UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
  FORM
10-Q
  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
  For
the quarterly period ended September 30, 2009
  Commission
File Number 000-51297
  T
BANCSHARES, INC.
 (Exact
name of registrant as specified in its charter)
  Texas
              
              71-0919962(State or other jurisdiction of
                incorporation or organization)
              
              (I.R.S. Employer
                Identification No.)
 
 16000
Dallas Parkway, Suite 125, Dallas, Texas 75248
 (Address
of principal executive offices)
 
 (972)
720- 9000
 (Issuer’s
telephone number, including area code)
  Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or such shorter period that
the registrant was required to filed such reports), and (2) has been subject to
such filing requirements for the past 90 days.   Yesx
     No ̈
  Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such
files).   Yes ̈
    No ̈
 
 Check
whether the registrant is a large accelerated filer, an accelerated filer, a
nonaccelerated filer or a smaller reporting company.
 
 Larger Accelerated Filer
                Yes    ̈
                
                No   xAccelerated Filer
                Yes    ̈
                
                No   xNonaccelerated Filer
                Yes    ̈
                
                No   xSmaller Reporting Company
                Yes   x
                
                No    ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).   Yes   ̈
No  x
  The
number of shares outstanding of the issuer’s Common Stock as of November 13,
2009, was 1,941,305 shares.
 
 Transitional
Small Business Disclosure Format (check
one)   Yes   ̈No  x
  
  T
BANCSHARES, INC.
  INDEX
  PAGEPART
      I.
                FINANCIAL
      INFORMATION
                
                3ITEM
      1.
                Financial
      Statements
                
                3ITEM
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                18ITEM
      3.
                Quantitative
      and Qualitative Disclosures about Market Risk
                
                32ITEM
      4T.
                Controls
      and Procedures
                
                32PART
      II.
                OTHER
      INFORMATION
                
                32ITEM
      1.
                Legal
      Proceedings
                
                32ITEM
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                32ITEM
      3.
                Defaults
      Upon Senior Securities
                
                32ITEM
      4.
                Submission
      of Matters to a Vote of Security Holders
                
                33ITEM
      5.
                Other
      Information
                
                33ITEM
      6.
                Exhibits
                
                34
  2
 
 PART I. FINANCIAL
INFORMATION
 ITEM 1. Financial
Statements
 T
BANCSHARES, INC.
 CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION
  (000's)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008(unaudited)ASSETSCash
      and due from banks
                  
                  $
                  1,662
                  
                  
                  $
                  1,242Federal
      funds sold
                  
                  
                  9,190
                  
                  
                  
                  7,215Total
      cash and cash equivalents
                  
                  
                  10,852
                  
                  
                  
                  8,457Securities
      available for sale at estimated fair value
                  
                  
                  5,257
                  
                  
                  
                  -Securities
      held to maturity at amortized cost
                  
                  
                  854
                  
                  
                  
                  981Securities,
      restricted
                  
                  
                  1,240
                  
                  
                  
                  722Total
      investment securities
                  
                  
                  7,351
                  
                  
                  
                  1,703Loans,
      net of allowance for loan losses of $1,787 and $1,638,
      respectively
                  
                  
                  119,610
                  
                  
                  
                  123,393Bank
      premises and equipment, net
                  
                  
                  893
                  
                  
                  
                  1,169Other
      assets
                  
                  
                  2,885
                  
                  
                  
                  1,528Total
      assets
                  
                  $
                  141,591
                  
                  
                  $
                  136,250LIABILITIESDemand
      Deposits:Noninterest-bearing
                  
                  $
                  7,121
                  
                  
                  $
                  10,077Interest-bearing
                  
                  
                  41,742
                  
                  
                  
                  42,407Time
      deposits $100,000 and over
                  
                  
                  41,953
                  
                  
                  
                  37,240Other
      time deposits
                  
                  
                  17,575
                  
                  
                  
                  21,372Total
      deposits
                  
                  
                  108,391
                  
                  
                  
                  111,096Borrowed
      Funds
                  
                  
                  18,000
                  
                  
                  
                  10,500Other
      liabilities
                  
                  
                  924
                  
                  
                  
                  860Total
      liabilities
                  
                  
                  127,315
                  
                  
                  
                  122,456Shareholders'
      EquityCommon
      Stock, $0.01 par value; 10,000,000 shares authorized; 1,941,305 and
      1,703,801 shares issued and outstanding at September 30, 2009 and December
      31, 2008, respectively
                  
                  
                  19
                  
                  
                  
                  17Additional
      paid-in capital
                  
                  
                  18,511
                  
                  
                  
                  16,915Retained
      deficit
                  
                  
                  (4,263
                  )
                  
                  
                  (3,138
                  )Accumulated
      other comprehensive income
                  
                  
                  9
                  
                  
                  
                  -Total
      shareholders' equity
                  
                  
                  14,276
                  
                  
                  
                  13,794Total
      liabilities and shareholders' equity
                  
                  $
                  141,591
                  
                  
                  $
                  136,250
  See
accompanying notes to consolidated financial statements
  3
 
 T
BANCSHARES, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three Months Ended September 30,
                          
                          
                          Nine Months Ended September 30,(000's) except earnings per share
                          
                          2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Interest
      IncomeLoan,
      including fees
                          
                          $
                          2,047
                          
                          
                          $
                          2,323
                          
                          
                          $
                          6,179
                          
                          
                          $
                          7,294Securities,
      restricted
                          
                          
                          42
                          
                          
                          
                          15
                          
                          
                          
                          97
                          
                          
                          
                          39Federal
      funds sold
                          
                          
                          45
                          
                          
                          
                          77
                          
                          
                          
                          106
                          
                          
                          
                          271Total
      interest income
                          
                          
                          2,134
                          
                          
                          
                          2,415
                          
                          
                          
                          6,382
                          
                          
                          
                          7,604Interest
      ExpenseDeposits
                          
                          
                          831
                          
                          
                          
                          1,261
                          
                          
                          
                          2,470
                          
                          
                          
                          3,871Borrowed
      funds
                          
                          
                          7
                          
                          
                          
                          -
                          
                          
                          
                          42
                          
                          
                          
                          -Total
      interest expense
                          
                          
                          838
                          
                          
                          
                          1,261
                          
                          
                          
                          2,512
                          
                          
                          
                          3,871Net
      interest income
                          
                          
                          1,296
                          
                          
                          
                          1,154
                          
                          
                          
                          3,870
                          
                          
                          
                          3,733Provision
      for loan losses
                          
                          
                          1,085
                          
                          
                          
                          177
                          
                          
                          
                          1,243
                          
                          
                          
                          476Net
      interest income after provision for loan losses
                          
                          
                          211
                          
                          
                          
                          977
                          
                          
                          
                          2,627
                          
                          
                          
                          3,257Noninterest
      IncomeTrust
      income
                          
                          
                          1,769
                          
                          
                          
                          2,298
                          
                          
                          
                          4,950
                          
                          
                          
                          7,970Service
      fees
                          
                          
                          32
                          
                          
                          
                          27
                          
                          
                          
                          78
                          
                          
                          
                          80Total
      noninterest income
                          
                          
                          1,801
                          
                          
                          
                          2,325
                          
                          
                          
                          5,028
                          
                          
                          
                          8,050Noninterest
      ExpenseSalaries
      and employee benefits
                          
                          
                          757
                          
                          
                          
                          762
                          
                          
                          
                          2,363
                          
                          
                          
                          2,279Occupancy
      and equipment
                          
                          
                          314
                          
                          
                          
                          280
                          
                          
                          
                          996
                          
                          
                          
                          978Trust
      consulting services
                          
                          
                          1,503
                          
                          
                          
                          2,023
                          
                          
                          
                          4,253
                          
                          
                          
                          6,974Professional
      fees
                          
                          
                          91
                          
                          
                          
                          167
                          
                          
                          
                          307
                          
                          
                          
                          513Data
      processing
                          
                          
                          71
                          
                          
                          
                          94
                          
                          
                          
                          210
                          
                          
                          
                          270Other
                          
                          
                          207
                          
                          
                          
                          199
                          
                          
                          
                          651
                          
                          
                          
                          566Total
      noninterest  expense
                          
                          
                          2,943
                          
                          
                          
                          3,525
                          
                          
                          
                          8,780
                          
                          
                          
                          11,580Net
      Loss
                          
                          $
                          (931
                          )
                          
                          $
                          (223
                          )
                          
                          $
                          (1,125
                          )
                          
                          $
                          (273
                          )Loss
      per common share:Basic
                          
                          
                          (0.48
                          )
                          
                          
                          (0.13
                          )
                          
                          
                          (0.58
                          )
                          
                          
                          (0.16
                          )Diluted
                          
                          
                          (0.48
                          )
                          
                          
                          (0.13
                          )
                          
                          
                          (0.58
                          )
                          
                          
                          (0.16
                          )Weighted
      average common shares outstanding
                          
                          
                          1,941,305
                          
                          
                          
                          1,703,801
                          
                          
                          
                          1,934,345
                          
                          
                          
                          1,703,801Weighted
      average diluted shares outstanding
                          
                          
                          1,941,305
                          
                          
                          
                          1,703,801
                          
                          
                          
                          1,934,345
                          
                          
                          
                          1,703,801
 
 See
accompanying notes to consolidated financial statements
  4
 
 T
BANCSHARES, INC.
 CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 (Unaudited)
 
 (000's)
                  
                  Common
                    Stock
                  
                  
                  Additional
                    Paid-in
                    Capital
                  
                  
                  Retained
                    Deficit
                  
                  
                  Accumulated
                    Other
                    Comprehensive
                    Income
                  
                  
                  TotalBALANCE,
      January 1, 2008
                  
                  $
                  17
                  
                  
                  $
                  16,819
                  
                  
                  $
                  (2,710
                  )
                  
                  $
                  -
                  
                  
                  $
                  14,126Comprehensive
      loss:Net
      loss — YTD
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (273
                  )
                  
                  
                  
                  
                  
                  
                  (273
                  )Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (273
                  )Stock
      based compensation
                  
                  
                  
                  
                  
                  
                  60
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  60BALANCE,
      September 30, 2008
                  
                  $
                  17
                  
                  
                  $
                  16,879
                  
                  
                  $
                  (2,983
                  )
                  
                  $
                  -
                  
                  
                  $
                  13,913BALANCE,
      January 1, 2009
                  
                  $
                  17
                  
                  
                  $
                  16,915
                  
                  
                  $
                  (3,138
                  )
                  
                  $
                  -
                  
                  
                  $
                  13,794Comprehensive
      loss:Net
      loss — YTD
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,125
                  )
                  
                  
                  
                  
                  
                  
                  (1,125
                  )Change
      in accumulated gain on securities available for sale
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9
                  
                  
                  
                  9Total
      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,116
                  )Net
      proceeds from rights offering
                  
                  
                  2
                  
                  
                  
                  1,519
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,521Stock
      based compensation
                  
                  
                  
                  
                  
                  
                  77
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  77BALANCE,
      September 30, 2009
                  
                  $
                  19
                  
                  
                  $
                  18,511
                  
                  
                  $
                  (4,263
                  )
                  
                  $
                  9
                  
                  
                  $
                  14,276
 
 See
accompanying notes to consolidated financial
statements
  5
 
 T BANCSHARES,
INC.
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine Months Ended September 30,(000's)
                  
                  2009
                  
                  
                  2008Cash
      Flows from Operating ActivitiesNet
      loss
                  
                  $
                  (1,125
                  )
                  
                  $
                  (273
                  )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Provision
      for loan losses
                  
                  
                  1,243
                  
                  
                  
                  476Depreciation
      and amortization
                  
                  
                  356
                  
                  
                  
                  342Net
      amortization/(accretion) of securities
                  
                  
                  36
                  
                  
                  
                  (16
                  )Gain
      on sale of other real estate owned
                  
                  
                  (1
                  )
                  
                  
                  -Stock
      based compensation
                  
                  
                  77
                  
                  
                  
                  60Net
      change in other assets
                  
                  
                  260
                  
                  
                  
                  (776
                  )Net
      change in other liabilities
                  
                  
                  64
                  
                  
                  
                  785Net
      cash provided by operating activities
                  
                  
                  910
                  
                  
                  
                  598Cash
      Flows from Investing ActivitiesPurchase
      of securities held to maturity
                  
                  
                  -
                  
                  
                  
                  (3,003
                  )Proceeds
      from principal payments and maturities of securities
                  
                  
                  1,528
                  
                  
                  
                  3,000Purchase
      of securities available for sale
                  
                  
                  (6,685
                  )
                  
                  
                  -Purchase
      of securities, restricted, net
                  
                  
                  (943
                  )
                  
                  
                  (52
                  )Proceeds
      from sale of securities, restricted
                  
                  
                  425
                  
                  
                  
                  -Net
      change in loans
                  
                  
                  548
                  
                  
                  
                  (6,547
                  )Proceeds
      from sale of other real estate owned
                  
                  
                  376
                  
                  
                  
                  -Purchases
      of premises and equipment
                  
                  
                  (80
                  )
                  
                  
                  (28
                  )Net
      cash used in investing activities
                  
                  
                  (4,831
                  )
                  
                  
                  (6,630
                  )Cash
      Flows from Financing ActivitiesNet
      change in demand deposits
                  
                  
                  (3,621
                  )
                  
                  
                  (15,743
                  )Net
      change in time deposits
                  
                  
                  916
                  
                  
                  
                  7,148Proceeds
      from borrowed funds
                  
                  
                  145,050
                  
                  
                  
                  -Repayment
      of borrowed funds
                  
                  
                  (137,550
                  )
                  
                  
                  -Net
      proceeds from rights offering
                  
                  
                  1,521
                  
                  
                  
                  -Net
      cash provided by financing activities
                  
                  
                  6,316
                  
                  
                  
                  (8,595
                  )Net
      change in cash and cash equivalents
                  
                  
                  2,395
                  
                  
                  
                  (14,627
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  8,457
                  
                  
                  
                  23,560Cash
      and cash equivalents at end of period
                  
                  $
                  10,852
                  
                  
                  $
                  8,933Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                  
                  $
                  2,498
                  
                  
                  $
                  3,845Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  20Non-cash
      transactions:Transfers
      from loans to other real estate owned
                  
                  $
                  1,992
                  
                  
                  $
                  -
 
 See
accompanying notes to consolidated financial statements
  6
  T
BANCSHARES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
  NOTE 1. BASIS OF
PRESENTATION
  We
prepared the consolidated financial statements of T Bancshares, Inc. and its
subsidiaries (the “Company,” “we,” “us,” or “our,” hereafter) following the
requirements of the Securities and Exchange Commission (“SEC”) for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles generally
accepted in the United States of America (“GAAP”) can be condensed or
omitted.
  We are
responsible for the unaudited financial statements included in this document.
The financial statements include all normal and recurring adjustments that are
considered necessary for the fair presentation of our financial position and
operating results. The accounting and reporting policies of the Company reflect
banking industry practice and conform to generally accepted accounting
principles in the United States of America. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported asset and liability balances and revenue and expense
amounts and the disclosure of contingent assets and liabilities. The allowance
for loan loss is the primary estimate by management, which is established
through a provision for loan loss charge to expense. It is reasonably possible
that actual results could differ significantly from those
estimates.
 
 Certain
reclassifications have been made to the 2008 financial statements from their
original presentation to conform with the 2009 financial statement
presentation.  These reclassifications had no effect on shareholders’
equity at December 31, 2008 or net loss for the three or nine months
ended September 30, 2008.
 
 In
preparing these condensed consolidated interim financial statements, the Company
has evaluated, for potential recognition or disclosure, events or transactions
subsequent to the end of the most recent quarterly period through November 13,
2009, the issuance date of these condensed consolidated interim financial
statements.  No such transactions or events resulted in additional
recognition or disclosure.
  The
information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and accompanying notes
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008.
 
 NOTE
2. ADOPTION OF NEW ACCOUNTING POLICIES
  Accounting Standards
Codification. The Financial Accounting Standards Board’s (FASB)
Accounting Standards Codification (ASC) became effective on July 1, 2009.
At that date, the ASC became FASB’s officially recognized source of
authoritative U.S. generally accepted accounting principles (GAAP) applicable to
all public and non-public non-governmental entities, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task
Force (EITF) and related literature. Rules and interpretive releases of the SEC
under the authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. All other accounting literature is considered
non-authoritative. The switch to the ASC affects the away companies refer to
U.S. GAAP in financial statements and accounting policies. Citing particular
content in the ASC involves specifying the unique numeric path to the content
through the Topic, Subtopic, Section and Paragraph structure.
  FASB ASC Topic 820, “Fair Value
Measurements and Disclosures.” New authoritative accounting guidance
under ASC Topic 820,”Fair Value Measurements and Disclosures,” affirms that the
objective of fair value when the market for an asset is not active is the price
that would be received to sell the asset in an orderly transaction, and
clarifies and includes additional factors for determining whether there has been
a significant decrease in market activity for an asset when the market for that
asset is not active. ASC Topic 820 requires an entity to base its conclusion
about whether a transaction was not orderly on the weight of the evidence. The
new accounting guidance amended prior guidance to expand certain disclosure
requirements. The Corporation adopted the new authoritative accounting guidance
under ASC Topic 820 during the first quarter of 2009. Adoption of the new
guidance did not significantly impact the Corporation’s financial statements,
except that expanded disclosure has been made as reflected in Note
17.
  7
  FASB ASC Topic 825 “Financial
Instruments.” New authoritative accounting guidance under ASC Topic
825,”Financial Instruments,” requires an entity to provide disclosures about the
fair value of financial instruments in interim financial information and amends
prior guidance to require those disclosures in summarized financial information
at interim reporting periods. The new interim disclosures required under Topic
825 are included in Note 17 - Fair Value Measurements.
  FASB ASC Topic 855, “Subsequent
Events.” New authoritative accounting guidance under ASC Topic 855,
“Subsequent Events,” establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or available to be issued. ASC Topic 855 defines
(i) the period after the balance sheet date during which a reporting
entity’s management should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (ii) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
(iii) the disclosures an entity should make about events or transactions
that occurred after the balance sheet date. The new authoritative accounting
guidance under ASC Topic 855 became effective for the Corporation’s financial
statements for periods ending after June 15, 2009 and did not have a
significant impact on the Corporation’s financial statements.
 
 NOTE 3. LOANS
 
 Loans
held in portfolio consisted of the following:
  (000's)
                    
                    September 30,
                      2009
                    
                    
                    December 31,
                      2008Commercial
      and industrial
                    
                    $
                    84,740
                    
                    
                    $
                    81,342Consumer
      installment
                    
                    
                    2,907
                    
                    
                    
                    3,799Real
      estate — mortgage
                    
                    
                    24,786
                    
                    
                    
                    20,543Real
      estate — construction
                    
                    
                    9,108
                    
                    
                    
                    19,481Other
                    
                    
                    -
                    
                    
                    
                    12Total
      loans
                    
                    
                    121,541
                    
                    
                    
                    125,177Less
      allowance for loan losses
                    
                    
                    1,787
                    
                    
                    
                    1,638Less
      deferred loan fees
                    
                    
                    144
                    
                    
                    
                    146Net
      loans
                    
                    $
                    119,610
                    
                    
                    $
                    123,393
  The
change in the allowance for loan losses is as follows:
 
 (000's)
                    
                    September 30,
                      2009
                    
                    
                    September 30,
                      2008Balance
      at beginning of period
                    
                    $
                    1,638
                    
                    
                    $
                    1,600Provision
      charged to operations
                    
                    
                    1,243
                    
                    
                    
                    476Loans
      charged off
                    
                    
                    (1,103
                    )
                    
                    
                    (451
                    )Recoveries
      of loans previously charged off
                    
                    
                    9
                    
                    
                    
                    44Balance
      at end of period
                    
                    $
                    1,787
                    
                    
                    $
                    1,669
  At
September 30, 2009, there were $4,632,000 of nonaccrual loans and no loans
contractually delinquent over ninety days and still accruing interest, and at
December 31, 2008, there were $3,254,000 of nonaccrual loans and $1,328,000 of
loans contractually delinquent over ninety days and still accruing
interest.
  8
 
 NOTE 4. SECURITIES
  A summary
of the amortized cost and fair value of securities is presented
below.
 
 September 30, 2009(000's)
                  
                  Amortized
                    Cost
                  
                  
                  Unrealized
                    Gains
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Estimated
                    Fair ValueSecurities Available for
      Sale:U.S.
      Government Agencies
                  
                  $
                  5,248
                  
                  
                  $
                  9
                  
                  
                  $
                  -
                  
                  
                  $
                  5,257Securities
      Held to Maturity:U.S.
      Government Agencies
                  
                  $
                  854
                  
                  
                  $
                  39
                  
                  
                  $
                  -
                  
                  
                  $
                  893Securities,
      restrictedOther
                  
                  $
                  1,240
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  1,240
  December 31, 2008(000's)
                  
                  Amortized
                    Cost
                  
                  
                  Unrealized
                    Gains
                  
                  
                  Unrealized
                    Losses
                  
                  
                  Estimated
                    Fair ValueSecurities
      Held to Maturity:U.S.
      Government Agencies
                  
                  $
                  981
                  
                  
                  $
                  31
                  
                  
                  $
                  -
                  
                  
                  $
                  1,012Securities,
      restricted:Other
                  
                  $
                  722
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  722
  At
September 30, 2009 securities with market value of $5.1 million were
pledged against borrowed funds at the Federal Home Loan Bank of Dallas, and one
security with market value of $1.0 million was pledged against trust deposit
balances held at the bank.   Our subsidiary, T Bank, N.A. (the
“Bank”), held Federal Reserve Bank of Dallas stock in the amount of $420,000 at
September 30, 2009 and December 31, 2008. The Bank also held Federal Home Loan
Bank of Dallas stock in the amount of $819,900 and $302,400 at September 30,
2009 and December 31, 2008, respectively. Both stocks are carried at cost
and are reported as securities, restricted in the table above.
  NOTE 5. RELATED PARTIES
  Certain
directors and officers of the Company have depository accounts with the Bank.
None of those deposit accounts has terms more favorable than those available to
any other depositor.
  NOTE 6. BANK PREMISES AND
EQUIPMENT
  The
original cost and related accumulated depreciation at September 30, 2009 and
December 31, 2008 were as follows:
  (000's)
                    
                    September 30,
                      2009
                    
                    
                    December 31,
                      2008Leasehold
      improvements
                    
                    $
                    929
                    
                    
                    $
                    929Furniture
      and equipment
                    
                    
                    1,874
                    
                    
                    
                    1,7942,803
                    
                    
                    
                    2,723Less:
      accumulated depreciation
                    
                    
                    1,910
                    
                    
                    
                    1,554Balance
      at end of period
                    
                    $
                    893
                    
                    
                    $
                    1,169
  9
 
 NOTE
7. OTHER ASSETS
  Other
assets consisted of the following at September 30, 2009 and December 31,
2008:
  (000's)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008Other
      Real Estate Owned
                  
                  $
                  1,600
                  
                  
                  $
                  -Accounts
      receivable – trust fees
                  
                  
                  610
                  
                  
                  
                  509Accrued
      interest receivable
                  
                  
                  358
                  
                  
                  
                  472Prepaid
      assets
                  
                  
                  290
                  
                  
                  
                  267Capitalized
      rights offering costs
                  
                  
                  -
                  
                  
                  
                  242Other
                  
                  
                  27
                  
                  
                  
                  38$
                  2,885
                  
                  
                  $
                  1,528
  Other
Real Estate Owned (“OREO”) consists of two properties at September 30, 2009,
which are recorded at lower of cost or fair value.  The OREO assets
are actively being marketed, and disposal of the asset is anticipated to occur
prior to December 31, 2010.
 
 NOTE 8. DEPOSITS
  Deposits
are summarized as follows:
  (000's)
                  
                  As of September
      30, 2009
                  
                  
                  As of December 31, 2008Noninterest
      bearing demand
                  
                  $
                  7,121
                  
                  
                  
                  6
                  %
                  
                  $
                  10,077
                  
                  
                  
                  9
                  %Interest
      bearing demand (NOW)
                  
                  
                  1,791
                  
                  
                  
                  2
                  %
                  
                  
                  1,899
                  
                  
                  
                  2
                  %Money
      market accounts
                  
                  
                  39,751
                  
                  
                  
                  37
                  %
                  
                  
                  40,333
                  
                  
                  
                  36
                  %Savings
      accounts
                  
                  
                  200
                  
                  
                  
                  0
                  %
                  
                  
                  175
                  
                  
                  
                  0
                  %Certificates
      of deposit, $100,000 and greater
                  
                  
                  41,953
                  
                  
                  
                  39
                  %
                  
                  
                  37,240
                  
                  
                  
                  34
                  %Certificates
      of deposit, less than $100,000
                  
                  
                  17,575
                  
                  
                  
                  16
                  %
                  
                  
                  21,372
                  
                  
                  
                  19
                  %$
                  108,391
                  
                  
                  
                  100
                  %
                  
                  $
                  111,096
                  
                  
                  
                  1000
                  %
  At
September 30, 2009, the scheduled maturities of certificates of deposit were as
follows:
  (000’s)2009
                      
                      $
                      6,2652010
                      
                      
                      24,7452011
                      
                      
                      17,6882012
                      
                      
                      9,0042013
                      
                      
                      1,5172014
                      
                      
                      309Total
                      
                      $
                      59,528
  10
 
 NOTE
9.  BORROWED FUNDS
  Borrowed
funds as of September 30, 2009 and December 31, 2008, were as
follows:
 
 (000's)
                    
                    September 30,
                      2009
                    
                    
                    December 31,
                      2008Federal
      Home Loan Bank Advance
                    
                    $
                    18,000
                    
                    
                    $
                    -Federal
      Reserve Bank Advance
                    
                    
                    -
                    
                    
                    
                    10,500Total
                    
                    $
                    18,000
                    
                    
                    $
                    10,500
  At
September 30, 2009, borrowed funds consisted of loans of $18.0 million from the
Federal Home Loan Bank. The Federal Home Loan Bank advance had a rate of .08%
and a twenty-eight day term, which matured on October 28, 2009 and was renewed
with similar terms.  There were no outstanding borrowed funds with the
Federal Reserve Bank at September 30, 2009. The Company has a $21.3 million
credit line with the Federal Reserve Bank, which is secured by $31.3 million in
pledged commercial and industrial loans, and $18.1 million credit line with the
Federal Home Loan Bank which is secured by $16.4 million in pledged real estate
loans and $5.0 million in securities.
  NOTE 10. OTHER LIABLITIES
 
 Other
liabilities comprised the following at September 30, 2009 and December 31,
2008:
  (000's)
                    
                    September 30,
                      2009
                    
                    
                    December 31,
                      2008Trust
      Advisor Fees Payable
                    
                    $
                    514
                    
                    
                    $
                    453Interest
      Payable
                    
                    
                    138
                    
                    
                    
                    125Audit
      Fees
                    
                    
                    4
                    
                    
                    
                    97Incentive
      Compensation
                    
                    
                    85
                    
                    
                    
                    67Legal
                    
                    
                    44
                    
                    
                    
                    -Franchise
      & Property Taxes
                    
                    
                    28
                    
                    
                    
                    37Other
      Accruals
                    
                    
                    111
                    
                    
                    
                    81$
                    924
                    
                    
                    $
                    860
 
 NOTE 11. INCOME TAXES
  No
federal income tax expense has been recorded for the quarter ended September 30,
2009, as net operating losses are being used to offset taxable income. Based
upon the Company’s limited operating history, the federal income tax benefit of
these losses has a valuation allowance equal to the amount of the benefit. As of
December 31, 2008, the Company had net tax operating loss carry forwards of
approximately $760,000 that will ultimately expire in 2028 if not used. This
amount is lower than the losses reflected in the financial statements as all
organizational costs are capitalized for income tax purposes and provisions for
loan losses are not recognized for tax purposes.
 
 NOTE 12. STOCK OPTIONS
  The
shareholders of the Company approved the 2005 Stock Incentive Plan at the annual
shareholder meeting held on June 2, 2005. The plan authorizes the granting of
options to purchase up to 260,000 shares of common stock of the Company to
employees of the Company and its subsidiaries. The plan is designed to provide
the Company with the flexibility to grant incentive stock options and
non-qualified stock options to its executive and other officers. The purpose of
the plan is to provide increased incentive for key employees to render services
and to exert maximum effort for the success of the Company. The plan has a term
of 10 years. The plan is administered by the Board of Directors. As of September
30, 2009, options to purchase a total of 195,500 had been issued with a weighted
average exercise price of $10.03. As of December 31, 2008, options to purchase a
total of 205,500 had been issued with a weighted average exercise price of
$9.87. These options vest through December 2013. These options could potentially
dilute earnings per share, but were not included in the earnings (loss) per
share computations because their effect was anti-dilutive for the three and nine
months ended September 30, 2009 and 2008.
  Effective
January 1, 2006, the Company adopted FASB ASC Topic 718 using the
modified-prospective-transition method. Under this method, prior periods are not
restated. Also, under this transition method, stock compensation cost recognized
beginning January 1, 2006 includes: (a) compensation cost for all share-based
payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant-date estimated fair value, and (b) compensation cost for all
share-based payments granted on or subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of FASB ASC
Topic 718.
  11
 
 The
following is a summary of activity in the Company’s stock option plan at
September 30, 2009:
  Number of
                      Shares
                      Underlying
                      Options
                    
                    
                    Weighted
                      Average
                      Exercise
                      PricesOutstanding
      at beginning of the year
                    
                    
                    205,500
                    
                    
                    $
                    9.87Granted
                    
                    
                    -
                    
                    
                    
                    -Exercised
                    
                    
                    -
                    
                    
                    
                    -Expired
      / forfeited
                    
                    
                    10,000
                    
                    
                    
                    6.75Outstanding
      at end of period
                    
                    
                    195,500
                    
                    
                    $
                    10.03Exercisable
      at end of period
                    
                    
                    126,700
                    
                    
                    $
                    10.25Available
      for grant at end of period
                    
                    
                    53,500
  The
weighted average remaining contractual life of options outstanding at September
30, 2009 was 6.6 years.
  The
following is a summary of the Company’s nonvested options at September 30,
2009:
  Shares
                        
                        
                        Weighted
                          Average
                          Grant Date
                          Fair ValueNonvested
      at January 1, 2009
                        
                        
                        88,700
                        
                        
                        $
                        2.78Granted
                        
                        
                        -
                        
                        
                        
                        -Vested
                        
                        
                        9,900
                        
                        
                        
                        3.76Forfeited
                        
                        
                        10,000
                        
                        
                        
                        2.01Nonvested
      at September 30, 2009
                        
                        
                        68,800
                        
                        
                        $
                        2.75
  As of
September 30, 2009, there was approximately $174,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements to
be recognized over the vesting period.
  NOTE 13. STOCK WARRANTS
 
 The
Company’s organizers advanced funds for organizational and other preopening
expenses. As consideration for the advances, the organizers received warrants to
purchase one share of common stock for every $20 advanced up to a maximum of
$100,000. A total of 96,750 warrants were issued and remain outstanding at
September 30, 2009. These warrants are exercisable at a price of $10.00 per
share at any time until November 2, 2014. During the nine months ended September
30, 2009, no warrants were exercised.
  There
were no additional warrants issued during the nine months ended September 30,
2009.  The outstanding warrants could potentially dilute earnings per
share, but were not included in the earnings (loss) per share computations
because their effect was anti-dilutive for the respective three and nine months
ended September 30, 2009 and 2008.
  12
  NOTE 14. COMMITMENTS AND
CONTINGENCIES
  The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the accompanying balance sheets. The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instruments for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments. At September 30, 2009,
the Company had commitments to extend credit and standby letters of credit of
approximately $5.0 million and $15,000, respectively. At December 31, 2008, the
Company had commitments to extend credit and standby letters of credit of
approximately $6.5 million and $12,000, respectively.
  Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
 
 The
Company is involved in various regulatory inspections, inquiries, investigations
and proceedings, and litigation matters that arise from time to time in the
ordinary course of business. The process of resolving matters through litigation
or other means is inherently uncertain, and it is possible that an unfavorable
resolution of these matters, will adversely affect the Company, its results of
operations, financial condition and cash flows.  The Company’s regular
practice is to expense legal fees as services are rendered in connection with
legal matters, and to accrue for liabilities when payment is
probable.
  Employment
Agreements
  The
Company has entered into employment agreements with two officers of the Bank,
Steve Jones and Patrick Howard. The agreements are for an initial one-year term
and are automatically renewable for an additional one-year term unless either
party elects not to renew.
  NOTE 15. REGULATORY
MATTERS
  The Bank
is subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken could have a direct material effect on the Bank's
and, accordingly, the Company’s financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank’s assets, liabilities and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank’s capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings and other factors.
  Quantitative
measures established by regulations to ensure capital adequacy require the Bank
to maintain minimum amounts and ratios (set forth in the table below) of total
and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital (as defined) to average assets (as defined). To
be categorized as well-capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table.
 
 On July
9, 2008, the Bank announced that it entered into a Stipulation and Consent to
the Issuance of a Consent Order (the "Stipulation") and a Consent Order (the
"Order") with the Office of the Comptroller of the Currency (the "OCC"). The
Stipulation and the Order were based on the OCC's findings during its
examination as of September 30, 2007. As part of the Order, the Bank has agreed
to strengthen its Bank Secrecy Act ("BSA") internal controls, revise and
implement changes to its internal BSA audit program, maintain specific capital
ratios and correct any violations of law. Therefore, regardless of the Bank’s
capital position, the requirement in the Order to meet and maintain a specific
capital level means that the Bank may not be deemed to be well capitalized under
regulatory requirements as of September 30, 2009. The capital ratios required by
the Order are 11.5% Total Capital to Risk Weighted Assets and 9.00% Tier 1
Capital to Average Assets. As of September 30, 2009, the Bank was not compliant
with the 9.00% Tier 1 Capital to Average Assets requirement.  However,
the Bank’s Tier 1 Capital to Actual Assets ratio as of September 30, 2009 was
9.82%.
  13
 
 To be
categorized as well-capitalized under prompt corrective action provisions, the
Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table.
  (000's)
                                                                                                                    
                                                                                                                    Actual
                                                                                                                    
                                                                                                                    For Capital Adequacy Purposes
                                                                                                                    
                                                                                                                    To Be Well Capitalized Under
                                                                                                                      Prompt Corrective Action
                                                                                                                      ProvisionsAmount
                                                                                                                    
                                                                                                                    
                                                                                                                    Ratio
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    Ratio
                                                                                                                    
                                                                                                                    Amount
                                                                                                                    
                                                                                                                    
                                                                                                                    RatioAs
      of September 30, 2009Total
      Capital (to Risk Weighted Assets)
                                                                                                                    
                                                                                                                    $
                                                                                                                    15,363
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    13.16
                                                                                                                    %
                                                                                                                    $
                                                                                                                    9,338
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    8.00
                                                                                                                    %
                                                                                                                    $
                                                                                                                    11,672
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    10.00
                                                                                                                    %Tier
      1 Capital (to Risk Weighted Assets)
                                                                                                                    
                                                                                                                    
                                                                                                                    13,900
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    11.91
                                                                                                                    %
                                                                                                                    
                                                                                                                    4,669
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    4.00
                                                                                                                    %
                                                                                                                    
                                                                                                                    7,003
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    6.00
                                                                                                                    %Tier
      1 Capital (to Average Assets)
                                                                                                                    
                                                                                                                    
                                                                                                                    13,900
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    8.62
                                                                                                                    %
                                                                                                                    
                                                                                                                    6,453
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    4.00
                                                                                                                    %
                                                                                                                    
                                                                                                                    8,066
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    5.00
                                                                                                                    %As
      of December 31, 2008Total
      Capital (to Risk Weighted Assets)
                                                                                                                    
                                                                                                                    $
                                                                                                                    14,400
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    12.05
                                                                                                                    %
                                                                                                                    $
                                                                                                                    9,558
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    8.00
                                                                                                                    %
                                                                                                                    $
                                                                                                                    11,947
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    10.00
                                                                                                                    %Tier
      1 Capital (to Risk Weighted Assets)
                                                                                                                    
                                                                                                                    
                                                                                                                    12,905
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    10.80
                                                                                                                    %
                                                                                                                    
                                                                                                                    4,779
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    4.00
                                                                                                                    %
                                                                                                                    
                                                                                                                    7,168
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    6.00
                                                                                                                    %Tier
      1 Capital (to Average Assets)
                                                                                                                    
                                                                                                                    
                                                                                                                    12,905
                                                                                                                    
                                                                                                                    
                                                                                                                    
                                                                                                                    9.21
                                                                                                                    %
                                                                                                                    
                                                                                                                    5,603
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    4.00
                                                                                                                    %
                                                                                                                    
                                                                                                                    7,004
                                                                                                                    >
                                                                                                                    
                                                                                                                    
                                                                                                                    5.00
                                                                                                                    %
  14
 
 NOTE 16. PARENT COMPANY CONDENSED FINANCIAL
STATEMENTS
  T
BANCSHARES, INC.
 CONDENSED
BALANCE SHEETS
 (Unaudited)
  (000's)
                  
                  September 30,
                    2009
                  
                  
                  December 31,
                    2008ASSETSCash
      and due from banks
                  
                  $
                  376
                  
                  
                  $
                  333Due
      from subsidiary
                  
                  
                  -
                  
                  
                  
                  333Capitalized
      servicing rights
                  
                  
                  -
                  
                  
                  
                  242Investment
      in subsidiary
                  
                  
                  13,909
                  
                  
                  
                  12,905Total
      Assets
                  
                  $
                  14,285
                  
                  
                  $
                  13,813LIABILITIES
      AND CAPITALOther
      Liabilities
                  
                  
                  9
                  
                  
                  
                  19Capital
                  
                  
                  14,276
                  
                  
                  
                  13,794Total
      Liabilities and Capital
                  
                  $
                  14,285
                  
                  
                  $
                  13,813
  T
BANCSHARES, INC.
 CONDENSED
STATEMENTS OF INCOME
 (Unaudited)
 
 Three Months Ended September 30,
                  
                  
                  Nine Months Ended September 30,(000's)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Equity
      in income (loss) from subsidiary
                  
                  $
                  (884
                  )
                  
                  $
                  (195
                  )
                  
                  $
                  (1,005
                  )
                  
                  $
                  (92
                  )Noninterest
      expense:Professional
      and administrative
                  
                  
                  17
                  
                  
                  
                  14
                  
                  
                  
                  43
                  
                  
                  
                  121Stock
      based compensation
                  
                  
                  28
                  
                  
                  
                  14
                  
                  
                  
                  77
                  
                  
                  
                  60Total
      noninterest expenses
                  
                  
                  45
                  
                  
                  
                  28
                  
                  
                  
                  120
                  
                  
                  
                  181Net
      loss
                  
                  $
                  (931
                  )
                  
                  $
                  (223
                  )
                  
                  $
                  (1,125
                  )
                  
                  $
                  (273
                  )
  15
 
 T
BANCSHARES, INC.
 CONDENSED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine Months Ended September
      30,(000's)
                  
                  2009
                  
                  
                  2008Cash
      Flows from Operating ActivitiesNet
      loss
                  
                  $
                  (1,125
                  )
                  
                  $
                  (273
                  )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Equity
      in (earnings) loss of Bank
                  
                  
                  1,005
                  
                  
                  
                  92Stock
      based compensation
                  
                  
                  77
                  
                  
                  
                  60Net
      change in other assets
                  
                  
                  333
                  
                  
                  
                  (85
                  )Net
      change in other liabilities
                  
                  
                  (10
                  )
                  
                  
                  -Net
      cash provided (used) by operating activities
                  
                  
                  280
                  
                  
                  
                  (206
                  )Cash
      Flows from Investing ActivitiesProceeds
      from sale of premises and equipment
                  
                  
                  -
                  
                  
                  
                  -Net
      cash used in investing activities
                  
                  
                  -
                  
                  
                  
                  -Cash
      Flows from Financing ActivitiesNet
      proceeds from rights offering
                  
                  
                  1,763
                  
                  
                  
                  -Contribution
      to bank
                  
                  
                  (2,000
                  )
                  
                  
                  -Net
      cash used in financing activities
                  
                  
                  (237
                  )
                  
                  
                  -Net
      change in cash and cash equivalents
                  
                  
                  43
                  
                  
                  
                  (206
                  )Cash
      and cash equivalents at beginning of period
                  
                  
                  333
                  
                  
                  
                  743Cash
      and cash equivalents at end of period
                  
                  $
                  376
                  
                  
                  $
                  537Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                  
                  $
                  -
                  
                  
                  $
                  -Income
      taxes
                  
                  $
                  -
                  
                  
                  $
                  -
  NOTE
17. Fair Value Measurements
  The fair
value of an asset or liability is the price that would be received to sell that
asset or paid to transfer that liability in an orderly transaction occurring in
the principal market (or most advantageous market in the absence of a principal
market) for such asset or liability. In estimating fair value, the Company
utilizes valuation techniques that are consistent with the market approach, the
income approach and/or the cost approach. Such valuation techniques are
consistently applied. Inputs to valuation techniques include the assumptions
that market participants would use in pricing an asset or liability. FASB ASC
Topic 820 establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or
liabilities and the lowest priority to unobservable inputs. The fair value
hierarchy is as follows:
 
 ·
              Level 1 Inputs -
      Unadjusted quoted prices in active markets for identical assets or
      liabilities that the reporting entity has the ability to access at the
      measurement date.
 
 ·
              Level 2 Inputs -
      Inputs other than quoted prices included in Level 1 that are
      observable for the asset or liability, either directly or indirectly.
      These might include quoted prices for similar assets or liabilities in
      active markets, quoted prices for identical or similar assets or
      liabilities in markets that are not active, inputs other than quoted
      prices that are observable for the asset or liability (such as interest
      rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that
      are derived principally from or corroborated by market data by correlation
      or other means.
  16
 
 ·
              Level 3 Inputs -
      Unobservable inputs for determining the fair values of assets or
      liabilities that reflect an entity’s own assumptions about the assumptions
      that market participants would use in pricing the assets or
      liabilities.
 
 In
general, fair value is based upon quoted market prices, where available. If such
quoted market prices are not available, fair value is based upon internally
developed models that primarily use, as inputs, observable market-based
parameters. Valuation adjustments may be made to ensure that financial
instruments are recorded at fair value. The Company’s valuation methodologies
may produce a fair value calculation that may not be indicative of net
realizable value or reflective of future fair values. While management believes
the Company’s valuation methodologies are appropriate and consistent with other
market participants, the use of different methodologies or assumptions to
determine the fair value of certain financial instruments could result in a
different estimate of fair value at the reporting date. Furthermore, the
reported fair value amounts have not been comprehensively revalued since the
presentation dates, and therefore, estimates of fair value after the balance
sheet date may differ significantly from the amounts presented
herein.
  The
following table summarizes financial and nonfinancial assets measured at
fair value as of September 30, 2009, segregated by the level of the valuation
inputs within the fair value hierarchy utilized to measure fair
value:
  (000's)
                  
                  Level 1
                    Inputs
                  
                  
                  Level 2
                    Inputs
                  
                  
                  Level 3
                    Inputs
                  
                  
                  Total
                    Fair ValueSecurities
      available for sale:U.S.
      government agencies and corporations
                  
                  $
                  —
                  
                  
                  $
                  5,257
                  
                  
                  $
                  —
                  
                  
                  $
                  5,257Other
      Assets:OREO
                  
                  
                  —
                  
                  
                  
                  1,600
                  
                  
                  
                  —
                  
                  
                  
                  1,600
 
 Non-financial
assets measured at fair value on a non-recurring basis include OREO. Certain
OREO assets, upon initial recognition, were remeasured and reported at fair
value through a charge-off to the allowance for possible loan losses based upon
the fair value of the OREO asset. The fair value of an OREO asset, upon
initial recognition, is estimated using Level 2 inputs based on observable
market data.  In connection with the measurement and initial
recognition of the OREO assets, the Company recognized charge-offs of the
allowance for loan losses totaling $1.1 million, which has been recorded on the
consolidated statement of income through the provision for loan
losses.
  17
  ITEM 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
  The
following discussion and analysis represents our consolidated financial
condition as of September 30, 2009 and December 31, 2008, and our consolidated
results of operations for the three months and nine months ended September 30,
2009 and 2008. The discussion should be read in conjunction with our financial
statements and the notes related thereto, which appear elsewhere in this
Quarterly Report on Form 10-Q.
  Statements
contained in this report that are not purely historical are forward-looking
statements, including our expectations, intentions, beliefs, or strategies
regarding the future. Any statements in this document about expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements. 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, these statements
involve estimates, assumptions and uncertainties, which could cause actual
results to differ materially from those expressed in them. Any forward-looking
statements are qualified in their entirety by reference to the factors discussed
throughout this document. All forward-looking statements concerning economic
conditions, rates of growth, rates of income or values as may be included in
this document are based on information available to us on the dates noted, and
we assume no obligation to update any such forward-looking statements. It is
important to note that our actual results may differ materially from those in
such forward-looking statements due to fluctuations in interest rates,
inflation, government regulations, economic conditions, customer
disintermediation and competitive product and pricing pressures in the
geographic and business areas in which we conduct operations, including our
plans, objectives, expectations and intentions and other factors discussed under
the section entitled “Risk Factors,” in our Annual Report on Form 10-K for the
year ended December 31, 2008, including the following:
  ·
              we
      have limited operating history upon which to base an estimate of our
      future financial performance;
 
 ·
              if
      we are unable to implement our business plan and strategies, we will be
      hampered in our ability to develop business and serve our customers,
      which, in turn, could have an adverse effect on our financial
      performance;
 
 ·
              we
      are subject to significant government regulation and legislation that
      increases the cost of doing business and inhibits our ability to
      compete;
 
 ·
              if
      we fail to retain our key employees, growth and profitability could be
      adversely affected;
 
 ·
              we
      face substantial competition in our primary market
  area;
 
 ·
              if
      we fail to sustain attractive investment returns to our Trust customers,
      our growth and profitability in our Trust services could be adversely
      affected;
 
 ·
              we
      have a significant dental industry loan concentration in which economic or
      regulatory changes could adversely affect the ability of those customers
      to fulfill their loan obligations;
 
 ·
              if
      we fail to adequately address formal administrative actions with the
      Office of the Comptroller of the Currency, this may have an adverse impact
      on the Company’s operating results or financial
  condition;
 
 ·
              we
      may face additional regulatory scrutiny or further administrative actions
      based on a prior relationship with a customer, which could adversely and
      materially affect our financial performance and
  prospects;
 
 ·
              we
      compete in an industry that continually experiences technological change,
      and we may not be able to compete effectively with other banking
      institutions with greater
resources;
 
 ·
              the
      Bank’s current legally mandated lending limits are lower than those of our
      competitors, which may impair our ability to attract
      borrowers;
 
 ·
              further
      economic deterioration and continued rising unemployment both nationally
      and  affecting our primary service area may have an adverse
      effect on our financial
performance;
 
 ·
              changes
      in governmental economic and monetary policies, the Internal Revenue Code
      and banking and credit regulations, as well as other factors, will affect
      the demand for loans and the ability of the Bank to attract
      deposits;
 
 ·
              changes
      in the general level of interest rates and other economic factors can
      affect the Bank’s interest income by affecting the spread between
      interest-earning assets and interest-bearing
  liabilities;
  18
 
 ·
              we
      have no current intentions of paying cash
  dividends;
 
 ·
              we
      may not be able to raise additional capital on terms favorable to us;
      and
 
 ·
              our
      directors and executive officers beneficially own a significant portion of
      our outstanding common stock.
 
 These
factors and the risk factors referred to in our Annual Report on Form 10-K for
the year ended December 31, 2008 could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements made by
us, and 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. New factors emerge from time to time, and it
is not possible for us to predict which will arise.
  Executive
Overview
  Introduction
  The
Company is a bank holding company headquartered in Dallas, Texas, offering a
broad array of banking services through the Bank. Our principal markets include
North Dallas, Addison, Plano, Frisco, Southlake and the neighboring Texas
communities. As of September 30, 2009, we had, on a consolidated basis, total
assets of $141.6 million, net loans of $119.6 million, total deposits of $108.4
million, and shareholders’ equity of $14.3 million. We currently operate through
a main office located at 16000 Dallas Parkway, Dallas, Texas, and a branch
office at 8100 North Dallas Parkway, Plano, Texas.  We also have a loan
production office located at 850 E. State Highway 114, Suite 200, Southlake,
Texas.
  We were
incorporated under the laws of the State of Texas on December 23, 2002 to
organize and serve as the holding company for the Bank. In 2004, we completed an
initial public offering of our common stock, issuing 1,680,000 shares at a price
of $10.00 per share. The net proceeds that we received from the offering, after
deducting offering expenses, were approximately $16.4 million. The Bank opened
for business on November 2, 2004.
  The
following discussion focuses on our financial condition at September 30, 2009
and December 31, 2008, and our results of operations for the three and nine
months ended September 30, 2009 and 2008.
 
 Recent
Developments
 
 We
recently withdrew our application for funds submitted in connection with the
TARP Capital Purchase Program due to the volatile political climate surrounding
this program as well as continually evolving rules and regulations which affect
recipients.  The U.S. Treasury Department had not yet made a decision
on the application.
 
 Results
of Operations
  Net
Interest Income and Net Interest Margin
  Net
interest income is the difference between interest income, principally from
loan, lease and investment securities portfolios, and interest expense,
principally on customer deposits and borrowed funds. Net interest income is our
principal source of earnings. Changes in net interest income result from changes
in volume and spread and are reflected in the net interest margin. 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.
 
 The
following tables present the changes in net interest income and identify the
changes due to differences in the average volume of 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.
  19
 
 Three Months Ended September
      30, 2009 Compared to
                    Three Months Ended September 30,
      2008Increase (Decrease) Due to
                    Change in(000’s)
                  
                  Yield/
                    Rate
                  
                  
                  Average
                    Volume
                  
                  
                  Number
      of
                    Days
                  
                  
                  TotalFederal
      Funds Sold
                  
                  $
                  (52
                  )
                  
                  $
                  19
                  
                  
                  $
                  -
                  
                  
                  $
                  (33
                  )Securities
                  
                  
                  (5
                  )
                  
                  
                  33
                  
                  
                  
                  -
                  
                  
                  
                  28Loans,
      net of reserve (1)
                  
                  
                  (53
                  )
                  
                  
                  (223
                  )
                  
                  
                  -
                  
                  
                  
                  (276
                  )Total
      earning assets
                  
                  
                  (110
                  )
                  
                  
                  (171
                  )
                  
                  
                  -
                  
                  
                  
                  (281
                  )NOW
                  
                  
                  (1
                  )
                  
                  
                  1
                  
                  
                  
                  -
                  
                  
                  
                  -Money
      Market
                  
                  
                  (151
                  )
                  
                  
                  30
                  
                  
                  
                  
                  
                  
                  
                  (121
                  )Certificates
      of deposit $100,000 or less
                  
                  
                  (42
                  )
                  
                  
                  (122
                  )
                  
                  
                  -
                  
                  
                  
                  (164
                  )Certificates
      of deposit $100,000 or more
                  
                  
                  (49
                  )
                  
                  
                  (96
                  )
                  
                  
                  -
                  
                  
                  
                  (145
                  )Borrowed
      Funds
                  
                  
                  -
                  
                  
                  
                  7
                  
                  
                  
                  -
                  
                  
                  
                  7Total
      Interest-bearing liabilities
                  
                  
                  (243
                  )
                  
                  
                  (180
                  )
                  
                  
                  -
                  
                  
                  
                  (423
                  )Changes
      in net interest income
                  
                  $
                  133
                  
                  
                  $
                  9
                  
                  
                  $
                  -
                  
                  
                  $
                  142
 
 Nine Months Ended September 30,
      2009 Compared to
                    Nine Months Ended September 30,
      2008Increase (Decrease) Due to
                    Change in(000’s)
                  
                  Yield/
                    Rate
                  
                  
                  Average
                    Volume
                  
                  
                  Number
      of
                    Days
                  
                  
                  TotalFederal
      Funds Sold
                  
                  $
                  (193
                  )
                  
                  $
                  29
                  
                  
                  $
                  (1
                  )
                  
                  $
                  (165
                  )Securities
                  
                  
                  (9
                  )
                  
                  
                  67
                  
                  
                  
                  -
                  
                  
                  
                  58Loans,
      net of reserve (1)
                  
                  
                  (503
                  )
                  
                  
                  (588
                  )
                  
                  
                  (24
                  )
                  
                  
                  (1,115
                  )Total
      earning assets
                  
                  
                  (705
                  )
                  
                  
                  (492
                  )
                  
                  
                  (25
                  )
                  
                  
                  (1,222
                  )NOW
                  
                  
                  (4
                  )
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (4
                  )Money
      Market
                  
                  
                  (462
                  )
                  
                  
                  25
                  
                  
                  
                  (3
                  )
                  
                  
                  (440
                  )Certificates
      of deposit $100,000 or less
                  
                  
                  (137
                  )
                  
                  
                  (314
                  )
                  
                  
                  (3
                  )
                  
                  
                  (454
                  )Certificates
      of deposit $100,000 or more
                  
                  
                  (171
                  )
                  
                  
                  (327
                  )
                  
                  
                  (6
                  )
                  
                  
                  (504
                  )Borrowed
      Funds
                  
                  
                  -
                  
                  
                  
                  43
                  
                  
                  
                  -
                  
                  
                  
                  43Total
      Interest-bearing liabilities
                  
                  
                  (774
                  )
                  
                  
                  (573
                  )
                  
                  
                  (12
                  )
                  
                  
                  (1,359
                  )Changes
      in net interest income
                  
                  $
                  69
                  
                  
                  $
                  81
                  
                  
                  $
                  (13
                  )
                  
                  $
                  137
 
 (1) Average loans include loans on
non-accrual status.
  20
 
 Net
interest income for the three months ended September 30, 2009 increased
$142,000, or 12.3%, compared to the same period in the prior
year.  The increase was due primarily to a decline in the average
interest yield for interest-bearing liabilities, which was partially offset by a
decrease in average interest yield for interest-earning assets.
 
 Total
interest income for the three months ended September 30, 2009 decreased
$281,000, or 11.6%, compared to the same period in 2008. For the three month
period ended September 30, 2009, the average interest yield for interest-earning
assets fell to 5.3%, or 14.5%, compared to 6.2% for the same period in
2008. Average earning asset volume increased $4.7 million, or 3.1%, to
$156.4 million for the three months ended September 30, 2009, compared to $151.7
million for the same period in the prior year.
 
 Total
interest expense for the three months ended September 30, 2009 decreased
$423,000, or 33.5%, compared to the same period in 2008. For the three
month-period ended September 30, 2009, the average interest yield for
interest-bearing liabilities fell to 2.4%, or 38.5%, compared to 3.9% for the
same period in 2008. Average interest bearing deposit volume fell $8.6 million,
or 6.7%, to $118.7 million for the three months ended September 30, 2009,
compared to $127.3 million for the same period in 2008. Average non-interest
bearing deposits fell $5.3 million, or 36.5%, to $9.3 million for the three
months ended September 30, 2009, compared to $14.6 million for the same period
in 2008. However, the decrease in deposits was offset by the use of
borrowed funds.  Borrowed funds averaged $17.8 million and had an
average rate of 0.2% for the three months ended September 30, 2009, compared to
no borrowed funds in the same period in 2008.
 
 Net
interest income for the nine months ended September 30, 2009 increased $138,000,
or 3.7%, compared to the same period in the prior year.  The increase
was due to a decline in both the average interest yield and volume for
interest-bearing liabilities, which was partially offset by both a decrease in
average interest yield and volume for interest-earning
assets.
 
 Total
interest income for the nine months ended September 30, 2009 decreased $1.2
million, or 16.1%, compared to the same period in 2008.  For the nine
month period ended September 30, 2009, the average interest yield for
interest-earning assets fell to 5.7%, or 16.2%, compared to 6.8% for the same
period in 2008. Average earning asset volume decreased $1.2 million, or 0.8%, to
$147.9 million for the nine months ended September 30, 2009, compared to $149.1
million for the same period in the prior year.
 
 Total
interest expense for the nine months ended September 30, 2009 decreased $1.4
million, or 35.1%, compared to the same period in 2008. For the nine month
period ended September 30, 2009, the average interest yield for interest-bearing
liabilities fell to 2.6%, or 36.6%, compared to 4.1% for the same period in
2008. Average interest bearing deposit volume fell $16.5 million, or 13.2%, to
$108.9 million for the nine months ended September 30, 2009, compared to $125.4
million for the same period in 2008. Average non-interest bearing deposits fell
$4.3 million, or 30.7%, to $9.8 million for the nine months ended September 30,
2009, compared to $14.2 million for the same period in 2008. However, the
decrease in deposits was offset by the use of borrowed
funds.  Borrowed funds averaged $18.3 million and had an average rate
of 0.3% for the nine months ended September 30, 2009, compared to no borrowed
funds in the same period in 2008.
  Key
Performance Indicators at September 30, 2009
  The
following were key indicators of our performance and results of operations
through the first three quarters of 2009:
  ·
                  total
      assets increased to $141.6 million at the end of the third quarter of
      2009, representing an increase of $5.4 million, or 3.9%, from $136.2
      million at the end of 2008;
  ·
                total
      loans, net of allowance for loan losses, decreased to $119.6 million at
      the end of the third quarter of 2009, representing a decrease
      of  $3.8 million, or 3.1%, from $123.4 million at the end of
      2008;
 
 ·
                total
      deposits decreased to $108.4 million at the end of the third quarter of
      2009, representing a decrease of $2.7 million, or 2.4%, from $111.1
      million at the end of 2008;
 
 ·
                total
      revenue was $11.4 million for the nine months ended September 30, 2009,
      compared to $15.7 million for the same period in the prior year,
      representing a decrease of 27.1%, or $4.3
  million.
 
 ·
                For
      the nine months ended September 30, 2009, total additions to the provision
      for loan losses were $1.243 million compared to $476 thousand for the same
      period last year. The increase was primarily related to three loans which
      were partially or fully charged off in September,
  2009.
 ·
                net
      loss was $1.1 million for the nine months ended September 30, 2009,
      compared to net loss of $273,000 for the same period in the prior
      year.
  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 and nine months ended September 30,
2009 and 2008.
  21
 
 FINANCIAL
SUMMARY
 Consolidated
Daily Average Balances, Average Yields and Rates
 
 Three Months Ended September 30,2009
                    
                    
                    2008(000's) except earnings per share
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      YieldInterest-earning
      assetsLoans,
      net of reserve
                    
                    $
                    121,128
                    
                    
                    $
                    2,047
                    
                    
                    
                    6.6
                    %
                    
                    $
                    134,341
                    
                    
                    $
                    2,323
                    
                    
                    
                    6.8
                    %Federal
      funds sold
                    
                    
                    28,268
                    
                    
                    
                    45
                    
                    
                    
                    0.6
                    %
                    
                    
                    15,796
                    
                    
                    
                    77
                    
                    
                    
                    1.9
                    %Securities
                    
                    
                    7,049
                    
                    
                    
                    42
                    
                    
                    
                    2.3
                    %
                    
                    
                    1,570
                    
                    
                    
                    15
                    
                    
                    
                    3.6
                    %Total
      earning assets
                    
                    
                    156,445
                    
                    
                    
                    2,134
                    
                    
                    
                    5.3
                    %
                    
                    
                    151,707
                    
                    
                    
                    2,415
                    
                    
                    
                    6.2
                    %Cash
      and other assets
                    
                    
                    4,863
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,534Total
      assets
                    
                    $
                    161,308
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    156,241Interest-bearing
      liabilitiesNOW
      accounts
                    
                    $
                    1,993
                    
                    
                    $
                    4
                    
                    
                    
                    0.7
                    %
                    
                    $
                    1,710
                    
                    
                    $
                    4
                    
                    
                    
                    1.0
                    %Money
      market accounts
                    
                    
                    57,821
                    
                    
                    
                    164
                    
                    
                    
                    1.1
                    %
                    
                    
                    47,249
                    
                    
                    
                    285
                    
                    
                    
                    2.4
                    %Savings
      accounts
                    
                    
                    212
                    
                    
                    
                    1
                    
                    
                    
                    0.9
                    %
                    
                    
                    166
                    
                    
                    
                    1
                    
                    
                    
                    1.5
                    %Certificates
      of deposit less than $100,000
                    
                    
                    18,056
                    
                    
                    
                    197
                    
                    
                    
                    4.3
                    %
                    
                    
                    29,173
                    
                    
                    
                    361
                    
                    
                    
                    4.9
                    %Certificates
      of deposit $100,000 or greater
                    
                    
                    40,647
                    
                    
                    
                    465
                    
                    
                    
                    4.5
                    %
                    
                    
                    49,005
                    
                    
                    
                    610
                    
                    
                    
                    4.9
                    %Total
      interest bearing deposits
                    
                    
                    118,729
                    
                    
                    
                    831
                    
                    
                    
                    2.8
                    %
                    
                    
                    127,303
                    
                    
                    
                    1,261
                    
                    
                    
                    3.9
                    %Borrowed
      funds
                    
                    
                    17,812
                    
                    
                    
                    7
                    
                    
                    
                    0.2
                    %
                    
                    
                    -
                    
                    
                    
                    -Total
      interest bearing liabilities
                    
                    
                    136,541
                    
                    
                    
                    838
                    
                    
                    
                    2.4
                    %
                    
                    
                    127,303
                    
                    
                    
                    1,261
                    
                    
                    
                    3.9
                    %Noninterest
      bearing deposits
                    
                    
                    9,307
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,654Other
      liabilities
                    
                    
                    664
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,161Stockholders
      equity
                    
                    
                    14,796
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    13,123Total
      liabilities and stockholders' equity
                    
                    $
                    161,308
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    156,241Net
      interest income
                    
                    
                    
                    
                    
                    
                    1,296
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,154Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.9
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.3
                    %Net
      interest margin
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.3
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.0
                    %Provision
      for loan loss
                    
                    
                    
                    
                    
                    
                    1,085
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    177Non-interest
      income
                    
                    
                    
                    
                    
                    
                    1,801
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,325Non-interest
      expense
                    
                    
                    
                    
                    
                    
                    2,943
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,525Loss
      before income taxes
                    
                    
                    
                    
                    
                    
                    (931
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (223
                    )Income
      taxes expense (benefit)
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Net
      loss
                    
                    
                    
                    
                    
                    $
                    (931
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (223
                    )Earnings
      (loss) per share
                    
                    
                    
                    
                    
                    
                    (0.48
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (0.13
                    )Return
      on average equity
                    
                    
                    
                    
                    
                    
                    (6.29
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1.49
                    )%Return
      on average assets
                    
                    
                    
                    
                    
                    
                    (0.58
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (0.12
                    )%Equity
      to assets ratio
                    
                    
                    
                    
                    
                    
                    9.17
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8.40
                    %
  22
 
 FINANCIAL
SUMMARY
 Consolidated
Daily Average Balances, Average Yields and Rates
 
 Nine Months Ended September 30,2009
                  
                  
                  2008(000's) except earnings per share
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    YieldInterest-earning
      assetsLoans,
      net of reserve
                  
                  $
                  120,975
                  
                  
                  $
                  6,179
                  
                  
                  
                  6.7
                  %
                  
                  $
                  132,304
                  
                  
                  $
                  7,294
                  
                  
                  
                  7.4
                  %Federal
      funds sold
                  
                  
                  21,845
                  
                  
                  
                  106
                  
                  
                  
                  0.6
                  %
                  
                  
                  15,305
                  
                  
                  
                  271
                  
                  
                  
                  2.0
                  %Securities
                  
                  
                  5,114
                  
                  
                  
                  97
                  
                  
                  
                  2.5
                  %
                  
                  
                  1,547
                  
                  
                  
                  39
                  
                  
                  
                  3.4
                  %Total
      earning assets
                  
                  
                  147,934
                  
                  
                  
                  6,382
                  
                  
                  
                  5.7
                  %
                  
                  
                  149,156
                  
                  
                  
                  7,604
                  
                  
                  
                  6.8
                  %Cash
      and other assets
                  
                  
                  4,348
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,610Total
      assets
                  
                  $
                  152,282
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  153,766Interest-bearing
      liabilitiesNOW
      accounts
                  
                  $
                  1,876
                  
                  
                  $
                  10
                  
                  
                  
                  0.7
                  %
                  
                  $
                  1,785
                  
                  
                  $
                  14
                  
                  
                  
                  1.0
                  %Money
      market accounts
                  
                  
                  49,415
                  
                  
                  
                  515
                  
                  
                  
                  1.4
                  %
                  
                  
                  47,017
                  
                  
                  
                  956
                  
                  
                  
                  2.7
                  %Savings
      accounts
                  
                  
                  195
                  
                  
                  
                  2
                  
                  
                  
                  1.1
                  %
                  
                  
                  159
                  
                  
                  
                  2
                  
                  
                  
                  1.4
                  %Certificates
      of deposit less than $100,000
                  
                  
                  19,088
                  
                  
                  
                  625
                  
                  
                  
                  4.4
                  %
                  
                  
                  28,654
                  
                  
                  
                  1,086
                  
                  
                  
                  5.1
                  %Certificates
      of deposit $100,000 or greater
                  
                  
                  38,288
                  
                  
                  
                  1,318
                  
                  
                  
                  4.6
                  %
                  
                  
                  47,768
                  
                  
                  
                  1,813
                  
                  
                  
                  5.1
                  %Total
      interest bearing deposits
                  
                  
                  108,862
                  
                  
                  
                  2,470
                  
                  
                  
                  3.0
                  %
                  
                  
                  125,383
                  
                  
                  
                  3,871
                  
                  
                  
                  4.1
                  %Borrowed
      funds
                  
                  
                  18,308
                  
                  
                  
                  42
                  
                  
                  
                  0.3
                  %
                  
                  
                  -
                  
                  
                  
                  -Total
      interest bearing liabilities
                  
                  
                  127,170
                  
                  
                  
                  2,512
                  
                  
                  
                  2.6
                  %
                  
                  
                  125,383
                  
                  
                  
                  3,871
                  
                  
                  
                  4.1
                  %Noninterest
      bearing deposits
                  
                  
                  9,826
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,171Other
      liabilities
                  
                  
                  656
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,005Stockholders
      equity
                  
                  
                  14,630
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  13,207Total
      liabilities and stockholders' equity
                  
                  $
                  152,282
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  153,766Net
      interest income
                  
                  
                  
                  
                  
                  
                  3,870
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,733Net
      interest spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.1
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2.7
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.5
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.2
                  %Provision
      for loan loss
                  
                  
                  
                  
                  
                  
                  1,243
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  476Non-interest
      income
                  
                  
                  
                  
                  
                  
                  5,028
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8,050Non-interest
      expense
                  
                  
                  
                  
                  
                  
                  8,780
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  11,580Loss
      before income taxes
                  
                  
                  
                  
                  
                  
                  (1,125
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (273
                  )Income
      taxes expense (benefit)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
      loss
                  
                  
                  
                  
                  
                  $
                  (1,125
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (273
                  )Earnings
      (loss) per share
                  
                  
                  
                  
                  
                  
                  (0.58
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.16
                  )Return
      on average equity
                  
                  
                  
                  
                  
                  
                  (7.69
                  )%
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2.76
                  )%Return
      on average assets
                  
                  
                  
                  
                  
                  
                  (7.39
                  )%
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.24
                  )%Equity
      to assets ratio
                  
                  
                  
                  
                  
                  
                  9.61
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  8.59
                  %
  23
  Provision
for Loan Losses
  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 of this discussion and analysis captioned “Allowance for Loan
Losses.”
  The
provision for loan losses totaled $1.1 million and $1.2 million for the
three and nine months ended September 30, 2009, compared to $177,000 and
$476,000 for the three and nine months ended September 30, 2008. The
provision amounts are directly related to loan volumes. We had charge-offs of
$1.1 million and recoveries of $9,000 during the nine months ended September 30,
2009.  We had charge-offs of $451,000 and recoveries of $44,000 during
the nine months ended September 30, 2008.
  Non-interest
Income
  Non-interest
income was primarily attributable to fee income generated by the Company for
trust services and service charges on depository accounts.
 
 Total
non-interest income decreased $524,000, or 22.5%, to $1.8 million for the three
months ended September 30, 2009, compared to $3.5 million for the same period in
the prior year. The decrease is directly attributable to a decline in trust
income.
 
 Total
non-interest income decreased $3.0 million, or 37.5%, to $5.0 million for the
nine months ended September 30, 2009, compared to $8.0 million for the same
period in the prior year. The decrease is directly attributable to a decline in
trust income.
 
 Trust
income is earned on the value of managed and non-managed assets held in
custody.  For the three and nine months ended September 30, 2009,
trust income totaled $1.8 million and $4.9 million, respectively, compared to
$2.3 million and $8.0 million, respectively, for the same period in the prior
year.  The decrease in trust income is directly attributable to the
general decline in the market values of assets in trust accounts on which the
fees are based.
 
 Service
fees were $32,000 and $78,000 for the three and nine months ended September 30,
2009, respectively, compared to $27,000 and $80,000 for the same periods in the
prior year.
 
 Noninterest
Expense
  Total
non-interest expense decreased $583,000, or 16.5%, to $2.9 million for the three
months ended September 30, 2009, respectively, compared to $2.5 million for the
same period in the prior year.
 
 Salaries
and employee benefits decreased $5,000, or 0.7%, to $757,000 for the three
months ended September 30, 2009, compared to $762,000 for the same period in the
prior year.  The decrease is attributable to a reduction of full-time
equivalent employees during the third quarter of 2009.
  Occupancy
and equipment expenses are primarily lease expenses and depreciation and
amortization of leasehold improvements and furniture, fixtures and
equipment.  For the three months ended September 30, 2009, occupancy
and equipment expense increased $34,000, or 12.1%, to $314,000, compared to
$280,000 for the same period in the prior year.
  Trust
expenses are advisory fees paid to a fund advisor to manage certain assets held
in the trust department and are based on the value of the assets held in
custody.  For the three months ended September 30, 2009, trust
expenses decreased $521,000, or 25.8%, to $1.5 million, compared to $2.0 million
for the same period in the prior year.  Similar to trust income, the
decrease in trust expense is directly attributable to the general decline in the
market values of assets in trust accounts.
 
 Professional
fees decreased $76,000, or 45.6%, to $91,000 for the three months ended
September 30, 2009, compared to $167,000 for the same period in the prior year.
The decrease was due to lower legal and accounting fees.
 
 Data
processing fees decreased $23,000, or 24.5%, to $71,000 for the three months
ended September 30, 2009, compared to $94,000 for the same period in the prior
year. The decrease was due to lower processing volumes.
 
 Total
non-interest expense decreased $2.8 million, or 24.2%, to $8.8 million for the
nine months ended September 30, 2009, compared to $11.6 million for the same
period in the prior year.
 
 Salaries
and employee benefits increased $84,000, or 3.7%, to $2.4 million for the nine
months ended September 30, 2009, compared to $2.3 million for the same period in
the prior year.  The increase is attributable to adding three
individuals to the executive team in 2008.
  24
 
 Occupancy
and equipment expense increased $18,000, or 1.8%, to $996,000 for the nine
months ended September 30, 2009, compared to $978,000 for the same period in the
prior year.
  Trust
expenses decreased $2.7 million, or 39.0%, to $4.3 million for the nine months
ended September 30, 2009, compared to $7.0 million for the same period in the
prior year.  Similar to trust income, the decrease in trust expense is
directly attributable to the general decline in the market values of assets in
trust accounts since September 2008.
 
 Professional
fees decreased $206,000, or 40.2%, to $307,000 for the nine months ended
September 30, 2009, compared to $513,000 for the same period in the prior year.
The decrease was due to lower legal and accounting fees.
 
 Data
processing fees decreased $60,000, or 22.2%, to $210,000 for the nine months
ended September 30, 2009, compared to $270,000 for the same period in the prior
year. The decrease was due to lower processing volumes.
  Income
Taxes
  No
federal income tax expense was recorded for the three and nine months ended
September 30, 2009, due to available operating losses to offset taxable
income.  Based upon the Company’s limited operating history, the
federal tax benefit of these losses has a valuation allowance equal to the
benefit.  Cumulative net operating loss available to carry forward for
tax purposes was approximately $760,000 as of December 31, 2008.
  Financial
Condition
  Our total
assets as of September 30, 2009 were $141.6 million, compared to $136.2 million
as of December 31, 2008. Deposits were $108.4 million as of September 30, 2009,
compared to $111.1 million as of December 31, 2008. Borrowed funds as of
September 30, 2009 were $18.0 million, compared to $10.5 million as of December
31, 2008.  The increase in borrowed funds and the corresponding
decrease in deposits is a result of the Company replacing higher cost deposits
on a short term basis with lower rate advances from the Federal Reserve Bank and
the Federal Home Loan Bank.
 
 As of
September 30, 2009, our shareholders’ equity was $14.3 million, compared to
$13.8 million as of December 31, 2008.  The $482,000 million increase
in equity is due to net proceeds of $1.5 million raised in rights offering
completed at the beginning of 2009, partially offset by the $1.1 million loss
recognized through the first nine months of 2009.
 
 Short-Term
Investments and Interest-bearing Deposits in Other Financial
Institutions
  At
September 30, 2009, we had $9.2 million in federal funds sold. At December 31,
2008, we had $7.2 million in federal funds sold. Federal funds sold allow us to
meet liquidity requirements and provide temporary interest-bearing holdings
until the funds can be otherwise deployed or invested.
 
 Investment
Securities
  Our
investment portfolio primarily serves as a source of interest income and,
secondarily, as a source of liquidity and a management tool for our interest
rate sensitivity. We manage our investment portfolio according to a written
investment policy established by our Board of Directors and implemented by our
Investment/Asset-Liability Committee.
  At
September 30, 2009, our securities included Federal Reserve Bank of Dallas stock
and Federal Home Loan Bank of Dallas stock at cost of $420,000 and $819,900,
respectively, with an estimated fair value that approximated cost. The increase
in Federal Home Loan Bank of Dallas stock, as compared to $302,000 as of
December 31, 2008, was to facilitate additional borrowings from the Federal
Home Loan Bank of Dallas. We also had government agency securities with
amortized cost and fair value of $6.1 million. Weighted average yield of the
securities portfolio at September 30, 2009 was 2.5%.  Securities with
market value of $5.1 million were pledged against borrowed funds at the Federal
Home Loan Bank of Dallas, and one security with market value of $1.0 million was
pledged against trust deposit balances held at the bank.
 
 At
December 31, 2008, our securities consisted of Federal Reserve Bank of Dallas
stock and Federal Home Loan Bank of Dallas stock at cost and fair value of
$420,000 and $302,000, respectively. We also had a government agency security
with amortized cost of $981,000 and fair value of $1,012,000.  Weighted
average yield of the securities portfolio at December 31, 2008 was
3.3%
  25


Loan
Portfolio
  Our
primary source of income is interest on loans. The following table presents the
composition of our loan portfolio by category as of the dates
indicated:
  As of
                    
                    
                    As of(000's)
                    
                    September 30, 2009
                    
                    
                    December 31, 2008Commercial
      and industrial
                    
                    $
                    84,740
                    
                    
                    $
                    81,342Consumer
      installment
                    
                    
                    2,907
                    
                    
                    
                    3,799Real
      estate — mortgage
                    
                    
                    24,786
                    
                    
                    
                    20,543Real
      estate — construction
                    
                    
                    9,108
                    
                    
                    
                    19,481Other
                    
                    
                    -
                    
                    
                    
                    12Total
      loans
                    
                    
                    121,541
                    
                    
                    
                    125,177Less
      allowance for loan losses
                    
                    
                    1,787
                    
                    
                    
                    1,638Less
      deferred loan fees
                    
                    
                    144
                    
                    
                    
                    146Total
      net loans
                    
                    $
                    119,610
                    
                    
                    $
                    123,393
  As of
September 30, 2009 and December 31, 2008, our total net loans were $119.6
million and $123.4 million, respectively. Total loans, net of reserves and
deferred fees, as a percentage of total assets were 84.5% as of September 30,
2009, and 90.6% as of December 31, 2008. The decrease is the combined result of
softening overall loan demand in our local market as well as our strategy to
reduce the risk in the loan portfolio by reducing overall exposure to real
estate construction loans by tightened our underwriting guidelines.
  Our
commercial loan portfolio is composed of lines of credit for working capital and
term loans to finance equipment and other business assets. Our lines of credit
typically are limited to a percentage of the value of the assets securing the
line. Lines of credit and term loans typically are reviewed annually and are
supported by accounts receivable, inventory, equipment and other assets of our
clients businesses. At September 30, 2009 and December 31, 2008, commercial
loans totaled $84.7 million and $81.3 million, representing approximately 69.7%
and 65.0% of our total funded loans, respectively.
  Our
consumer loan portfolio consists of personal lines of credit and loans to
acquire personal assets such as automobiles and boats. Our lines of credit
generally have terms of one year and our term loans generally have terms of
three to five years. Our lines of credit typically have floating rates. At
September 30, 2009 and December 31, 2008, consumer loans totaled $2.9 million
and $3.8 million, approximately 2.4% and 3.0% of our total funded loans,
respectively.
 
 Our real
estate loan portfolio is composed of construction loans and short-term mortgage
loans. Construction loans consist primarily of single-family residential
properties, typically have terms of less than one year and have floating rates
and commitment fees. Our construction loans are typically to builders who have
an established record of successful project completion and loan repayment.
Short-term mortgage loans are typically secured by commercial properties
occupied by the borrower and typically have terms of three to ten years with
both fixed and floating rates. At September 30, 2009 and December 31, 2008, real
estate loans totaled $33.9 million and $40.0 million, approximately 30.7% and
32.0% of our total loans, respectively. The decline in real estate loans is
primarily due to reductions in the construction loan portfolio as a result of
loans paying at or before maturity.  Additionally, current economic
conditions have resulted in fewer requests from credit worthy
borrowers.
 
 Loan
concentrations are considered to exist when there are amounts loaned to multiple
borrowers engaged in similar activities that would cause them to be similarly
impacted by economic or other conditions. At September 30, 2009, our commercial
loan portfolio included $78.6 million of loans, approximately 64.6% of our total
funded loans, to dental professionals. These loans were to fund practice
acquisitions, practice enhancements, equipment purchases, real estate and
personal borrowing needs. We believe that these loans are well secured to credit
worthy borrowers and are diversified geographically. As new loans are generated
the percentage of the total loan portfolio consisting of the foregoing
concentration may remain constant or increase thereby continuing the risk
associated with industry concentration.
  Management
may renew loans at maturity when requested by a customer whose financial
strength appears to support such a renewal or when such a renewal appears to be
in our best interest. We require payment of accrued interest in such instances
and may adjust the rate of interest, require a principal reduction, or modify
other terms of the loan at the time of renewal.
  26
  The
following table shows the maturity/reset date distribution and type of loan
within our loan portfolio as of September 30, 2009:
 
 As of September 30, 2009Over 1 Year through
                    5 Years
                  
                  
                  Over 5 Years(000's)
                  
                  One Year
                    or
                    Less
                  
                  
                  Fixed Rate
                  
                  
                  Floating or
                    Adjustable
                    Rate
                  
                  
                  Fixed Rate
                  
                  
                  Floating or
                    Adjustable
                    Rate
                  
                  
                  TotalCommercial
      andindustrial
      *
                  
                  $
                  13,866
                  
                  
                  $
                  7,340
                  
                  
                  $
                  8,441
                  
                  
                  $
                  54,819
                  
                  
                  $
                  274
                  
                  
                  $
                  84,740Consumer
      installment
                  
                  
                  714
                  
                  
                  
                  1,308
                  
                  
                  
                  -
                  
                  
                  
                  885
                  
                  
                  
                  -
                  
                  
                  
                  2,907Real
      estate — mortgage
                  
                  
                  5,048
                  
                  
                  
                  7,296
                  
                  
                  
                  340
                  
                  
                  
                  10,222
                  
                  
                  
                  1,880
                  
                  
                  
                  24,786Real
      estate — construction*
                  
                  
                  5,359
                  
                  
                  
                  3,749
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  9,108Other
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  24,987
                  
                  
                  $
                  19,693
                  
                  
                  $
                  8,781
                  
                  
                  $
                  65,926
                  
                  
                  $
                  2,154
                  
                  
                  $
                  121,541
  *Includes
nonaccrual and other loans at September 30, 2009.
  Nonperforming
Loans and Assets
  Nonperforming
assets consist of loans on nonaccrual status, loans 90 days or more past due and
still accruing interest, loans that have been restructured resulting in a
reduction or deferral of interest or principal, OREO, and other repossessed
assets. The impact of foreclosures and distressed sales is impacting the value
of real estate and the overall economy broadly. This economic downturn has
affected our real estate portfolio. As of September 30, 2009, we had no loans 90
days or more past due and still accruing interest, $4.6 million in loans on
nonaccrual status and $1.6 million in OREO. At December 31, 2008, we had $1.3
million of loans 90 days or more past due and still accruing interest, $3.3
million in loans on nonaccrual status and no OREO.  Total
nonperforming assets as of September 30, 2009 was $6.2 million, an increase of
34.8% compared to $4.6 million as of December 31, 2008.
  A
potential problem loan is defined as a loan where information about possible
credit problems of the borrower is known, causing management to have doubts as
to the ability of the borrower to comply with the present loan payment terms and
which may result in the inclusion of such loan in one of the nonperforming asset
categories. We maintain an internally classified loan list that helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance for loan losses. Loans classified as “special mention” are those that
contain a weakness that, if left unattended, could develop into a problem
affecting the ultimate collectability of the loan. Loans classified as
“substandard” are those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain repayment resources
or poor financial condition, which may jeopardize recoverability of the loan.
Loans classified as “doubtful” are those loans that have characteristics similar
to substandard loans, but also have an increased risk that loss may occur or at
least a portion of the loan may require a charge-off if liquidated at present.
Although loans classified as substandard do not duplicate loans classified as
doubtful, both substandard and doubtful loans may include some loans that are
past due at least 90 days, are on nonaccrual status, or have been restructured.
Loans classified as “loss” are those loans that are in the process of being
charged-off. At September 30, 2009 the Company had $3.1 million in special
mention loans, $11.2 million in substandard loans and no loans classified as
doubtful, compared to $8.2 million in special mention loans, $4.8 million in
substandard loans and no loans classified as doubtful loans at December 31,
2008.
 
 Allowance
for Loan Losses
  Implicit
in our lending activities is the fact that we will experience loan losses and
that the risk of loss will vary with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. To reflect the
currently perceived risk of loss associated with our loan portfolio, additions
are made to our allowance for loan losses in the form of direct charges against
income and our allowance is available to absorb possible loan losses. The
factors that influence the allowance amount include, among others, the remaining
collateral and/or financial condition of the borrowers, historical loan loss,
changes in the size and composition of the loan portfolio, and general economic
conditions.
  The
amount of the allowance equals the cumulative total of the provisions made from
time to time, reduced by loan charge-offs and increased by recoveries of loans
previously charged-off. Our allowance for loan losses was $1.8 million, or 1.5%
of total funded loans, at September 30, 2009, compared to 1.3% at December 31,
2008.
  27
 
 Credit
and loan decisions are made by management and the Board of Directors in
conformity with loan policies established by the Board. Our practice is to
charge-off any loan or portion of a loan when the loan is determined by
management to be fully or partially uncollectible due to the borrower’s failure
to meet repayment terms, the borrower’s deteriorating or deteriorated financial
condition, the depreciation of the underlying collateral, the loan’s
classification as a loss by regulatory examiners, or other reasons. With the
current downturn in the economy, charge-offs in our portfolio have increased. We
had charge-offs of $1.1 million, primarily representing three credits, and
recoveries of $9,000 during the nine months ended September 30, 2009. During the
year ended December 31, 2008, we had charge-offs of $451,000 and recoveries of
$72,000.
 
 The
following table sets forth the specific allocation of the allowance for the
periods indicated and the percentage of allocated possible loan losses in each
category to total gross loans. An allocation for a loan classification is only
for internal analysis of the adequacy of the allowance and is not an indication
of expected or anticipated losses. Although we believe we use the best
information available to make loan loss allowance determinations, future
adjustments could be necessary if circumstances or economic conditions differ
substantially from the assumptions used in making our initial determinations.
The current downturn in the economy or higher unemployment could result in
increased levels of nonperforming assets and charge-offs, increased loan loss
provisions and reductions in income. Additionally, as an integral part of their
examination process, bank regulatory agencies periodically review our allowance
for loan losses. The banking agencies could require the recognition of additions
to the loan loss allowance based on their judgment of information available to
them at the time of their examination
  (000's)
                  
                  As of
                    September 30, 2009
                  
                  
                  As of
                    December 31, 2008Allocated:
                  
                  Amount
                  
                  
                  Loan
                    Category to
                    Gross Loans
                  
                  
                  Amount
                  
                  
                  Loan
                    Category to
                    Gross LoansCommercial
      and industrial
                  
                  $
                  1,246
                  
                  
                  
                  69.7
                  %
                  
                  $
                  1,064
                  
                  
                  
                  65.0
                  %Consumer
      installment
                  
                  
                  43
                  
                  
                  
                  2.4
                  %
                  
                  
                  49
                  
                  
                  
                  3.0
                  %Real
      estate — mortgage
                  
                  
                  364
                  
                  
                  
                  20.4
                  %
                  
                  
                  269
                  
                  
                  
                  16.4
                  %Real
      estate — construction
                  
                  
                  134
                  
                  
                  
                  7.5
                  %
                  
                  
                  256
                  
                  
                  
                  15.6
                  %Total
      allowance for loan losses
                  
                  $
                  1,787
                  
                  
                  
                  100.0
                  %
                  
                  $
                  1,638
                  
                  
                  
                  100.0
                  %
  Nonearning
Assets
  Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $893,000 at September 30, 2009 and $1.2 million at
December 31, 2008.
 
 Deposits
  Deposits
are our primary source of funding. Total average deposits at September 30, 2009
and December 31, 2008 were $118.7 million and $135.9 million, respectively,
representing a decrease of $17.2 million, or 12.7%, during the nine-month period
ended September 30, 2009. We continue to seek ways to attract additional
deposits. The following table sets forth, for the periods indicated, the
distribution of our average deposit account balances and average cost of funds
on each category of deposits:
 
 For the nine months ended(000's)
                        
                        September 30, 2009
                        
                        
                        September 30, 2008Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          Rate
                        
                        
                        Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          RateNoninterest
      bearing deposits
                        
                        $
                        9,826
                        
                        
                        
                        8.3
                        %
                        
                        
                        0.0
                        %
                        
                        $
                        14,171
                        
                        
                        
                        10.2
                        %
                        
                        
                        0.0
                        %NOW
      accounts
                        
                        
                        1,876
                        
                        
                        
                        1.6
                        %
                        
                        
                        0.7
                        %
                        
                        
                        1,785
                        
                        
                        
                        1.3
                        %
                        
                        
                        1.0
                        %Money
      market accounts
                        
                        
                        49,415
                        
                        
                        
                        41.6
                        %
                        
                        
                        1.4
                        %
                        
                        
                        47,017
                        
                        
                        
                        33.7
                        %
                        
                        
                        2.7
                        %Savings
      accounts
                        
                        
                        195
                        
                        
                        
                        .2
                        %
                        
                        
                        1.1
                        %
                        
                        
                        159
                        
                        
                        
                        .1
                        %
                        
                        
                        1.4
                        %Certificates
      of deposit, less than $100,000
                        
                        
                        19,088
                        
                        
                        
                        16.1
                        %
                        
                        
                        4.4
                        %
                        
                        
                        28,654
                        
                        
                        
                        20.5
                        %
                        
                        
                        5.1
                        %Certificates
      of deposit, $100,000 or greater
                        
                        
                        38,288
                        
                        
                        
                        32.2
                        %
                        
                        
                        4.6
                        %
                        
                        
                        47,768
                        
                        
                        
                        34.2
                        %
                        
                        
                        5.1
                        %Total
      deposits
                        
                        $
                        118,688
                        
                        
                        
                        100.00
                        %
                        
                        
                        3.0
                        %
                        
                        $
                        139,554
                        
                        
                        
                        100.0
                        %
                        
                        
                        3.7
                        %
  28
  The
following table sets forth the amount and maturities of the certificates of
deposit of $100,000 or more as of the dates indicated:
  (000's)
                    
                    September 30,
                      2009
                    
                    
                    December 31,
                      2008Three
      months or less
                    
                    $
                    3,926
                    
                    
                    $
                    3,345Over
      three months through 12 months
                    
                    
                    16,252
                    
                    
                    
                    7,557Over
      one year through three years
                    
                    
                    18,362
                    
                    
                    
                    21,031Over
      three years
                    
                    
                    3,413
                    
                    
                    
                    5,307Total
                    
                    $
                    41,953
                    
                    
                    $
                    37,240
  Off-Balance
Sheet Arrangements
  Neither
the Company nor the Bank has any material off-balance sheet arrangements other
than the Bank’s commitments to extend credit at September 30, 2009. See Note 14
to the financial statements included in this report. In addition to the on
balance sheet liquidity available, the Bank has a line of credit with each of
the Federal Home Loan Bank of Dallas and the Federal Reserve Bank of Dallas,
which provide us with sources of off-balance sheet liquidity. As of September
30, 2009, our established credit line with the Federal Home Loan Bank was $18.1
million, or 12.8% of assets, of which $18.0 million was utilized. As of
September 30, 2009, our established credit line with the Federal Reserve Bank
was $21.3 million, or 15.0% of assets, of which none was utilized. We also have
access to federal funds purchased for $5.1 million, or 3.6% of assets.
Additionally, we serve as trustee or custodian for $90.7 million in cash
deposits held in a Blackrock money market mutual fund, of which approximately
$49.6 million could be held at the Bank in deposit accounts fully insured by the
FDIC.
 
 Capital Resources
and Capital Adequacy Requirements
  The
risk-based capital regulations established and administered by the banking
regulatory agencies discussed previously are applicable to the Bank. Risk-based
capital guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Under the regulations, assets and off-balance sheet items are assigned
to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk weighted assets and
off-balance sheet items. Under the prompt corrective action regulations, to be
adequately capitalized a bank must maintain minimum ratios of total capital to
risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,
and Tier 1 capital to total assets of 4.00%. Failure to meet these capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements. A well-capitalized
institution must maintain a minimum ratio of total capital to risk-weighted
assets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weighted
assets of at least 6.00%, and a minimum ratio of Tier 1 capital to total assets
of at least 5.00% and must not be subject to any written order, agreement, or
directive requiring it to meet or maintain a specific capital
level.
  On July
9, 2008, the Bank announced that it entered into a Stipulation and Consent to
the Issuance of a Consent Order (the "Stipulation") and a Consent Order (the
"Order") with the Office of the Comptroller of the Currency (the "OCC"). The
Stipulation and the Order were based on the OCC's findings during its
examination as of September 30, 2007. As part of the Order, the Bank has agreed
to strengthen its Bank Secrecy Act ("BSA") internal controls, revise and
implement changes to its internal BSA audit program, maintain specific capital
ratios and correct any violations of law. Regardless of the Bank’s capital
position, the requirement in the Order to meet and maintain a specific capital
level means that the Bank may not be deemed to be well capitalized under
regulatory requirements, irrespective of the Bank’s actual capital ratios. The
capital ratios required by the Order are 11.5% Total Capital to Risk Weighted
Assets and 9.00% Tier 1 Capital to Average Assets.  The Bank has
previously been in compliance with this requirement.    As
of September 30, 2009, the Bank was not compliant with the 9.00% Tier 1 Capital
to Average Assets requirement.  However, the Bank’s Tier 1 Capital to
Actual Assets ratio as of September 30, 2009 was 9.82%.
  29
  Actual
                    
                    For Capital Adequacy
                      Purposes
                    
                    To Be Well Capitalized
                      Under Prompt Corrective
                      Action Provisions(000's)
                    
                    Amount
                    
                    
                    Ratio
                    
                    Amount
                    
                    
                    Ratio
                    
                    Amount
                    
                    
                    RatioAs
      of September 30, 2009Total
      Capital (to Risk Weighted Assets)
                    
                    $
                    15,363
                    
                    
                    
                    13.16
                    %
                    $
                    9,338
                    >
                    
                    
                    8.00
                    %
                    $
                    11,672
                    >
                    
                    
                    10.00
                    %Tier
      1 Capital (to Risk Weighted Assets)
                    
                    
                    13,900
                    
                    
                    
                    11.91
                    %
                    
                    4,669
                    >
                    
                    
                    4.00
                    %
                    
                    7,003
                    >
                    
                    
                    6.00
                    %Tier
      1 Capital (to Average Assets)
                    
                    
                    13,900
                    
                    
                    
                    8.62
                    %
                    
                    6,453
                    >
                    
                    
                    4.00
                    %
                    
                    8,066
                    >
                    
                    
                    5.00
                    %As
      of December 31, 2008Total
      Capital (to Risk Weighted Assets)
                    
                    $
                    14,400
                    
                    
                    
                    12.05
                    %
                    $
                    9,558
                    >
                    
                    
                    8.00
                    %
                    $
                    11,947
                    >
                    
                    
                    10.00
                    %Tier
      1 Capital (to Risk Weighted Assets)
                    
                    
                    12,905
                    
                    
                    
                    10.80
                    %
                    
                    4,779
                    >
                    
                    
                    4.00
                    %
                    7,168
                    >
                    
                    
                    6.00
                    %Tier
      1 Capital (to Average Assets)
                    
                    
                    12,905
                    
                    
                    
                    9.21
                    %
                    
                    5,603
                    >
                    
                    
                    4.00
                    %
                    7,004
                    >
                    
                    
                    5.00
                    %
  Liquidity
Management
  At
September 30, 2009, the Company (excluding the Bank) had approximately $376,000
in cash proceeds, which includes $108,000 of initial shareholder warrant and
option exercises. These funds can be used for Company operations, investment and
for later infusion into the Bank and other corporate activities. The primary
source of liquidity for the Company will be dividends paid by the Bank. The Bank
is currently restricted from paying dividends without regulatory approval, which
will not be granted until the Bank’s accumulated deficit has been
eliminated.
  The
Bank’s liquidity is monitored by its management, the Investment/Asset-Liability
Committee and the Board of Directors who review historical funding requirements,
current liquidity position, sources and stability of funding, marketability of
assets, options for attracting additional funds, and anticipated future funding
needs, including the level of unfunded commitments.
  The
Bank’s primary sources of funds will be retail and commercial deposits, loan
repayments, maturity of investment securities, other short-term borrowings, and
other funds provided by operations. While scheduled loan repayments and maturing
investments are relatively predictable, deposit flows and loan prepayments are
more influenced by interest rates, general economic conditions, and competition.
The Bank will maintain investments in liquid assets based upon management’s
assessment of (1) the need for funds, (2) expected deposit flows, (3) yields
available on short-term liquid assets, and (4) objectives of the asset/liability
management program.
  At
September 30, 2009, we had outstanding loan origination commitments and unused
commercial and retail lines of credit of $5.0 million and $15,000 in standby
letters of credit. Certificates of deposit that are scheduled to mature within
one year totaled $29.7 million at September 30, 2009.
 
 The
Bank’s significant contractual obligations and other potential funding needs at
September 30, 2009 consist of:
  As of September 30, 2009(000's)
                    Less than
                      One
                      Year
                    
                    One to Three
                      Years
                    
                    Over Three to
                      Five Years
                    
                    Over Five
                      YearsOperating
      leases
                    
                    $
                    291
                    
                    
                    $
                    507
                    
                    
                    $
                    365
                    
                    
                    $
                    162Certificates
      of deposit
                    
                    $
                    29,721
                    
                    
                    $
                    24,891
                    
                    
                    $
                    4,916
                    
                    
                    $
                    -
  30
  The Bank
had cash and cash equivalents of $10.9 million, or 7.7% of total assets, at
September 30, 2009. In addition to the on-balance sheet liquidity available, the
Bank has lines of credit with the Federal Home Loan Bank of Dallas and the
Federal Reserve Bank of Dallas, which provide the Bank with a source of
off-balance sheet liquidity. As of September 30, 2009, the Bank’s established
credit line with the Federal Home Loan Bank of Dallas was $18.1, million or
12.8% of assets, of which $18.0 million was utilized.  The established
credit line with the Federal Reserve Bank of Dallas was $21.3 million, or 15.0%
of assets, of which none was utilized at September 30, 2009.  The Bank
also has access to federal funds purchased for $5.1 million, or 3.6% of
assets.
 
 As loan
demand increases, greater pressure will be exerted on the Bank’s liquidity. As
of September 30, 2009, the loan to deposit ratio was 112%.  Although
this deposit ratio is high, it is not reflective of the Bank’s liquidity
position.  With the low rates available from the Federal Home Loan
Bank and the Federal Reserve Bank ranging from 0.10% to 0.50% and money market
deposits available to the Bank through the Bank’s Trust department, the Bank is
able to move higher rate deposits to alternate trust investment funds and
replace them with lower rate borrowed funds from the Federal Home Loan Bank and
Federal Reserve Bank.  With additional advances available from the
Federal Home Loan Bank and Federal Reserve Bank and the money market deposits
available through the Bank’s Trust department, the Bank has off-balance sheet
liquidity available of no less than 40% of total assets as of September 30,
2009.  We believe that the Bank has adequate liquidity to meet
anticipated future funding needs.
  The Bank
is subject to various regulatory capital requirements administered by federal
banking agencies, which could affect its ability to pay dividends to the
Company. Failure to meet minimum capital requirements can initiate certain
mandatory and discretionary actions by regulators that, if undertaken, could
have a direct material adverse effect on our financial statements. The minimum
ratios required for the Bank to be considered “well-capitalized” for regulatory
purposes, and therefore eligible to consider the payment of dividends to the
Company, will be 10% total capital to risk weighted assets, 6% tier 1 capital to
risk weighted assets and 5% tier 1 capital to average assets. As noted in
theCapital
Resources and Capital Adequacy Requirements   section of this
discussion, regardless of the Bank’s capital position, the requirement in the
Order to meet and maintain a specific capital level means that the Bank may not
be deemed to be well capitalized under regulatory requirements.
  31
  ITEM
3. Quantitative and Qualitative Disclosures about Market Risk
 
 Because
the registrant is a small business issuer, disclosure under this item is not
required.
 
 ITEM 4T. Controls and
Procedures
  As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer/acting co-principal financial officer and acting co-principal
financial officer have evaluated the effectiveness of our “disclosure controls
and procedures” (“Disclosure Controls”).  Disclosure Controls, as defined
in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are procedures that are designed with the objective of ensuring
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required disclosure.
 
 Our
management, including the principal executive officer/acting co-principal
financial officer and acting co-principal financial officer, does not expect
that our Disclosure Controls will prevent all error and all fraud.  A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have
been detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.
 
 Based
upon their controls evaluation, our principal executive officer/acting
co-principal financial officer and acting co-principal financial officer have
concluded that our Disclosure Controls are effective at a reasonable assurance
level.
 
 Changes
in Internal Control over Financial Reporting
 
 There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2009 that materially affected, or were reasonably
likely to materially affect, our internal controls over financial
reporting.
  PART II. OTHER INFORMATION
  ITEM 1. Legal Proceedings
  In the
ordinary course of its operations, the Company is a party to various legal
proceedings. Based on the information presently available, management believes
that the ultimate outcome in such proceedings, in the aggregate, will not have a
material adverse effect on the business’s financial condition or results of
operations of the Company.
  ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds
  None.
  ITEM 3. Defaults Upon Senior
Securities
  None.
  32
 
 ITEM 4. Submission of Matters to a Vote of
Security Holders
  None
  ITEM 5. Other Information
  None.
  33
 
 ITEM 6. Exhibits
  Exhibit Number
                
                Description of Exhibit3.1
                
                Articles
      of Incorporation (1)3.2
                
                Bylaws
      of Registrant (1)31.1
                
                Rule
      13a-14(a) Certification of Principal Executive Officer and Acting
      Co-Principal Financial Officer.31.2
                
                Rule
      13a-14(a) Certification of Acting Co-Principal Financial
      Officer.32.1
                
                Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002.
 
 (1)
              Incorporated
      by reference from the Registration Statement on Form SB-2 filed by the
      Registrant with the SEC on December 15, 2003 and as amended on June 11,
      2007 (file no. 333-111153).
  34
 
 SIGNATURES
  Pursuant
to the requirements of the Securities Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
  T
      BANCSHARES, INC.Date:
      November 13, 2009
                By:
                /s/ Patrick G. AdamsPatrick
      G. Adams
                  President
      and Chief Executive Officer
                  Principal
      Executive Officer
                  Acting
      Co-Principal Financial
Officer
  Date:
      November 13, 2009
                By:
                /s/
      Ken BramlageKen
      Bramlage
                  Vice
      President and Controller
                  Acting
      Co-Principal Financial
Officer
  35