipate any potential issues that these loans may develop so that risk ratings may be appropriately adjusted in a timely manner. The Company increased its allowance for loan losses from$2.2 million as ofMarch 31, 2020 to$3.2 million as ofMarch 31, 2021 , due in part to the changes in the economic environment related to the disruption in business activity as a result of the COVID-19 pandemic. For more information on the COVID-19 pandemic, see "Recent Developments Related to the COVID-19 Pandemic" in Item 7., "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 1A., "Risk Factors," in our 2020 Form 10-K.
The impact of the COVID-19 pandemic on the Company for the periods covered by this Form 10-Q is detailed in each applicable section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included below.
General We are a financial holding company headquartered inDallas, Texas . We provide a wide array of financial products and services including banking, trust, investment advisory, securities brokerage, third party administration, recordkeeping and insurance to individuals, small businesses and institutions in all 50 states. The following discussion and analysis presents our consolidated financial condition as ofMarch 31, 2021 andDecember 31, 2020 , and our consolidated results of operations for the three months endedMarch 31, 2021 and 2020. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Form 10-Q and in the audited financial statements in our 2020 Form 10-K. We operate through four main direct and indirect subsidiaries: (i) TBI, which was incorporated under the laws of theState of Texas onDecember 23, 2002 to serve as the bank holding company for the Bank, (ii)Sanders Morris , a registered broker-dealer withFINRA , and registered investment advisor with theSEC , (iii)Tectonic Advisors , a registered investment advisor registered with theSEC focused generally on managing money for relatively large, affiliated institutions, and (iv) HWG, an insurance agency registered with the TDI.
Critical Accounting Policies and Estimates
We prepare consolidated financial statements based on GAAP and to customary practices within the financial services industry. These policies, in certain areas, require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While we base estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates. We consider accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain at the time we make the accounting estimate and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the financial statements. 30
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Accounting policies related to the allowance for loan losses are considered to be critical as these policies involve considerable subjective judgment and estimation by management. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance, which includes allowance allocations calculated in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310, Receivables, and allowance allocations calculated in accordance with FASB ASC Topic 450, Contingencies. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio. Relevant available information includes historical credit loss experience, current conditions and reasonable and supportable forecasts. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets. Refer to the 2020 Form 10-K for additional information regarding critical accounting policies. Performance Summary Net income available to common shareholders increased$1.9 million , or 95.0%, to$3.9 million for the three months endedMarch 31, 2021 , compared to$2.0 million for the three months endedMarch 31, 2020 . Earnings per diluted common share was$0.59 and$0.31 for the three months endedMarch 31, 2021 and 2020, respectively. The increase in earnings was primarily due to increased revenue in the Banking andOther Financial Services segments. Our accounting and reporting policies conform to generally accepted accounting principles inthe United States ("GAAP") and the prevailing practices in the banking industry. However, this Form 10-Q contains financial information determined by methods other than in accordance with GAAP, which includes return on average tangible common equity. We calculate return on average tangible common equity as net income available to common shareholders (net income less dividends paid on preferred stock) divided by average tangible common equity. We calculate average tangible common equity as average shareholders' equity less average goodwill, average core deposit intangible and average preferred stock. The most directly comparable GAAP financial measure for tangible common equity is average total shareholders' equity. We believe these non-GAAP measures and ratios, when taken together with the corresponding GAAP measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP measures and ratios in assessing our operating results and related trends, and when planning and forecasting future periods. However, these non-GAAP measures and ratios should be considered in addition to, and not as a substitute for or preferable to, measures and ratios prepared in accordance with GAAP. For the three months endedMarch 31, 2021 , annual return on average assets was 3.38%, compared to 2.61% for the same period in the prior year, and annual return on average tangible common equity was 49.85%, compared to 37.55% for the same period in the prior year. The higher annual return ratios for the three months endedMarch 31, 2021 was due to an increase in income which outpaced the increases in average assets and average tangible common equity compared to the same period in the prior year. The growth in average tangible common equity between the two periods is primarily related to earnings, net of preferred dividends paid, fromMarch 31, 2020 toMarch 31, 2021 . The growth in average assets is primarily attributable to growth in loans.
The following table presents non-GAAP reconciliations of annual return on average tangible common equity:
As of and As of and for the for the Three Months Three Months EndedMarch 31 , EndedMarch 31 , (Dollars in thousands, except percentages) 2021
2020
Income available to common shareholders $ 3,910 $ 2,013 Average shareholders' equity $ 60,716 $ 50,705 Less: average goodwill 10,729 10,729 Less: average core deposit intangible 928
1,162
Less: average preferred stock 17,250
17,250
Average tangible common equity $ 31,809 $
21,564
Annual return on average tangible common equity 49.85 % 37.55 % 31
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Total assets grew by$25.0 million , or 4.9%, to$538.4 million as ofMarch 31, 2021 from$513.4 million as ofDecember 31, 2020 . This increase was primarily due to an increase in our loans, net of allowance for loan losses, of$29.4 million , or 7.4%, to$427.0 million as ofMarch 31, 2021 , from$397.6 million as ofDecember 31, 2020 , due primarily to loans originated under the second round of the PPP, offset by repayments or forgiveness of PPP loans, primarily those made under the first round of the PPP. Substantially all loans outside of those made under the PPP are secured by specific collateral, including business assets, consumer assets, and commercial real estate. We anticipate that as the majority of PPP loans are forgiven or paid off, which we believe will occur principally over the next nine months, and as customers spend down their PPP funds, this will result in a reduction in both loans and borrowings. Shareholders' equity increased$3.8 million , or 6.3%, to$63.8 million as ofMarch 31, 2021 , from$60.0 million as ofDecember 31, 2020 . See analysis of shareholders' equity in the section captioned "Capital Resources and Regulatory Capital Requirements" included elsewhere in this discussion.
Results of Operations for the Three Months Ended
Details of the changes in the various components of net income are discussed below.
Net Interest Income Net interest income is the difference between interest income on interest-earning assets, such as loans, investment securities, and interest-bearing cash, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Changes in net interest income result from changes in volume and spread, and are reflected in the net interest margin, as well as changes in average interest rates. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets, and is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The effective federal funds rate decreased 150 basis points duringMarch 2020 (50 basis points onMarch 3, 2020 and 100 basis points onMarch 15, 2020 ) to zero to 0.25%, where it remained throughMarch 31, 2021 . The following table presents the changes in net interest income and identifies the changes due to differences in the average volume of interest-earning assets and interest-bearing liabilities and the changes due to changes in the average interest rate on those assets and liabilities. The changes in net interest income due to changes in both average volume and average interest rate have been allocated to the average volume change or the average interest rate change in proportion to the absolute amounts of the change in each. Three Months Ended March 31, 2021 vs March 31, 2020 Increase (Decrease) Due to Change in Average (In thousands) Rate Volume Total
Interest-bearing deposits and federal funds sold $ (57 ) $
-$ (57 ) Securities (191 ) 25 (166 ) Loans, net of unearned discount (1) (595 ) 2,017 1,422 Total earning assets (843 ) 2,042 1,199 Savings and interest-bearing demand (4 ) 2 (2 ) Money market deposit accounts (143 ) 41 (102 ) Time deposits (465 ) (28 ) (493 ) FHLB and other borrowings (19 ) 67 48 Subordinated notes (1 ) 1 - Total interest-bearing liabilities (632 ) 83 (549 ) Changes in net interest income$ (211 ) $ 1,959 $ 1,748 (1) Average loans include non-accrual. 32
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Net interest income increased$1.8 million , or 50.0%, from$3.6 million for the three months endedMarch 31, 2020 to$5.4 million for the three months endedMarch 31, 2021 . Net interest margin for the three months endedMarch 31, 2021 and 2020 was 4.47% and 4.24%, respectively, an increase of 23 basis points. The increase in net interest income was primarily due to PPP fees of$1.6 million recognized for the three months endedMarch 31, 2021 . Other changes included an increase in the average volume of loans and decrease in average rates paid on interest-bearing deposits and borrowings, partly offset by a decrease in average yields on earning assets and increase in average volume of interest-bearing deposits and borrowings. The loan yield was impacted by the PPP loans with an average balance of$103.3 million for the three months endedMarch 31, 2021 , with a rate of 1.00%. The average volume of interest-earning assets increased$144.4 million , or 42.0%, from$343.1 million for the three months endedMarch 31, 2020 to$487.2 million for the three months endedMarch 31, 2021 . The average volume of loans increased$141.4 million , or 47.6%, from$297.4 million for the three months endedMarch 31, 2020 to$438.8 million for the three months endedMarch 31, 2021 . PPP loans account for$103.3 million of the average volume increase. The average yield for loans decreased 77 basis points from 6.47% for the three months endedMarch 31, 2020 to 5.70% for the three months endedMarch 31, 2021 . InApril 2020 , we began originating loans to qualified small businesses under the PPP administered by the SBA under the provisions of the CARES Act. In 2020, we funded$98.3 million of PPP loans. As ofMarch 31, 2021 , approximately$60.4 million of the PPP loans originated in 2020 have been forgiven by the SBA and were paid off, leaving an outstanding balance of$37.9 million as ofMarch 31, 2021 . During the first quarter of 2021, we funded an additional$64.2 million of PPP loans. Total outstanding PPP loans were$102.1 million as ofMarch 31, 2021 . During the three months endedMarch 31, 2021 , we recognized$1.6 million in PPP loan related deferred fees (net of amortization of related deferred origination costs) as a yield adjustment and this amount is included in interest income on loans. As a result of the inclusion of these net fees in interest income, the average yield on PPP loans was 7.4% during the three months endedMarch 31, 2021 . For the outstanding balance of PPP loans funded throughMarch 31, 2021 , we expect to recognize additional PPP loan related deferred fees (net of deferred origination costs) totaling approximately$3.2 million as a yield adjustment, all in 2021. Net discount accretion for acquired loans decreased$340,000 from$377,000 for the three months endedMarch 31, 2020 to$37,000 for the three months endedMarch 31, 2021 . The average yield on interest-bearing deposits (primarily held in an interest-bearing account at theFederal Reserve ) decreased 97 basis points from 1.06% for the three months endedMarch 31, 2020 to 0.09% for the three months endedMarch 31, 2021 as a result of aforementioned decrease in market interest rates. The average volume of interest-bearing liabilities increased$113.3 million , or 40.9%, from$277.0 million for the three months endedMarch 31, 2020 to$390.3 million for the three months endedMarch 31, 2021 . The average volume of interest-bearing deposits increased$35.3 million , or 13.5%, from$260.8 million for the three months endedMarch 31, 2020 to$296.1 million for the three months endedMarch 31, 2021 , and the average interest rate paid on interest-bearing deposits decreased 105 basis points from 1.96% for the three months endedMarch 31, 2020 to 0.91% for the three months endedMarch 31, 2021 . Non-interest bearing deposits increased$20.2 million , or 56.4%, from$35.8 million for the three months endedMarch 31, 2020 to$56.0 million for the three months endedMarch 31, 2021 . The average cost of deposits during the three months endedMarch 31, 2021 was impacted by decreases in interest rates paid on money market and time deposits as a result of the aforementioned decrease in market interest rates. The average volume of FHLB and other borrowings increased$77.9 million from$4.2 million for the three months endedMarch 31, 2020 to$82.1 million for the three months endedMarch 31, 2021 , consisting entirely of funding from the PPPLF program, at an interest rate of 0.35%, used to fund the PPP loans. The average cost of FHLB and other borrowings decreased 178 basis points from 2.13% for the three months endedMarch 31, 2020 to 0.35% for the three months endedMarch 31, 2021 . 33
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The following table sets forth our average balances of assets, liabilities and shareholders' equity, in addition to the major components of net interest income and our net interest margin, for the three months endedMarch 31, 2021 and 2020. Three Months Ended March 31, 2021 2020 (In thousands, except Average Average Average Average percentages) Balance Interest Yield Balance Interest Yield Assets Interest-bearing deposits and federal funds sold$ 22,468 $ 5 0.09 %$ 23,802 $ 62 1.06 % Securities 25,939 146 2.28 21,865 312 5.79 Loans, net of unearned discount (1) 438,784 6,163 5.70 297,397 4,741 6.47 Total earning assets 487,191 6,314 5.26 343,064 5,115 6.00 Cash and other assets 31,128 28,798 Allowance for loan losses (2,945 ) (1,424 ) Total assets$ 515,374 $ 370,438 Liabilities and Shareholders' Equity Savings and interest-bearing demand$ 12,091 7 0.23 %$ 9,255 9 0.39 % Money market deposit accounts 107,089 98 0.37 63,752 200 1.27 Time deposits 176,968 556 1.27 187,816 1,049 2.27 Total interest-bearing deposits 296,148 661 0.91 260,823 1,258 1.96 FHLB and other borrowings 82,113 70 0.35 4,194 22 2.13 Subordinated notes 12,000 219 7.40 12,000 219 7.40 Total interest-bearing liabilities 390,261 950 0.99 277,017 1,499 2.19 Non-interest-bearing deposits 56,044 35,813 Other liabilities 8,353 6,903 Total liabilities 454,689 319,733 Shareholders' equity 60,716 50,705 Total liabilities and shareholders' equity$ 515,374 $ 370,438 Net interest income$ 5,364 $ 3,616 Net interest spread 4.27 % 3.81 % Net interest margin 4.47 % 4.24 % (1) Includes non-accrual loans. Provision for Loan Losses The provision for loan losses totaled$428,000 for the three months endedMarch 31, 2021 , a decrease of$360,000 compared to$788,000 for the three months endedMarch 31, 2020 . Included in the provision in the prior year period was$224,000 , which represented the amount of reserve for loan loss required in excess of the discount balance on loans acquired. We determined a provision for loan losses that we consider sufficient to maintain an allowance to absorb probable losses inherent in our portfolio as of the balance sheet date.
For additional information concerning this determination, see the section captioned "Allowance for Loan Losses" elsewhere in this discussion.
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Table of Contents Non-Interest Income
The components of non-interest income were as follows:
Three Months Ended March 31, (In thousands) 2021 2020 Trust income$ 1,440 $ 1,277 Gain on sale of loans - 432 Advisory income 3,017 2,494 Brokerage income 2,466 2,071 Service fees and other income 2,306 1,736 Rental income 88 91 Total$ 9,317 $ 8,101 Total non-interest income for the three months endedMarch 31, 2021 increased$1.2 million , or 15.0%, compared to the same period in the prior year. Material changes in the various components of non-interest income are discussed below. Trust Income. Trust income is earned for trust services on the value of managed and non-managed assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related fees. Trust income for the three months endedMarch 31, 2021 increased$163,000 , or 12.8%, compared to the same period in the prior year. The increase in the fee income for the three months endedMarch 31, 2021 is due to an increase in the average market value of the trust assets as compared to the three month period in the prior year. The expectation of an economic recovery from the COVID-19 pandemic has increased market values of trust assets over those experienced during the latter part of the three months endedMarch 31, 2020 , when the impacts of the COVID-19 pandemic were first being felt, causing extreme volatility and decreasing fees during the three month period in the prior year. Volatility related to an uneven recovery from the economic downturn related to the COVID-19 pandemic could result in future net decreases in the average values of our assets held in custody, and/or continued volatility in asset values, potentially decreasing our trust income. Gain on sale of loans. Gain on sale of loans is generally gain on sales of the guaranteed portion of loans within our SBA loan portfolio. There were no loan sales, and consequently, no gain on sale of loans for the three months endedMarch 31, 2021 . Gain on sale of loans for the three months endedMarch 31, 2020 was$432,000 , resulting from the sale of$6.2 million of SBA loans. Advisory income. Advisory fees are typically based on a percentage of the underlying average asset values for a given period, where each percentage point represents 100 basis points. These revenues are of a recurring nature, but are directly affected by increases and decreases in the values of the underlying assets. For the three months endedMarch 31, 2021 , advisory income increased$523,000 , or 21.0%, compared to the same period in the prior year. The increase in advisory income between the two periods is due to an increase in the average market value of the advisory assets during the three months endedMarch 31, 2021 as compared to the same period in the prior year. Similar to our trust income, changes in the value of our assets under management will result in comparable changes in our advisory income. The expectation of an economic recovery from the COVID-19 pandemic has increased market values of our advisory assets, whereas the economic disruption caused by the start of the COVID-19 pandemic during the three months endedMarch 31, 2020 increased market volatility leading to lower advisory fees in the earlier three month period. Volatility related to an uneven or difficult to sustain recovery from the COVID-19 pandemic could result in future net decreases to our assets under management, potentially decreasing advisory income. Brokerage income. Brokerage revenues are generally based on a per share fee or commission to trade a share of a particular stock, bond or other security. In addition, brokerage revenues, in this context, include private placements, participation in syndication of public offerings, and certain other brokerage revenues, including interest earned on margin lending. Brokerage revenue is dependent on the volume of trading, and on private placement and syndication activity during the period, and in the case of margin lending, on interest rates. Brokerage income for the three months endedMarch 31, 2021 increased$395,000 , or 19.1%, compared to the same periods in the prior year. The economic disruption related to the COVID-19 pandemic led to a dramatic slowing of activity that began during the first quarter 2020 and continued throughout the remainder of the year. This led to delays in private placements and syndicated public offerings, which have begun to recover along with general trading activity. This activity may face a prolonged recovery. 35
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The table below reflects a rollforward of our client assets, which includes both advisory and brokerage assets, as ofMarch 31, 2021 andDecember 31, 2020 , and the inflows and outflows and net market appreciation during the three months endedMarch 31,2021 . Our brokerage and advisory assets experienced an increase of approximately$417.0 million , or 9.2%, during the three months endedMarch 31, 2021 , related to positive net flows and market appreciation. (In thousands) Client Assets As of December 31, 2020$ 4,524,376 Client inflows 519,177 Client outflows (437,760 ) Net flows 81,417 Market appreciation 335,882 As of March 31, 2021$ 4,941,675 Service fees and other income. Service fees includes fees for deposit-related services, loan servicing, and third party administration fees. Service fees and other income for the three months endedMarch 31, 2021 increased$570,000 , or 32.8%, compared to the same period in the prior year. This increase is the result of an increase in third party administration fees of$459,000 , and in loan servicing fees of$153,000 primarily due to reversal of the servicing asset valuation allowance during the three months endedMarch 31, 2021 . In addition, there was an increase in other income of$85,000 related to an income distribution from an interest in securities not readily marketable during the three months endedMarch 31, 2021 . These increases were offset by a decrease in other income of approximately$124,000 related to a non-recurring extinguishment of a retirement liability during the first quarter of 2020, and immaterial fluctuations totaling a net$3,000 decrease compared to the same period in the prior year. The increase in third party administration fees during the three months endedMarch 31, 2021 as compared to the same period in the prior year, was in part due to the COVID-19 pandemic and the resulting lag in information from plan sponsors to complete annual plan administration work related to the shutdown of dental practices nationwide which began inMarch 2020 , whereas during the three months endedMarch 31, 2021 , information was received timely and therefore, a larger percentage of plan administration work was able to be completed earlier. Rental income. The Company receives monthly rental income from tenants leasing space in the Bank building. Rental income for the three months endedMarch 31, 2021 decreased$3,000 from the same period in the prior year. Non-Interest Expense
The components of non-interest expense were as follows:
Three Months Ended March 31, (In thousands) 2021 2020
Salaries and employee benefits
427 533 Trust expenses 564 555 Brokerage and advisory direct costs 506 486 Professional fees 450 374 Data processing 205 192 Other 775 778 Total$ 8,695 $ 7,822 Total non-interest expense for the three months endedMarch 31, 2021 increased$873,000 , or 11.2%, compared to the same period in the prior year, primarily due to increases in salaries and employee benefits and professional fees, as well as increases in our brokerage and advisory direct costs and data processing fees, which were partially offset by a decrease in depreciation expense within our occupancy and equipment expense. Material changes in the various components of non-interest income are discussed below. 36
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Salaries and employee benefits. Salaries and employee benefits for the three months endedMarch 31, 2021 increased$864,000 , or 17.6%, compared to the same period in the prior year. The increase was due to increases in salaries, bonuses and earnouts and related payroll taxes at our other financial services segment, which was partially offset by a decrease in certain incentive bonuses, and salary increases at our Banking segment and increases in stock compensation expense in ourHoldCo segment, and increases in health insurance costs across the Company, compared to the same period in the prior year. In ourOther Financial Services segment,$137,000 of the increase related to merit increases in salaries and an increase in headcount related to growth in the Bank'sNolan division, which provides TPA services, and$53,000 related to salary increases at Sanders Morris. In addition, there was a net increase in earnouts and incentive bonuses at Sanders Morris related to increases in brokerage commission activity of$93,000 compared to the same period in the prior year, during which the COVID-19 pandemic had begun to suppress private placements and syndicated offerings, as well as certain trading activity on whichSanders Morris earns higher margins, which recovered somewhat during the three months endedMarch 31, 2021 . Payroll taxes increased in ourOther Financial Services segment by$146,000 related to the increases and the timing of bonus payouts. Salaries in our Banking segment increased$144,000 for the three months endingMarch 31, 2021 . The increase was the result of an increase in salary and payroll tax expense of$135,000 and$31,000 , respectively, resulting from annual salary merit increases and an increase in staff, slightly offset by a decrease in bonuses of$22,000 . Stock compensation expense increased by$61,000 related to stock grants made onSeptember 30, 2020 offset by a decrease in expense related to options granted, and bonus expense in ourHoldco segment increased by$38,000 related to an increase in bonus accrued compared to the same period in the prior year. Health insurance costs increased across the Company by$38,000 during the three months endedMarch 31, 2021 , compared to the same period in the prior year. Occupancy and equipment expense. Occupancy and equipment expense for three months endedMarch 31, 2021 decreased$106,000 , or 19.9%, compared to the same period in the prior year. The decrease is attributable to a decrease of$69,000 in depreciation expense at ourOther Financial Services segment related primarily to a group of fixed assets and software costs reaching full depreciation/amortization during the three months endedJune 30, 2020 , and decrease in rent, utilities and common area maintenance expenses in that segment of$36,000 , slightly offset by an increase in repairs and maintenance expense of$7,000 , and decreases in facilities telephone and depreciation of$8,000 in our Banking segment. Trust expenses. Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company, and are based on the value of the assets held in custody. Volatility in the bond and equity markets impacts the market value of trust assets and the related expenses. The monthly advisory fees are assessed based on the market value of assets at month-end. Trust expenses increased$9,000 , or 1.6%, due to an increase in the market value of trust assets for the three months endedMarch 31, 2021 over the market value during the three months endedMarch 31, 2020 , which represented a recovery in asset values. Brokerage and advisory direct costs. Brokerage and advisory direct costs for three months endedMarch 31, 2021 increased$20,000 , or 4.1%, compared to the same periods in the prior year. The increase related primarily to increases in advisory program fees at Sanders Morris related to increases in asset values of$85,000 , offset by decreases in brokerage and exchange clearing fees at Sanders Morris of approximately$47,000 , and in information services and referral fees of$18,000 . Professional fees. Professional fees, which include legal, consulting, audit and tax fees, for the three months endedMarch 31, 2021 increased$76,000 , or 20.3%, compared to the same period in the prior year. The increase was the result of an increase of$96,000 in ourOther Financial Services segment, offset by decreases in our Banking andHoldco segments of$5,000 and$15,000 , respectively. The increase in our other financial services segment was related to increases in consulting fees related to our participant directed recordkeeping group, where staffing changes led to an increase in consulting expense of$30,000 compared to the same period in the prior year, and an increase in professional fees in ourNolan division related to an agreement with the former owner ofNolan under which payments increased by$35,000 due to an increase in the earnings from ourNolan division over the same period in the prior year, and an increase in tax consulting expense related to the completion of the tax returns for the trust department's pooled funds earlier in the year compared to the prior period of$9,000 , and other individually immaterial increases of approximately$20,000 . The offsetting decreases related to a decrease in audit and tax consulting fees at the Bank totaling$37,000 , offset by increases in legal and professional fees of$18,000 and$14,000 , respectively, and a decrease in professional fees at ourHoldco segment of$15,000 , compared to the same period in the prior year. Data processing. Data processing includes costs related to the Company's operating systems. Data processing expense for three months endedMarch 31, 2021 increased$13,000 , or 6.8%, compared to the same periods in the prior year. The increase was due to an increase in trust data processing for the three months endedMarch 31, 2021 of$14,000 , related to discounts received during the three months endedMarch 31, 2020 which decreased expense for that three month period, offset slightly by a$1,000 decrease in data processing and operating systems atSanders Morris and Tectonic Advisors compared to the same period in the prior year. 37
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Other. Other expenses include costs for insurance,Federal Deposit Insurance Corporation ("FDIC") andOffice of the Comptroller of the Currency ("OCC") assessments, director fees, regulatory filing fees related to our brokerage business, business travel, management fees, and other operational expenses. Other expenses for three months endedMarch 31, 2021 decreased$3,000 , or 0.4%, compared to the same period in the prior year. The net decrease was primarily related to a decrease of$43,000 in our Banking segment, offset by increases of$15,000 and$25,000 in ourOther Financial Services andHoldco segments, respectively. The decrease in other expenses in our Banking segment relates primarily to a decrease in employee recruitment costs of$20,000 , and to decreases in travel, meals, and entertainment costs of approximately$14,000 , and a decrease in payroll processing fees of$9,000 . The offsetting increases primarily relate to increases in computer software, supplies, and office expenses in ourOther Financial Services segment of$83,000 , offset by decreases of$37,000 across travel, meals and entertainment expense, and a decrease in public relations expense of$12,000 , and other individually immaterial increases totaling$34,000 . The increase in ourHoldco segment of$25,000 relates to an increase of$14,000 in our directors' and officers' insurance coverage, and an increase of$11,000 in our directors' fees related to timing. Income Taxes
Income tax expense for the three months ended
Segment Reporting
We have three operating segments: Banking,
Our Banking operating segment includes both commercial and consumer banking services. Commercial banking services are provided primarily to small to medium-sized businesses and their employees, which includes a wide array of lending and cash management products. Consumer banking services include lending and depository services.
OurOther Financial Services segment includesTectonic Advisors , Sanders Morris, the Bank's Trust Division, which includes a TPA services unit, and HWG. Through these business divisions, we offer investment advisory and brokerage services to individuals and businesses, private trust services, and financial management services, including personal wealth management, retirement plan design and administrative services, and insurance brokerage services.
A third operating segment,
The following table presents key metrics related to our segments:
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