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 June 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.   Yesx
     No ̈





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





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





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





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





The
number of shares outstanding of the issuer’s Common Stock as of August 13, 2010,
was 1,941,305 shares.





Transitional
Small Business Disclosure Format (check
one)   Yes   ̈No  x








T
BANCSHARES, INC.





INDEX




PAGEPART
      I.
              FINANCIAL
      INFORMATION
              
              3ITEM
      1.
              Financial
      Statements
              
              3ITEM
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              19ITEM
      3.
              Quantitative
      and Qualitative Disclosures about Market Risk
              
              34ITEM
      4.
              Controls
      and Procedures
              
              34PART
      II.
              OTHER
      INFORMATION
              
              34ITEM
      1.
              Legal
      Proceedings
              
              34ITEM
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              34ITEM
      3.
              Defaults
      Upon Senior Securities
              
              34ITEM
      4.
              (Removed
      and Reserved).
              
              35ITEM
      5.
              Other
      Information
              
              35ITEM
      6.
              Exhibits
              
              36


2





PART I. FINANCIAL
INFORMATION


ITEM 1. Financial
Statements


T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION





(000's)
      except shares information
                
                June 30,
                  2010
                
                
                December 31,
                  2009(unaudited)ASSETSCash
      and due from banks
                
                $
                1,026
                
                
                $
                1,216Interest-bearing
      deposits
                
                
                2,120
                
                
                
                5,526Federal
      funds sold
                
                
                185
                
                
                
                550Total
      cash and cash equivalents
                
                
                3,331
                
                
                
                7,292Securities
      available for sale at estimated fair value
                
                
                3,618
                
                
                
                4,005Securities
      held to maturity at amortized cost
                
                
                720
                
                
                
                801Securities,
      restricted at cost
                
                
                1,078
                
                
                
                1,281Loans,
      net of allowance for loan losses of $1,820 and $1,713,
      respectively
                
                
                101,949
                
                
                
                121,419Bank
      premises and equipment, net
                
                
                662
                
                
                
                793Other
      real estate owned
                
                
                1,657
                
                
                
                1,616Other
      assets
                
                
                2,034
                
                
                
                2,204Total
      assets
                
                $
                115,049
                
                
                $
                139,411LIABILITIESDemand
      Deposits:Noninterest-bearing
                
                $
                9,644
                
                
                $
                9,428Interest-bearing
                
                
                20,596
                
                
                
                36,157Time
      deposits $100 and over
                
                
                42,612
                
                
                
                46,034Other
      time deposits
                
                
                13,788
                
                
                
                16,506Total
      deposits
                
                
                86,640
                
                
                
                108,125Borrowed
      funds
                
                
                14,000
                
                
                
                16,000Other
      liabilities
                
                
                3,526
                
                
                
                3,695Total
      liabilities
                
                
                104,166
                
                
                
                127,820SHAREHOLDERS’
      EQUITYCommon
      Stock, $ .01 par value; 10,000,000 shares authorized; 1,941,305 shares
      issued and outstanding
                
                
                19
                
                
                
                19Additional
      paid-in capital
                
                
                18,558
                
                
                
                18,537Retained
      deficit
                
                
                (7,708
                )
                
                
                (6,982
                )Accumulated
      other comprehensive income
                
                
                14
                
                
                
                17Total
      shareholders' equity
                
                
                10,883
                
                
                
                11,591Total
      liabilities and shareholders' equity
                
                $
                115,049
                
                
                $
                139,411





See
accompanying notes to consolidated financial statements


3





T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended June
      30,
                  
                  
                  Six Months Ended June 30,(000's)
      except earnings (loss) per share and shares outstanding
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Interest
      IncomeLoan,
      including fees
                  
                  $
                  1,982
                  
                  
                  $
                  2,058
                  
                  
                  $
                  3,980
                  
                  
                  $
                  4,131Securities,
      restricted
                  
                  
                  36
                  
                  
                  
                  36
                  
                  
                  
                  71
                  
                  
                  
                  55Federal
      funds sold
                  
                  
                  -
                  
                  
                  
                  42
                  
                  
                  
                  1
                  
                  
                  
                  61Interest-bearing
      deposits
                  
                  
                  2
                  
                  
                  
                  -
                  
                  
                  
                  9
                  
                  
                  
                  -Total
      interest income
                  
                  
                  2,020
                  
                  
                  
                  2,136
                  
                  
                  
                  4,061
                  
                  
                  
                  4,247Interest
      ExpenseDeposits
                  
                  
                  635
                  
                  
                  
                  802
                  
                  
                  
                  1,353
                  
                  
                  
                  1,638Borrowed
      funds
                  
                  
                  7
                  
                  
                  
                  22
                  
                  
                  
                  12
                  
                  
                  
                  35Total
      interest expense
                  
                  
                  642
                  
                  
                  
                  824
                  
                  
                  
                  1,365
                  
                  
                  
                  1,673Net
      interest income
                  
                  
                  1,378
                  
                  
                  
                  1,312
                  
                  
                  
                  2,696
                  
                  
                  
                  2,574Provision
      for loan losses
                  
                  
                  (118
                  )
                  
                  
                  40
                  
                  
                  
                  1,185
                  
                  
                  
                  158Net
      interest income after provision for loan losses
                  
                  
                  1,496
                  
                  
                  
                  1,272
                  
                  
                  
                  1,511
                  
                  
                  
                  2,416Noninterest
      IncomeTrust
      income
                  
                  
                  1,922
                  
                  
                  
                  1,625
                  
                  
                  
                  3,812
                  
                  
                  
                  3,182Service
      fees
                  
                  
                  38
                  
                  
                  
                  22
                  
                  
                  
                  76
                  
                  
                  
                  46Total
      noninterest income
                  
                  
                  1,960
                  
                  
                  
                  1,647
                  
                  
                  
                  3,888
                  
                  
                  
                  3,228Noninterest
      ExpenseSalaries
      and employee benefits
                  
                  
                  706
                  
                  
                  
                  794
                  
                  
                  
                  1,456
                  
                  
                  
                  1,606Occupancy
      and equipment
                  
                  
                  226
                  
                  
                  
                  340
                  
                  
                  
                  502
                  
                  
                  
                  682Trust
      consulting services
                  
                  
                  1,646
                  
                  
                  
                  1,396
                  
                  
                  
                  3,252
                  
                  
                  
                  2,751Professional
      fees
                  
                  
                  155
                  
                  
                  
                  118
                  
                  
                  
                  406
                  
                  
                  
                  217Data
      processing
                  
                  
                  64
                  
                  
                  
                  67
                  
                  
                  
                  123
                  
                  
                  
                  139Other
                  
                  
                  205
                  
                  
                  
                  227
                  
                  
                  
                  386
                  
                  
                  
                  444Total
      noninterest  expense
                  
                  
                  3,002
                  
                  
                  
                  2,942
                  
                  
                  
                  6,125
                  
                  
                  
                  5,839Net
      Income (Loss)
                  
                  $
                  454
                  
                  
                  $
                  (23
                  )
                  
                  $
                  (726
                  )
                  
                  $
                  (195
                  )Earning
      (loss) per common share:Basic
                  
                  
                  0.23
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.37
                  )
                  
                  
                  (0.10
                  )Diluted
                  
                  
                  0.23
                  
                  
                  
                  (0.01
                  )
                  
                  
                  (0.37
                  )
                  
                  
                  (0.10
                  )Weighted
      average common shares outstanding
                  
                  
                  1,941,305
                  
                  
                  
                  1,941,305
                  
                  
                  
                  1,941,305
                  
                  
                  
                  1,930,808Weighted
      average diluted shares outstanding
                  
                  
                  1,941,305
                  
                  
                  
                  1,941,305
                  
                  
                  
                  1,941,305
                  
                  
                  
                  1,930,808





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
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (195
                          )
                          
                          
                          
                          
                          
                          
                          (195
                          )Change
      in accumulated gain on securities available for sale
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          3
                          
                          
                          
                          3Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (192
                          )Net
      proceeds from rights offering
                          
                          
                          2
                          
                          
                          
                          1,519
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,521Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          50
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          50BALANCE,
      June 30, 2009
                          
                          $
                          19
                          
                          
                          $
                          18,484
                          
                          
                          $
                          (3,333
                          )
                          
                          $
                          3
                          
                          
                          $
                          15,173BALANCE,
      January 1, 2010
                          
                          $
                          19
                          
                          
                          $
                          18,537
                          
                          
                          $
                          (6,982
                          )
                          
                          $
                          17
                          
                          
                          $
                          11,591Comprehensive
      loss:Net
      loss — YTD
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (726
                          )
                          
                          
                          
                          
                          
                          
                          (726
                          )Change
      in accumulated gain on securities available for sale
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (3
                          )
                          
                          
                          (3
                          )Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (729
                          )Stock
      based compensation
                          
                          
                          
                          
                          
                          
                          21
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          21BALANCE,
      June 30, 2010
                          
                          $
                          19
                          
                          
                          $
                          18,558
                          
                          
                          $
                          (7,708
                          )
                          
                          $
                          14
                          
                          
                          $
                          10,883





See
accompanying notes to consolidated financial statements


5





T
BANCSHARES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,(000's)
                
                2010
                
                
                2009Cash
      Flows from Operating ActivitiesNet
      loss
                
                $
                (726
                )
                
                $
                (195
                )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Provision
      for loan losses
                
                
                1,185
                
                
                
                158Depreciation
      and amortization
                
                
                151
                
                
                
                241Net
      amortization/(accretion) of securities
                
                
                26
                
                
                
                14Gain
      on sale of other real estate owned
                
                
                -
                
                
                
                (1
                )Stock
      based compensation
                
                
                21
                
                
                
                50Net
      change in other assets
                
                
                129
                
                
                
                299Net
      change in other liabilities
                
                
                (169
                )
                
                
                83Net
      cash provided by operating activities
                
                
                617
                
                
                
                649Cash
      Flows from Investing ActivitiesPrincipal
      payments and maturities of securities held to maturity
                
                
                81
                
                
                
                76Purchase
      of securities available for sale, net
                
                
                (2,069
                )
                
                
                (5,685
                )Principal
      payments, calls and maturities of securities available for
      sale
                
                
                2,427
                
                
                
                110Purchase
      of securities, restricted, net
                
                
                (263
                )
                
                
                (902
                )Proceeds
      from sale of securities, restricted
                
                
                466
                
                
                
                425Net
      change in loans
                
                
                18,285
                
                
                
                2,729Proceeds
      from sale of other real estate owned
                
                
                -
                
                
                
                377Purchases
      of premises and equipment
                
                
                (20
                )
                
                
                (79
                )Net
      cash provided by (used in) investing activities
                
                
                18,907
                
                
                
                (2,949
                )Cash
      Flows from Financing ActivitiesNet
      change in demand deposits
                
                
                (15,345
                )
                
                
                (9,824
                )Net
      change in time deposits
                
                
                (6,140
                )
                
                
                (1,820
                )Proceeds
      from borrowed funds
                
                
                27,000
                
                
                
                124,450Repayment
      of borrowed funds
                
                
                (29,000
                )
                
                
                (110,950
                )Net
      proceeds from rights offering
                
                
                -
                
                
                
                1,521Net
      cash provided by (used in) financing activities
                
                
                (23,485
                )
                
                
                3,377Net
      change in cash and cash equivalents
                
                
                (3,961
                )
                
                
                1,077Cash
      and cash equivalents at beginning of period
                
                
                7,292
                
                
                
                8,457Cash
      and cash equivalents at end of period
                
                $
                3,331
                
                
                $
                9,534Supplemental
      disclosures of cash flow informationCash
      paid during the period forInterest
                
                $
                1,346
                
                
                $
                1,637Income
      taxes
                
                $
                -
                
                
                $
                -Non-cash
      transactions:Transfers
      from loans to other real estate owned
                
                $
                -
                
                
                $
                955





See
accompanying notes to consolidated financial statements


6





T
BANCSHARES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)





NOTE 1. BASIS OF
PRESENTATION





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





We are
responsible for the unaudited financial statements included in this document.
The financial statements include all normal and recurring adjustments that are
considered necessary for the fair presentation of our financial position and
operating results. The accounting and reporting policies of the Company reflect
banking industry practice and conform to generally accepted accounting
principles in the United States of America. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported asset and liability balances and revenue and expense
amounts and the disclosure of contingent assets and liabilities. The allowance
for loan loss is the primary estimate by management, which is established
through a provision for loan loss charge to expense. It is reasonably possible
that actual results could differ significantly from those
estimates.





Certain
reclassifications have been made to the 2009 financial statements from their
original presentation to conform with the 2010 financial statement
presentation.  These reclassifications had no effect on shareholders’
equity or net loss for the six months ended June 30, 2009.





In
preparing these condensed consolidated interim financial statements, the Company
has evaluated, for potential recognition or disclosure, events or transactions
subsequent to the end of the most recent quarterly period through the issuance
date of these condensed consolidated interim financial statements.  No
such transactions or events resulted in additional recognition or
disclosure.





The
information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and accompanying notes
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2009.





NOTE
2. ADOPTION OF NEW ACCOUNTING POLICIES





ASU No. 2010-06, “Fair Value
Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair
Value Measurements.” -In 2010, the Financial Accounting
Standards Board 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.





ASU No. 2010-20,
“Receivables (Topic 830) - Disclosures about the Credit Quality of
Financing Receivables and the Allowance for Credit Losses.”
-In 2010, the FASB issued authoritative guidance that
requires entities to provide enhanced disclosures in the financial statements
about their loans including credit risk exposures and the allowance for loan
losses. While some of the required disclosures are already included in the
management discussion and analysis section of our interim and annual filings,
the new guidance will require inclusion in the notes to the financial
statements. Included in the new guidance are credit quality information,
impaired loan information, loan modification information and nonaccrual and past
due information. The period-end information will be required to be disclosed for
the year ending December 31, 2010 and the activity-related information will
be required to be disclosed beginning with the first quarter of 2011. 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.




7


NOTE 3. LOANS





Loans
held in portfolio consisted of the following:




(000's)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009Commercial
      and industrial
                  
                  $
                  72,473
                  
                  
                  $
                  88,920Consumer
      installment
                  
                  
                  850
                  
                  
                  
                  1,852Real
      estate — mortgage
                  
                  
                  22,773
                  
                  
                  
                  25,464Real
      estate — construction
                  
                  
                  7,795
                  
                  
                  
                  7,045Other
                  
                  
                  12
                  
                  
                  
                  2Total
      loans
                  
                  
                  103,903
                  
                  
                  
                  123,283Less
      allowance for loan losses
                  
                  
                  1,820
                  
                  
                  
                  1,713Less
      deferred loan fees
                  
                  
                  134
                  
                  
                  
                  151Net
      loans
                  
                  $
                  101,949
                  
                  
                  $
                  121,419





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





(000's)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009Balance
      at beginning of period
                  
                  $
                  1,713
                  
                  
                  $
                  1,638Provision
      charged to operations
                  
                  
                  1,185
                  
                  
                  
                  1,369Loans
      charged off
                  
                  
                  (1,345
                  )
                  
                  
                  (1,303
                  )Recoveries
      of loans previously charged off
                  
                  
                  267
                  
                  
                  
                  9Balance
      at end of period
                  
                  $
                  1,820
                  
                  
                  $
                  1,713





At June
30, 2010, there were $3.3 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.





June 30, 2010(000's)
                
                Amortized
                  Cost
                
                
                Unrealized
                  Gains
                
                
                Unrealized
                  Losses
                
                
                Estimated
                  Fair ValueSecurities Available for
      Sale:U.S.
      Government Agencies
                
                $
                3,604
                
                
                $
                19
                
                
                $
                5
                
                
                $
                3,618Securities
      Held to Maturity:U.S.
      Government Agencies
                
                $
                720
                
                
                $
                55
                
                
                $
                -
                
                
                $
                775Securities,
      restrictedOther
                
                $
                1,078
                
                
                $
                -
                
                
                $
                -
                
                
                $
                1,078




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





At June
30, 2010, securities with market value of $3.5 million were pledged against
borrowed funds at the Federal Home Loan Bank of Dallas, and one security with
market value of $724,000 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 June 30, 2010 and December 31,
2009. The Bank also held Federal Home Loan Bank of Dallas stock in the amount of
$658,400 and $861,000 at June 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 June 30, 2010 and December
31, 2009 were as follows:




(000's)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009Leasehold
      improvements
                  
                  $
                  929
                  
                  
                  $
                  929Furniture
      and equipment
                  
                  
                  1,896
                  
                  
                  
                  1,8762,825
                  
                  
                  
                  2,805Less:
      accumulated depreciation
                  
                  
                  2,163
                  
                  
                  
                  2,012Balance
      at end of period
                  
                  $
                  662
                  
                  
                  $
                  793


9





NOTE
7. OTHER REAL ESTATE OWNED AND OTHER ASSETS





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




(000's)
                
                June 30,
                  2010
                
                
                December 31,
                  2009Accounts
      receivable – trust fees
                
                
                647
                
                
                
                640Accrued
      interest receivable
                
                
                318
                
                
                
                397Prepaid
      assets
                
                
                1,048
                
                
                
                1,136Other
                
                
                21
                
                
                
                31$
                2,034
                
                
                $
                2,204





Other
Real Estate Owned (“OREO”) of $1.7 million consists of two properties at June
30, 2010, which are recorded at lower of cost or fair value.  The OREO
assets are actively being marketed, and disposal of the assets is anticipated to
occur prior to December 31, 2010.





NOTE 8. DEPOSITS





Deposits
are summarized as follows:





(000's)
                
                As of June
      30, 2010
                
                
                As of December 31, 2009Noninterest
      bearing demand
                
                $
                9,644
                
                
                
                11
                %
                
                $
                9,428
                
                
                
                9
                %Interest
      bearing demand (NOW)
                
                
                2,054
                
                
                
                3
                %
                
                
                1,960
                
                
                
                2
                %Money
      market accounts
                
                
                18,366
                
                
                
                21
                %
                
                
                34,006
                
                
                
                31
                %Savings
      accounts
                
                
                176
                
                
                
                0
                %
                
                
                191
                
                
                
                0
                %Certificates
      of deposit, $100,000 and greater
                
                
                42,612
                
                
                
                49
                %
                
                
                46,034
                
                
                
                43
                %Certificates
      of deposit, less than $100,000
                
                
                13,788
                
                
                
                16
                %
                
                
                16,506
                
                
                
                15
                %$
                86,640
                
                
                
                100
                %
                
                $
                108,125
                
                
                
                100
                %





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




(000’s)2010
                  
                  $
                  7,3682011
                  
                  
                  32,6282012
                  
                  
                  14,0702013
                  
                  
                  2,0072014
                  
                  
                  3152015
                  
                  
                  12Total
                  
                  $
                  56,400


10





NOTE
9.  BORROWED FUNDS





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





(000's)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009Federal
      Home Loan Bank Advance
                  
                  $
                  14,000
                  
                  
                  $
                  16,000Total
                  
                  $
                  14,000
                  
                  
                  $
                  16,000





At June
30, 2010, borrowed funds consisted of two $3.0 million loans and an $8.0 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 0.05%.
The Company has a $21.8 million credit line with the Federal Reserve Bank, which
is secured by $35.5 million in pledged commercial and industrial loans, and
$18.1 million credit line with the Federal Home Loan Bank which is secured by
$18.1 million in pledged real estate loans and $3.6 million in securities. The
$8.0 million overnight advance from the Federal Home Loan Bank of Dallas was
repaid on July 1, 2010.


NOTE 10. OTHER LIABLITIES





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




(000's)
                
                June 30,
                  2010
                
                
                December 31,
                  2009Reserve
      for Comptroller Settlement
                
                $
                2,585
                
                
                $
                2,685Trust
      Advisor Fees Payable
                
                
                538
                
                
                
                522Interest
      Payable
                
                
                120
                
                
                
                101Audit
      Fees
                
                
                55
                
                
                
                38Incentive
      Compensation
                
                
                42
                
                
                
                51Legal
                
                
                49
                
                
                
                28Franchise
      & Property Taxes
                
                
                72
                
                
                
                37Other
      Accruals
                
                
                65
                
                
                
                233$
                3,526
                
                
                $
                3,695





NOTE 11. INCOME TAXES





No
federal income tax expense has been recorded for the quarter ended June 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 June 30,
2010 and December 31, 2009, options to purchase a total of 212,500 and 195,500,
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 six months ended June 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 at June
30, 2010:




Number of
                    Shares
                    Underlying
                    Options
                  
                  
                  Weighted
                    Average
                    Exercise
                    PricesOutstanding
      at beginning of the year
                  
                  
                  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
                  
                  
                  157,400
                  
                  
                  $
                  10.18Available
      for grant at end of period
                  
                  
                  36,500





The
weighted average remaining contractual life of options outstanding at June 30,
2010 was 6.2 years.





The
following is a summary of the Company’s nonvested options at June 30,
2010:




Shares
                      
                      
                      Weighted
                        Average
                        Grant Date
                        Fair ValueNonvested
      at January 1, 2010
                      
                      
                      39,600
                      
                      
                      $
                      3.24Granted
                      
                      
                      27,000
                      
                      
                      
                      0.98Vested
                      
                      
                      3,500
                      
                      
                      
                      2.39Forfeited
                      
                      
                      8,000
                      
                      
                      
                      2.01Nonvested
      at June 30, 2010
                      
                      
                      56,100
                      
                      
                      $
                      2.36





As of
June 30, 2010, there was approximately $100,000 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 June
30, 2010. These warrants are exercisable at a price of $10.00 per share at any
time until November 2, 2014. During the six months ended June 30, 2010, no
warrants were exercised.





There
were no additional warrants issued during the six months ended June 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 six months
ended June 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 June 30, 2010, the
Company had commitments to extend credit and standby letters of credit of
approximately $7.4 million and $5,000, respectively. At December 31, 2009, the
Company had commitments to extend credit and standby letters of credit of
approximately $6.8 million and $15,000, respectively.





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.





The
Company is involved in various regulatory inspections, inquiries, investigations
and proceedings, and litigation matters that arise from time to time in the
ordinary course of business. The process of resolving matters through litigation
or other means is inherently uncertain, and it is possible that an unfavorable
resolution of these matters, will adversely affect the Company, its results of
operations, financial condition and cash flows.  The Company’s regular
practice is to expense legal fees as services are rendered in connection with
legal matters, and to accrue for liabilities when payment is
probable.





Employment
Agreements





The
Company 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 $2.4
million.  Further, there is no assurance that the Bank would be able
to comply with all of the requirements of the Agreement, including meeting the
stated capital requirements contained therein.  Nor is there assurance
that, should the Bank pay significant and material amounts of restitution and/or
civil money penalties, the short and long term financial condition, results of
operations, liquidity, and/or prospects of the Bank, upon which the Company is
dependent, will not be materially adversely, and irreparably,
impacted.





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





Based on
the information available to management regarding actual historical rates that
restitution checks are ultimately negotiated by consumers, management’s estimate
is that approximately 68% of the total potential exposure will be realized.
Therefore, management believes the appropriate reserve to accrue for restitution
is 68% of $3.5 million, or $2.4 million.  We have estimated and
accrued an expense of $185,000 representing the estimated cost to administer the
restitution based on information from our claims administrator, and accrued
an expense of $100,000 for the civil money penalty to be imposed by the
Comptroller in connection with the Consent Order for a Civil Money Penalty,
dated April 15, 2010, which was issued by the Comptroller in connection with the
execution of the Agreement. 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 expenses
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 June 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 June 30, 2010, the Bank’s
Total Capital to Risk Weighted Assets ratio and Tier 1 Capital to Average Assets
ratio of 11.22% and 8.03%, 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 June 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 June 30, 2010Total
      Capital (to Risk Weighted Assets)
                  
                  $
                  11,927
                  
                  
                  
                  11.22
                  %
                  
                  $
                  8,504
                  >
                  
                  
                  8.00
                  %
                  
                  $
                  10,629
                  >
                  
                  
                  10.00
                  %Tier
      1 Capital (to Risk Weighted Assets)
                  
                  
                  10,592
                  
                  
                  
                  9.96
                  %
                  
                  
                  4,252
                  >
                  
                  
                  4.00
                  %
                  
                  
                  6,378
                  >
                  
                  
                  6.00
                  %Tier
      1 Capital (to Average Assets)
                  
                  
                  10,592
                  
                  
                  
                  8.03
                  %
                  
                  
                  5,279
                  >
                  
                  
                  4.00
                  %
                  
                  
                  6,598
                  >
                  
                  
                  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)
                
                June30,
                  2010
                
                
                December 31,
                  2009ASSETSCash
      and due from banks
                
                $
                300
                
                
                $
                367Due
      from subsidiary
                
                
                -
                
                
                
                -Capitalized
      servicing rights
                
                
                -
                
                
                
                -Investment
      in subsidiary
                
                
                10,606
                
                
                
                11,259Total
      Assets
                
                $
                10,906
                
                
                $
                11,626LIABILITIES
      AND CAPITALOther
      Liabilities
                
                
                23
                
                
                
                35Capital
                
                
                10,883
                
                
                
                11,591Total
      Liabilities and Capital
                
                $
                10,906
                
                
                $
                11,626


T
BANCSHARES, INC.


CONDENSED
STATEMENTS OF INCOME


(Unaudited)





Three Months Ended June 30,
                
                
                Six Months Ended June 30,(000's)
                
                2010
                
                
                2009
                
                
                2010
                
                
                2009Equity
      in income (loss) from subsidiary
                
                $
                510
                
                
                $
                28
                
                
                $
                (650
                )
                
                $
                (121
                )Noninterest
      expense:Professional
      and administrative
                
                
                45
                
                
                
                29
                
                
                
                55
                
                
                
                24Stock
      based compensation
                
                
                11
                
                
                
                22
                
                
                
                21
                
                
                
                50Total
      noninterest expenses
                
                
                56
                
                
                
                51
                
                
                
                76
                
                
                
                74Net
      income (loss)
                
                $
                454
                
                
                $
                (23
                )
                
                $
                (726
                )
                
                $
                (195
                )


16


T
BANCSHARES, INC.


CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June30,(000's)
                
                2010
                
                
                2009Cash
      Flows from Operating ActivitiesNet
      loss
                
                $
                (726
                )
                
                $
                (195
                )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Equity
      in (earnings) loss of Bank
                
                
                650
                
                
                
                121Stock
      based compensation
                
                
                21
                
                
                
                50Net
      change in other assets
                
                
                -
                
                
                
                333Net
      change in other liabilities
                
                
                (12
                )
                
                
                (15
                )Net
      cash provided (used) by operating activities
                
                
                (67
                )
                
                
                294Cash
      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
                
                
                (67
                )
                
                
                57Cash
      and cash equivalents at beginning of period
                
                
                367
                
                
                
                333Cash
      and cash equivalents at end of period
                
                $
                300
                
                
                $
                390Supplemental
      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 June 30, 2010, segregated by the level of the valuation inputs
within the fair value hierarchy utilized to measure fair value:




(000's)
                
                Level 1
                  Inputs
                
                
                Level 2
                  Inputs
                
                
                Level 3
                  Inputs
                
                
                Total
                  Fair ValueSecurities
      available for sale:U.S.
      government agencies
                
                $
                —
                
                
                $
                3,618
                
                
                $
                —
                
                
                $
                3,618Other
      Assets:OREO
                
                
                —
                
                
                
                1,657
                
                
                
                —
                
                
                
                1,657





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.  In connection with the measurement and initial recognition of
the OREO assets, the Company recognized charge-offs of the allowance for loan
losses totaling $1.1 million for the six months ended June 30, 2010, which has
been recorded on the consolidated statement of income through the provision for
loan losses.





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




June30,2010
                  
                  
                  December31,2009Carrying
                    Amount
                  
                  
                  Estimated
                    Fair Value
                  
                  
                  Carrying
                    Amount
                  
                  
                  Estimated
                    Fair ValueFinancial
      assetsCash
      and cash equivalents
                  
                  $
                  3,331
                  
                  
                  $
                  3,331
                  
                  
                  $
                  7,292
                  
                  
                  $
                  7,292Securities
      available for sale
                  
                  
                  3,618
                  
                  
                  
                  3,618
                  
                  
                  
                  4,005
                  
                  
                  
                  4,005Loans,
      net
                  
                  
                  101,949
                  
                  
                  
                  101,107
                  
                  
                  
                  121,419
                  
                  
                  
                  120,702Accrued
      interest receivable
                  
                  
                  317
                  
                  
                  
                  317
                  
                  
                  
                  397
                  
                  
                  
                  397Financial
      liabilitiesDeposits
                  
                  
                  86,640
                  
                  
                  
                  89,931
                  
                  
                  
                  108,125
                  
                  
                  
                  108,685Accrued
      interest payable
                  
                  
                  120
                  
                  
                  
                  120
                  
                  
                  
                  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 June 30, 2010 and December 31, 2009, and our consolidated
results of operations for three months and six months ended June 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;





·
            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 June 30, 2010, we had, on a consolidated basis, total assets
of $115.0 million, net loans of $101.9 million, total deposits of $86.6 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 June 30, 2010 and
December 31, 2009, and our results of operations for the three months and six
months ended June 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 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.





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





ThreeMonthsEndedJune30, 2010 Comparedto
                  ThreeMonthsEndedJune30,2009Increase (Decrease) Due to
                  Change in(000’s)
                
                Yield/
                  Rate
                
                
                Average
                  Volume
                
                
                Number of
                  Days
                
                
                TotalFederal
      Funds Sold
                
                $
                (29
                )
                
                $
                (13
                )
                
                $
                -
                
                
                $
                (42
                )Securities
                
                
                (4
                )
                
                
                6
                
                
                
                -
                
                
                
                2Loans,
      net of reserve (1)
                
                
                (44
                )
                
                
                (32
                )
                
                
                -
                
                
                
                (76
                )Total
      earning assets
                
                
                (77
                )
                
                
                (39
                )
                
                
                -
                
                
                
                (116
                )NOW
                
                
                -
                
                
                
                1
                
                
                
                -
                
                
                
                1Money
      Market
                
                
                (77
                )
                
                
                (5
                )
                
                
                
                
                
                
                (82
                )Certificates
      of deposit $100,000 or less
                
                
                (30
                )
                
                
                (45
                )
                
                
                -
                
                
                
                (75
                )Certificates
      of deposit $100,000 or more
                
                
                (44
                )
                
                
                33
                
                
                
                -
                
                
                
                (11
                )Borrowed
      Funds
                
                
                9
                
                
                
                (24
                )
                
                
                -
                
                
                
                (15
                )Total
      interest-bearing liabilities
                
                
                (142
                )
                
                
                (40
                )
                
                
                -
                
                
                
                (182
                )Changes
      in net interest income
                
                $
                65
                
                
                $
                1
                
                
                $
                -
                
                
                $
                66





SixMonths EndedJune30,2010 Comparedto
                  SixMonthsEndedJune30,2009Increase (Decrease) Due to
                  Change in(000’s)
                
                Yield/
                  Rate
                
                
                Average
                  Volume
                
                
                Number of
                  Days
                
                
                TotalFederal
      Funds Sold
                
                $
                (42
                )
                
                $
                (18
                )
                
                $
                -
                
                
                $
                (60
                )Securities
                
                
                (15
                )
                
                
                40
                
                
                
                -
                
                
                
                25Loans,
      net of reserve (1)
                
                
                (132
                )
                
                
                (19
                )
                
                
                -
                
                
                
                (151
                )Total
      earning assets
                
                
                (189
                )
                
                
                3
                
                
                
                -
                
                
                
                (186
                )NOW
                
                
                (1
                )
                
                
                1
                
                
                
                -
                
                
                
                -Money
      Market
                
                
                (168
                )
                
                
                3
                
                
                
                -
                
                
                
                (165
                )Certificates
      of deposit $100,000 or less
                
                
                (51
                )
                
                
                (94
                )
                
                
                -
                
                
                
                (145
                )Certificates
      of deposit $100,000 or more
                
                
                (85
                )
                
                
                110
                
                
                
                -
                
                
                
                25Borrowed
      Funds
                
                
                (3
                )
                
                
                (20
                )
                
                
                -
                
                
                
                (23
                )Total
      interest-bearing liabilities
                
                
                (308
                )
                
                
                -
                
                
                
                -
                
                
                
                (308
                )Changes
      in net interest income
                
                $
                119
                
                
                $
                3
                
                
                $
                -
                
                
                $
                122





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





Net
interest income for the three months ended June 30, 2010 increased $66,000, or
5.0%, compared to the same period in the prior year.  The increase was
due primarily to a decline in the average interest yield for interest-bearing
liabilities, which was partially offset by a decrease in average interest yield
for interest-earning assets.





Total
interest income for the three months ended June 30, 2010 decreased $116,000, or
5.4%, compared to the same period in 2009. For the three month period ended June
30, 2010, the average interest yield for interest-earning assets increased to
6.3%, or 12.5%, compared to 5.6% for the same period in 2009. Average
earning asset volume decreased $25.3 million, or 16.7%, to $126.5 million for
the three months ended June 30, 2010, compared to $151.8 million for the same
period in the prior year. The decrease is primarily attributable to a reduction
in Fed funds sold during the period.


21


Total
interest expense for the three months ended June 30, 2010 decreased $182,000, or
22.1%, compared to the same period in 2009. For the three month-period ended
June 30, 2010, the average interest yield for interest-bearing liabilities fell
to 2.4%, or 4.0%, compared to 2.5% for the same period in 2009. Average interest
bearing deposit volume fell $3.5 million, or 3.3%, to $101.4 million for the
three months ended June 30, 2010, compared to $104.9 million for the same period
in 2009.





Net
interest income for the six months ended June 30, 2010 increased $122,000, or
4.7%, 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 $186,000, or 4.4%, to $4.1 million for the six months
ended June 30, 2010, compared to $4.2 million for the same period in the prior
year. The average interest yield increased to 6.1%, or 5.1%, for the six months
ended June 30, 2010, compared to 5.9% for the same period in the prior
year.  Average earning asset volume fell $11.7 million, or 8.1%, to
$131.9 million for the six months ended June 30, 2010, compared to $143.6
million for the same period in the prior year.





Total
interest expense decreased by $308,000, or 18.4%, to $1.4 million for the six
months ended June 30, 2010, compared to $1.7 million for the six months ended
June 30, 2009.  The decrease in interest expense is due to a decrease
in the average rate paid for interest bearing deposits.  For the six
month period ended June 30, 2010, the average rate paid for interest earning
deposits fell to 2.6% as compared to 3.2% for the same period in the prior
year.  Average interest bearing deposit volume increased $1.4 million,
or 1.4%, to $105.2 million for the six months ended June 30, 2010, compared to
$103.8 million for the same period in the prior year.  Average borrowed
funds decreased $11.4 million, or 61.4%, to $7.2 million for the six months
ended June 30, 2010, compared to $18.6 million for the same period in the prior
year.





Key
Performance Indicators at June 30, 2010





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





·
            total
      assets was $115.0 million at the end of the second quarter of 2010,
      representing a decrease of $24.4 million, or 17.5%, from $139.4 million at
      the end of 2009;




·
            total
      loans, net of allowance for loan losses, decreased to $101.9 million at
      the end of the second quarter of 2010, representing a decrease
      of  $19.5 million, or 16.0%, from $121.4 million at the end of
      2009;




·
            total
      deposits decreased to $86.6 million at the end of the second quarter of
      2010, representing a decrease of $21.5 million, or 19.9%, from $108.1
      million at the end of 2009;




·
            total
      revenue was $7.9 million for the six months ended June 30, 2010, compared
      to $7.5 million for the same period in the prior year, representing an
      increase of 6.3%, or $474,000.




·
            net
      income was $454,000 for the three months ended June 30, 2010, compared to
      net loss of $23,000 for the same period in the prior
  year.




·
            net
      loss was $726,000 for the six months ended June 30, 2010, compared to net
      loss of $195,000 for the same period in the prior
  year.





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 six months ended June 30, 2010 and
2009.


22





FINANCIAL
SUMMARY


Consolidated
Daily Average Balances, Average Yields and Rates





Three Months Ended June 30,2010
                  
                  
                  2009(000's) except earnings per share
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    YieldInterest-earning
      assetsLoans,
      net of reserve
                  
                  $
                  117,647
                  
                  
                  $
                  1,982
                  
                  
                  
                  6.7
                  %
                  
                  $
                  119,541
                  
                  
                  $
                  2,058
                  
                  
                  
                  6.8
                  %Federal
      funds sold
                  
                  
                  648
                  
                  
                  
                  -
                  
                  
                  
                  0.2
                  %
                  
                  
                  25,458
                  
                  
                  
                  42
                  
                  
                  
                  0.6
                  %Securities
      and other
                  
                  
                  8,152
                  
                  
                  
                  38
                  
                  
                  
                  1.8
                  %
                  
                  
                  6,884
                  
                  
                  
                  36
                  
                  
                  
                  2.1
                  %Total
      earning assets
                  
                  
                  126,447
                  
                  
                  
                  2,020
                  
                  
                  
                  6.3
                  %
                  
                  
                  151,833
                  
                  
                  
                  2,136
                  
                  
                  
                  5.6
                  %Cash
      and other assets
                  
                  
                  5,506
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,278Total
      assets
                  
                  $
                  131,953
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  156,111Interest-bearing
      liabilitiesNOW
      accounts
                  
                  $
                  2,029
                  
                  
                  $
                  3
                  
                  
                  
                  0.7
                  %
                  
                  $
                  1,671
                  
                  
                  $
                  3
                  
                  
                  
                  0.7
                  %Money
      market accounts
                  
                  
                  44,761
                  
                  
                  
                  85
                  
                  
                  
                  0.8
                  %
                  
                  
                  47,000
                  
                  
                  
                  167
                  
                  
                  
                  1.4
                  %Savings
      accounts
                  
                  
                  179
                  
                  
                  
                  -
                  
                  
                  
                  0.9
                  %
                  
                  
                  194
                  
                  
                  
                  -
                  
                  
                  
                  1.1
                  %Certificates
      of deposit less than $100,000
                  
                  
                  14,118
                  
                  
                  
                  132
                  
                  
                  
                  3.7
                  %
                  
                  
                  18,972
                  
                  
                  
                  207
                  
                  
                  
                  4.4
                  %Certificates
      of deposit $100,000 or greater
                  
                  
                  40,336
                  
                  
                  
                  415
                  
                  
                  
                  4.1
                  %
                  
                  
                  37,070
                  
                  
                  
                  425
                  
                  
                  
                  4.6
                  %Total
      interest bearing deposits
                  
                  
                  101,423
                  
                  
                  
                  635
                  
                  
                  
                  2.5
                  %
                  
                  
                  104,906
                  
                  
                  
                  802
                  
                  
                  
                  3.1
                  %Borrowed
      funds
                  
                  
                  5,725
                  
                  
                  
                  7
                  
                  
                  
                  0.5
                  %
                  
                  
                  24,901
                  
                  
                  
                  22
                  
                  
                  
                  0.3
                  %Total
      interest bearing liabilities
                  
                  
                  107,148
                  
                  
                  
                  642
                  
                  
                  
                  2.4
                  %
                  
                  
                  129,807
                  
                  
                  
                  824
                  
                  
                  
                  2.5
                  %Noninterest
      bearing deposits
                  
                  
                  11,100
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,274Other
      liabilities
                  
                  
                  3,090
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  619Stockholders
      equity
                  
                  
                  10,615
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  15,411Total
      liabilities and stockholders' equity
                  
                  $
                  131,953
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  156,111Net
      interest income
                  
                  
                  
                  
                  
                  
                  1,378
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,312Net
      interest spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.9
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.1
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.3
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.5
                  %Provision
      for loan loss
                  
                  
                  
                  
                  
                  
                  (118
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  40Non-interest
      income
                  
                  
                  
                  
                  
                  
                  1,960
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,647Non-interest
      expense
                  
                  
                  
                  
                  
                  
                  3,002
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,942Loss
      before income taxes
                  
                  
                  
                  
                  
                  
                  454
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (23
                  )Income
      taxes expense (benefit)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
      income/loss
                  
                  
                  
                  
                  
                  $
                  454
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (23
                  )Earnings
      (loss) per share
                  
                  
                  
                  
                  
                  
                  0.23
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.01
                  )Return
      on average equity
                  
                  
                  
                  
                  
                  
                  17.11
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.60
                  )%Return
      on average assets
                  
                  
                  
                  
                  
                  
                  1.38
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.06
                  )%Equity
      to assets ratio
                  
                  
                  
                  
                  
                  
                  8.04
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9.87
                  %


23





FINANCIAL
SUMMARY


Consolidated
Daily Average Balances, Average Yields and Rates





Six Months Ended June 30,2010
                  
                  
                  2009(000's) except earnings per share
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    Yield
                  
                  
                  Average
                    Balance
                  
                  
                  Interest
                  
                  
                  Average
                    YieldInterest-earning
      assetsLoans,
      net of reserve
                  
                  $
                  120,362
                  
                  
                  $
                  3,980
                  
                  
                  
                  6.6
                  %
                  
                  $
                  120,897
                  
                  
                  $
                  4,131
                  
                  
                  
                  6.8
                  %Federal
      funds sold
                  
                  
                  642
                  
                  
                  
                  1
                  
                  
                  
                  0.2
                  %
                  
                  
                  18,579
                  
                  
                  
                  61
                  
                  
                  
                  0.7
                  %Securities
                  
                  
                  10,855
                  
                  
                  
                  80
                  
                  
                  
                  1.5
                  %
                  
                  
                  4,143
                  
                  
                  
                  55
                  
                  
                  
                  2.7
                  %Total
      earning assets
                  
                  
                  131,859
                  
                  
                  
                  4,061
                  
                  
                  
                  6.1
                  %
                  
                  
                  143,619
                  
                  
                  
                  4,247
                  
                  
                  
                  5.9
                  %Cash
      and other assets
                  
                  
                  5,632
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,316Total
      assets
                  
                  $
                  137,491
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  147,935Interest-bearing
      liabilitiesNOW
      accounts
                  
                  $
                  2,049
                  
                  
                  $
                  7
                  
                  
                  
                  0.7
                  %
                  
                  $
                  1,817
                  
                  
                  $
                  7
                  
                  
                  
                  0.8
                  %Money
      market accounts
                  
                  
                  45,900
                  
                  
                  
                  186
                  
                  
                  
                  0.8
                  %
                  
                  
                  45,142
                  
                  
                  
                  351
                  
                  
                  
                  1.6
                  %Savings
      accounts
                  
                  
                  186
                  
                  
                  
                  1
                  
                  
                  
                  0.9
                  %
                  
                  
                  186
                  
                  
                  
                  1
                  
                  
                  
                  1.2
                  %Certificates
      of deposit less than $100,000
                  
                  
                  14,726
                  
                  
                  
                  283
                  
                  
                  
                  3.9
                  %
                  
                  
                  19,612
                  
                  
                  
                  428
                  
                  
                  
                  4.4
                  %Certificates
      of deposit $100,000 or greater
                  
                  
                  42,385
                  
                  
                  
                  876
                  
                  
                  
                  4.2
                  %
                  
                  
                  37,090
                  
                  
                  
                  851
                  
                  
                  
                  4.6
                  %Total
      interest bearing deposits
                  
                  
                  105,246
                  
                  
                  
                  1,353
                  
                  
                  
                  2.6
                  %
                  
                  
                  103,847
                  
                  
                  
                  1,638
                  
                  
                  
                  3.2
                  %Borrowed
      funds
                  
                  
                  7,166
                  
                  
                  
                  12
                  
                  
                  
                  0.4
                  %
                  
                  
                  18,560
                  
                  
                  
                  35
                  
                  
                  
                  0.4
                  %Total
      interest bearing liabilities
                  
                  
                  112,412
                  
                  
                  
                  1,365
                  
                  
                  
                  2.4
                  %
                  
                  
                  122,407
                  
                  
                  
                  1,673
                  
                  
                  
                  2.7
                  %Noninterest
      bearing deposits
                  
                  
                  9,206
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  10,090Other
      liabilities
                  
                  
                  1,805
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  652Stockholders
      equity
                  
                  
                  14,068
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  14,786Total
      liabilities and stockholders' equity
                  
                  $
                  137,491
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  147,935Net
      interest income
                  
                  
                  
                  
                  
                  
                  2,696
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  2,574Net
      interest spread
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.7
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.2
                  %Net
      interest margin
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4.1
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3.6
                  %Provision
      for loan loss
                  
                  
                  
                  
                  
                  
                  1,185
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  158Non-interest
      income
                  
                  
                  
                  
                  
                  
                  3,888
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  3,228Non-interest
      expense
                  
                  
                  
                  
                  
                  
                  6,125
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,839Loss
      before income taxes
                  
                  
                  
                  
                  
                  
                  (726
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (195
                  )Income
      taxes expense (benefit)
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  -Net
      loss
                  
                  
                  
                  
                  
                  $
                  (726
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  (195
                  )Earnings
      (loss) per share
                  
                  
                  
                  
                  
                  
                  (0.37
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.10
                  )Return
      on average equity
                  
                  
                  
                  
                  
                  
                  (10.32
                  )%
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1.32
                  )%Return
      on average assets
                  
                  
                  
                  
                  
                  
                  (1.06
                  )%
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (0.13
                  )%Equity
      to assets ratio
                  
                  
                  
                  
                  
                  
                  10.23
                  %
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9.99
                  %


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 $1.2 million for the six months ended June 30,
2010, compared to $158,000 for the six months ended June 30, 2009. The provision
amounts are directly related to loan volumes and losses. We had charge-offs of
$1.3 million and recoveries of $267,000 during the six months ended June 30,
2010, compared to charge-offs of $157,000 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 $313,000, or 19.0%, to $2.0 million for the three
months ended June 30, 2010, compared to $1.6 million for the same period in the
prior year. The increase is directly attributable to an increase in trust
income.





Total
non-interest income increased $660,000, or 20.4% to $3.9 million for the six
months ended June 30, 2010, compared to $3.2 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 six months ended June 30, 2010, trust
income totaled $1.9 million and $3.8 million, respectively, compared to $1.6
million and $3.2 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 $38,000 and $76,000 for the three and six months ended June 30, 2010,
respectively, compared to $22,000 and $46,000 for the same periods in the prior
year.





Noninterest
Expense





Total
non-interest expense increased $60,000, or 2.0%, to $3.0 million for the three
months ended June 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 June 30, 2010 and 2009 are discussed below.





Salaries
and employee benefits decreased $88,000, or 11.1%, to $706,000 for the three
months ended June 30, 2010, compared to $794,000 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 June 30, 2010, occupancy and
equipment expense decreased $114,000, or 33.5%, to $226,000, compared to
$340,000 for the same period in the prior year. The decrease was due to
decreases in depreciation, telephone, equipment rental and property
taxes.





Trust
expenses are advisory fees paid to a fund advisor to manage certain assets held
in the trust department and are based on the value of the assets held in
custody.  For the three months ended June 30, 2010, trust expenses
increased $250,000, or 17.9%, to $1.6 million as compared to $1.4 million for
the same period in the prior year.  Similar to trust income, the
increase in trust expense is directly attributable to the general rise in the
market values of assets in trust accounts.





Professional
fees increased $37,000, or 31.4%, to $155,000 for the three months ended June
30, 2010, compared to $118,000 for the same period in the prior year. The
increase was primarily due to an increase in audit expense.





Data
processing fees decreased $3,000, or 4.5%, to $64,000 for the three months ended
June 30, 2010, compared to $67,000 for the same period in the prior
year.





Other
expenses decreased $22,000, or 9.7%, to $205,000 for the three months ended June
30, 2010, compared to $227,000 for the same period in the prior
year.





Total
non-interest expense increased $286,000, or 4.9%, to $6.1 million for the six
months ended June 30, 2010, compared to $5.8 million for the same period in the
prior year. Changes in the components of non-interest expense for the six months
ending June 30, 2010 and 2009 are discussed below.


25





Salaries
and employee benefits decreased $150,000, or 9.3%, to $1.5 million for the six
months ended June 30, 2010, compared to $1.6 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 $180,000, or 26.4%, to $502,000, compared to
$682,000 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 $501,000, or 18.2%, to $3.3 million for the six months ended
June 30, 2010, compared to $2.8 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 $189,000, or 87.1%, to $406,000 for the six months ended June 30,
2010, compared to $217,000 for the same period in the prior year. The increase
was largely due to legal fees associated with the Agreement with the
Comptroller.





Data
processing fees decreased $16,000, or 11.5%, to $123,000 for the six months
ended June 30, 2010, compared to $139,000 for the same period in the prior
year.





Other
expenses decreased $58,000, or 13.1%, to $386,000 for the six months ended June
30, 2010, compared to $444,000 for the same period in the prior year. The
decrease is primarily attributable to a $47,000 decrease in Federal Deposit
Insurance assessment and decrease in public relations expenditures.





Income
Taxes





No
federal income tax expense was recorded for the six months ended June 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 June 30, 2010 were $115.0 million, compared to $139.4 million as of
December 31, 2009. Deposits were $86.6 million as of June 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 million
loan which was paid off. Borrowed funds as of June 30, 2010 were $14.0 million,
compared to $16.0 million as of December 31, 2009.





As of
June 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
$726,000 net loss and $21,000 stock-based compensation expense recognized
through the first six months of 2010.





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





At June
30, 2010, we had $2.1 million in interest-bearing deposits and $185,000 million
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 June
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 $658,000,
respectively, with an estimated fair value that approximated cost. We also had
government agency securities with amortized cost of $4.3 million and fair value
of $4.4 million. Weighted average yield of the securities portfolio at June 30,
2010 was 3.3%.  Securities with market value of $3.5 million were pledged
against borrowed funds at the Federal Home Loan Bank of Dallas, and one security
with market value of $724,000 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)
                  
                  June 30, 2010
                  
                  
                  December 31, 2009Commercial
      and industrial
                  
                  $
                  72,473
                  
                  
                  $
                  88,920Consumer
      installment
                  
                  
                  850
                  
                  
                  
                  1,852Real
      estate — mortgage
                  
                  
                  22,773
                  
                  
                  
                  25,464Real
      estate — construction
                  
                  
                  7,795
                  
                  
                  
                  7,045Other
                  
                  
                  12
                  
                  
                  
                  2Total
      loans
                  
                  
                  103,903
                  
                  
                  
                  123,283Less
      allowance for loan losses
                  
                  
                  1,820
                  
                  
                  
                  1,713Less
      deferred loan fees
                  
                  
                  134
                  
                  
                  
                  151Total
      net loans
                  
                  $
                  101,949
                  
                  
                  $
                  121,419





As of
June 30, 2010 and December 31, 2009, our total net loans were $101.9 million and
$121.4 million, respectively. Total loans, net of reserves and deferred fees, as
a percentage of total assets were 88.6% as of June 30, 2010, and 87.1% as of
December 31, 2009. The $19.5 million decrease is primarily due to the payoff of
a $14.0 million commercial loan which was fully secured by deposits. The
remaining $5.5 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 real estate commercial 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 June 30, 2010 and December 31, 2009, commercial loans
totaled $72.5 million and $88.9 million, representing approximately 69.8% 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 June
30, 2010 and December 31, 2009, consumer loans totaled $850,000 and $1.9
million, approximately 0.8% 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 June 30, 2010 and December 31, 2009, real
estate loans totaled $30.6 million and $32.5 million, approximately 29.4% 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 June 30, 2010, our commercial loan
portfolio included $73.6 million of loans, approximately 70.9% 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 June 30, 2010:





As of June 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 *
                  
                  $
                  7,132
                  
                  
                  $
                  6,065
                  
                  
                  $
                  30,430
                  
                  
                  $
                  27,744
                  
                  
                  $
                  1,091
                  
                  
                  $
                  72,462Consumer
      installment
                  
                  
                  244
                  
                  
                  
                  606
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  850Real
      estate — mortgage
                  
                  
                  2,584
                  
                  
                  
                  6,736
                  
                  
                  
                  6,727
                  
                  
                  
                  1,920
                  
                  
                  
                  4,805
                  
                  
                  
                  22,772Real
      estate — construction*
                  
                  
                  4,201
                  
                  
                  
                  2,073
                  
                  
                  
                  361
                  
                  
                  
                  -
                  
                  
                  
                  1,172
                  
                  
                  
                  7,807Other
                  
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  12Total
                  
                  $
                  14,173
                  
                  
                  $
                  15,480
                  
                  
                  $
                  37,518
                  
                  
                  $
                  29,664
                  
                  
                  $
                  7,068
                  
                  
                  $
                  103,903





*Includes
nonaccrual and other loans at June 30, 2010.


28





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
June 30, 2010, we had no loans 90 days or more past due and still accruing
interest, $3.3 million in loans on nonaccrual status and $1.7 million in OREO.
At December 31, 2009, we had no loans 90 days or more past due and still
accruing interest, $3.8 million in loans on nonaccrual status and $1.6 million
in OREO.  Total nonperforming assets as of June 30, 2010 was $4.4 million,
a decrease of 18.5% compared to $5.4 million as of December 31,
2009.





A
potential problem loan is defined as a loan where information about possible
credit problems of the borrower is known, causing management to have doubts as
to the ability of the borrower to comply with the present loan payment terms and
which may result in the inclusion of such loan in one of the nonperforming asset
categories. We maintain an internally classified loan list that helps management
assess the overall quality of the loan portfolio and the adequacy of the
allowance for loan losses. Loans classified as “special mention” are those that
contain a weakness that, if left unattended, could develop into a problem
affecting the ultimate collectability of the loan. Loans classified as
“substandard” are those loans with clear and defined weaknesses such as highly
leveraged positions, unfavorable financial ratios, uncertain repayment resources
or poor financial condition, which may jeopardize recoverability of the loan.
Loans classified as “doubtful” are those loans that have characteristics similar
to substandard loans, but also have an increased risk that loss may occur or at
least a portion of the loan may require a charge-off if liquidated at present.
Although loans classified as substandard do not duplicate loans classified as
doubtful, both substandard and doubtful loans may include some loans that are
past due at least 90 days, are on nonaccrual status, or have been restructured.
Loans classified as “loss” are those loans that are in the process of being
charged-off. At June 30, 2010 the Company had $3.7 million in special mention
loans, $7.2 million in substandard loans and no loans classified as doubtful,
compared to $1.4 million in special mention loans, $12.5 million in substandard
loans and no loans classified as doubtful loans at December 31,
2009.





Allowance
for Loan Losses





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





The
amount of the allowance equals the cumulative total of the provisions made from
time to time, reduced by loan charge-offs and increased by recoveries of loans
previously charged-off. Our allowance for loan losses was $1.8 million, or 1.7%
of total funded loans, at June 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 $1.3 million and recoveries of $267,000 during the six months
ended June 30, 2010. During the year ended December 31, 2009, we had charge-offs
of $1.3 million and recoveries of $9,000.


29





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
                  June 30, 2010
                
                
                As of
                  December 31, 2009Allocated:
                
                Amount
                
                
                Loan
                  Category to
                  Gross Loans
                
                
                Amount
                
                
                Loan
                  Category to
                  Gross LoansCommercial
      and industrial
                
                $
                1,269
                
                
                
                68.0
                %
                
                $
                1,285
                
                
                
                75.0
                %Consumer
      installment
                
                
                15
                
                
                
                2.0
                %
                
                
                23
                
                
                
                1.3
                %Real
      estate — mortgage
                
                
                399
                
                
                
                21.5
                %
                
                
                318
                
                
                
                18.6
                %Real
      estate — construction
                
                
                137
                
                
                
                8.5
                %
                
                
                87
                
                
                
                5.1
                %Total
      allowance for loan losses
                
                $
                1,820
                
                
                
                100.0
                %
                
                $
                1,713
                
                
                
                100.0
                %





Nonearning
Assets





Premises,
leasehold improvements and equipment, net of accumulated depreciation and
amortization, totaled $662,000 at June 30, 2010 and $793,000 at December 31,
2009.





Deposits





Deposits
are our primary source of funding. Total average deposits at June 30, 2010 and
December 31, 2009 were $114.5 million and $118.2 million, respectively,
representing a decrease of $3.7 million, or 3.1%, during the six month period
ending June 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 June 30, 2010 and
2009:





For the six months ended(000's)
                  
                  June 30, 2010
                  
                  
                  June 30, 2009Average
                    Balance
                  
                  
                  Percent of
                    Deposits
                  
                  
                  Average
                    Rate
                  
                  
                  Average
                    Balance
                  
                  
                  Percent of
                    Deposits
                  
                  
                  Average
                    RateNoninterest
      bearing deposits
                  
                  $
                  9,206
                  
                  
                  
                  11.1
                  %
                  
                  
                  0.0
                  %
                  
                  $
                  10,090
                  
                  
                  
                  8.9
                  %
                  
                  
                  0.0
                  %NOW
      accounts
                  
                  
                  2,049
                  
                  
                  
                  2.4
                  %
                  
                  
                  0.7
                  %
                  
                  
                  1,817
                  
                  
                  
                  1.6
                  %
                  
                  
                  0.8
                  %Money
      market accounts
                  
                  
                  45,900
                  
                  
                  
                  21.2
                  %
                  
                  
                  0.8
                  %
                  
                  
                  45,142
                  
                  
                  
                  39.6
                  %
                  
                  
                  1.6
                  %Savings
      accounts
                  
                  
                  186
                  
                  
                  
                  0.2
                  %
                  
                  
                  0.9
                  %
                  
                  
                  186
                  
                  
                  
                  0.2
                  %
                  
                  
                  1.2
                  %Certificates
      of deposit, less than $100,000
                  
                  
                  14,726
                  
                  
                  
                  15.9
                  %
                  
                  
                  3.9
                  %
                  
                  
                  19,612
                  
                  
                  
                  17.2
                  %
                  
                  
                  4.4
                  %Certificates
      of deposit, $100,000 or greater
                  
                  
                  42,385
                  
                  
                  
                  49.2
                  %
                  
                  
                  4.2
                  %
                  
                  
                  37,090
                  
                  
                  
                  32.5
                  %
                  
                  
                  4.6
                  %Total
      deposits
                  
                  $
                  114,452
                  
                  
                  
                  100.00
                  %
                  
                  
                  2.4
                  %
                  
                  $
                  113,937
                  
                  
                  
                  100.00
                  %
                  
                  
                  3.2
                  %


30





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)
                  
                  June 30,
                    2010
                  
                  
                  December 31,
                    2009Three
      months or less
                  
                  $
                  2,377
                  
                  
                  $
                  8,869Over
      three months through 12 months
                  
                  
                  12,566
                  
                  
                  
                  10,315Over
      one year through three years
                  
                  
                  27,434
                  
                  
                  
                  25,724Over
      three years
                  
                  
                  235
                  
                  
                  
                  1,126Total
                  
                  $
                  42,612
                  
                  
                  $
                  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 June 30, 2010. See Note 14 to
the financial statements included in this report. In addition to the on balance
sheet liquidity available, the Bank has a line of credit with each of the
Federal Home Loan Bank of Dallas and the Federal Reserve Bank of Dallas, which
provide us with sources of off-balance sheet liquidity. As of June 30, 2010, our
established credit line with the Federal Home Loan Bank was $18.1 million, or
15.7% of assets, of which $14.0 million was utilized. As of June 30, 2010, our
established credit line with the Federal Reserve Bank was $21.8 million, or
18.9% of assets, none of which was utilized. On July 1, 2010, an $8.0 million
overnight advance from the Federal Home Loan Bank of Dallas was repaid.Additionally, we serve
as trustee or custodian for $56.4 million in cash deposits held at BlackRock,
Inc. in a money market fund, of which approximately $38.0 million could be held
at the Bank in deposit accounts fully insured by the FDIC.





Capital Resources
and Capital Adequacy Requirements





The
risk-based capital regulations established and administered by the banking
regulatory agencies discussed previously are applicable to the Bank. Risk-based
capital guidelines are designed to make regulatory capital requirements more
sensitive to differences in risk profiles among banks, to account for
off-balance sheet exposure, and to minimize disincentives for holding liquid
assets. Under the regulations, assets and off-balance sheet items are assigned
to broad risk categories, each with appropriate weights. The resulting capital
ratios represent capital as a percentage of total risk weighted assets and
off-balance sheet items. Under the prompt corrective action regulations, to be
adequately capitalized a bank must maintain minimum ratios of total capital to
risk-weighted assets of 8.00%, Tier 1 capital to risk-weighted assets of 4.00%,
and Tier 1 capital to total assets of 4.00%. Failure to meet these capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank’s financial statements. A well capitalized
institution must maintain a minimum ratio of total capital to risk-weighted
assets of at least 10.00%, a minimum ratio of Tier 1 capital to risk weighted
assets of at least 6.00%, and a minimum ratio of Tier 1 capital to total assets
of at least 5.00% and must not be subject to any written order, agreement, or
directive requiring it to meet or maintain a specific capital level. On April
15, 2010, the Bank entered into the Agreement with the Comptroller requiring,
among other provisions, that the Bank ultimately achieve and maintain certain
capital ratios (See Item 1, Note 15, Regulatory Matters). The capital ratios
required by the Agreement are 11.5% Total Capital to Risk Weighted Assets and
9.00% Tier 1 Capital to Average Assets. Therefore, regardless of the Bank’s
capital position, the requirement in the Agreement to meet and maintain a
specific capital level means that the Bank may not be deemed to be well
capitalized under regulatory requirements as of June 30, 2010. As of June
30, 2010, the Bank’s Total Capital to Risk Weighted Assets ratio and Tier 1
Capital to Average Assets ratio of 11.22% and 8.03%, 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 June 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.


31





(000's)
                
                Actual
                
                
                For Capital Adequacy Purposes
                
                
                To Be Well Capitalized Under
                  Prompt Corrective Action
                  ProvisionsAmount
                
                
                Ratio
                
                
                Amount
                
                
                Ratio
                
                
                Amount
                
                
                RatioAs
      of June 30, 2010Total
      Capital (to Risk Weighted Assets)
                
                $
                11,927
                
                
                
                11.22
                %
                
                $
                8,504
                >
                
                
                8.00
                %
                
                $
                10,629
                >
                
                
                10.00
                %Tier
      1 Capital (to Risk Weighted Assets)
                
                
                10,592
                
                
                
                9.96
                %
                
                
                4,252
                >
                
                
                4.00
                %
                
                
                6,378
                >
                
                
                6.00
                %Tier
      1 Capital (to Average Assets)
                
                
                10,592
                
                
                
                8.03
                %
                
                
                5,279
                >
                
                
                4.00
                %
                
                
                6,598
                >
                
                
                5.00
                %As
      of December 31, 2009Total
      Capital (to Risk Weighted Assets)
                
                $
                12,640
                
                
                
                11.33
                %
                
                $
                8,925
                >
                
                
                8.00
                %
                
                $
                11,156
                >
                
                
                10.00
                %Tier
      1 Capital (to Risk Weighted Assets)
                
                
                11,242
                
                
                
                10.80
                %
                
                
                4,462
                >
                
                
                4.00
                %
                
                
                6,694
                >
                
                
                6.00
                %Tier
      1 Capital (to Average Assets)
                
                
                11,242
                
                
                
                7.51
                %
                
                
                5,988
                >
                
                
                4.00
                %
                
                
                7,485
                >
                
                
                5.00
                %





Liquidity
Management





At June
30, 2010, the Company (excluding the Bank) had approximately $300,000 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 June
30, 2010, we had outstanding loan origination commitments and unused commercial
and retail lines of credit of $7.4 million and $5,000 in standby letters of
credit. Certificates of deposit that are scheduled to mature within one year
totaled $20.0 million at June 30, 2010.





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




As of June30, 2010(000's)
                  Less than
                    One
                    Year
                  
                  One to Three
                    Years
                  
                  Over Three to
                    Five Years
                  
                  Over Five
                    YearsOperating
      leases
                  
                  $
                  292
                  
                  
                  $
                  450
                  
                  
                  $
                  255
                  
                  
                  $
                  110Certificates
      of deposit
                  
                  $
                  20,017
                  
                  
                  $
                  35,949
                  
                  
                  $
                  434
                  
                  
                  $
                  -


32





The Bank
had cash and cash equivalents of $3.3 million, or 2.9% of total assets, at June
30, 2010. In addition to the on-balance sheet liquidity available, the Bank has
lines of credit with the Federal Home Loan Bank of Dallas and the Federal
Reserve Bank of Dallas, which provide the Bank with a source of off-balance
sheet liquidity. As of June 30, 2010, the Bank’s established credit line with
the Federal Home Loan Bank of Dallas was $18.1, million or 15.7% of assets, of
which $14.0 million was utilized.  The established credit line with the
Federal Reserve Bank of Dallas was $21.8 million, or 18.9% of assets, none of
which was utilized at June 30, 2010.





As loan
demand increases, greater pressure will be exerted on the Bank’s liquidity. As
of June 30, 2010, the loan to deposit ratio was 118%.  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 June 30, 2010, are approximately $38 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 June 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.


33





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/acting co-principal financial officer and acting co-principal
financial officer have evaluated the effectiveness of our “disclosure controls
and procedures” (“Disclosure Controls”).  Disclosure Controls, as defined
in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), are procedures that are designed with the objective of ensuring
that information required to be disclosed in our reports filed under the
Exchange Act, such as this Annual Report, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms.  Disclosure Controls are also designed with
the objective of ensuring that such information is accumulated and communicated
to our management, including the chief executive officer and chief financial
officer, as appropriate to allow timely decisions regarding required
disclosure.




Our
management, including the principal executive officer/acting co-principal
financial officer and acting co-principal financial officer, does not expect
that our Disclosure Controls will prevent all error and all fraud.  A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs.  Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within the company have
been detected.  These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake.  The design of any system of controls
also is based in part upon certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions.





Based
upon their controls evaluation, our principal executive officer/acting
co-principal financial officer and acting co-principal financial officer have
concluded that our Disclosure Controls are effective at a reasonable assurance
level.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal controls over financial reporting during the
quarter ended June 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 its operations, the Company is a party to various legal
proceedings. Based on the information presently available, management believes
that the ultimate outcome in such proceedings, in the aggregate, will not have a
material adverse effect on the business’s financial condition or results of
operations of the Company.





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





None.





ITEM 3. Defaults Upon Senior
Securities





None.


34





ITEM 4.  (Removed and
Reserved).





ITEM 5. Other Information





Submission of Matters to a Vote of
Security Holders





The 2010
Annual Meeting of Shareholders of the Bank was held at Bent Tree Country Club,
5201 Westgrove Drive, Dallas, Texas 75248 on June 23, 2010.





Routine
items included the election of fifteen directors, and the vote was as set forth
below.





Nominee
              
              Votes For
              
              Votes Against
              
              Votes WithheldPatrick
      Adams
              
              720,810
              
              0
              
              17,500Stanley
      Allred
              
              720,810
              
              0
              
              17,500Dan
      Basso
              
              720,810
              
              0
              
              17,500Frankie
      Basso
              
              670,510
              
              0
              
              67,800David
      Carstens
              
              720,810
              
              0
              
              17,500Ron
      Denheyer
              
              720,810
              
              0
              
              17,500Patrick
      Howard
              
              671,310
              
              0
              
              67,000Steven
      Jones
              
              720,160
              
              0
              
              18,150Eric
      Langford
              
              720,810
              
              0
              
              17,500Steven
      Lugar
              
              720,810
              
              0
              
              17,500Charles
      Mapes
              
              720,810
              
              0
              
              17,500Thomas
      McDougal
              
              720,810
              
              0
              
              17,500Cyvia
      Noble
              
              720,810
              
              0
              
              17,500Anthony
      Pusateri
              
              670,510
              
              0
              
              67,800Gordon
      Youngblood
              
              720,810
              
              0
              
              17,500





In
addition, the shareholders of the Company ratified the appointment of Weaver
& Tidwell, LLP as the independent registered public accounting firm of the
Company for the fiscal year ending December 31, 2010 with 1,113,067 shares
voting in favor, 38,745 shares voting against, and 16,500 shares abstaining from
voting.


35





ITEM 6. Exhibits




Exhibit Number
            
            Description of Exhibit3.1
            
            Articles
      of Incorporation (1)3.2
            
            Bylaws
      of Registrant (1)31.1
            
            Rule
      13a-14(a) Certification of Chief Executive Officer.31.2
            
            Rule
      13a-14(a) Certification of Chief Financial Officer.32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





(1)
            Incorporated
      by reference from the Registration Statement on Form SB-2 filed by the
      Registrant with the SEC on December 15, 2003 and as amended on June 11,
      2007 (file no. 333-111153).


36





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:
      August 13, 2010
            By:
            /s/ Patrick HowardPatrick
      Howard
              President
      and Chief Executive Officer


37





EXHIBIT
INDEX





Exhibit Number
            
            Description of Exhibit3.1
            
            Articles
      of Incorporation (1)3.2
            
            Bylaws
      of Registrant (1)31.1
            
            Rule
      13a-14(a) Certification of Chief Executive Officer.31.2
            
            Rule
      13a-14(a) Certification of Chief Financial Officer.32.1
            
            Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002.





(1)
            Incorporated
      by reference from the Registration Statement on Form SB-2 filed by the
      Registrant with the SEC on December 15, 2003 and as amended on June 11,
      2007 (file no. 333-111153).