Tectonic Financial: This 9% Fixed-To-Floating Preferred Stock Started Trading On The Nasdaq

Summary

Overview of Tectonic Financial's new preferred stock, TECTP.

Brief look at the company.

Comparison with the sector.

Where in the context of all Fixed-to-Floating preferred stocks does TECTP stand?

Lack of easily accessible public information.

Introduction

Our goal is to present to you our IPO analysis for every new fixed-income security that enters the market and to find out if there is any trading potential. In this article, we want to shed light on the newest Preferred Stock issued by the private company Tectonic Financial, Inc. Even though the product may not be of interest to us and our financial objectives, it definitely is worth taking a look at.

The New Issue

Before we submerge into our brief analysis, here is a link to the 424B4 Filing by Tectonic Financial, Inc. - the prospectus.

Source: SEC.gov

For a total of 1.5M shares issued, the total gross proceeds to the company are $15M. You can find some relevant information about the new preferred stock in the table below:

Source: Author's spreadsheet

Tectonic Financial, Inc. 9.00% Fixed-to-Floating Rate Series B Non-Cumulative Perpetual Preferred Stock (NASDAQ: TECTP) pays a qualified fixed dividend at a rate of 9.00% before 05/15/2024 and then switches to paying a floating rate dividend at a rate of the three-month LIBOR plus a spread of 6.72%. The new issue bears no S&P rating, pays quarterly dividends and is callable as of 05/15/2024. TECTP has a par value of $10 and with the current price of $10.50, it has a Current Yield of 8.57% and YTC of 7.77%.

Here is the product's Yield-to-Call curve:

Source: Author's spreadsheet

Ranking

With respect to the payment of dividends and distributions upon our liquidation, dissolution or winding up, the Series B preferred stock will rank:

  • senior and prior to our common stock and any other class or series of preferred stock that by its terms is designated as ranking junior to the Series B preferred stock;
  • pari passu with the Series A preferred stock and all future series of preferred stock that by its terms is designated as ranking equal to the Series B preferred stock or which do not state they are junior or senior to the Series B preferred; and
  • junior to all existing and future indebtedness and other liabilities of the Company and any class or series of preferred stock that is expressly designated as ranking senior to the Series B preferred stock (subject to any requisite consents prior to issuance).

The Company

Tectonic Financial, Inc. operates as the holding company for T Bank, N.A. that provides commercial and consumer banking services to small-to medium-sized businesses, single-family residential and commercial contractors, and consumers in Dallas, Tarrant, Denton, Collin, and Rockwall counties. It offers various deposit products that include demand deposits, NOW accounts, money market accounts, regular savings accounts, individual retirement accounts, and certificates of deposit. The company also provides occupied and non-owner occupied commercial real estate loans, construction and development loans, and residential real estate loans; commercial loans for retail establishments, professional service providers, and small-to-medium-sized businesses; equipment, real estate, and other tangible collateral secured loans; and consumer installment loans to individuals for personal, family, and household purposes, including secured and unsecured installment and term loans. In addition, it offers traditional fiduciary services, such as serving as executor, trustee, agent, administrator, or custodian for individuals, nonprofit organizations, employee benefit plans, and organizations; and remote check deposits, bill payment, electronic transfer of funds between financial institutions, person-to-person payments, and positive pay, as well as traditional Internet services, such as balance inquiries and internal funds transfers. Further, the company offers investment advisory and due diligence services; stocks and other securities brokerage services; and property and casualty, and life and disability insurance brokerage services. The company was formerly known as T Acquisition, Inc. and changed its name to Tectonic Financial, Inc. in May 2019. Tectonic Financial, Inc. was incorporated in 2002 and is headquartered in Dallas, Texas.

Source: Bloomberg.com | Tectonic Financial, Inc.

Sector Comparison

The charts below contain all preferred stocks in the ' Asset Management ' sector (according to Finviz.com):

  • By Yield-to-Call and Current Yield

Source: Author's database

The upper right stock is the one the highest YTC and the highest CY at the same time. In this case, it is the newly issued, TECTP.

  • By Years-to-Call and Yield-to-Call

Source: Author's database

This is the Yield curve of these securities. The higher the preferred stock, the better.

  • Here is the full list:

Source: Author's database

All Fixed-To-Floating Securities

The next two charts present all fixed-to-floating securities with non-suspended distribution:

  • By Years-to-Call and Yield-to-Call

Source: Author's database

  • By Yield-to-Call and Current Yield

Source: Author's database

Redemption Following A Regulatory Capital Treatment Event

The Preferred Stock may be redeemed at the Company’s option, and subject to regulatory approval, at a cash redemption price equal to $10.00 per share of Preferred Stock, plus any declared and unpaid dividends, without regard to any undeclared dividends to, but excluding, the date of redemption (I) in whole or in part, on any dividend payment date on or after May 15, 2024 with not less than 30 days’ and not more than 60 days’ notice prior to the date of redemption specified in the notice, or (II) in whole, but not in part, at any time within 90 days following a “Regulatory Capital Treatment Event,” as described and subject to the limitations in the prospectus. The holders of the Preferred Stock will not have the right to require redemption or repurchase of the Preferred Stock.

Source: FWP Filing by Tectonic Financial, Inc

Use of Proceeds

The Company intends to use approximately $1.9 million of the net proceeds to repay its bank stock loan, $8.0 million to offer to repurchase, in full, as promptly as practicable after the offering and subject to the receipt of any requisite regulatory approval, the Series A preferred stock. The Company intends to contribute the remaining proceeds (approximately $3.3 million) to the Bank to support its capital position, to finance potential acquisitions, and for general corporate purposes.

Source: FWP Filing by Tectonic Financial, Inc

Addition To The iShares Preferred And Income Securities ETF

With the current market capitalization of only $15M, TECTP cannot be an addition to the iShares Preferred and Income Securities ETF (NASDAQ: PFF).

Conclusion

As fixed-income traders, we follow every preferred stock or baby bond, which is listed on the stock exchange. Even a tiny issue as TECTP, and the homework we always do we share it with the public. It is not necessary for the IPO to be an arbitrage and a bargain but in many cases, the new security happens to be better than the ones already trading on the market. In this case, TECTP has a lot better yields than the rest of the preferred stocks in the sector but it does not come without additional risk.

There is a lack of easily accessible public information about the company, which in turn is private. There are no public reports on their website, not even current reports on sec.gov. The preferred stock is trading at 5% premium and the YTW of 7.77% it does not seem so tempting to go into the unknown. A fast look at the first chart with all fixed-to-floating preferred stocks reveals a lot of stocks with similar yield, but much easier to monitor and to be managed if needed. SSW-I, PMT-A, PMT-B, TWO-C, CIM-C, that have the closest years-to-call and yield-to-call with the newly issued preferred stock, look a much better option. Personally, at this point, I would stay away from this security.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.