UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For
the quarterly period ended September 30, 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. Yes  x  
No   ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or such shorter period that the
registrant was required to submit and post such files). Yes  ̈ No  ̈





Check
whether the registrant is a large accelerated filer, an accelerated filer, a
nonaccelerated filer or a smaller reporting company.





Larger
      Accelerated Filer
                Yes
       ̈
                No
      xAccelerated
      Filer
                Yes
       ̈
                No
      xNonaccelerated
      Filer
                Yes
       ̈
                No
      xSmaller
      Reporting Company
                Yes
      x
                No
       ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈ No x





The
number of shares outstanding of the issuer’s Common Stock as of November 15,
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
                
                33ITEM
      4.
                Controls
      and Procedures
                
                33PART
      II.
                OTHER
      INFORMATION
                
                33ITEM
      1.
                Legal
      Proceedings
                
                33ITEM
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                
                33ITEM
      3.
                Defaults
      Upon Senior Securities
                
                33ITEM
      4.
                (Removed
      and Reserved).
                
                34ITEM
      5.
                Other
      Information
                
                34ITEM
      6.
                Exhibits
                
                35





2


PART I. FINANCIAL INFORMATION


ITEM 1. Financial
Statements


T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION





(000's) except shares information
                  
                  September 30,
                    2010
                  
                  
                  December 31,
                    2009(unaudited)ASSETSCash
      and due from banks
                  
                  $
                  1,777
                  
                  
                  $
                  1,216Interest-bearing
      deposits
                  
                  
                  3,439
                  
                  
                  
                  5,526Federal
      funds sold
                  
                  
                  115
                  
                  
                  
                  550Total
      cash and cash equivalents
                  
                  
                  5,331
                  
                  
                  
                  7,292Securities
      available for sale at estimated fair value
                  
                  
                  2,353
                  
                  
                  
                  4,005Securities
      held to maturity at amortized cost
                  
                  
                  687
                  
                  
                  
                  801Securities,
      restricted at cost
                  
                  
                  1,005
                  
                  
                  
                  1,281Loans,
      net of allowance for loan losses of $1,777 and $1,713,
      respectively
                  
                  
                  99,690
                  
                  
                  
                  121,419Bank
      premises and equipment, net
                  
                  
                  607
                  
                  
                  
                  793Other
      real estate owned
                  
                  
                  3,011
                  
                  
                  
                  1,616Other
      assets
                  
                  
                  2,099
                  
                  
                  
                  2,204Total
      assets
                  
                  $
                  114,783
                  
                  
                  $
                  139,411LIABILITIESDemand
      Deposits:Noninterest-bearing
                  
                  $
                  11,501
                  
                  
                  $
                  9,428Interest-bearing
                  
                  
                  22,307
                  
                  
                  
                  36,157Time
      deposits $100 and over
                  
                  
                  42,758
                  
                  
                  
                  46,034Other
      time deposits
                  
                  
                  12,648
                  
                  
                  
                  16,506Total
      deposits
                  
                  
                  89,214
                  
                  
                  
                  108,125Borrowed
      funds
                  
                  
                  12,200
                  
                  
                  
                  16,000Other
      liabilities
                  
                  
                  2,420
                  
                  
                  
                  3,695Total
      liabilities
                  
                  
                  103,834
                  
                  
                  
                  127,820SHAREHOLDERS’
      EQUITYCommon
      stock, $ 0.01 par value; 10,000,000 shares authorized; 1,941,305 shares
      issued and outstanding
                  
                  
                  19
                  
                  
                  
                  19Additional
      paid-in capital
                  
                  
                  18,569
                  
                  
                  
                  18,537Retained
      deficit
                  
                  
                  (7,679
                  )
                  
                  
                  (6,982
                  )Accumulated
      other comprehensive income
                  
                  
                  40
                  
                  
                  
                  17Total
      shareholders' equity
                  
                  
                  10,949
                  
                  
                  
                  11,591Total
      liabilities and shareholders' equity
                  
                  $
                  114,783
                  
                  
                  $
                  139,411





See
accompanying notes to consolidated financial statements


3





T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,(000's) except earnings (loss) per share and shares outstanding
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Interest
      IncomeLoan,
      including fees
                
                $
                1,834
                
                
                $
                2,047
                
                
                $
                5,814
                
                
                $
                6,179Securities
                
                
                32
                
                
                
                42
                
                
                
                103
                
                
                
                97Federal
      funds sold
                
                
                -
                
                
                
                45
                
                
                
                1
                
                
                
                106Interest-bearing
      deposits
                
                
                2
                
                
                
                -
                
                
                
                11
                
                
                
                -Total
      interest income
                
                
                1,868
                
                
                
                2,134
                
                
                
                5,929
                
                
                
                6,382Interest
      ExpenseDeposits
                
                
                620
                
                
                
                831
                
                
                
                1,973
                
                
                
                2,470Borrowed
      funds
                
                
                8
                
                
                
                7
                
                
                
                20
                
                
                
                42Total
      interest expense
                
                
                628
                
                
                
                838
                
                
                
                1,993
                
                
                
                2,512Net
      interest income
                
                
                1,240
                
                
                
                1,296
                
                
                
                3,936
                
                
                
                3,870Provision
      for loan losses
                
                
                (314
                )
                
                
                1,085
                
                
                
                871
                
                
                
                1,243Net
      interest income after provision for loan losses
                
                
                1,554
                
                
                
                211
                
                
                
                3,065
                
                
                
                2,627Noninterest
      IncomeTrust
      income
                
                
                1,905
                
                
                
                1,769
                
                
                
                5,717
                
                
                
                4,950Service
      fees
                
                
                46
                
                
                
                32
                
                
                
                122
                
                
                
                78Total
      noninterest income
                
                
                1,951
                
                
                
                1,801
                
                
                
                5,839
                
                
                
                5,028Noninterest
      ExpenseSalaries
      and employee benefits
                
                
                640
                
                
                
                757
                
                
                
                2,096
                
                
                
                2,363Occupancy
      and equipment
                
                
                254
                
                
                
                314
                
                
                
                757
                
                
                
                996Trust
      consulting services
                
                
                1,623
                
                
                
                1,503
                
                
                
                4,874
                
                
                
                4,253Professional
      fees
                
                
                127
                
                
                
                91
                
                
                
                533
                
                
                
                307Data
      processing
                
                
                64
                
                
                
                71
                
                
                
                187
                
                
                
                210Other
                
                
                768
                
                
                
                207
                
                
                
                1,154
                
                
                
                651Total
      noninterest expense
                
                
                3,476
                
                
                
                2,943
                
                
                
                9,601
                
                
                
                8,780Net
      Income (Loss)
                
                $
                29
                
                
                $
                (931
                )
                
                $
                (697
                )
                
                $
                (1,125
                )Earning
      (loss) per common shareBasic
                
                
                0.01
                
                
                
                (0.48
                )
                
                
                (0.36
                )
                
                
                (0.58
                )Diluted
                
                
                0.01
                
                
                
                (0.48
                )
                
                
                (0.36
                )
                
                
                (0.58
                )Weighted
      average common shares outstanding
                
                
                1,941,305
                
                
                
                1,941,305
                
                
                
                1,941,305
                
                
                
                1,934,345Weighted
      average diluted shares outstanding
                
                
                1,941,305
                
                
                
                1,941,305
                
                
                
                1,941,305
                
                
                
                1,934,345





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
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,125
                      )
                      
                      
                      
                      
                      
                      
                      (1,125
                      )Change
      in accumulated gain on securities available for sale
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9
                      
                      
                      
                      9Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,116
                      )Net
      proceeds from rights offering
                      
                      
                      2
                      
                      
                      
                      1,519
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,521Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      77
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      77BALANCE,
      September 30, 2009
                      
                      $
                      19
                      
                      
                      $
                      18,511
                      
                      
                      $
                      (4,263
                      )
                      
                      $
                      9
                      
                      
                      $
                      14,276BALANCE,
      January 1, 2010
                      
                      $
                      19
                      
                      
                      $
                      18,537
                      
                      
                      $
                      (6,982
                      )
                      
                      $
                      17
                      
                      
                      $
                      11,591Comprehensive
      loss:Net
      loss — YTD
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (697
                      )
                      
                      
                      
                      
                      
                      
                      (697
                      )Change
      in accumulated gain on securities available for sale
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      23
                      
                      
                      
                      23Total
      comprehensive loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (674
                      )Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      32
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      32BALANCE,
      September 30, 2010
                      
                      $
                      19
                      
                      
                      $
                      18,569
                      
                      
                      $
                      (7,679
                      )
                      
                      $
                      40
                      
                      
                      $
                      10,949





See
accompanying notes to consolidated financial statements


5


T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,(000's)
                
                2010
                
                
                2009Cash
      Flows from Operating ActivitiesNet
      loss
                
                $
                (697
                )
                
                $
                (1,125
                )Adjustments
      to reconcile net loss to net cash provided by operating
      activitiesProvision
      for loan losses
                
                
                871
                
                
                
                1,243Depreciation
      and amortization
                
                
                217
                
                
                
                356Net
      amortization of securities
                
                
                42
                
                
                
                36Gain
      on sale of other real estate owned
                
                
                -
                
                
                
                (1
                )Stock
      based compensation
                
                
                32
                
                
                
                77Net
      change in other assets
                
                
                105
                
                
                
                260Net
      change in other liabilities
                
                
                (1,275
                )
                
                
                64Net
      cash provided by (used in) operating activities
                
                
                (705
                )
                
                
                910Cash
      Flows from Investing ActivitiesPrincipal
      payments and maturities of securities held to maturity
                
                
                114
                
                
                
                128Purchase
      of securities available for sale, net
                
                
                (2,069
                )
                
                
                (6,685
                )Principal
      payments, calls and maturities of securities available for
      sale
                
                
                3,702
                
                
                
                1,400Purchase
      of securities, restricted, net
                
                
                (453
                )
                
                
                (943
                )Proceeds
      from sale of securities, restricted
                
                
                729
                
                
                
                425Net
      change in loans
                
                
                19,463
                
                
                
                548Proceeds
      from sale of other real estate owned
                
                
                -
                
                
                
                376Purchases
      of premises and equipment
                
                
                (31
                )
                
                
                (80
                )Net
      cash provided by (used in) investing activities
                
                
                21,455
                
                
                
                (4,831
                )Cash
      Flows from Financing ActivitiesNet
      change in demand deposits
                
                
                (11,777
                )
                
                
                (3,621
                )Net
      change in time deposits
                
                
                (7,134
                )
                
                
                916Proceeds
      from borrowed funds
                
                
                37,400
                
                
                
                145,050Repayment
      of borrowed funds
                
                
                (41,200
                )
                
                
                (137,550
                )Net
      proceeds from rights offering
                
                
                -
                
                
                
                1,521Net
      cash provided by (used in) financing activities
                
                
                (22,711
                )
                
                
                6,316Net
      change in cash and cash equivalents
                
                
                (1,961
                )
                
                
                2,395Cash
      and cash equivalents at beginning of period
                
                
                7,292
                
                
                
                8,457Cash
      and cash equivalents at end of period
                
                $
                5,331
                
                
                $
                10,852Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                
                $
                1,978
                
                
                $
                2,498Income
      taxes
                
                $
                -
                
                
                $
                -Non-cash
      transactionsTransfers
      from loans to other real estate owned
                
                $
                1,395
                
                
                $
                1,992





See
accompanying notes to consolidated financial statements


6


T
BANCSHARES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE 1. BASIS OF
PRESENTATION





We
prepared the consolidated financial statements of T Bancshares, Inc. and its
subsidiaries (the “Company,” “we,” “us,” or “our,” hereafter) following the
requirements of the Securities and Exchange Commission (“SEC”) for interim
reporting. As permitted under those rules, certain footnotes or other financial
information that are normally required by accounting principles generally
accepted in the United States of America (“GAAP”) can be condensed or
omitted.





We are
responsible for the unaudited financial statements included in this document.
The financial statements include all normal and recurring adjustments that are
considered necessary for the fair presentation of our financial position and
operating results. The accounting and reporting policies of the Company reflect
banking industry practice and conform to GAAP. 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 or nine months ended September 30, 2009.





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 Update No.
2010-06, Fair Value Measurements and Disclosures (Topic 820) - Improving
Disclosures About Fair Value Measurements. -In 2010, the Financial
Accounting Standards Board (“FASB”) issued authoritative guidance expanding
disclosures related to fair value measurements including (i) the amounts of
significant transfers of assets or liabilities between Levels 1 and 2 of the
fair value hierarchy and the reasons for the transfers, (ii) the reasons for
transfers of assets or liabilities in or out of Level 3 of the fair value
hierarchy, with significant transfers disclosed separately, (iii) the policy for
determining when transfers between levels of the fair value hierarchy are
recognized, and (iv) for recurring fair value measurements of assets and
liabilities in Level 3 of the fair value hierarchy, a gross presentation of
information about purchases, sales, issuances and settlements. The new guidance
further clarifies that (i) fair value measurement disclosures should be provided
for each class of assets and liabilities (rather than major category), which
would generally be a subset of assets or liabilities within a line item in the
statement of financial position and (ii) disclosures should be provided about
the valuation techniques and inputs used to measure fair value for both
recurring and nonrecurring fair value measurements for each class of assets and
liabilities included in Levels 2 and 3 of the fair value hierarchy. The
disclosures related to the gross presentation of purchases, sales, issuances and
settlements of assets and liabilities included in Level 3 of the fair value
hierarchy will be required beginning January 1, 2011. The remaining disclosure
requirements and clarifications made by the new guidance became effective on
January 1, 2010. The Company does not expect the adoption of this authoritative
guidance to have a significant effect on the financial condition and results of
operations; however, it will increase the amount of disclosure in the notes to
the consolidated financial statements.





FASBAccounting Standards Codification
(“ASC”)310 Receivables(“ASC 310”) was amended to enhance disclosures about credit quality of
financing receivables and the allowance for credit losses. The amendments
require an entity to disclose credit quality information, such as internal risk
gradings, more detailed nonaccrual and past due information, and modifications
of its financing receivables. The disclosures under ASC 310, as amended, will be
effective for interim and annual reporting periods ending on or after
December 15, 2010. We do not expect this amendment to have a significant
impact on our financial results, but it will significantly expand the
disclosures that we are required to provide.


7


NOTE 3. LOANS





Loans
held in portfolio consisted of the following:





(000's)
                
                September 30,
                  2010
                
                
                December 31,
                  2009Commercial
      and industrial
                
                $
                70,315
                
                
                $
                88,920Consumer
      installment
                
                
                1,116
                
                
                
                1,852Real
      estate — mortgage
                
                
                22,558
                
                
                
                25,464Real
      estate — construction
                
                
                7,624
                
                
                
                7,045Other
                
                
                -
                
                
                
                2Total
      loans
                
                
                101,613
                
                
                
                123,283Less
      allowance for loan losses
                
                
                1,777
                
                
                
                1,713Less
      deferred loan fees
                
                
                146
                
                
                
                151Net
      loans
                
                $
                99,690
                
                
                $
                121,419





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





(000's)
                
                September 30,
                  2010
                
                
                December 31,
                  2009Balance
      at beginning of period
                
                $
                1,713
                
                
                $
                1,638Provision
      charged to operations
                
                
                871
                
                
                
                1,369Loans
      charged off
                
                
                (1,354
                )
                
                
                (1,303
                )Recoveries
      of loans previously charged off
                
                
                547
                
                
                
                9Balance
      at end of period
                
                $
                1,777
                
                
                $
                1,713





At
September 30, 2010, there were $1.9 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.





September 30, 2010(000's)
                                
                                Amortized
                                  Cost
                                
                                
                                Unrealized
                                  Gains
                                
                                
                                Unrealized
                                  Losses
                                
                                
                                Estimated
                                  Fair ValueSecurities Available for
      Sale:U.S.
      Government Agencies
                                
                                $
                                2,313
                                
                                
                                $
                                45
                                
                                
                                $
                                5
                                
                                
                                $
                                2,353Securities
      Held to Maturity:U.S.
      Government Agencies
                                
                                $
                                687
                                
                                
                                $
                                54
                                
                                
                                $
                                -
                                
                                
                                $
                                741Securities,
      restrictedOther
                                
                                $
                                1,005
                                
                                
                                $
                                -
                                
                                
                                $
                                -
                                
                                
                                $
                                1,005





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





At
September 30, 2010, securities with market value of $2.2 million were pledged
against borrowed funds at the Federal Home Loan Bank of Dallas, and one security
with market value of $741,000 was pledged against trust deposit balances held at
our subsidiary, T Bank, N.A. (the “Bank”). The Bank held Federal Reserve Bank of
Dallas stock in the amount of $420,000 at September 30, 2010 and December 31,
2009. The Bank also held Federal Home Loan Bank of Dallas stock in the amount of
$584,400 and $861,000 at September 30, 2010 and December 31, 2009, respectively.
Both of the Federal Reserve Bank of Dallas stock and the Federal Home Loan Bank
of Dallas stock are carried at cost and are reported as “Securities, restricted”
in the table above.





NOTE 5. RELATED PARTIES





Certain
directors and officers of the Company have depository accounts with the Bank.
None of those deposit accounts has terms more favorable than those available to
any other depositor.





NOTE 6. BANK PREMISES AND
EQUIPMENT





The
original cost and related accumulated depreciation at September 30, 2010 and
December 31, 2009 were as follows:





(000's)
                  
                  September 30,
                    2010
                  
                  
                  December 31,
                    2009Leasehold
      improvements
                  
                  $
                  929
                  
                  
                  $
                  929Furniture
      and equipment
                  
                  
                  1,907
                  
                  
                  
                  1,8762,836
                  
                  
                  
                  2,805Less:
      accumulated depreciation
                  
                  
                  2,229
                  
                  
                  
                  2,012Balance
      at end of period
                  
                  $
                  607
                  
                  
                  $
                  793




9


NOTE
7. OTHER REAL ESTATE OWNED AND OTHER ASSETS





Other
assets consisted of the following at September 30, 2010 and December 31,
2009:





(000's)
                
                September 30,
                  2010
                
                
                December 31,
                  2009Accounts
      receivable – trust fees
                
                $
                651
                
                
                $
                640Accrued
      interest receivable
                
                
                310
                
                
                
                397Prepaid
      assets
                
                
                1,121
                
                
                
                1,136Other
                
                
                17
                
                
                
                31$
                2,099
                
                
                $
                2,204





Other
Real Estate Owned (“OREO”) totaled $3.0 million and $1.6 million at September
30, 2010 and December 31, 2009, respectively, which are recorded at lower of
cost or fair value. In connection with the measurement and initial recognition
of the additions to OREO for the nine months ended September 30, 2010, the
Company recognized charge-offs of the allowance for loan losses totaling
$57,500, which has been recorded on the consolidated statement of operations
through the provision for loan losses. The OREO assets are actively being
marketed, and disposal of the assets is anticipated to occur in the next 12
months.





NOTE 8. DEPOSITS





Deposits
are summarized as follows:





(000's)
                
                As of September 30, 2010
                
                
                As of December 31, 2009Noninterest
      bearing demand
                
                $
                11,501
                
                
                
                13
                %
                
                $
                9,428
                
                
                
                9
                %Interest
      bearing demand (NOW)
                
                
                1,904
                
                
                
                2
                %
                
                
                1,960
                
                
                
                2
                %Money
      market accounts
                
                
                20,223
                
                
                
                23
                %
                
                
                34,006
                
                
                
                31
                %Savings
      accounts
                
                
                180
                
                
                
                0
                %
                
                
                191
                
                
                
                0
                %Certificates
      of deposit, $100,000 and greater
                
                
                42,758
                
                
                
                48
                %
                
                
                46,034
                
                
                
                43
                %Certificates
      of deposit, less than $100,000
                
                
                12,648
                
                
                
                14
                %
                
                
                16,506
                
                
                
                15
                %$
                89,214
                
                
                
                100
                %
                
                $
                108,125
                
                
                
                100
                %





At
September 30, 2010, the scheduled maturities of certificates of deposit were as
follows:





(000’s)2010
                    
                    $
                    3,9972011
                    
                    
                    34,2962012
                    
                    
                    14,6602013
                    
                    
                    2,1172014
                    
                    
                    3142015
                    
                    
                    22Total
                    
                    $
                    55,406




10


NOTE
9. BORROWED FUNDS





Borrowed
funds as of September 30, 2010 and December 31, 2009, were as
follows:





(000's)
                  
                  September 30,
                    2010
                  
                  
                  December 31,
                    2009Federal
      Home Loan Bank Advance
                  
                  $
                  12,200
                  
                  
                  $
                  16,000Total
                  
                  $
                  12,200
                  
                  
                  $
                  16,000





At
September 30, 2010, borrowed funds consisted of two $3.0 million loans and a
$6.2 million overnight advance from the Federal Home Loan Bank of Dallas. The
loans have a term of 1 year and mature on October 28, 2010 and April 13, 2011,
respectively. The interest rates for the loans are fixed at 0.47% and 0.54%,
respectively. The interest rate for the overnight advance was 0.04%. The Company
has a $25.5 million credit line with the Federal Reserve Bank, which is secured
by $41.1 million in pledged commercial and industrial loans, and $18.2 million
credit line with the Federal Home Loan Bank which is secured by $19.8 million in
pledged real estate loans and $2.3 million in securities. The $6.2 million
overnight advance from the Federal Home Loan Bank of Dallas was renewed on
October 1, 2010 and repaid on October 8, 2010.





NOTE 10. OTHER LIABLITIES





The
following comprised other liabilities at September 30, 2010 and December 31,
2009:





(000's)
                
                September 30,
                  2010
                
                
                December 31,
                  2009Reserve
      for Comptroller Settlement
                
                $
                1,523
                
                
                $
                2,685Trust
      Advisor Fees Payable
                
                
                545
                
                
                
                522Interest
      Payable
                
                
                116
                
                
                
                101Audit
      Fees
                
                
                21
                
                
                
                38Incentive
      Compensation
                
                
                78
                
                
                
                51Legal
                
                
                8
                
                
                
                28Franchise
      & Property Taxes
                
                
                84
                
                
                
                37Other
      Accruals
                
                
                45
                
                
                
                233$
                2,420
                
                
                $
                3,695





NOTE 11. INCOME TAXES





No
federal income tax expense has been recorded for the quarter ended September 30,
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 (the “Plan”)
at the annual shareholder meeting held on June 2, 2005. The Plan authorizes the
granting of options to purchase up to 260,000 shares of common stock of the
Company to employees of the Company and its subsidiaries. The Plan is designed
to provide the Company with the flexibility to grant incentive stock options and
non-qualified stock options to its executive and other officers. The purpose of
the Plan is to provide increased incentive for key employees to render services
and to exert maximum effort for the success of the Company. The Plan has a term
of 10 years. The Plan is administered by the Board of Directors. As of September
30, 2010 and December 31, 2009, options to purchase a total of 212,500 and
195,500 shares of common stock, respectively, had been issued with a weighted
average exercise price of $9.14 and $10.03, respectivelyThese options vest
through May 2015. These options could potentially dilute earnings per share, but
were not included in the earnings (loss) per share computations because their
effect was anti-dilutive for the three and nine months ended September 30, 2010
and 2009.


11


The
Company accounts for stock options in accordance with FASB ASC Topic 718. Under
this method, compensation cost for all share-based payments granted are recorded
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 for the
nine months ended September 30, 2010:





Number of
                  Shares
                  Underlying
                  Options
                
                
                Weighted
                  Average
                  Exercise
                  PricesOutstanding
      at beginning of the period
                
                
                195,500
                
                
                $
                10.03Granted
                
                
                27,000
                
                
                
                1.79Exercised
                
                
                -
                
                
                
                -Expired
      / forfeited
                
                
                10,000
                
                
                
                6.75Outstanding
      at end of period
                
                
                212,500
                
                
                $
                9.14Exercisable
      at end of period
                
                
                162,800
                
                
                $
                10.26Available
      for grant at end of period
                
                
                36,500





The
weighted average remaining contractual life of options outstanding at September
30, 2010 was 6.0 years.





The
following is a summary of the Company’s nonvested options for the nine months
ended September 30, 2010:





Shares
                
                
                Weighted
                  Average
                  Grant Date
                  Fair ValueNonvested
      at January 1, 2010
                
                
                39,600
                
                
                $
                3.24Granted
                
                
                27,000
                
                
                
                0.98Vested
                
                
                8,900
                
                
                
                3.94Forfeited
                
                
                8,000
                
                
                
                2.01Nonvested
      at September 30, 2010
                
                
                49,700
                
                
                $
                2.08





As of
September 30, 2010, there was approximately $91,000 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 $20.00 advanced up to a maximum of
$100,000. A total of 96,750 warrants were issued and remain outstanding at
September 30, 2010. These warrants are exercisable at a price of $10.00 per
share at any time until November 2, 2014. During the nine months ended September
30, 2010, no warrants were exercised.





There
were no additional warrants issued during the nine months ended September 30,
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 and nine months ended
September 30, 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 September 30, 2010,
the Company had commitments to extend credit and standby letters of credit of
approximately $5.1 million and $14,600, 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 entered into employment agreements with two officers of the Bank, Steve
Jones and Patrick Howard, on October 3, 2007 and September 4, 2007,
respectively. 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 April
15, 2010, the Bank executed a written agreement (the “Agreement”) with the
Comptroller of the Currency (the “Comptroller”) 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 $3.0 million.
Further, the Bank may not be able to comply with all of the requirements of the
Agreement, including meeting the stated capital requirements contained therein.
In addition, should the Bank be required to pay significant and material amounts
of restitution greater than estimated amounts, the short and long term financial
condition, results of operations, liquidity, and/or prospects of the Bank, upon
which the Company is dependent, may 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. The Comptroller approved the Bank’s Restitution Plan on July 6, 2010.
In accordance with the approved Restitution Plan, the Bank issued 38,728 checks
totaling $3.8 million on August 13, 2010. As of September 30, 2010, 16,000
checks totaling $1.5 million had been cashed, or 39% of the dollar amount of
checks issued. The checks expire on November 13, 2010, after which date they
will no longer be valid and cannot be negotiated. Based on this, as well as the
daily rate at which checks were being cashed on and after September 30, 2010,
management revised its original estimate from 68% to 55% of checks that it
believes will actually be cashed by consumers. This reduced the prior estimate
from $2.4 million to $2.1 million for twelve of the thirteen merchants listed in
the Agreement. In addition, certain consumers purchased products or services
from a merchant, Low Pay, Inc. (“Low Pay”), that was in litigation with the
Federal Trade Commission (“FTC”) as of the date of the Agreement. These
consumers represented $1.6 million of the Bank’s total obligation set forth in
the Agreement. On September 10, 2010, the FTC entered into Consent Decrees with
Low Pay and several related parties settling the litigation. Based on our review
of this settlement, we have revised our estimate and increased the Bank’s
reserve to incorporate 55% of the $1.6 million obligation to the Low Pay
consumers, or $880 thousand. Because the Bank originally accrued an expense of
$2.4 million for the twelve merchants, the excess accrued reserve partially
offsets the estimated $880 thousand for the Low Pay obligation. As such, the
Bank accrued an expense of $560 thousand as of September 30, 2010. Pursuant
to the Agreement, we paid $100,000 for the civil money penalty on April 15,
2010. 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. We believe
this expected reserve and accrued expense 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. 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 September 30, 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 September 30,
2010, the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1 Capital
to Average Assets ratio of 11.36% and 9.24%, 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 Comptroller that the Bank’s capital is materially
deficient to achieve the capital ratios stated in the Agreement. As of September
30, 2010, the Bank has not received either communication from the Comptroller,
and therefore does not consider itself 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 September 30, 2010Total
      Capital (to Risk Weighted Assets)
                
                $
                11,967
                
                
                
                11.36
                %
                
                $
                8,424
                >
                
                
                8.00
                %
                
                $
                10,530
                >
                
                
                10.00
                %Tier
      1 Capital (to Risk Weighted Assets)
                
                
                10,645
                
                
                
                10.11
                %
                
                
                4,212
                >
                
                
                4.00
                %
                
                
                6,318
                >
                
                
                6.00
                %Tier
      1 Capital (to Average Assets)
                
                
                10,645
                
                
                
                9.24
                %
                
                
                4,610
                >
                
                
                4.00
                %
                
                
                5,762
                >
                
                
                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)
                
                September 30,
                  2010
                
                
                December 31,
                  2009ASSETSCash
      and due from banks
                
                $
                264
                
                
                $
                367Due
      from subsidiary
                
                
                -
                
                
                
                -Capitalized
      servicing rights
                
                
                -
                
                
                
                -Investment
      in subsidiary
                
                
                10,685
                
                
                
                11,259Total
      Assets
                
                $
                10,949
                
                
                $
                11,626LIABILITIES
      AND CAPITALOther
      Liabilities
                
                $
                -
                
                
                $
                35Capital
                
                
                10,949
                
                
                
                11,591Total
      Liabilities and Capital
                
                $
                10,949
                
                
                $
                11,626





T
BANCSHARES, INC.


CONDENSED
STATEMENTS OF INCOME


(Unaudited)





Three Months Ended September 30,
                
                
                Nine Months Ended September 30,(000's)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Equity
      in income (loss) from subsidiary
                
                $
                53
                
                
                $
                (884
                )
                
                $
                (597
                )
                
                $
                (1,005
                )Noninterest
      expense:Professional
      and administrative
                
                
                13
                
                
                
                17
                
                
                
                68
                
                
                
                43Stock
      based compensation
                
                
                11
                
                
                
                28
                
                
                
                32
                
                
                
                77Total
      noninterest expenses
                
                
                24
                
                
                
                45
                
                
                
                100
                
                
                
                120Net
      income (loss)
                
                $
                29
                
                
                $
                (931
                )
                
                $
                (697
                )
                
                $
                (1,125
                )




16


T
BANCSHARES, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,(000's)
                      
                      2010
                      
                      
                      2009Cash
      Flows from Operating ActivitiesNet
      loss
                      
                      $
                      (697
                      )
                      
                      $
                      (1,125
                      )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Equity
      in loss of Bank
                      
                      
                      597
                      
                      
                      
                      1,005Stock
      based compensation
                      
                      
                      32
                      
                      
                      
                      77Net
      change in other assets
                      
                      
                      -
                      
                      
                      
                      333Net
      change in other liabilities
                      
                      
                      (35
                      )
                      
                      
                      (10
                      )Net
      cash provided (used) by operating activities
                      
                      
                      (103
                      )
                      
                      
                      280Cash
      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
                      
                      
                      (103
                      )
                      
                      
                      43Cash
      and cash equivalents at beginning of period
                      
                      
                      367
                      
                      
                      
                      333Cash
      and cash equivalents at end of period
                      
                      $
                      264
                      
                      
                      $
                      376Supplemental
      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 September 30, 2010 and December 31, 2009, segregated by the level of
the valuation inputs within the fair value hierarchy utilized to measure fair
value:





(000's)
                  
                  Level
      1
                    Inputs
                  
                  
                  Level
      2
                    Inputs
                  
                  
                  Level
      3
                    Inputs
                  
                  
                  Total
                    Fair
      ValueAs
      of September 30, 2010Securities
      available for sale:U.S.
      government agencies
                  
                  $
                  —
                  
                  
                  $
                  2,353
                  
                  
                  $
                  —
                  
                  
                  $
                  2,353Other
      Assets:OREO
                  
                  
                  —
                  
                  
                  
                  3,011
                  
                  
                  
                  —
                  
                  
                  
                  3,011As
      of December 31, 2009Securities
      available for sale:U.S.
      government agencies and corporations
                  
                  $
                  —
                  
                  
                  $
                  4,005
                  
                  
                  $
                  —
                  
                  
                  $
                  4,005Other
      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 re-measured 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.





Carrying
amount and estimated fair values of financial instruments were as
follows:





September 30, 2010
                
                
                December 31, 2009Carrying
                  Amount
                
                
                Estimated
                  Fair Value
                
                
                Carrying
                  Amount
                
                
                Estimated
                  Fair ValueFinancial
      assetsCash
      and cash equivalents
                
                $
                5,331
                
                
                $
                5,331
                
                
                $
                7,292
                
                
                $
                7,292Securities
      available for sale
                
                
                2,353
                
                
                
                2,353
                
                
                
                4,005
                
                
                
                4,005Loans,
      net
                
                
                99,690
                
                
                
                99,816
                
                
                
                121,419
                
                
                
                120,702Accrued
      interest receivable
                
                
                310
                
                
                
                310
                
                
                
                397
                
                
                
                397Financial
      liabilitiesDeposits
                
                
                89,214
                
                
                
                91,364
                
                
                
                108,125
                
                
                
                108,685Accrued
      interest payable
                
                
                116
                
                
                
                116
                
                
                
                101
                
                
                
                101





The
methods and assumptions used to estimate fair value are described as
follows:





Carrying
amount is the estimated fair value for cash and cash equivalents, restricted
securities, accrued interest receivable and payable, and demand and savings
deposits and variable rate loans or deposits that re-price frequently and fully.
For fixed rate loans or deposits and for variable rate loans or deposits with
infrequent re-pricing, fair value is based on discounted cash flows using
current market rates applied to the estimated life and credit risk. The
estimated fair value of other financial instruments and off-balance-sheet loan
commitments approximate cost and are not considered significant to this
presentation.


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 September 30, 2010 and December 31, 2009, and our consolidated
results of operations for three months and nine months ended September 30, 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 within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, 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
      including the potential impact of the Dodd-Frank Wall Street Reform and
      Consumer Protection Act and Basel
III;
 
 ·
              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
      Comptroller, including, without limitation, the Agreement, 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 September 30, 2010, we had, on a consolidated basis, total
assets of $114.8 million, net loans of $99.7 million, total deposits of $89.2
million, and shareholders’ equity of $10.9 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 were
incorporated under the laws of the State of Texas on December 23, 2002 to
organize and serve as the holding company for the Bank. In 2004, we completed an
initial public offering of our common stock, issuing 1,680,000 shares at a price
of $10.00 per share. The net proceeds that we received from the offering, after
deducting offering expenses, were approximately $16.4 million. The Bank opened
for business on November 2, 2004.





The
following discussion focuses on our financial condition at September 30, 2010
and December 31, 2009, and our results of operations for the three months and
nine months ended September 30, 2010 and 2009.





Recent
Developments





On July
21, 2010, President Obama signed into law the Dodd−Frank Wall Street Reform and
Consumer Protection Act (the “Dodd−Frank Act”). Although certain provisions of
the Dodd−Frank Act will not apply to banking organizations with less than $10
billion of assets, such as the Company and the Bank, the changes resulting from
the legislation will impact our business. The Dodd-Frank Act will permit us to
pay interest on business checking accounts, which could (i) cause the Federal
Reserve Board to amend its Regulation D establishing reserve requirements for
depository institutions, and (ii) significantly reduce or eliminate the need for
depository institutions to offer sweep account products. We are currently in the
process of evaluating this regulatory change, but have not fully quantified the
full impact. Compliance with the Dodd−Frank Act’s provisions may curtail our
revenue opportunities, increase our operating costs, require us to hold higher
levels of regulatory capital and/or liquidity or otherwise adversely affect our
business or financial results in the future. Our management is actively
reviewing the provisions of the Dodd−Frank Act and assessing its probable impact
on our business, financial condition, and result of operations. However, because
many aspects of the Dodd−Frank Act are subject to future rulemaking, no
assurance can be given as to the ultimate effect that the Dodd-Frank Act or any
of its provisions may have on the Company, the financial services industry or
the nation’s economy.





On
November 8, 2010, the Bank closed on the sale of OREO property with a net book
value of $562 thousand, recognizing a loss of $13,000, reducing total OREO
balance to $2.5 million.





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 table presents the changes in net interest income and identifies 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





Three Months Ended September 30, 2010 Compared to
                  Three Months Ended September 30, 2009Increase (Decrease) Due to
                  Change in(000’s)
                
                Yield/
                  Rate
                
                
                Average
                  Volume
                
                
                Number of
                  Days
                
                
                TotalFederal
      Funds Sold
                
                $
                (34
                )
                
                $
                (11
                )
                
                $
                -
                
                
                $
                (45
                )Securities
      and other
                
                
                (10
                )
                
                
                2
                
                
                
                -
                
                
                
                (8
                )Loans,
      net of reserve (1)
                
                
                168
                
                
                
                (381
                )
                
                
                -
                
                
                
                (213
                )Total
      earning assets
                
                
                124
                
                
                
                (390
                )
                
                
                -
                
                
                
                (266
                )NOW
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Money
      Market
                
                
                (4
                )
                
                
                (89
                )
                
                
                
                
                
                
                (93
                )Certificates
      of deposit $100,000 or less
                
                
                (35
                )
                
                
                (44
                )
                
                
                -
                
                
                
                (79
                )Certificates
      of deposit $100,000 or more
                
                
                (63
                )
                
                
                24
                
                
                
                -
                
                
                
                (39
                )Borrowed
      Funds
                
                
                15
                
                
                
                (14
                )
                
                
                -
                
                
                
                1Total
      interest-bearing liabilities
                
                
                (87
                )
                
                
                (123
                )
                
                
                -
                
                
                
                (210
                )Changes
      in net interest income
                
                $
                211
                
                
                $
                (267
                )
                
                $
                -
                
                
                $
                (56
                )





Nine Months Ended September 30, 2010 Compared to
                  Nine Months Ended September 30, 2009Increase (Decrease) Due to
                  Change in(000’s)
                
                Yield/
                  Rate
                
                
                Average
                  Volume
                
                
                Number of
                  Days
                
                
                TotalFederal
      Funds Sold
                
                $
                (74
                )
                
                $
                (31
                )
                
                $
                -
                
                
                $
                (105
                )Securities
      and other
                
                
                (37
                )
                
                
                54
                
                
                
                -
                
                
                
                17Loans,
      net of reserve (1)
                
                
                13
                
                
                
                (378
                )
                
                
                -
                
                
                
                (365
                )Total
      earning assets
                
                
                (98
                )
                
                
                (355
                )
                
                
                -
                
                
                
                (453
                )NOW
                
                
                (1
                )
                
                
                1
                
                
                
                -
                
                
                
                -Money
      Market
                
                
                (190
                )
                
                
                (69
                )
                
                
                -
                
                
                
                (259
                )Certificates
      of deposit $100,000 or less
                
                
                (86
                )
                
                
                (138
                )
                
                
                -
                
                
                
                (224
                )Certificates
      of deposit $100,000 or more
                
                
                (146
                )
                
                
                132
                
                
                
                -
                
                
                
                (14
                )Borrowed
      Funds
                
                
                11
                
                
                
                (33
                )
                
                
                -
                
                
                
                (22
                )Total
      interest-bearing liabilities
                
                
                (412
                )
                
                
                (107
                )
                
                
                -
                
                
                
                (519
                )Changes
      in net interest income
                
                $
                314
                
                
                $
                (248
                )
                
                $
                -
                
                
                $
                66





(1)
Average loans include non-accrual .





Net
interest income for the three months ended September 30, 2010 decreased $56,000,
or 4.3%, compared to the same period in the prior year. The decrease was due
primarily to a decline in average earning asset volume, which was partially
offset by an increase in average interest yield for interest-earning
assets.





Total
interest income for the three months ended September 30, 2010 decreased
$266,000, or 12.5%, compared to the same period in 2009. For the three month
period ended September 30, 2010, the average interest yield for interest-earning
assets increased to 6.7%, or 26.4%, compared to 5.3% for the same period in
2009. Average earning asset volume decreased $48.1 million, or 30.7%, to $108.3
million for the three months ended September 30, 2010, compared to $156.4
million for the same period in the prior year. The decrease is attributable to a
reduction in Fed funds sold and loan volume during the period ended September
30, 2010.


21


Total
interest expense for the three months ended September 30, 2010 decreased
$210,000, or 25.1%, compared to the same period in 2009. For the three
month-period ended September 30, 2010, the average interest yield for
interest-bearing liabilities increased slightly to 2.7%, or 3.6%, compared to
2.4% for the same period in 2009. Average interest bearing deposit volume fell
$34.5 million, or 29.1%, to $84.2 million for the three months ended September
30, 2010, compared to $118.7 million for the same period in 2009. The decrease
was primarily attributable to maturing CDs. Average borrowed funds decreased
$11.4 million, or 63.7%, to $6.5 million for the nine months ended September 30,
2010, compared to $17.8 million for the same period in the prior
year.





Net
interest income for the nine months ended September 30, 2010 increased $66,000,
or 1.7%, compared to the same period in the prior year. The increase was due
primarily to a decrease in average interest yield for interest bearing
deposits.





Total
interest income decreased $453,000, or 7.1%, to $5.9 million for the nine months
ended September 30, 2010, compared to $6.4 million for the same period in the
prior year. The average interest yield increased to 6.3%, or 10.5%, for the nine
months ended September 30, 2010, compared to 5.7% for the same period in the
prior year. Average earning asset volume fell $24.0 million, or 16.2%, to $123.9
million for the nine months ended September 30, 2010, compared to $147.9 million
for the same period in the prior year. The decrease was primarily attributable
to reductions in Fed Funds sold and loan pay-offs.





Total
interest expense decreased by $519,000, or 20.7%, to $2.0 million for the nine
months ended September 30, 2010, compared to $2.5 million for the nine months
ended September 30, 2009. The decrease in interest expense is due to a decrease
in the average rate paid for interest bearing deposits. For the nine month
period ended September 30, 2010, the average rate paid for interest earning
deposits fell to 2.5% as compared to 2.6% for the same period in the prior year.
Average interest bearing deposit volume decreased $10.7 million, or 9.8%, to
$98.2 million for the nine months ended September 30, 2010, compared to $108.9
million for the same period in the prior year. Average borrowed funds decreased
$11.4 million, or 62.1%, to $6.9 million for the nine months ended September 30,
2010, compared to $18.3 million for the same period in the prior
year.





Key
Performance Indicators at September 30, 2010





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


·
              total
      assets was $114.8 million at the end of the third quarter of 2010,
      representing a decrease of $24.6 million, or 17.7%, from $139.4 million at
      the end of 2009;
 
 ·
              total
      loans, net of allowance for loan losses, decreased to $99.7 million at the
      end of the third quarter of 2010, representing a decrease of $21.7
      million, or 17.9%, from $121.4 million at the end of
  2009;
 
 ·
              total
      deposits decreased to $89.2 million at the end of the third quarter of
      2010, representing a decrease of $18.9 million, or 17.5%, from $108.1
      million at the end of 2009;
 
 ·
              net
      income was $29,000 for the three months ended September 30, 2010 after
      accruing an expense of $560 thousand as a result of the FTC’s settlement
      with Low Pay, and our concomitant analysis performed to determine the
      adequacy of the reserve established at December 31, 2009 for consumer
      restitution in connection with the Agreement with the Comptroller,
      compared to net loss of $931,000 for the same period in the prior
      year.
 
 ·
              net
      loss was $697,000 for the nine months ended September 30, 2010, compared
      to net loss of $1.1 million for the same period in the prior
      year.
 
 ·
              total
      revenue was $11.8 million for the nine months ended September 30, 2010,
      compared to $11.4 million for the same period in the prior year,
      representing an increase of 3.1%, or
$358,000.
 
 ·
              Tier
      1 capital to average assets and total capital ratios were 9.24% and 11.36%
      compared to 7.51% and 11.33% at December 31, 2009. The increases are
      primarily due to strategic reductions in assets and
      liabilities.
 The
following tables set forth our average balances of assets, liabilities and
shareholders’ equity, in addition to the major components of net interest income
and our net interest margin for the three and nine months ended September 30,
2010 and 2009.


22





FINANCIAL
SUMMARY


Consolidated
Daily Average Balances, Average Yields and Rates





Three Months Ended September 30,2010
                      
                      
                      2009(000's) except earnings per share
                      
                      Average
                        Balance
                      
                      
                      Income/
                        Expense
                      
                      
                      Average
                        Yield
                      
                      
                      Average
                        Balance
                      
                      
                      Income/
                        Expense
                      
                      
                      Average
                        YieldInterest-earning
      assetsLoans,
      net of reserve
                      
                      $
                      100,272
                      
                      
                      $
                      1,834
                      
                      
                      
                      7.2
                      %
                      
                      $
                      121,128
                      
                      
                      $
                      2,047
                      
                      
                      
                      6.6
                      %Federal
      funds sold
                      
                      
                      514
                      
                      
                      
                      -
                      
                      
                      
                      -
                      %
                      
                      
                      28,268
                      
                      
                      
                      45
                      
                      
                      
                      0.6
                      %Securities
      and other
                      
                      
                      7,562
                      
                      
                      
                      34
                      
                      
                      
                      1.8
                      %
                      
                      
                      7,049
                      
                      
                      
                      42
                      
                      
                      
                      2.3
                      %Total
      earning assets
                      
                      
                      108,348
                      
                      
                      
                      1,868
                      
                      
                      
                      6.7
                      %
                      
                      
                      156,445
                      
                      
                      
                      2,134
                      
                      
                      
                      5.3
                      %Cash
      and other assets
                      
                      
                      6,884
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4,863Total
      assets
                      
                      $
                      115,232
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      161,308Interest-bearing
      liabilitiesNOW
      accounts
                      
                      $
                      1,902
                      
                      
                      $
                      3
                      
                      
                      
                      0.7
                      %
                      
                      $
                      1,993
                      
                      
                      $
                      4
                      
                      
                      
                      0.7
                      %Money
      market accounts
                      
                      
                      25,905
                      
                      
                      
                      72
                      
                      
                      
                      1.1
                      %
                      
                      
                      57,821
                      
                      
                      
                      164
                      
                      
                      
                      1.1
                      %Savings
      accounts
                      
                      
                      178
                      
                      
                      
                      1
                      
                      
                      
                      0.9
                      %
                      
                      
                      212
                      
                      
                      
                      1
                      
                      
                      
                      0.9
                      %Certificates
      of deposit less than $100,000
                      
                      
                      13,202
                      
                      
                      
                      118
                      
                      
                      
                      3.6
                      %
                      
                      
                      18,056
                      
                      
                      
                      197
                      
                      
                      
                      4.3
                      %Certificates
      of deposit $100,000 or greater
                      
                      
                      43,003
                      
                      
                      
                      426
                      
                      
                      
                      3.9
                      %
                      
                      
                      40,647
                      
                      
                      
                      465
                      
                      
                      
                      4.5
                      %Total
      interest bearing deposits
                      
                      
                      84,190
                      
                      
                      
                      620
                      
                      
                      
                      2.9
                      %
                      
                      
                      118,729
                      
                      
                      
                      831
                      
                      
                      
                      2.8
                      %Borrowed
      funds
                      
                      
                      6,472
                      
                      
                      
                      8
                      
                      
                      
                      0.5
                      %
                      
                      
                      17,812
                      
                      
                      
                      7
                      
                      
                      
                      0.2
                      %Total
      interest bearing liabilities
                      
                      
                      90,662
                      
                      
                      
                      628
                      
                      
                      
                      2.7
                      %
                      
                      
                      136,541
                      
                      
                      
                      838
                      
                      
                      
                      2.4
                      %Noninterest
      bearing deposits
                      
                      
                      11,199
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9,307Other
      liabilities
                      
                      
                      2,533
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      664Stockholders
      equity
                      
                      
                      10,838
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      14,796Total
      liabilities and stockholders' equity
                      
                      $
                      115,232
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      161,308Net
      interest income
                      
                      
                      
                      
                      
                      
                      1,240
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,296Net
      interest spread
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.0
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2.9
                      %Net
      interest margin
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      4.6
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      3.3
                      %Provision
      for loan loss
                      
                      
                      
                      
                      
                      
                      (314
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,085Non-interest
      income
                      
                      
                      
                      
                      
                      
                      1,951
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,801Non-interest
      expense
                      
                      
                      
                      
                      
                      
                      3,476
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,943Loss
      before income taxes
                      
                      
                      
                      
                      
                      
                      29
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (931
                      )Income
      taxes expense (benefit)
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      -Net
      income/loss
                      
                      
                      
                      
                      
                      $
                      29
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      $
                      (931
                      )Earnings
      (loss) per share
                      
                      
                      
                      
                      
                      
                      0.01
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (0.48
                      )Return
      on average equity
                      
                      
                      
                      
                      
                      
                      0.27
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (6.29
                      )%Return
      on average assets
                      
                      
                      
                      
                      
                      
                      0.03
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (0.58
                      )%Equity
      to assets ratio
                      
                      
                      
                      
                      
                      
                      9.41
                      %
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      9.17
                      %




23





FINANCIAL
SUMMARY


Consolidated
Daily Average Balances, Average Yields and Rates





Nine Months Ended September 30,2010
                    
                    
                    2009(000's) except earnings per share
                    
                    Average
                      Balance
                    
                    
                    Income/
                      Expense
                    
                    
                    Average
                      Yield
                    
                    
                    Average
                      Balance
                    
                    
                    Income/
                      Expense
                    
                    
                    Average
                      YieldInterest-earning
      assetsLoans,
      net of reserve
                    
                    $
                    113,592
                    
                    
                    $
                    5,814
                    
                    
                    
                    6.7
                    %
                    
                    $
                    120,975
                    
                    
                    $
                    6,179
                    
                    
                    
                    6.7
                    %Federal
      funds sold
                    
                    
                    598
                    
                    
                    
                    1
                    
                    
                    
                    0.2
                    %
                    
                    
                    21,845
                    
                    
                    
                    106
                    
                    
                    
                    0.6
                    %Securities
                    
                    
                    9,746
                    
                    
                    
                    114
                    
                    
                    
                    1.5
                    %
                    
                    
                    5,114
                    
                    
                    
                    97
                    
                    
                    
                    2.5
                    %Total
      earning assets
                    
                    
                    123,936
                    
                    
                    
                    5,929
                    
                    
                    
                    6.3
                    %
                    
                    
                    147,934
                    
                    
                    
                    6,382
                    
                    
                    
                    5.7
                    %Cash
      and other assets
                    
                    
                    6,054
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4,348Total
      assets
                    
                    $
                    129,990
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    152,282Interest-bearing
      liabilitiesNOW
      accounts
                    
                    $
                    2,000
                    
                    
                    $
                    10
                    
                    
                    
                    0.7
                    %
                    
                    $
                    1,876
                    
                    
                    $
                    10
                    
                    
                    
                    0.7
                    %Money
      market accounts
                    
                    
                    39,161
                    
                    
                    
                    258
                    
                    
                    
                    0.9
                    %
                    
                    
                    49,415
                    
                    
                    
                    515
                    
                    
                    
                    1.4
                    %Savings
      accounts
                    
                    
                    184
                    
                    
                    
                    1
                    
                    
                    
                    0.9
                    %
                    
                    
                    195
                    
                    
                    
                    2
                    
                    
                    
                    1.1
                    %Certificates
      of deposit less than $100,000
                    
                    
                    14,212
                    
                    
                    
                    401
                    
                    
                    
                    3.8
                    %
                    
                    
                    19,088
                    
                    
                    
                    625
                    
                    
                    
                    4.4
                    %Certificates
      of deposit $100,000 or greater
                    
                    
                    42,593
                    
                    
                    
                    1,303
                    
                    
                    
                    4.1
                    %
                    
                    
                    38,288
                    
                    
                    
                    1,318
                    
                    
                    
                    4.6
                    %Total
      interest bearing deposits
                    
                    
                    98,150
                    
                    
                    
                    1,973
                    
                    
                    
                    2.7
                    %
                    
                    
                    108,862
                    
                    
                    
                    2,470
                    
                    
                    
                    3.0
                    %Borrowed
      funds
                    
                    
                    6,932
                    
                    
                    
                    20
                    
                    
                    
                    0.4
                    %
                    
                    
                    18,308
                    
                    
                    
                    42
                    
                    
                    
                    0.3
                    %Total
      interest bearing liabilities
                    
                    
                    105,082
                    
                    
                    
                    1,993
                    
                    
                    
                    2.5
                    %
                    
                    
                    127,170
                    
                    
                    
                    2,512
                    
                    
                    
                    2.6
                    %Noninterest
      bearing deposits
                    
                    
                    9,708
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9,826Other
      liabilities
                    
                    
                    4,251
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    656Stockholders
      equity
                    
                    
                    10,949
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    14,630Total
      liabilities and stockholders' equity
                    
                    $
                    129,990
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    152,282Net
      interest income
                    
                    
                    
                    
                    
                    
                    3,936
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3,870Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.8
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.1
                    %Net
      interest margin
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    4.2
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.5
                    %Provision
      for loan loss
                    
                    
                    
                    
                    
                    
                    871
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1,243Non-interest
      income
                    
                    
                    
                    
                    
                    
                    5,839
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    5,028Non-interest
      expense
                    
                    
                    
                    
                    
                    
                    9,601
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    8,780Loss
      before income taxes
                    
                    
                    
                    
                    
                    
                    (697
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (1,125
                    )Income
      taxes expense (benefit)
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    -Net
      loss
                    
                    
                    
                    
                    
                    $
                    (697
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (1,125
                    )Earnings
      (loss) per share
                    
                    
                    
                    
                    
                    
                    (0.36
                    )
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (0.58
                    )Return
      on average equity
                    
                    
                    
                    
                    
                    
                    (6.37
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (7.69
                    )%Return
      on average assets
                    
                    
                    
                    
                    
                    
                    (0.54
                    )%
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (7.39
                    )%Equity
      to assets ratio
                    
                    
                    
                    
                    
                    
                    8.42
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    9.61
                    %




24


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 $871,000 for the nine months ended September
30, 2010, compared to $1.2 million for the nine months ended September 30, 2009.
The provision amounts are directly related to loan volumes and losses. We had
charge-offs of $1.4 million and recoveries of $547,000 during the nine months
ended September 30, 2010, compared to charge-offs of $1.1 million and recoveries
of $9,000 for the same period in the prior year.





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 $150,000, or 8.3%, to $2.0 million for the three
months ended September 30, 2010, compared to $1.8 million for the same period in
the prior year. The increase is directly attributable to an increase in trust
income.





Total
non-interest income increased $811,000, or 16.1% to $5.8 million for the nine
months ended September 30, 2010, compared to $5.0 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 and nine months ended September 30, 2010, trust income totaled
$1.9 million and $5.7 million, respectively, compared to $1.8 million and $4.9
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 $46,000 and $122,000 for the three and nine months ended September 30,
2010, respectively, compared to $32,000 and $78,000 for the same periods in the
prior year. The increase was primarily due to rental income received on two OREO
properties foreclosed on in August 2009 and September 2010.





Non-interest
Expense





Total
non-interest expense increased $533,000, or 18.1%, to $3.5 million for the three
months ended September 30, 2010, compared to $2.9 million for the same period in
the prior year. Changes in the components of non-interest expense for the three
months ending September 30, 2010 and 2009 are discussed below.





Salaries
and employee benefits decreased $117,000, or 15.5%, to $640,000 for the three
months ended September 30, 2010, compared to $757,000 for the same period in the
prior year. The decrease was related to reduction of full-time equivalent
employees and to decrease in bonus expense.





Occupancy
and equipment expenses are primarily lease expenses and depreciation and
amortization of leasehold improvements and furniture, fixtures and equipment.
For the three months ended September 30, 2010, occupancy and equipment expense
decreased $60,000, or 19.1%, to $254,000, compared to $314,000 for the same
period in the prior year. The decrease was due primarily to a reduction in the
depreciation of furniture, fixtures and equipment.





Trust
expenses are advisory fees paid to a fund advisor to advise the Bank on the
common investment funds held in the trust department and are based on the value
of the assets held in custody. For the three months ended September 30, 2010,
trust expenses increased $120,000, or 8.0%, to $1.6 million as compared to $1.5
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 $36,000, or 40.0%, to $127,000 for the three months ended
September 30, 2010, compared to $91,000 for the same period in the prior year.
The increase was primarily due to an increase in audit expense.





Data
processing fees decreased $7,000, or 9.9%, to $64,000 for the three months ended
September 30, 2010, compared to $71,000 for the same period in the prior
year.





Other
expenses increased $561,000, or 271.0%, to $768,000 for the three months ended
September 30, 2010, compared to $207,000 for the same period in the prior
year. The increase was due to a charge of $560,000 as a result of an
analysis performed to determine the adequacy of the reserve established at
December 31, 2009 for consumer restitution in connection with the Agreement with
the Comptroller.





Total
non-interest expense increased $821,000, or 9.4%, to $9.6 million for the nine
months ended September 30, 2010, compared to $8.8 million for the same period in
the prior year. Changes in the components of non-interest expense for the nine
months ending September 30, 2010 and 2009 are discussed below.


25





Salaries
and employee benefits decreased $267,000, or 11.3%, to $2.1 million for the nine
months ended September 30, 2010, compared to $2.4 million for the same period in
the prior year. The decrease was related to reduction of full-time equivalent
employees and to decrease in bonus expense.





Occupancy
and equipment expense decreased $239,000, or 24.0%, to $757,000, compared to
$996,000 for the same period in the prior year. The decrease was due to
decreases in depreciation, telephone, equipment rental and property
taxes.





Trust
expenses increased $621,000, or 14.6%, to $4.9 million for the nine months ended
September 30, 2010, compared to $4.3 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 $226,000, or 73.6%, to $533,000 for the nine months ended
September 30, 2010, compared to $307,000 for the same period in the prior year.
The increase was largely due to legal fees associated with the Agreement with
the Comptroller and audit fees.





Data
processing fees decreased $23,000, or 11.0%, to $187,000 for the nine months
ended September 30, 2010, compared to $210,000 for the same period in the prior
year.





Other
expenses increased $503,000, or 77.3%, to $1.2 million for the nine months ended
September 30, 2010, compared to $651,000 for the same period in the prior year.
The increase is primarily attributable to a charge of $560,000 as a result of an
analysis performed to determine the adequacy of the reserve established at
December 31, 2009 for consumer restitution in connection with the Agreement with
the Comptroller, partially offset by a $60,000 decrease in Federal Deposit
Insurance.





Income
Taxes





No
federal income tax expense was recorded for the nine months ended September 30,
2010, due to available operating losses to offset taxable income. Based upon the
Company’s limited operating history, the federal tax benefit of these losses has
a valuation allowance equal to the benefit. Cumulative net operating loss
available to carry forward for tax purposes is approximately $1.8 million as of
December 31, 2009.





Financial
Condition





Our total
assets as of September 30, 2010 were $114.8 million, compared to $139.4 million
as of December 31, 2009. Deposits were $89.2 million as of September 30, 2010,
compared to $108.1 million as of December 31, 2009. The decrease in deposits is
primarily a result of the withdrawal of one deposit account that fully secured a
$14.0 million loan which was paid off. Borrowed funds as of September 30, 2010
were $12.2 million, compared to $16.0 million as of December 31, 2009. Of the
$12.2 million in borrowed funds, a $6.2 million overnight advance from the
Federal Home Loan Bank of Dallas was renewed on October 1, 2010 and repaid on
October 8, 2010.





As of
September 30, 2010, our shareholders’ equity was $10.9 million, compared to
$11.6 million as of December 31, 2009. The $708,000 decrease in equity includes
$697,000 net loss and $32,000 stock-based compensation expense recognized
through the first nine months of 2010.





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





At
September 30, 2010, we had $3.4 million in interest-bearing deposits and
$115,000 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
September 30, 2010, our securities included Federal Reserve Bank of Dallas stock
and Federal Home Loan Bank of Dallas stock at cost of $420,000 and $584,400,
respectively, with an estimated fair value that approximated cost. We also had
government agency securities with amortized cost of $3.0 million and fair value
of $3.1 million. Weighted average yield of the securities portfolio at September
30, 2010 was 3.0%. Securities with market value of $2.2 million were pledged
against borrowed funds at the Federal Home Loan Bank of Dallas, and one security
with market value of $741,000 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%.


26





Loan
Portfolio





Our
primary source of income is interest on loans. The following table presents the
composition of our loan portfolio by category as of the dates
indicated:




As of
                      
                      
                      As of(000's)
                      
                      September 30, 2010
                      
                      
                      December 31, 2009Commercial
      and industrial
                      
                      $
                      70,315
                      
                      
                      $
                      88,920Consumer
      installment
                      
                      
                      1,116
                      
                      
                      
                      1,852Real
      estate — mortgage
                      
                      
                      22,558
                      
                      
                      
                      25,464Real
      estate — construction
                      
                      
                      7,624
                      
                      
                      
                      7,045Other
                      
                      
                      -
                      
                      
                      
                      2Total
      loans
                      
                      
                      101,613
                      
                      
                      
                      123,283Less
      allowance for loan losses
                      
                      
                      1,777
                      
                      
                      
                      1,713Less
      deferred loan fees
                      
                      
                      146
                      
                      
                      
                      151Total
      net loans
                      
                      $
                      99,690
                      
                      
                      $
                      121,419





As of
September 30, 2010 and December 31, 2009, our total net loans were $99.7 million
and $121.4 million, respectively. Total loans, net of reserves and deferred
fees, as a percentage of total assets were 86.9% as of September 30, 2010, and
87.1% as of December 31, 2009. The $21.7 million decrease is primarily due to
the payoff of a $14.0 million commercial loan which was fully secured by
deposits. The remaining $7.7 million 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 commercial
real estate loans to dental professionals.





Our
commercial loan portfolio is composed of lines of credit for working capital and
term loans to finance equipment and other business assets. Our lines of credit
typically are limited to a percentage of the value of the assets securing the
line. Lines of credit and term loans typically are reviewed annually and are
supported by accounts receivable, inventory, equipment and other assets of our
clients businesses. At September 30, 2010 and December 31, 2009, commercial
loans totaled $70.3 million and $88.9 million, representing approximately 69.2%
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
September 30, 2010 and December 31, 2009, consumer loans totaled $1.1 million
and $1.9 million, approximately 1.1% 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 September 30, 2010 and December 31, 2009, real
estate loans totaled $30.2 million and $32.5 million, approximately 29.7% 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 September 30, 2010, our commercial
loan portfolio included $71.1 million of loans, approximately 69.9% 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 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.


27


The
following table shows the maturity/reset date distribution and type of loan
within our loan portfolio as of September 30, 2010:





As of September 30, 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 (1)
                
                $
                6,975
                
                
                $
                6,786
                
                
                $
                30,005
                
                
                $
                25,475
                
                
                $
                1,074
                
                
                $
                70,315Consumer
      installment
                
                
                582
                
                
                
                534
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,116Real
      estate — mortgage
                
                
                4,850
                
                
                
                6,369
                
                
                
                4,691
                
                
                
                1,905
                
                
                
                4,743
                
                
                
                22,558Real
      estate — construction(1)
                
                
                3,468
                
                
                
                2,028
                
                
                
                361
                
                
                
                -
                
                
                
                1,767
                
                
                
                7,624Other
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Total
                
                $
                15,875
                
                
                $
                15,717
                
                
                $
                35,057
                
                
                $
                27,380
                
                
                $
                7,584
                
                
                $
                101,613





(1)Includes
nonaccrual and other loans at September 30, 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, other real estate owned
(“OREO”), and other repossessed assets. The impact of foreclosures and
distressed sales is impacting the value of real estate and the overall economy
broadly. This economic downturn has affected our real estate portfolio. As of
September 30, 2010, we had no loans 90 days or more past due and still accruing
interest, $1.9 million in loans on nonaccrual status and $3.0 million in OREO.
At December 31, 2009, we had no loans 90 days or more past due and still
accruing interest, $1.8 million in loans on nonaccrual status and $1.6 million
in OREO.  Total nonperforming assets as of September 30, 2010 was $4.3
million, a decrease of 20.4% compared to $5.4 million as of December 31, 2009.
The decrease was primarily attributable to one OREO property which was income
producing returning to performing status and two loans which were charged
off.





A
potential problem loan is defined as a loan where information about possible
credit problems of the borrower is known, causing management to have doubts as
to the ability of the borrower to comply with the present loan payment terms and
which may result in the inclusion of such loan in one of the nonperforming asset
categories. We maintain an internally classified loan list that helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance for loan losses. Loans classified as “special mention” are those that
contain a weakness that, if left unattended, could develop into a problem
affecting the ultimate collectability of the loan. Loans classified as
“substandard” are those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain repayment resources
or poor financial condition, which may jeopardize recoverability of the loan.
Loans classified as “doubtful” are those loans that have characteristics similar
to substandard loans, but also have an increased risk that loss may occur or at
least a portion of the loan may require a charge-off if liquidated at present.
Although loans classified as substandard do not duplicate loans classified as
doubtful, both substandard and doubtful loans may include some loans that are
past due at least 90 days, are on nonaccrual status, or have been restructured.
Loans classified as “loss” are those loans that are in the process of being
charged-off. At September 30, 2010 the Company had $3.4 million in special
mention loans, $6.0 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.


28


Allowance
for Loan Losses





Implicit
in our lending activities is the fact that we will experience loan losses and
that the risk of loss will vary with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. To reflect the
currently perceived risk of loss associated with our loan portfolio, additions
are made to our allowance for loan losses in the form of direct charges against
income and our allowance is available to absorb possible loan losses. The
factors that influence the allowance amount include, among others, the remaining
collateral and/or financial condition of the borrowers, historical loan loss,
changes in the size and composition of the loan portfolio, and general economic
conditions.





The
amount of the allowance equals the cumulative total of the provisions made from
time to time, reduced by loan charge-offs and increased by recoveries of loans
previously charged-off. Our allowance for loan losses was $1.8 million, or 1.7%
of total funded loans, at September 30, 2010, compared to $1.7 million, or 1.4%,
at December 31, 2009.





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
downturn in the economy, charge-offs in our portfolio have increased. We had
charge-offs of $1.4 million and recoveries of $547,000 during the nine months
ended September 30, 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
                  September 30, 2010
                
                
                As of
                  December 31, 2009Allocated:
                
                Amount
                
                
                Loan
                  Category to
                  Gross Loans
                
                
                Amount
                
                
                Loan
                  Category to
                  Gross LoansCommercial
      and industrial
                
                $
                1,230
                
                
                
                69.2
                %
                
                $
                1,285
                
                
                
                75.0
                %Consumer
      installment
                
                
                20
                
                
                
                1.1
                %
                
                
                23
                
                
                
                1.3
                %Real
      estate — mortgage
                
                
                394
                
                
                
                22.2
                %
                
                
                318
                
                
                
                18.6
                %Real
      estate — construction
                
                
                133
                
                
                
                7.5
                %
                
                
                87
                
                
                
                5.1
                %Total
      allowance for loan losses
                
                $
                1,777
                
                
                
                100.0
                %
                
                $
                1,713
                
                
                
                100.0
                %





Nonearning
Assets





Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $607,000 at September 30, 2010 and $793,000 at December
31, 2009.


29


Deposits





Deposits
are our primary source of funding. Total average deposits at September 30, 2010
and December 31, 2009 were $107.9 million and $118.2 million, respectively,
representing a decrease of $10.3 million, or 8.7%, during the nine month period
ending September 30, 2010. We continue to seek ways to attract additional
deposits.





The
following table shows the average deposit balances and average cost of funds for
each category of deposits, for the periods ended September 30, 2010 and
2009:





For the nine months ended(000's)
                        
                        September 30, 2010
                        
                        
                        September 30, 2009Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          Rate
                        
                        
                        Average
                          Balance
                        
                        
                        Percent of
                          Deposits
                        
                        
                        Average
                          RateNoninterest
      bearing deposits
                        
                        $
                        9,708
                        
                        
                        
                        9.0
                        %
                        
                        
                        0.0
                        %
                        
                        $
                        9,826
                        
                        
                        
                        8.3
                        %
                        
                        
                        0.0
                        %NOW
      accounts
                        
                        
                        2,000
                        
                        
                        
                        1.8
                        %
                        
                        
                        0.7
                        %
                        
                        
                        1,876
                        
                        
                        
                        1.6
                        %
                        
                        
                        0.7
                        %Money
      market accounts
                        
                        
                        39,161
                        
                        
                        
                        36.3
                        %
                        
                        
                        0.9
                        %
                        
                        
                        49,415
                        
                        
                        
                        41.6
                        %
                        
                        
                        1.4
                        %Savings
      accounts
                        
                        
                        184
                        
                        
                        
                        0.2
                        %
                        
                        
                        0.9
                        %
                        
                        
                        195
                        
                        
                        
                        .2
                        %
                        
                        
                        1.1
                        %Certificates
      of deposit, less than $100,000
                        
                        
                        14,212
                        
                        
                        
                        13.2
                        %
                        
                        
                        3.8
                        %
                        
                        
                        19,088
                        
                        
                        
                        16.1
                        %
                        
                        
                        4.4
                        %Certificates
      of deposit, $100,000 or greater
                        
                        
                        42,593
                        
                        
                        
                        39.5
                        %
                        
                        
                        4.1
                        %
                        
                        
                        38,288
                        
                        
                        
                        32.2
                        %
                        
                        
                        4.6
                        %Total
      deposits
                        
                        $
                        107,858
                        
                        
                        
                        100.00
                        %
                        
                        
                        2.7
                        %
                        
                        $
                        118,688
                        
                        
                        
                        100.00
                        %
                        
                        
                        3.0
                        %




The
following table sets forth the amount and maturities of the certificates of
deposit of $100,000 or more as of the dates indicated:




(000's)
                  
                  September 30,
                    2010
                  
                  
                  December 31,
                    2009Three
      months or less
                  
                  $
                  2,230
                  
                  
                  $
                  8,869Over
      three months through 12 months
                  
                  
                  21,845
                  
                  
                  
                  10,315Over
      one year through three years
                  
                  
                  17,950
                  
                  
                  
                  25,724Over
      three years
                  
                  
                  233
                  
                  
                  
                  1,126Total
                  
                  $
                  42,758
                  
                  
                  $
                  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 September 30, 2010. See Note 14
to the financial statements included in this report. Additional liquidity is
also provided through the Bank’s lines of credit with each of the Federal Home
Loan Bank of Dallas and the Federal Reserve Bank of Dallas, which provide us
with sources of off-balance sheet liquidity. As of September 30, 2010, our
established credit line with the Federal Home Loan Bank of Dallas was $18.2
million, or 15.9% of assets, of which $12.2 million was utilized. As of
September 30, 2010, our established credit line with the Federal Reserve Bank of
Dallas was $25.5 million, or 22.2% of assets, none of which was utilized. On
October 1, 2010, a $6.2 million overnight advance from the Federal Home Loan
Bank of Dallas was renewed and paid off on October 8, 2010.Additionally, we serve
as trustee or custodian for $88.0 million in cash deposits held at BlackRock,
Inc. in a money market fund, of which approximately $42.8 million could be held
at the Bank in deposit accounts fully insured by the FDIC.


30


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 September 30, 2010. As of
September 30, 2010, the Bank was in compliance with its  Tier 1
Capital to Average Assets ratio set forth in the Agreement with a ratio of 9.24%
and was below the Total Capital to Risk Weighted Assets ratio requirement set
forth in the agreement with a ratio of 11.36% Under the terms of the
Agreement, the Bank has until the earlier of 90 days after the Bank receives
notice from the Comptroller that the restitution process has been completed or
written notice from the Comptroller that the Bank’s capital is materially
deficient to achieve the capital ratios stated in the Agreement. As of September
30, 2010, the Bank has not received either communication from the Comptroller,
and therefore does not consider itself 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 September 30, 2010Total
      Capital (to Risk Weighted Assets)
                                                            
                                                            $
                                                            11,967
                                                            
                                                            
                                                            
                                                            11.36
                                                            %
                                                            
                                                            $
                                                            8,424
                                                            >
                                                            
                                                            
                                                            8.00
                                                            %
                                                            
                                                            $
                                                            10,530
                                                            >
                                                            
                                                            
                                                            10.00
                                                            %Tier
      1 Capital (to Risk Weighted Assets)
                                                            
                                                            
                                                            10,645
                                                            
                                                            
                                                            
                                                            10.11
                                                            %
                                                            
                                                            
                                                            4,212
                                                            >
                                                            
                                                            
                                                            4.00
                                                            %
                                                            
                                                            
                                                            6,318
                                                            >
                                                            
                                                            
                                                            6.00
                                                            %Tier
      1 Capital (to Average Assets)
                                                            
                                                            
                                                            10,645
                                                            
                                                            
                                                            
                                                            9.24
                                                            %
                                                            
                                                            
                                                            4,610
                                                            >
                                                            
                                                            
                                                            4.00
                                                            %
                                                            
                                                            
                                                            5,762
                                                            >
                                                            
                                                            
                                                            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
                                                            %




31


Liquidity
Management





At
September 30, 2010, the Company (excluding the Bank) had approximately $264,000
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 and
the Bank is no longer subject to the Agreement with the
Comptroller.





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, custodial, and commercial
deposits, loan repayments, maturity of investment securities, other short-term
borrowings, and other funds provided by operations. While scheduled loan
repayments and maturing investments are relatively predictable, deposit flows
and loan prepayments are more influenced by interest rates, general economic
conditions, and competition. The Bank will maintain investments in liquid assets
based upon management’s assessment of (1) the need for funds, (2) expected
deposit flows, (3) yields available on short-term liquid assets, and (4)
objectives of the asset/liability management program.





At
September 30, 2010, we had outstanding loan origination commitments and unused
commercial and retail lines of credit of $5.1 million and $14,600 in standby
letters of credit. Certificates of deposit that are scheduled to mature within
one year totaled $31.4 million at September 30, 2010.





The
Bank’s significant contractual obligations and other potential funding needs at
September 30, 2010 consist of:




As of September 30, 2010(000's)
                            
                            Less than
                              One
                              Year
                            
                            One to Three
                              Years
                            
                            Over Three to
                              Five Years
                            
                            Over Five
                              YearsOperating
      leases
                            
                            $
                            292
                            
                            $
                            432
                            
                            $
                            218
                            
                            $
                            93Certificates
      of deposit
                            
                            $
                            31,436
                            
                            $
                            23,526
                            
                            $
                            444
                            
                            $
                            -





The Bank
had cash and cash equivalents of $5.3 million, or 4.6% of total assets, at
September 30, 2010.  Liquidity is also provided through the Bank’s
lines of credit with the Federal Home Loan Bank of Dallas and the Federal
Reserve Bank of Dallas, which provide the Bank with a source of off-balance
sheet liquidity. As of September 30, 2010, the Bank’s established credit line
with the Federal Home Loan Bank of Dallas was $18.2, million or 15.9% of assets,
of which $12.2 million was utilized.  The established credit line with the
Federal Reserve Bank of Dallas was $25.5 million, or 22.2% of assets, none of
which was utilized at September 30, 2010.





As loan
demand increases, greater pressure will be exerted on the Bank’s liquidity. As
of September 30, 2010, the loan to deposit ratio was 112%.  Although this
deposit ratio is high, it is not reflective of the Bank’s liquidity
position.  With the low rates available from the Federal Home Loan Bank and
the Federal Reserve Bank ranging from 0.10% to 0.75%, 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 September 30, 2010, are approximately $43 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 September 30, 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.


32


ITEM
3. Quantitative and Qualitative Disclosures about Market Risk





Because
the registrant is a small reporting company, disclosure under this item is not
required.





ITEM 4. Controls and
Procedures





As of the
end of the period covered by this Quarterly Report on Form 10-Q, our principal
executive officer and our 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 and 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 and principal
financial officer have concluded that our Disclosure Controls are effective at a
reasonable assurance level.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 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 our operations, we are 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 our financial condition or results of operations.





ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds





None.





ITEM 3. Defaults Upon Senior
Securities





None.


33


ITEM 4. (Removed and
Reserved).





ITEM 5. Other Information





None


34




Item
      6.
            Exhibits
      and Financial Statement Schedules.




Exhibit
                No.
              
              Description
      of Exhibit3.1
              
              Articles
      of Incorporation (1)3.2
              
              Bylaws
      of Registrant (1)10.1
              
              T
      Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) 2005 Incentive Plan
      (2)(3)10.2
              
              Form
      of Incentive Stock Option Agreement (2)(3)10.3
              
              Form
      of Non-Qualified Stock Option Agreement (2)(3)10.4
              
              T
      Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) Organizers' Warrant
      Agreement dated November 2, 2004  (1)10.5
              
              T
      Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) Shareholders'
      Warrant Agreement dated November 2, 2004  (1)10.6
              
              Extension
      of term of initial Shareholder Warrants (1)10.7
              
              Form
      of Employment Agreement by and between T Bancshares, Inc. and Patrick
      Howard (1)(3)10.8
              
              Form
      of Employment Agreement by and between T Bancshares, Inc. and Steve Jones
      (1)(3)10.9
              
              Agreement
      between T Bank, N.A. and the Office of the Comptroller of the Currency,
      dated April 15, 2010 (4)10.10
              
              Consent
      Order for Civil Money Penalty of T Bank, N.A., dated April 15, 2010
      (4)31.1
              
              Rule
      13a-14(a) Certification of Chief Executive Officer*31.2
              
              Rule
      13a-14(a) Certification of Chief Financial Officer*32
              
              Certification
      Pursuant to Rule 14d-14(b) of the Securities Exchange
  Act*




(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.(2)
              
              Incorporated
      by reference from the Registration Statement on Form S-8 filed by the
      Registrant with the SEC on September 20, 2005.(3)
              
              Indicates
      a compensatory plan or contract.(4)
              
              Incorporated
      by reference from the Annual Report on Form 10-K filed by the Registrant
      with the SEC on April 15, 2010.*
              
              Filed
      Herewith




35


SIGNATURES





Pursuant
to the requirements of the Securities Act of 1934, the registrant has duly
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.




T
      BANCSHARES, INC.Date:
      November 15, 2010
                By:
                /s/
      Patrick HowardPatrick
      Howard
                  President
      and Chief Executive Officer/Principal Executive OfficerBy:
                /s/
      Ken BramlageKen
      Bramlage
                  Senior
      Vice President and Chief Financial Officer/Principal Financial
      Officer




36