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 March 31, 2010




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 May 13, 2010,
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
                
                19ITEM
      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.
                (Reserved
      and Removed)
                
                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)
                
                March 31,
                  2010
                
                
                December 31,
                  2009(unaudited)ASSETSCash
      and due from banks
                
                $
                1,631
                
                
                $
                1,216Interest-bearing
      deposits
                
                
                1,835
                
                
                
                5,526Federal
      funds sold
                
                
                110
                
                
                
                550Total
      cash and cash equivalents
                
                
                3,576
                
                
                
                7,292Securities
      available for sale at estimated fair value
                
                
                2,729
                
                
                
                4,005Securities
      held to maturity at amortized cost
                
                
                753
                
                
                
                801Securities,
      restricted at cost
                
                
                1,282
                
                
                
                1,281Loans,
      net of allowance for loan losses of $1,956 and $1,713,
      respectively
                
                
                120,609
                
                
                
                121,419Bank
      premises and equipment, net
                
                
                723
                
                
                
                793Other
      real estate owned
                
                
                1,616
                
                
                
                1,616Other
      assets
                
                
                2,228
                
                
                
                2,204Total
      assets
                
                $
                133,516
                
                
                $
                139,411LIABILITIESDemand
      Deposits:Noninterest-bearing
                
                $
                8,811
                
                
                $
                9,428Interest-bearing
                
                
                35,241
                
                
                
                36,157Time
      deposits $100,000 and over
                
                
                41,906
                
                
                
                46,034Other
      time deposits
                
                
                14,522
                
                
                
                16,506Total
      deposits
                
                
                100,480
                
                
                
                108,125Borrowed
      funds
                
                
                19,000
                
                
                
                16,000Other
      liabilities
                
                
                3,615
                
                
                
                3,695Total
      liabilities
                
                
                123,095
                
                
                
                127,820SHAREHOLDERS’
      EQUITYCommon
      Stock, $ .01 par value; 10,000,000 shares authorized; 1,941,305 shares
      issued and outstanding
                
                
                19
                
                
                
                19Additional
      paid-in capital
                
                
                18,548
                
                
                
                18,537Retained
      deficit
                
                
                (8,162
                )
                
                
                (6,982
                )Accumulated
      other comprehensive income
                
                
                16
                
                
                
                17Total
      shareholders' equity
                
                
                10,421
                
                
                
                11,591Total
      liabilities and shareholders' equity
                
                $
                133,516
                
                
                $
                139,411





See
accompanying notes to consolidated financial statements


3





T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF INCOME


(Unaudited)





(000's) except earnings per share
                
                Three Months Ended March 31,2010
                
                
                2009Interest
      IncomeLoan,
      including fees
                
                $
                1,998
                
                
                $
                2,073Securities
                
                
                35
                
                
                
                19Federal
      funds sold
                
                
                -
                
                
                
                20Interest-bearing
      deposits
                
                
                6
                
                
                
                -Total
      interest income
                
                
                2,039
                
                
                
                2,112Interest
      ExpenseDeposits
                
                
                718
                
                
                
                836Borrowed
      funds
                
                
                5
                
                
                
                14Total
      interest expense
                
                
                723
                
                
                
                850Net
      interest income
                
                
                1,316
                
                
                
                1,262Provision
      for loan losses
                
                
                1,303
                
                
                
                118Net
      interest income after provision for loan losses
                
                
                13
                
                
                
                1,144Noninterest
      IncomeTrust
      income
                
                
                1,891
                
                
                
                1,556Service
      fees
                
                
                39
                
                
                
                24Total
      noninterest income
                
                
                1,930
                
                
                
                1,580Noninterest
      ExpenseSalaries
      and employee benefits
                
                
                750
                
                
                
                812Occupancy
      and equipment
                
                
                276
                
                
                
                298Trust
      expenses
                
                
                1,606
                
                
                
                1,354Professional
      fees
                
                
                250
                
                
                
                99Data
      processing
                
                
                59
                
                
                
                116Other
                
                
                182
                
                
                
                217Total
      noninterest expense
                
                
                3,123
                
                
                
                2,896Net
      Income (Loss)
                
                $
                (1,180
                )
                
                $
                (172
                )Earning
      (Loss) per common share:Basic
                
                
                (0.61
                )
                
                
                (0.09
                )Diluted
                
                
                (0.61
                )
                
                
                (0.09
                )Weighted
      average common shares outstanding
                
                
                1,941,305
                
                
                
                1,920,194Weighted
      average diluted shares outstanding
                
                
                1,941,305
                
                
                
                1,920,194





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, 2009
                          
                          $
                          17
                          
                          
                          $
                          16,915
                          
                          
                          $
                          (3,138
                          )
                          
                          $
                          -
                          
                          
                          $
                          13,794Comprehensive
      loss:Net
      loss — YTD
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3,844
                          )
                          
                          
                          
                          
                          
                          
                          (3,844
                          )Change
      in accumulated gain on securities available for sale
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          17
                          
                          
                          
                          17Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3,827
                          )Net
      proceeds from rights offering
                          
                          
                          2
                          
                          
                          
                          1,519
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,521Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          103
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          103BALANCE,
      December 31, 2009
                          
                          $
                          19
                          
                          
                          $
                          18,537
                          
                          
                          $
                          (6,982
                          )
                          
                          $
                          17
                          
                          
                          $
                          11,591BALANCE,
      January 1, 2010
                          
                          $
                          19
                          
                          
                          $
                          18,537
                          
                          
                          $
                          (6,982
                          )
                          
                          $
                          17
                          
                          
                          $
                          11,591Comprehensive
      loss:Net
      loss — YTD
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,180
                          )
                          
                          
                          
                          
                          
                          
                          (1,180
                          )Change
      in accumulated gain on securities available for sale
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (1,180
                          )Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          10
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          10BALANCE,
      March 31, 2010
                          
                          $
                          19
                          
                          
                          $
                          18,547
                          
                          
                          $
                          (8,162
                          )
                          
                          $
                          17
                          
                          
                          $
                          10,421





See
accompanying notes to consolidated financial
statements


5





T BANCSHARES,
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended March 31,(000's)
                
                2010
                
                
                2009Cash
      Flows from Operating ActivitiesNet
      loss
                
                $
                (1,180
                )
                
                $
                (172
                )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                1,303
                
                
                
                118Depreciation
      and amortization
                
                
                84
                
                
                
                118Net
      amortization/(accretion) of securities
                
                
                18
                
                
                
                -Stock
      based compensation
                
                
                10
                
                
                
                27Net
      change in other assets
                
                
                (24
                )
                
                
                321Net
      change in other liabilities
                
                
                (80
                )
                
                
                28Net
      cash provided by operating activities
                
                
                131
                
                
                
                440Cash
      Flows from Investing ActivitiesPrincipal
      payments and maturities of securities held to maturity
                
                
                48
                
                
                
                30Purchase
      of securities available for sale
                
                
                (1,000
                )
                
                
                (1,000
                )Principal
      payments, calls and maturities of securities available for
      sale
                
                
                2,258
                
                
                
                -Purchase
      of securities, restricted, net
                
                
                (1
                )
                
                
                (402
                )Net
      change in loans
                
                
                (493
                )
                
                
                126Proceeds
      from sale of other real estate owned
                
                
                -
                
                
                
                -Purchases
      of premises and equipment
                
                
                (14
                )
                
                
                (79
                )Net
      cash provided by (used in) investing activities
                
                
                798
                
                
                
                (1,325
                )Cash
      Flows from Financing ActivitiesNet
      change in demand deposits
                
                
                (1,533
                )
                
                
                (10,877
                )Net
      change in time deposits
                
                
                (6,112
                )
                
                
                (3,372
                )Proceeds
      from borrowed funds
                
                
                16,000
                
                
                
                70,950Repayment
      of borrowed funds
                
                
                (13,000
                )
                
                
                (58,450
                )Net
      proceeds from rights offering
                
                
                -
                
                
                
                1,521Net
      cash used in financing activities
                
                
                (4,645 )
                
                
                
                (228
                )Net
      change in cash and cash equivalents
                
                
                (3,716
                )
                
                
                (1,113
                )Cash
      and cash equivalents at beginning of period
                
                
                7,292
                
                
                
                8,457Cash
      and cash equivalents at end of period
                
                $
                3,576
                
                
                $
                7,344Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                
                $
                745
                
                
                $
                810Income
      taxes
                
                $
                -
                
                
                $
                -Non-cash
      transactions:Transfers
      from loans to other real estate owned
                
                $
                -
                
                
                $
                955





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 2009 financial statements from their
original presentation to conform with the 2010 financial statement
presentation.  These reclassifications had no effect on shareholders’
equity or net loss for the three months ended March 31, 2009.





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 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, 2009.





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 Company 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 Company’s financial statements, except
that expanded disclosure has been made as reflected in Note 17.





Further new authoritative accounting
guidance (Accounting Standards Update No. 2009-5) under ASC Topic 820
provides guidance for measuring the fair value of a liability in circumstances
in which a quoted price in an active market for the identical liability is not
available. In such instances, a reporting entity is required to measure fair
value utilizing a valuation technique that uses (i) the quoted price of the
identical liability when traded as an asset, (ii) quoted prices for similar
liabilities or similar liabilities when traded as assets, or (iii) another
valuation technique that is consistent with the existing principles of ASC
Topic 820, such as an income approach or market approach. The new
authoritative accounting guidance also clarifies that when estimating the fair
value of a liability, a reporting entity is not required to include a separate
input or adjustment to other inputs relating to the existence of a restriction
that prevents the transfer of the liability. The forgoing new authoritative
accounting guidance under ASC Topic 820 became effective for the Company’s
financial statements for periods ending after October 1, 2009 and did not
have a significant impact on the Company’s financial
statements.


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. Subsequently, ASU
2010-09 “Amendments to Certain Recognition and Disclosure Requirements” was
issued.  This guidance, as amended, 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 Company’s financial statements for periods ending after June 15,
2009.  ASU 2010-09 was adopted upon issuance.  Adoption did not have a
significant impact on the Company’s financial statements.





NOTE 3. LOANS





Loans
held in portfolio consisted of the following:




(000's)
                  
                  March 31,
                    2010
                  
                  
                  December 31,
                    2009Commercial
      and industrial
                  
                  $
                  88,798
                  
                  
                  $
                  88,920Consumer
      installment
                  
                  
                  1,133
                  
                  
                  
                  1,852Real
      estate — mortgage
                  
                  
                  24,780
                  
                  
                  
                  25,464Real
      estate — construction
                  
                  
                  8,007
                  
                  
                  
                  7,045Other
                  
                  
                  2
                  
                  
                  
                  2Total
      loans
                  
                  
                  122,720
                  
                  
                  
                  123,283Less
      allowance for loan losses
                  
                  
                  1,956
                  
                  
                  
                  1,713Less
      deferred loan fees
                  
                  
                  155
                  
                  
                  
                  151Net
      loans
                  
                  $
                  120,609
                  
                  
                  $
                  121,419




The
change in the allowance for loan losses is as follows:





(000's)
                  
                  March 31,
                    2010
                  
                  
                  December 31,
                    2009Balance
      at beginning of period
                  
                  $
                  1,713
                  
                  
                  $
                  1,638Provision
      charged to operations
                  
                  
                  1,303
                  
                  
                  
                  1,369Loans
      charged off
                  
                  
                  (1,090
                  )
                  
                  
                  (1,303
                  )Recoveries
      of loans previously charged off
                  
                  
                  30
                  
                  
                  
                  9Balance
      at end of period
                  
                  $
                  1,956
                  
                  
                  $
                  1,713




At March
31, 2010, there were $4.7 million of nonaccrual loans and no loans contractually
delinquent over ninety days and still accruing interest, and at December 31,
2009, there were $3.8 million of nonaccrual loans and no 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.





March 31, 2010(000's)
                
                Amortized
                  Cost
                
                
                Unrealized
                  Gains
                
                
                Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueSecurities Available for
      Sale:U.S.
      Government Agencies
                
                $
                2,713
                
                
                $
                18
                
                
                $
                2
                
                
                $
                2,729Securities
      Held to Maturity:U.S.
      Government Agencies
                
                $
                753
                
                
                $
                37
                
                
                $
                -
                
                
                $
                790Securities,
      restrictedOther
                
                $
                1,282
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,282




December 31, 2009(000's)
                          
                          Amortized
                            Cost
                          
                          
                          Unrealized
                            Gains
                          
                          
                          Unrealized
                            Losses
                          
                          
                          Estimated
                            Fair ValueSecurities Available for
      Sale:U.S.
      Government Agencies
                          
                          $
                          3,988
                          
                          
                          $
                          20
                          
                          
                          $
                          -
                          
                          
                          $
                          4,005Securities
      Held to Maturity:U.S.
      Government Agencies
                          
                          $
                          801
                          
                          
                          $
                          29
                          
                          
                          $
                          3
                          
                          
                          $
                          830Securities,
      restricted:Other
                          
                          $
                          1,281
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          1,281




At March
31, 2010 securities with market value of $2.7 million were pledged against
borrowed funds at the Federal Home Loan Bank of Dallas, and one security with
market value of $790,000 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 March 31, 2010 and
December 31, 2009. The Bank also held Federal Home Loan Bank of Dallas stock in
the amount of $861,700 and $861,000 at March 31, 2010 and December 31, 2009,
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 March 31, 2010 and
December 31, 2009 were as follows:




(000's)
                  
                  March 31,
                    2010
                  
                  
                  December 31,
                    2009Leasehold
      improvements
                  
                  $
                  929
                  
                  
                  $
                  929Furniture
      and equipment
                  
                  
                  1,890
                  
                  
                  
                  1,8762,819
                  
                  
                  
                  2,805Less:
      accumulated depreciation
                  
                  
                  2,096
                  
                  
                  
                  2,012Balance
      at end of period
                  
                  $
                  723
                  
                  
                  $
                  793


9





NOTE
7. OTHER REAL ESTATE OWNED AND OTHER ASSETS




Other
assets consisted of the following at March 31, 2010 and December 31,
2009:




(000's)
                
                March 31,
                  2010
                
                
                December 31,
                  2009Accounts
      receivable – trust fees
                
                
                639
                
                
                
                640Accrued
      interest receivable
                
                
                400
                
                
                
                397Prepaid
      assets
                
                
                1,163
                
                
                
                1,136Capitalized
      rights offering costs
                
                
                -
                
                
                
                -Other
                
                
                26
                
                
                
                31$
                2,228
                
                
                $
                2,204




Other
Real Estate Owned (“OREO”) consists of two properties at March 31, 2010, which
are recorded at lower of cost or fair value.  The OREO assets are
actively being marketed, and disposal of the assets is anticipated to occur
prior to December 31, 2010.





NOTE 8. DEPOSITS




Deposits
are summarized as follows: [The highlighted balances seemed switched from one
quarter to the next]




(000's)
                
                As of March
      31, 2010
                
                
                As of December 31, 2009Noninterest
      bearing demand
                
                $
                8,811
                
                
                
                9
                %
                
                $
                9,428
                
                
                
                9
                %Interest
      bearing demand (NOW)
                
                
                2,418
                
                
                
                2
                %
                
                
                1,960
                
                
                
                2
                %Money
      market accounts
                
                
                32,629
                
                
                
                32
                %
                
                
                34,006
                
                
                
                31
                %Savings
      accounts
                
                
                194
                
                
                
                0
                %
                
                
                191
                
                
                
                0
                %Certificates
      of deposit, $100,000 and greater
                
                
                41,906
                
                
                
                42
                %
                
                
                46,034
                
                
                
                43
                %Certificates
      of deposit, less than $100,000
                
                
                14,522
                
                
                
                15
                %
                
                
                16,506
                
                
                
                15
                %$
                100,480
                
                
                
                100
                %
                
                $
                108,125
                
                
                
                100
                %




At March
31, 2010, the scheduled maturities of certificates of deposit were as
follows:




(000’s)2010
                            
                            $
                            15,9212011
                            
                            
                            27,0932012
                            
                            
                            11,4812013
                            
                            
                            1,6202014
                            
                            
                            313Total
                            
                            $
                            56,428


10





NOTE
9.  BORROWED FUNDS




Borrowed
funds as of March 31, 2010 and December 31, 2009, were as follows:





(000's)
                
                March 31,
                  2010
                
                
                December 31,
                  2009Federal
      Home Loan Bank Advance
                
                $
                15,000
                
                
                $
                16,000Federal
      Reserve Bank Advance
                
                
                4,000
                
                
                
                -Total
                
                $
                19,000
                
                
                $
                16,000




At March
31, 2010, borrowed funds consisted of a $3.0 million advance and a $12.0 million
advance from the Federal Home Loan Bank of Dallas. The loans have a term of 1
year and 1 day and mature on October 28, 2010 and April 1, 2010, respectively.
The interest rates for the loans are fixed at 0.47% and 0.12%,
respectively.  The Bank also had a $4.0 million advance from the
Federal Reserve Bank of Dallas at March 31, 2010.  The loan had a term
of 1 day and a fixed rate of 0.75%. The Company has a $24.2 million credit line
with the Federal Reserve Bank, which is secured by $37.5 million in pledged
commercial and industrial loans, and $17.8 million credit line with the Federal
Home Loan Bank which is secured by $21.7 million in pledged real estate loans
and $2.7 million in securities.




NOTE 10. OTHER LIABLITIES





The
following comprised other liabilities at March 31, 2010 and December 31,
2009:




(000's)
                
                March 31,
                  2010
                
                
                December 31,
                  2009Reserve
      for OCC Settlement
                
                $
                2,685
                
                
                $
                2,685Trust
      Advisor Fees Payable
                
                
                531
                
                
                
                522Interest
      Payable
                
                
                123
                
                
                
                101Audit
      Fees
                
                
                35
                
                
                
                38Incentive
      Compensation
                
                
                40
                
                
                
                51Legal
                
                
                140
                
                
                
                28Franchise
      & Property Taxes
                
                
                20
                
                
                
                37Other
      Accruals
                
                
                41
                
                
                
                233$
                3,615
                
                
                $
                3,695





NOTE 11. INCOME TAXES




No
federal income tax expense has been recorded for the quarter ended March 31,
2010, 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, 2009, the Company had net tax operating loss carry forwards of
approximately $1.8 million 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 March 31,
2010 and December 31, 2009, options to purchase a total of 195,500 had been
issued with a weighted average exercise price of $10.03. 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 months ended March 31, 2010
and 2009.


11





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.





The
following is a summary of activity in the Company’s stock option plan at March
31, 2010:




Number of
                  Shares
                  Underlying
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  PricesOutstanding
      at beginning of the year
                
                
                195,500
                
                
                $
                10.03Granted
                
                
                -
                
                
                
                -Exercised
                
                
                -
                
                
                
                -Expired
      / forfeited
                
                
                -
                
                
                
                -Outstanding
      at end of period
                
                
                195,500
                
                
                $
                10.03Exercisable
      at end of period
                
                
                159,400
                
                
                $
                10.14Available
      for grant at end of period
                
                
                53,500




The
weighted average remaining contractual life of options outstanding at March 31,
2010 was 6.1 years.




The
following is a summary of the Company’s nonvested options at March 31,
2010:




Shares
                
                
                Weighted
                  Average
                  Grant Date
                  Fair ValueNonvested
      at January 1, 2010
                
                
                39,600
                
                
                $
                3.24Granted
                
                
                -
                
                
                
                -Vested
                
                
                3,500
                
                
                
                2.39Forfeited
                
                
                -
                
                
                
                -Nonvested
      at March 31,2010
                
                
                36,100
                
                
                $
                3.32




As of
March 31, 2010, there was approximately $101,000 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 March
31, 2010. These warrants are exercisable at a price of $10.00 per share at any
time until November 2, 2014. During the three months ended March 31, 2010, no
warrants were exercised.




There
were no additional warrants issued during the three months ended March 31,
2010.  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 months ended
March 31, 2010 and 2009.


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 March 31, 2010, the
Company had commitments to extend credit and standby letters of credit of
approximately $7.7 million and $15,000, respectively. At December 31, 2009, the
Company had commitments to extend credit and standby letters of credit of
approximately $6.8 million and $15,000, 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
"2008 Order") with the Comptroller. The 2008 Order contained provisions
requiring, among other things, the Bank to strengthen its internal controls,
policies, and procedures related to the BSA. The 2008 Order was terminated by
the Agreement, dated April 15, 2010, entered into by the Bank with the
Comptroller and the Stipulation and Consent to the Issuance of a Consent Order
for Civil Money Penalties (collectively, the “Agreement”). Because the Agreement
does not have any provisions related to the BSA, we believe the Bank is in
substantial compliance with the requirements of the BSA.





On April
15, 2010, the Bank executed the Agreement with the Comptroller  (the
“Agreement”) containing the general terms outlined as follows:





·
            deposit
      $5.1 million for consumer restitution charged by the merchants to
      eligible consumers;




·
            provide
      for a civil money penalty of
$100,000;




·
            require
      the Bank to retain an independent claims administrator to locate and
      arrange for the issuance of individual consumer checks to the identified
      eligible consumers;


13





·
            terminate
      the Consent Order dated July 9, 2008, between the Bank and the
      Comptroller, which contained provisions requiring the Bank to establish a
      satisfactory program to ensure compliance with the Bank Secrecy Act and
      established minimum capital ratios;




·
            require
      the Bank to establish a capital plan which, among other provisions,
      details the Bank’s plan to achieve tier 1 capital ratio of 9% and total
      risk based capital ratio of 11.5%;




·
            require
      the Bank to develop a written program designed to reduce the level of
      criticized assets;




·
            require
      the Bank to develop and implement an asset liquidity enhancement plan
      designed to increase the amount of asset liquidity maintained by the Bank,
      including a loan to deposit ratio of 85%;
and




·
            require
      the Bank to develop a written profit plan to improve and sustain the
      earnings of the Bank.





Although
we do not know at this time the precise amounts that would ultimately be payable
by us under the terms of the Agreement, we expect that any such settlement would
ultimately require the Bank to, among other things, pay a significant and
material restitution payment which we have estimated to be $2.4
million.  Further, there is no assurance that the Bank would be able
to comply with all of the requirements of the Agreement, including meeting the
stated capital requirements contained therein.  Nor is there assurance
that, should the Bank pay significant and material amounts of restitution and/or
civil money penalties, the short and long term financial condition, results of
operations, liquidity, and/or prospects of the Bank, upon which the Company is
dependent, will not be materially adversely, and irreparably,
impacted.





In
determining the amount of funds that the Bank needs to reserve to make
restitution payments to consumers under the Agreement, management has made
certain assumptions regarding the number of consumers who elect to accept
restitution checks and the ability of the Bank and its claim processor to locate
consumers.  Based on such assumptions, management concluded that it is
possible that the Bank will be liable for an amount that is up to $5.1 million,
while the Agreement does not limit the liability to this
amount.  However, until the restitution process is fully investigated,
formulated, and approved by the Comptroller, the Company has estimated that the
amount of restitution would not exceed the $5.1 million set forth in the
Agreement.  In addition, certain consumers purchased products or
services from a merchant that is currently in litigation with the Federal Trade
Commission (“FTC”), which management believes represents approximately $1.6
million of the $5.1 million set forth in the Agreement.  We do not
have enough information to estimate the probability of outcome of the FTC
litigation with the merchant. Additionally, we cannot estimate the amount, if
any, of restitution that the merchant or FTC may pay the consumers of this
merchant which, if paid in full, would reduce the Bank’s possible liability to
$3.5 million. Because our Agreement with the Comptroller stipulates that
the Bank will not be responsible for the $1.6 million if the FTC or the merchant
ultimately pay the consumers, we have not included this amount in our estimate
of the appropriate reserve.





Based on
the information available to management regarding actual historical rates that
restitution checks are ultimately negotiated by consumers, management’s estimate
is that approximately 68% of the total potential exposure will be realized.
Therefore, management believes the appropriate reserve to accrue for restitution
is 68% of $3.5 million, or $2.4 million.  We have estimated and
accrued an expense of $185,000 representing the estimated cost to administer the
restitution based on information from our claims administrator, and accrued
an expense of $100,000 for the civil money penalty to be imposed by the
Comptroller in connection with the Consent Order for a Civil Money Penalty,
dated April 15, 2010, which was issued by the Comptroller in connection with the
execution of the Agreement. This expected reserve and accrued expenses we
believe represents a reasonable estimate under FASB ASC Topic 450 of liability
based on the facts and circumstances as we understand them
today.  However, we can not assure you that this estimate of the
required reserve will not change due to the risk factors described in Item 1A.
If management’s estimates prove inaccurate, the Bank may be required to
recognize additional payments on restitution checks.  As a result, our
financial condition and results of operation may be materially adversely
affected.


14





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. However,  regardless
of the Bank’s capital position, the requirement in the Agreement 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 March 31, 2010. The capital
ratios required by the Agreement are 11.5% Total Capital to Risk Weighted Assets
and 9.00% Tier 1 Capital to Average Assets. As of March 31, 2010,
the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1 Capital
to Average Assets ratio of 10.35% and 7.05%, respectively, were below the
requirements set forth in the Agreement. Under the terms of the Agreement,
the Bank has until the earlier of 90 days after the Bank receives notice from
the Assistant  Deputy Comptroller that the restitution process has
been completed or written notice from the OCC that the Bank’s capital is
materially deficient to achieve the capital ratios stated in the Agreement. As
of March 31, 2010, the Bank has not received either communication from the OCC,
and therefore is not in breach of this provision of the Agreement.





(000's)
                                  
                                  Actual
                                  
                                  
                                  For Capital Adequacy Purposes
                                  
                                  
                                  To Be Well Capitalized Under
                                    Prompt Corrective Action
                                    ProvisionsAmount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  Ratio
                                  
                                  
                                  Amount
                                  
                                  
                                  RatioAs
      of March 31, 2010Total
      Capital (to Risk Weighted Assets)
                                  
                                  $
                                  11,475
                                  
                                  
                                  
                                  10.35
                                  %
                                  
                                  $
                                  8,868
                                  >
                                  
                                  
                                  8.00
                                  %
                                  
                                  $
                                  11,086
                                  >
                                  
                                  
                                  10.00
                                  %Tier
      1 Capital (to Risk Weighted Assets)
                                  
                                  
                                  10,082
                                  
                                  
                                  
                                  9.09
                                  %
                                  
                                  
                                  4,434
                                  >
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  6,651
                                  >
                                  
                                  
                                  6.00
                                  %Tier
      1 Capital (to Average Assets)
                                  
                                  
                                  10,082
                                  
                                  
                                  
                                  7.05
                                  %
                                  
                                  
                                  5,724
                                  >
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  7,155
                                  >
                                  
                                  
                                  5.00
                                  %As
      of December 31, 2009Total
      Capital (to Risk Weighted Assets)
                                  
                                  $
                                  12,640
                                  
                                  
                                  
                                  11.33
                                  %
                                  
                                  $
                                  8,925
                                  >
                                  
                                  
                                  8.00
                                  %
                                  
                                  $
                                  11,156
                                  >
                                  
                                  
                                  10.00
                                  %Tier
      1 Capital (to Risk Weighted Assets)
                                  
                                  
                                  11,242
                                  
                                  
                                  
                                  10.80
                                  %
                                  
                                  
                                  4,462
                                  >
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  6,694
                                  >
                                  
                                  
                                  6.00
                                  %Tier
      1 Capital (to Average Assets)
                                  
                                  
                                  11,242
                                  
                                  
                                  
                                  7.51
                                  %
                                  
                                  
                                  5,988
                                  >
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  7,485
                                  >
                                  
                                  
                                  5.00
                                  %


15





NOTE 16. PARENT COMPANY CONDENSED FINANCIAL
STATEMENTS




T
BANCSHARES, INC.


CONDENSED
BALANCE SHEETS


(Unaudited)




(000's)
                
                March 31,
                  2010
                
                
                December 31,
                  2009ASSETSCash
      and due from banks
                
                $
                322
                
                
                $
                367Due
      from subsidiary
                
                
                -
                
                
                
                -Capitalized
      servicing rights
                
                
                -
                
                
                
                -Investment
      in subsidiary
                
                
                10,099
                
                
                
                11,259Total
      Assets
                
                $
                10,421
                
                
                $
                11,626LIABILITIES
      AND CAPITALOther
      Liabilities
                
                
                -
                
                
                
                35Capital
                
                
                10,421
                
                
                
                11,591Total
      Liabilities and Capital
                
                $
                10,421
                
                
                $
                11,626




T
BANCSHARES, INC.


CONDENSED
STATEMENT OF INCOME


(Unaudited)











Three Months Ended March
      31,(000's)
                
                2010
                
                
                2009Equity
      in income (loss) from subsidiary
                
                $
                (1,160
                )
                
                $
                (149
                )Noninterest
      expense:Professional
      and administrative
                
                
                10
                
                
                
                (4
                )Stock
      based compensation
                
                
                10
                
                
                
                27Total
      noninterest expenses
                
                
                20
                
                
                
                23Net
      income (loss)
                
                $
                (1,180
                )
                
                $
                (172
                )


16


T
BANCSHARES, INC.
 CONDENSED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Three Months Ended March31,(000's)
                            
                            2010
                            
                            
                            2009Cash
      Flows from Operating ActivitiesNet
      loss
                            
                            $
                            (1,180
                            )
                            
                            $
                            (172
                            )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Equity
      in (earnings) loss of Bank
                            
                            
                            1,160
                            
                            
                            
                            149Stock
      based compensation
                            
                            
                            10
                            
                            
                            
                            27Net
      change in other assets
                            
                            
                            -
                            
                            
                            
                            333Net
      change in other liabilities
                            
                            
                            (35
                            )
                            
                            
                            (14
                            )Net
      cash provided (used) by operating activities
                            
                            
                            (45
                            )
                            
                            
                            323Cash
      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
                            
                            
                            -
                            
                            
                            
                            1,763Contribution
      to bank
                            
                            
                            -
                            
                            
                            
                            (2,000
                            )Net
      cash used in financing activities
                            
                            
                            -
                            
                            
                            
                            (237
                            )Net
      change in cash and cash equivalents
                            
                            
                            (45
                            )
                            
                            
                            86Cash
      and cash equivalents at beginning of period
                            
                            
                            367
                            
                            
                            
                            333Cash
      and cash equivalents at end of period
                            
                            $
                            322
                            
                            
                            $
                            419Supplemental
      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.
  17
  ·
                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 March 31, 2010, 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
                    
                    $
                    —
                    
                    
                    $
                    2,729
                    
                    
                    $
                    —
                    
                    
                    $
                    2,729Other
      Assets:OREO
                    
                    
                    —
                    
                    
                    
                    1,616
                    
                    
                    
                    —
                    
                    
                    
                    1,616
 
 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 for the three months ended March 31, 2010, which
has been recorded on the consolidated statement of income through the provision
for loan losses.


18




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 March 31, 2010 and December 31, 2009, and our consolidated
results of operations for the three months ended March 31, 2010 and 2009. 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, 2009, 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
      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;


19


·
            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, 2009 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 March 31, 2010, we had, on a consolidated basis, total assets
of $133.5 million, net loans of $120.6 million, total deposits of $100.5
million, and shareholders’ equity of $10.4 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 March 31, 2010 and
December 31, 2009, and our results of operations for the three ended March 31,
2010 and 2009.





Recent
Developments





On May 5,
2010, the Bank received written notice from the Comptroller that it had
completed its obligation as it relates to the payment of civil money penalties
in the amount of $100,000 as required by the Agreement (See Item 1. Note 15. Regulatory
Matters).





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.


20





ThreeMonthsEndedMarch31,2010 Comparedto
                                  ThreeMonthsEndedMarch31,2009Increase (Decrease) Due to
                                  Change in(000’s)
                                
                                Yield/
                                  Rate
                                
                                
                                Average
                                  Volume
                                
                                
                                Number of
                                  Days
                                
                                
                                TotalFederal
      funds sold
                                
                                $
                                (14
                                )
                                
                                $
                                (6
                                )
                                
                                $
                                -
                                
                                
                                $
                                (20
                                )Securities
      and other
                                
                                
                                (13
                                )
                                
                                
                                35
                                
                                
                                
                                -
                                
                                
                                
                                22Loans,
      net of reserve (1)
                                
                                
                                (89
                                )
                                
                                
                                14
                                
                                
                                
                                -
                                
                                
                                
                                (75
                                )Total
      earning assets
                                
                                
                                (116
                                )
                                
                                
                                43
                                
                                
                                
                                -
                                
                                
                                
                                (73
                                )NOW
      accounts
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Money
      market accounts
                                
                                
                                (92
                                )
                                
                                
                                8
                                
                                
                                
                                
                                
                                
                                
                                (84
                                )Certificates
      of deposit $100,000 or less
                                
                                
                                (22
                                )
                                
                                
                                (48
                                )
                                
                                
                                -
                                
                                
                                
                                (70
                                )Certificates
      of deposit $100,000 or more
                                
                                
                                (40
                                )
                                
                                
                                76
                                
                                
                                
                                -
                                
                                
                                
                                36Borrowed
      funds
                                
                                
                                (7
                                )
                                
                                
                                (2
                                )
                                
                                
                                -
                                
                                
                                
                                (9
                                )Total
      Interest-bearing liabilities
                                
                                
                                (161
                                )
                                
                                
                                34
                                
                                
                                
                                -
                                
                                
                                
                                (127
                                )Changes
      in net interest income
                                
                                $
                                45
                                
                                
                                $
                                9
                                
                                
                                $
                                -
                                
                                
                                $
                                54





(1)
            Average
      loans include loans on non-accrual
status.





Net
interest income for the three months ended March 31, 2010 increased $54,000, or
4.3%, 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 March 31, 2010 decreased $73,000, or
3.5%, compared to the same period in 2009. For the three month period ended
March 31, 2010, the average interest yield for interest-earning assets fell to
5.9%, or 4.4%, compared to 6.2% for the same period in 2009. Average
earning asset volume increased $1.4 million, or 1.0%, to $137.3 million for the
three months ended March 31, 2010, compared to $135.9 million for the same
period in the prior year.





Total
interest expense for the three months ended March 31, 2010 decreased $127,000,
or 14.9%, compared to the same period in 2009. For the three month-period ended
March 31, 2010, the average interest yield for interest-bearing liabilities fell
to 2.4%, or 17.0%, compared to 3.0% for the same period in 2009. Average
interest bearing deposit volume increased $6.3 million, or 6.1%, to $109.1
million for the three months ended March 31, 2010, compared to $102.8 million
for the same period in 2009. However, the increase in deposits was offset
by a decrease of borrowed funds.  Average borrowed funds
volume decreased $3.5 million, or 28.9%, to $8.6 million for the three
months ended March 31, 2010, compared to $12.1 million for the same period in
2009. The average interest yield for borrowed funds fell to 0.2% for
the three months ended March 31, 2010, compared to an average interest yield of
0.5% in the same period in 2009.


21




Key
Performance Indicators at March 31, 2010





The
following were key indicators of our performance and results of operations
through the first quarter of 2010:





·
            total
      assets was $133.5 million at the end of the first quarter of 2010,
      representing a decrease of $5.9 million, or 4.2%, from $139.4 million at
      the end of 2009. The majority of the decrease was in cash and cash
      equivalents, and was due to management’s attempt to comply with the
      capital ratio requirements of the Consent Order dated July 9,
      2008;





·
            total
      loans, net of allowance for loan losses, was $120.6 million at the end of
      the first quarter of 2010, representing a decrease of  $810,000, or
      0.7%, from $121.4 million at the end of
2009;





·
            total
      deposits was $100.5 million at the end of the first quarter of 2010,
      representing a decrease of $7.6 million, or 7.1%, from $108.1 million at
      the end of 2009;





·
            total
      revenue was $4.0 million for the three months ended March 31, 2010,
      compared to $3.7 million for the same period in the prior year,
      representing an increase of 7.5%, or
$277,000;





·
            For
      the three months ended March 31, 2010, total additions to the provision
      for loan losses were $1.3 million compared to $118,000 for the same period
      last year. The increase was primarily related to three loans which were
      partially or fully charged off in March 2010;
  and





·
            net
      loss was $1.2 million for the three months ended March 31, 2010, compared
      to net loss of $172,000 for the same period in the prior year. The
      increase was primarily related to three loans which were partially or
      fully charged off in March 2010.





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.


22





FINANCIAL
SUMMARY


Consolidated
Daily Average Balances, Average Yields and Rates





Three Months Ended March 31,2010
                    
                    
                    2009(000's) except earnings per share
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Balance
                    
                    
                    Interest
                    
                    
                    Average
                      YieldInterest-earning
      assetsLoans,
      net of reserve
                    
                    $
                    123,107
                    
                    
                    $
                    1,998
                    
                    
                    
                    6.5
                    %
                    
                    $
                    122,268
                    
                    
                    $
                    2,073
                    
                    
                    
                    6.8
                    %Federal
      funds sold
                    
                    
                    634
                    
                    
                    
                    -
                    
                    
                    
                    0.2
                    %
                    
                    
                    11,624
                    
                    
                    
                    20
                    
                    
                    
                    0.7
                    %Securities
      and other
                    
                    
                    13,589
                    
                    
                    
                    41
                    
                    
                    
                    1.2
                    %
                    
                    
                    2,026
                    
                    
                    
                    19
                    
                    
                    
                    3.8
                    %Total
      earning assets
                    
                    
                    137,330
                    
                    
                    
                    2,039
                    
                    
                    
                    5.9
                    %
                    
                    
                    135,918
                    
                    
                    
                    2,112
                    
                    
                    
                    6.2
                    %Cash
      and other assets
                    
                    
                    5,760
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,341Total
      assets
                    
                    $
                    143,090
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    140,259Interest-bearing
      liabilitiesNOW
      accounts
                    
                    $
                    2,069
                    
                    
                    
                    4
                    
                    
                    
                    0.7
                    %
                    
                    $
                    1,965
                    
                    
                    
                    4
                    
                    
                    
                    0.8
                    %Money
      market accounts
                    
                    
                    47,052
                    
                    
                    
                    100
                    
                    
                    
                    0.9
                    %
                    
                    
                    43,264
                    
                    
                    
                    184
                    
                    
                    
                    1.7
                    %Savings
      accounts
                    
                    
                    194
                    
                    
                    
                    1
                    
                    
                    
                    0.9
                    %
                    
                    
                    179
                    
                    
                    
                    1
                    
                    
                    
                    1.3
                    %Certificates
      of deposit less than $100,000
                    
                    
                    15,341
                    
                    
                    
                    151
                    
                    
                    
                    4.0
                    %
                    
                    
                    20,260
                    
                    
                    
                    221
                    
                    
                    
                    4.5
                    %Certificates
      of deposit $100,000 or greater
                    
                    
                    44,456
                    
                    
                    
                    462
                    
                    
                    
                    4.2
                    %
                    
                    
                    37,110
                    
                    
                    
                    426
                    
                    
                    
                    4.7
                    %Total
      interest bearing deposits
                    
                    
                    109,112
                    
                    
                    
                    718
                    
                    
                    
                    2.7
                    %
                    
                    
                    102,778
                    
                    
                    
                    836
                    
                    
                    
                    3.3
                    %Borrowed
      funds
                    
                    
                    8,622
                    
                    
                    
                    5
                    
                    
                    
                    0.2
                    %
                    
                    
                    12,148
                    
                    
                    
                    14
                    
                    
                    
                    0.5
                    %Total
      interest bearing liabilities
                    
                    
                    117,734
                    
                    
                    
                    723
                    
                    
                    
                    2.5
                    %
                    
                    
                    114,926
                    
                    
                    
                    850
                    
                    
                    
                    3.0
                    %Non-interest
      bearing deposits
                    
                    
                    10,765
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,903Other
      liabilities
                    
                    
                    3,162
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    685Stockholders
      equity
                    
                    
                    11,429
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,745Total
      liabilities and stockholders' equity
                    
                    $
                    143,090
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    140,259Net
      interest income
                    
                    
                    
                    
                    
                    
                    1,316
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,262Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.4
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.2
                    %Net
      interest margin
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.8
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.7
                    %Provision
      for loan loss
                    
                    
                    
                    
                    
                    
                    1,303
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    118Non-interest
      income
                    
                    
                    
                    
                    
                    
                    1,930
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,580Non-interest
      expense
                    
                    
                    
                    
                    
                    
                    3,123
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2,896Loss
      before income taxes
                    
                    
                    
                    
                    
                    
                    (1,180
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (172
                    )Income
      taxes expense (benefit)
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Net
      loss
                    
                    
                    
                    
                    
                    $
                    (1,180
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (172
                    )Earnings
      (loss) per share
                    
                    
                    
                    
                    
                    
                    (0.61
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (0.09
                    )Return
      on average equity
                    
                    
                    
                    
                    
                    
                    (41.30
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1.17
                    )%Return
      on average assets
                    
                    
                    
                    
                    
                    
                    (3.30
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (0.12
                    )%Equity
      to assets ratio
                    
                    
                    
                    
                    
                    
                    7.99
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    10.51
                    %


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 $1.3 million for the three months ended March
31, 2010, compared to $118,000 for the three months ended March 31, 2009.
The provision amounts are directly related to loan volumes and loan losses. We
had charge-offs of $1.1 million and recoveries of $30,000 during the three
months ended March 31, 2010.  We had charge-offs of $146,000 and recoveries
of $7,000 during the three months ended March 31, 2009.





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 increased $350,000, or 22.1%, to $1.9 million for the three
months ended March 31, 2010, compared to $1.6 million for the same period in the
prior year. The increase is directly attributable to an increase in trust
income.





Trust
income is earned on the value of managed and non-managed assets held in
custody.  For the three months ended March 31, 2010, trust income totaled
$1.9 million, compared to $1.6 million for the same period in the prior
year.  The increase in trust income is directly attributable to the general
rise in the market values of assets in trust accounts on which the fees are
based.





Service
fees were $39,000 the three months ended March 31, 2010, compared to $24,000 for
the same period in the prior year.





Non-interest
Expense





Total
non-interest expense increased $227,000, or 7.8%, to $3.1 million for the three
months ended March 31, 2010, compared to $2.9 million for the same period in the
prior year.





Salaries
and employee benefits decreased $62,000, or 7.6%, to $750,000 for the three
months ended March 31, 2010, compared to $812,000 for the same period in the
prior year.  The decrease is attributable to a reduction of full-time
equivalent employees subsequent to the first 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 March 31, 2010, occupancy and
equipment expense decreased $22,000, or 7.4%, to $276,000, compared to $298,000
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 March 31, 2010, trust expenses
increased $252,000, or 18.6%, to $1.6 million, compared to $1.4 million for the
same period in the prior year.  Similar to trust income, the increase in
trust expense is directly attributable to the general rise in the market values
of assets in trust accounts.





Professional
fees increased $151,000, or 152.5%, to $250,000 for the three months ended March
31, 2010, compared to $99,000 for the same period in the prior year. The
increase was due to legal fees for the OCC investigation.





Data
processing fees decreased $57,000, or 49.1%, to $59,000 for the three months
ended March 31, 2010, compared to $116,000 for the same period in the prior
year. The decrease was due to lower fees negotiated with the Bank’s data
processing vendors.





Other
expenses decreased $35,000, or 16.1%, to $182,000 for the three months ended
March 31, 2010, compared to $217,000 for the same period in the prior
year.


24




Income
Taxes





No
federal income tax expense was recorded for the three months ended March 31,
2010, based upon prior operating losses and the Company’s carry-forward of those
losses.  The Company has fully reserved the federal tax benefit of these
losses. Cumulative net operating loss available to carry forward for tax
purposes amounted to approximately $1.8 million as of December 31,
2009.





Financial
Condition





Our total
assets as of March 31, 2010 were $133.6 million, compared to $139.4 million as
of December 31, 2009. Deposits were $100.5 million as of March 31, 2010,
compared to $108.1 million as of December 31, 2009. Borrowed funds as of March
31, 2010 were $19.0 million, compared to $16.0 million as of December 31,
2009.  The decrease in deposits is primarily a result of management’s
decision to not replace matured certificates of deposits in the first quarter of
2010, replacing them with trust custodial money market funds which are moved to
third a third party mutual fund at each quarter end to effect a reduction in
deposit insurance premiums(SeeLiquidity Management inITEM 2.Management’s Discussion and Analysis
of Financial Condition and Results of Operation.).





As of
March 31, 2010, our shareholders’ equity was $10.4 million, compared to $11.6
million as of December 31, 2009.  The $1.2 million decrease in equity is
due to the $1.2 million loss recognized through the first three months of
2010.





Short-Term
Investments and Interest-bearing Deposits in Other Financial
Institutions





At March
31, 2010, we had $1.8 million in interest-bearing deposits and $110,000 in
federal funds sold. At December 31, 2009, we had $5.5 million in
interest-bearing deposits and $550,000 in federal funds sold. Interest-bearing
deposits and 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 March
31, 2010, our securities included Federal Reserve Bank of Dallas stock and
Federal Home Loan Bank of Dallas stock at cost of $420,000 and $861,700,
respectively, with an estimated fair value that approximated cost. We also had
government agency securities with amortized cost and fair value of $3.5 million.
Weighted average yield of the securities portfolio at March 31, 2010 was
2.9%.  Securities with market value of $2.7 million were pledged against
borrowed funds at the Federal Home Loan Bank of Dallas, and one security with
market value of $790,000 was pledged against trust deposit balances held at the
Bank.





At
December 31, 2009, 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 $861,000, respectively. We also had government agency securities
with amortized cost and fair value of $4.8 million.  Weighted average yield
of the securities portfolio at December 31, 2009 was 2.5%


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)
                          
                          March31,2010
                          
                          
                          December 31, 2009Commercial
      and industrial
                          
                          $
                          88,798
                          
                          
                          $
                          88,920Consumer
      installment
                          
                          
                          1,133
                          
                          
                          
                          1,852Real
      estate — mortgage
                          
                          
                          24,780
                          
                          
                          
                          25,464Real
      estate — construction
                          
                          
                          8,007
                          
                          
                          
                          7,045Other
                          
                          
                          2
                          
                          
                          
                          2Total
      loans
                          
                          
                          122,720
                          
                          
                          
                          123,283Less
      allowance for loan losses
                          
                          
                          1,956
                          
                          
                          
                          1,713Less
      deferred loan fees
                          
                          
                          155
                          
                          
                          
                          151Total
      net loans
                          
                          $
                          120,609
                          
                          
                          $
                          121,419





As of
March 31, 2010 and December 31, 2009, our total net loans were $120.6 million
and $121.4 million, respectively. Total loans, net of reserves and deferred
fees, as a percentage of total assets were 90.3% as of March 31, 2010, and 87.1%
as of December 31, 2009. 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 March 31, 2010 and December 31, 2009, commercial loans
totaled $88.8 million and $88.9 million, representing approximately 72.4% and
72.1% 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 March
31, 2010 and December 31, 2009, consumer loans totaled $1.1 million and $1.9
million, approximately 0.9% and 1.5% 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 March 31, 2010 and December 31, 2009, real
estate loans totaled $32.8 million and $32.5 million, approximately 26.7% and
26.4% of our total loans, respectively.




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 March 31, 2010, our commercial loan
portfolio included $75.2 million of loans, approximately 61.3% 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 March 31, 2010:





As of March 31, 2010Over 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
      and industrial *
                                                                                            
                                                                                            $
                                                                                            22,612
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,644
                                                                                            
                                                                                            
                                                                                            $
                                                                                            31,550
                                                                                            
                                                                                            
                                                                                            $
                                                                                            29,177
                                                                                            
                                                                                            
                                                                                            $
                                                                                            815
                                                                                            
                                                                                            
                                                                                            $
                                                                                            88,798Consumer
      installment
                                                                                            
                                                                                            
                                                                                            527
                                                                                            
                                                                                            
                                                                                            
                                                                                            606
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,133Real
      estate — mortgage
                                                                                            
                                                                                            
                                                                                            6,926
                                                                                            
                                                                                            
                                                                                            
                                                                                            8,044
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,159
                                                                                            
                                                                                            
                                                                                            
                                                                                            1,357
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,294
                                                                                            
                                                                                            
                                                                                            
                                                                                            24,780Real
      estate — construction*
                                                                                            
                                                                                            
                                                                                            5,527
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,040
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            440
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            8,007Other
                                                                                            
                                                                                            
                                                                                            2
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            -
                                                                                            
                                                                                            
                                                                                            
                                                                                            2Total
                                                                                            
                                                                                            $
                                                                                            35,594
                                                                                            
                                                                                            
                                                                                            $
                                                                                            15,334
                                                                                            
                                                                                            
                                                                                            $
                                                                                            36,709
                                                                                            
                                                                                            
                                                                                            $
                                                                                            30,974
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,109
                                                                                            
                                                                                            
                                                                                            $
                                                                                            122,720





*Includes
nonaccrual and other loans at March 31, 2010.





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 March 31, 2010, we had no loans 90
days or more past due and still accruing interest, $4.7 million in loans on
nonaccrual status and $1.6 million in OREO. At December 31, 2009, we had no
loans 90 days or more past due and still accruing interest, $3.8 million in
loans on nonaccrual status and $1.6 million in OREO.  Total nonperforming
assets as of March 31, 2010 was $6.3 million, an increase of 14.8% compared to
$5.4 million as of December 31, 2009.





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 March 31, 2010 the Company had $1.6 million in special mention
loans, $11.4 million in substandard loans and no loans classified as doubtful,
compared to $1.4 million in special mention loans, $12.5 million in substandard
loans and no loans classified as doubtful loans at December 31,
2009.





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 $2.0 million, or 1.6%
of total funded loans, at March 31, 2010, compared to $1.7 million, or 1.4% at
December 31, 2009.


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 $30,000 during the three months ended March 31, 2010. During the
year ended December 31, 2009, we had charge-offs of $1.3 million and recoveries
of $9,000.





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
                          March31,2010
                        
                        
                        As of
                          December 31, 2009Allocated:
                        
                        Amount
                        
                        
                        Loan
                          Category to
                          Gross Loans
                        
                        
                        Amount
                        
                        
                        Loan
                          Category to
                          Gross LoansCommercial and industrial
                        
                        $
                        1,415
                        
                        
                        
                        72.4
                        %
                        
                        $
                        1,285
                        
                        
                        
                        75.0
                        %Consumer
      installment
                        
                        
                        18
                        
                        
                        
                        0.9
                        %
                        
                        
                        23
                        
                        
                        
                        1.3
                        %Real
      estate — mortgage
                        
                        
                        395
                        
                        
                        
                        20.2
                        %
                        
                        
                        318
                        
                        
                        
                        18.6
                        %Real
      estate — construction
                        
                        
                        128
                        
                        
                        
                        6.5
                        %
                        
                        
                        87
                        
                        
                        
                        5.1
                        %Total
      allowance for loan losses
                        
                        $
                        1,956
                        
                        
                        
                        100.0
                        %
                        
                        $
                        1,713
                        
                        
                        
                        100.0
                        %





Nonearning
Assets





Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $723,000 at March 31, 2010 and $793,000 at December 31,
2009.





Deposits





Deposits
are our primary source of funding. Total average deposits at March 31, 2010 and
December 31, 2009 were $119.9 million and $118.2 million, respectively,
representing an increase of $1.7 million, or 1.4%, during the three-month period
ended March 31, 2010. 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 three months ended(000's)
                        
                        March 31, 2010
                        
                        
                        March 31, 2009Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          Rate
                        
                        
                        Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          RateNoninterest
      bearing deposits
                        
                        $
                        10,765
                        
                        
                        
                        9.0
                        %
                        
                        
                        0.0
                        %
                        
                        $
                        9,903
                        
                        
                        
                        8.8
                        %
                        
                        
                        0.0
                        %NOW
      accounts
                        
                        
                        2,069
                        
                        
                        
                        1.7
                        %
                        
                        
                        0.7
                        %
                        
                        
                        1,965
                        
                        
                        
                        1.7
                        %
                        
                        
                        .8
                        %Money
      market accounts
                        
                        
                        47,052
                        
                        
                        
                        39.2
                        %
                        
                        
                        0.9
                        %
                        
                        
                        43,264
                        
                        
                        
                        38.4
                        %
                        
                        
                        1.7
                        %Savings
      accounts
                        
                        
                        194
                        
                        
                        
                        .2
                        %
                        
                        
                        0.9
                        %
                        
                        
                        179
                        
                        
                        
                        .2
                        %
                        
                        
                        1.3
                        %Certificates
      of deposit, less than $100,000
                        
                        
                        15,341
                        
                        
                        
                        12.8
                        %
                        
                        
                        4.0
                        %
                        
                        
                        20,260
                        
                        
                        
                        18.0
                        %
                        
                        
                        4.5
                        %Certificates
      of deposit, $100,000 or greater
                        
                        
                        44,456
                        
                        
                        
                        37.1
                        %
                        
                        
                        4.2
                        %
                        
                        
                        37,110
                        
                        
                        
                        32.9
                        %
                        
                        
                        4.7
                        %Total
      deposits
                        
                        $
                        119,877
                        
                        
                        
                        100.00
                        %
                        
                        
                        2.4
                        %
                        
                        $
                        112,681
                        
                        
                        
                        100.0
                        %
                        
                        
                        3.0
                        %


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)
                        
                        March31,
                          2010
                        
                        
                        December 31,
                          2009Three
      months or less
                        
                        $
                        7,082
                        
                        
                        $
                        8,869Over
      three months through 12 months
                        
                        
                        5,051
                        
                        
                        
                        10,315Over
      one year through three years
                        
                        
                        29,540
                        
                        
                        
                        25,724Over
      three years
                        
                        
                        233
                        
                        
                        
                        1,126Total
                        
                        $
                        41,906
                        
                        
                        $
                        46,034





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 March 31, 2010. 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 March 31, 2010,
our established credit line with the Federal Home Loan Bank was $17.8 million,
or 13.3% of assets, of which $15.0 million was utilized. As of March 31, 2010,
our established credit line with the Federal Reserve Bank was $24.2 million, or
18.1% of assets, of which $4,000 was utilized. Additionally, we serve as trustee
or custodian for $71.5 million in cash deposits held in a Blackrock money market
mutual fund, of which approximately $40.0 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 April
15, 2010, the Bank entered into the Agreement with the Comptroller requiring,
among other provisions, that the Bank ultimately achieve and maintain certain
capital ratios (See Item 1, Note 15, Regulatory Matters). The capital ratios
required by the Agreement are 11.5% Total Capital to Risk Weighted Assets and
9.00% Tier 1 Capital to Average Assets. Therefore, regardless of the Bank’s
capital position, the requirement in the Agreement 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 March 31, 2010. As of March
31, 2010, the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1
Capital to Average Assets ratio of 10.35% and 7.05%, respectively, were below
the requirements set forth in the Agreement. Under the terms of the
Agreement, the Bank has until the earlier of 90 days after the Bank receives
notice from the Assistant Deputy Comptroller that the restitution process has
been completed or written notice from the OCC that the Bank’s capital is
materially deficient to achieve the capital ratios stated in the Agreement. As
of March 31, 2010, the Bank has not received either communication from the OCC,
and therefore is not in breach of this provision of the
Agreement.


29





(000's)
                                                                    
                                                                    Actual
                                                                    
                                                                    For Capital Adequacy Purposes
                                                                    
                                                                    To Be Well Capitalized Under
                                                                      Prompt Corrective Action
                                                                      ProvisionsAmount
                                                                    
                                                                    Ratio
                                                                    
                                                                    Amount
                                                                    
                                                                    Ratio
                                                                    
                                                                    Amount
                                                                    
                                                                    
                                                                    RatioAs
      of March 31, 2010Total
      Capital (to Risk Weighted Assets)
                                                                    
                                                                    $
                                                                    11,475
                                                                    
                                                                    10.35
                                                                    %
                                                                    $
                                                                    8,868
                                                                    >
                                                                    8.00
                                                                    %
                                                                    $
                                                                    11,086
                                                                    >
                                                                    
                                                                    
                                                                    10.00
                                                                    %Tier
      1 Capital (to Risk Weighted Assets)
                                                                    
                                                                    
                                                                    10,082
                                                                    
                                                                    9.09
                                                                    %
                                                                    
                                                                    4,434
                                                                    >
                                                                    4.00
                                                                    %
                                                                    
                                                                    6,651
                                                                    >
                                                                    
                                                                    
                                                                    6.00
                                                                    %Tier
      1 Capital (to Average Assets)
                                                                    
                                                                    
                                                                    10,082
                                                                    
                                                                    7.05
                                                                    %
                                                                    
                                                                    5,724
                                                                    >
                                                                    4.00
                                                                    %
                                                                    
                                                                    7,155
                                                                    >
                                                                    
                                                                    
                                                                    5.00
                                                                    %As
      of December 31, 2009Total
      Capital (to Risk Weighted Assets)
                                                                    
                                                                    $
                                                                    12,640
                                                                    
                                                                    11.33
                                                                    %
                                                                    $
                                                                    8,925
                                                                    >
                                                                    8.00
                                                                    %
                                                                    $
                                                                    11,156
                                                                    >
                                                                    
                                                                    
                                                                    10.00
                                                                    %Tier
      1 Capital (to Risk Weighted Assets)
                                                                    
                                                                    
                                                                    11,242
                                                                    
                                                                    10.80
                                                                    %
                                                                    
                                                                    4,462
                                                                    >
                                                                    4.00
                                                                    %
                                                                    
                                                                    6,694
                                                                    >
                                                                    
                                                                    
                                                                    6.00
                                                                    %Tier
      1 Capital (to Average Assets)
                                                                    
                                                                    
                                                                    11,242
                                                                    
                                                                    7.51
                                                                    %
                                                                    
                                                                    5,988
                                                                    >
                                                                    4.00
                                                                    %
                                                                    
                                                                    7,485
                                                                    >
                                                                    
                                                                    
                                                                    5.00
                                                                    %





Liquidity
Management





At March
31, 2010, the Company (excluding the Bank) had approximately $322,000 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 March
31, 2010, we had outstanding loan origination commitments and unused commercial
and retail lines of credit of $7.7 million and $15,000 in standby letters of
credit. Certificates of deposit that are scheduled to mature within one year
totaled $18.0 million at March 31, 2010.





The
Bank’s significant contractual obligations and other potential funding needs at
March 31, 2010 consist of:




As of March31,2010(000's)
                                    Less than
                                      One
                                      Year
                                    
                                    One to Three
                                      Years
                                    
                                    Over Three to
                                      Five Years
                                    
                                    Over Five
                                      YearsOperating
      leases
                                    
                                    $
                                    292
                                    
                                    
                                    $
                                    469
                                    
                                    
                                    $
                                    292
                                    
                                    
                                    $
                                    127Certificates
      of deposit
                                    
                                    $
                                    18,007
                                    
                                    
                                    $
                                    38,002
                                    
                                    
                                    $
                                    419
                                    
                                    
                                    $
                                    -


30





The Bank
had cash and cash equivalents of $3.6 million, or 2.7% of total assets, at March
31, 2010. 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 March 31, 2010, the Bank’s established credit line with
the Federal Home Loan Bank of Dallas was $17.8, million or 13.3% of assets, of
which $15.0 million was utilized.  The established credit line with the
Federal Reserve Bank of Dallas was $24.2 million, or 18.1% of assets, of which
$4.0 million was utilized at March 31, 2010.





As loan
demand increases, greater pressure will be exerted on the Bank’s liquidity. As
of March 31, 2010, the loan to deposit ratio was 120%.  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 0.75%, the Bank, at quarter end,
transfers money market deposits available to the Bank through the Bank’s trust
department to third party trust investment funds and replaces them with borrowed
funds from the Federal Home Loan Bank and Federal Reserve Bank.  This
reduces the expense of FDIC insurance to the Bank. Trust money market deposits
available to the Bank as of March 31, 2010, are approximately $40 million. 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 March 31, 2010.  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 Agreement 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 March 31, 2010 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. (Removed and Revised)





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:
      May 17, 2010
                By:
                /s/ Patrick G. AdamsPatrick
      G. AdamsPresident
      and Chief Executive OfficerPrincipal
      Executive OfficerActing
      Co-Principal Financial
Officer




Date:
      May 17, 2010
                By:
                /s/
      Ken BramlageKen
      BramlageVice
      President and ControllerActing
      Co-Principal Financial
Officer


35