T Bancshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EX-31.1 - T Bancshares, Inc.	ex31-1.htm
EX-31.2 - EX-31.2 - T Bancshares, Inc.	ex31-2.htm
EX-32 - EX-32 - T Bancshares, Inc.	ex32.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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.)

16200 Dallas Parkway, Suite 190, Dallas, Texas 75248

(Address of principal executive offices)

(972) 720- 9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to filed such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

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 registrant’s Common Stock as of October 31, 2015 was 4,037,907 shares.

Table of Contents

T BANCSHARES, INC.

TABLE OF CONTENTS

		PAGE
PART I.	FINANCIAL INFORMATION	3
ITEM 1.	Financial Statements	3
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	40
ITEM 4.	Controls and Procedures	40
PART II.	OTHER INFORMATION	41
ITEM 1.	Legal Proceedings	41
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
ITEM 3.	Defaults Upon Senior Securities	41
ITEM 4.	Mine Safety Disclosures	41
ITEM 5.	Other Information	41
ITEM 6.	Exhibits	41

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

T BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

	September 30, 2015		December 31, 2014
(In thousands, except share amounts)	(unaudited)
ASSETS
Cash and due from banks	$	1,428	$	801
Interest-bearing deposits		7,056		5,588
Federal funds sold		674		543
Total cash and cash equivalents		9,158		6,932
Securities available for sale at estimated fair value		9,681		8,794
Securities, restricted at cost		841		1,038
Loans held for sale		3,036		5,158
Loans, net of allowance for loan losses of $1,551 and $1,695 respectively		137,289		124,405
Bank premises and equipment, net		4,546		4,552
Deferred tax assets, net		532		798
Receivable for loans sold		-		8,185
Other assets		3,794		3,221
Total assets	$	168,877	$	163,083

LIABILITIES
Demand deposits:
Noninterest-bearing	$	21,307	$	22,786
Interest-bearing		51,483		39,585
Time deposits $100,000 and over		63,223		59,397
Time deposits under $100,000		4,033		3,966
Total deposits		140,046		125,734
Borrowed funds		-		10,000
Other liabilities		2,292		3,552
Total liabilities		142,338		139,286

SHAREHOLDERS’ EQUITY
Common stock, $0.01 par value; 10,000,000 shares authorized; 4,037,907 and 4,029,932 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		40		40
Additional paid-in capital		22,743		22,664
Retained earnings		3,694		1,105
Accumulated other comprehensive income (loss)		62		(12	)
Total shareholders’ equity		26,539		23,797
Total liabilities and shareholders’ equity	$	168,877	$	163,083

See accompanying notes to consolidated financial statements

Table of Contents

T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands, except per share data)	2015			2014		2015			2014
Interest Income
Loan, including fees	$	2,013		$	1,965	$	6,024		$	5,598
Securities		58			64		174			197
Federal funds sold		-			-		1			1
Interest-bearing deposits		5			4		12			11
Total interest income		2,076			2,033		6,211			5,807
Interest Expense
Deposits		226			200		646			545
Borrowed funds		-			3		4			8
Total interest expense		226			203		650			553
Net interest income		1,850			1,830		5,561			5,254
Provision for loan losses		-			-		-			492
Net interest income after provision for loan losses		1,850			1,830		5,561			4,762
Non-interest Income
Trust income		3,017			2,902		9,146			8,549
Gain on sale of loans		568			949		1,552			1,386
Loan servicing fees, net		113			60		321			176
Service fees and other income		18			37		51			65
Rental income		77			81		232			239
Loss on sale of securities		(1	)		-		(1	)		-
Total non-interest income		3,792			4,029		11,301			10,415
Non-interest Expense
Salaries and employee benefits		1,099			981		3,459			3,051
Occupancy and equipment		212			344		632			928
Trust expenses		2,426			2,290		7,339			6,741
Professional fees		106			57		318			283
Data processing		215			199		632			593
Other		218			213		595			594
Total non-interest expense		4,276			4,084		12,975			12,190
Income before Income Taxes		1,366			1,775		3,887			2,987
Income tax expense		483			612		1,298			1,056
Net Income	$	883		$	1,163	$	2,589		$	1,931

Earnings per common share:
Basic		0.22			0.29		0.64			0.48
Diluted		0.22			0.29		0.64			0.48

Weighted average common shares outstanding		4,037,907			4,029,932		4,032,824			4,029,932
Weighted average diluted shares outstanding		4,047,671			4,037,593		4,042,578			4,032,678

See accompanying notes to consolidated financial statements

Table of Contents

T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015		2014			2015		2014
Net Income	$	883	$	1,163		$	2,589	$	1,931
Other comprehensive income (loss):
Securities available for sale:
Change in net unrealized gain (loss) on investment securities available-for-sale		55		(5	)		73		227
Reclassification adjustment for loss on sale included in income		1		-			1		-
Other comprehensive income (loss)		56		(5	)		74		227
Comprehensive income	$	939	$	1,158		$	2,663	$	2,158

See accompanying notes to consolidated financial statements

Table of Contents

T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

(In thousands)	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, January 1, 2014	$	40	$	22,631	$	(1,933	)	$	(305	)	$	20,433

Net income - YTD		-		-		1,931			-			1,931
Other comprehensive income		-		-		-			227			227
Exercise of stock options		-		8		-			-			8
Stock based compensation		-		17		-			-			17
BALANCE, September 30, 2014	$	40	$	22,656	$	(2	)	$	(78	)	$	22,616

BALANCE, January 1, 2015	$	40	$	22,664	$	1,105		$	(12	)	$	23,797

Net income – YTD		-		-		2,589			-			2,589
Other comprehensive income									74			74
Issuance of 7,975 shares in connection with the directors’ common stock plan		-		58		-			-			58
Stock based compensation		-		21		-			-			21
BALANCE, September 30, 2015	$	40	$	22,743	$	3,694		$	62		$	26,539

See accompanying notes to consolidated financial statements

Table of Contents

T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
(In thousands)	2015			2014
Cash Flows from Operating Activities
Net income	$	2,589		$	1,931
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			492
Depreciation and amortization		169			153
Accretion of discount on loans		(109	)		(8	)
Securities premium amortization, net		15			28
Origination of loans held for sale		(15,054	)		(19,730	)
Proceeds from payments and sales of loans held for sale		18,360			15,205
Loss on sale of securities		1			-
Net gain on sale of other real estate owned		-			(12	)
Net gain on sale of loans		(1,552	)		(1,386	)
Stock based compensation		79			17
Receivable for sold loans		8,185			5,739
Deferred income taxes		266			184
Net change in:
Servicing assets, net		93			43
Other assets		(298	)		(270	)
Other liabilities		(1,298	)		623
Net cash provided by operating activities		11,446			3,009

Cash Flows from Investing Activities
Purchase of securities available for sale		(101,500	)		-
Proceeds from sale of securities available for sale		100,000			-
Principal payments, calls and maturities of securities available for sale		709			600
Purchase of securities, restricted		(4,504	)		(350	)
Proceeds from sale of securities, restricted		4,701			541
Net change in loans		(12,775	)		(13,045	)
Proceeds from sale of other real estate owned		-			761
Purchases of premises and equipment		(163	)		(2,307	)
Net cash used in investing activities		(13,532	)		(13,800	)

Cash Flows from Financing Activities
Net change in demand deposits		10,419			15,663
Net change in time deposits		3,893			10,282
Proceeds from stock options exercised		-			8
Proceeds from borrowed funds		145,000			204,000
Repayment of borrowed funds		(155,000	)		(215,000	)
Net cash provided by financing activities		4,312			14,953

Net change in cash and cash equivalents		2,226			4,162
Cash and cash equivalents at beginning of period		6,932			5,444

Cash and cash equivalents at end of period	$	9,158		$	9,606

Supplemental disclosures of cash flow information
Cash paid during the period for
Interest	$	645		$	546
Income taxes	$	2,020		$	625

See accompanying notes to consolidated financial statements

Table of Contents

T BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

We prepared the unaudited 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 management believes are considered necessary for the fair presentation of our financial position and operating results. The accounting and reporting policies of the Company reflect banking industry practice and conform to GAAP. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported asset and liability balances and revenue and expense amounts and the disclosure of contingent assets and liabilities. The allowance for loan loss is the primary estimate by management, which is established through a provision for loan loss charged to expense. It is reasonably possible that actual results could differ significantly from those estimates. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

NOTE 2. ADOPTION OF NEW ACCOUNTING POLICIES

Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)." ASU 2014-09 implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 is effective for the Company on January 1, 2017 and is not expected to have a significant impact on the Company's financial statements.

Accounting Standards Update (ASU) No. 2014-11, “Transfers and Servicing (Topic 860).” ASU 2014-11 requires that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, ASU 2014-11 requires separate accounting for repurchase financings, which entails the transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty. ASU 2014-11 requires entities to disclose certain information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements. In addition, ASU 2014-11 requires disclosures related to collateral, remaining contractual tenor and of the potential risks associated with repurchase agreements, securities lending transactions and repurchase-to-maturity transactions. ASU 2014-11 became effective for the Company on January 1, 2015 and its adoption did not have a significant impact on the Company’s financial statements.

Accounting Standards Update (ASU) No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” ASU 2015-01 eliminates from GAAP the concept of extraordinary items, which, among other things, required an entity to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. ASU 2015-01 is effective for the Company beginning January 1, 2016, though early adoption is permitted. ASU 2015-01 is not expected to have a significant impact on the Company’s financial statements.

Table of Contents

NOTE 3. SECURITIES

A summary of the amortized cost and fair value of securities is presented below.

	September 30, 2015
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	6,184	$	96	$	28	$	6,252
Mortgage-backed securities		3,404		31		6		3,429
Total securities available for sale	$	9,588	$	127	$	34	$	9,681

Securities, restricted:
Other	$	841	$	-	$	-	$	841

	December 31, 2014
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	5,561	$	76	$	94	$	5,543
Mortgage-backed securities		3,251		12		12		3,251
Total securities available for sale	$	8,812	$	88	$	106	$	8,794

Securities, restricted:
Other	$	1,038	$	-	$	-	$	1,038

All mortgage-backed securities included in the above table were issued by U.S. government agencies, or U.S. government-sponsored agencies. Securities, restricted consist of Federal Reserve Bank of Dallas stock and Federal Home Loan Bank of Dallas stock, which are carried at cost.

At September 30, 2015 and December 31, 2014, securities with market value of $7.9 million and $6.8 million, respectively, were pledged against borrowed funds at the Federal Home Loan Bank of Dallas. At September 30, 2015 and December 31, 2014, securities with market values of $1.0 million and $1.2 million, respectively, were pledged against trust deposit balances held at the Company’s insured depository subsidiary, T Bank, N.A. (the “Bank”). One security was pledged against borrowed funds at the Federal Reserve Bank of Dallas at September 30, 2015 and December 31, 2014, with a market value of $778,000 and $840,000, respectively. The Bank held Federal Reserve Bank of Dallas stock in the amount of $570,000 at September 30, 2015 and December 31, 2014. The Bank also held Federal Home Loan Bank of Dallas stock in the amount of $271,000 and $468,000 at September 30, 2015 and December 31, 2014, respectively.

The amortized cost and estimated fair value of securities at September 30, 2015 are presented below by contractual maturity. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Residential mortgage-backed securities are shown separately since they are not due at a single maturity date.

	Available for Sale
(In thousands)	Amortized Cost		Estimated Fair Value
Due after one year through five years	$	1,000	$	999
Due after five years through ten years		4,454		4,475
Due after ten years		730		778
Mortgage-backed securities		3,404		3,429
Total	$	9,588	$	9,681

Table of Contents

The table below indicates the length of time individual investment securities and mortgage-backed securities have been in a continuous loss position at September 30, 2015:

	Less than 12 months				12 months or longer				Total
(In thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
U.S. government agencies	$	999	$	1	$	1,999	$	27	$	2,998	$	28
Mortgage-backed securities		1,281		6		-		-		1,281		6
Total	$	2,280	$	7	$	1,999	$	27	$	4,279	$	34

NOTE 4. LOANS

Major classifications of loans held for investment are as follows:

(In thousands)	September 30, 2015			December 31, 2014
Commercial and industrial	$	73,140		$	72,711
Consumer installment		2,273			1,578
Real estate – residential		6,401			1,993
Real estate – commercial		19,956			21,084
Real estate – construction and land		8,102			5,477
SBA:
SBA 7(a) unguaranteed portion		19,836			15,755
SBA 504		7,332			5,839
USDA		2,798			2,054
Other		542			1,000
Gross Loans		140,380			127,491
Less:
Allowance for loan losses		1,551			1,695
Deferred loan costs		(286	)		(153	)
Discount on loans		1,826			1,544
Net loans	$	137,289		$	124,405

The Company periodically sells the guaranteed portion of selected Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans into the secondary market, on a servicing-retained basis. The Company retains the unguaranteed portion of these loans. In calculating gain on the sale of these loans, the Company performs an allocation based on the relative fair values of the sold portion and retained portion of the loan. The Company’s assumptions are validated by reference to external market information.

During the three and nine months ended September 30, 2015, the Company originated $4.7 million and $14.6 million, respectively, of SBA and USDA loans. The guaranteed portions of the loans are recorded as loans held for sale. The Company had $3.0 million and $5.2 million of SBA and USDA loans held for sale as of September 30, 2015 and December 31, 2014, respectively. During the third quarter of 2015, the Company sold $6.0 million of SBA loans, recognizing a gain on sale of loans of $568,000, and recorded a servicing asset at fair value of $104,000.

Loan Origination/Risk Management.

The Company maintains written loan origination policy, procedures, and processes that address credit quality at several levels including individual loan level, loan type, and loan portfolio levels.

Commercial and industrial loans, which are predominantly loans to dentists, are underwritten based on historical and projected income of the business and individual borrowers and guarantors. The Company utilizes a comprehensive global debt service coverage analysis to determine debt service coverage ratios. This analysis compares global cash flow of the borrowers and guarantors on an individual credit to existing and proposed debt after consideration of personal and business related other expenses. Collateral is generally a lien on all available assets of the business borrower, including intangible assets. Creditworthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.

Table of Contents

Consumer loans are evaluated on the basis of credit worthiness as established through the use of credit reports and credit scores. Additional credit quality indicators include borrower debt to income ratios based on verifiable income sources.

Real estate mortgage loans are evaluated based on collateral value as well as global debt service coverage ratios based on historical and projected income from all related sources including the collateral property, the borrower, and all guarantors where applicable.

Small Business Administration Lending - The Company originates SBA loans that are sometimes sold into the secondary market. The Company continues to service these loans after sale and is required under the SBA programs to retain specified amounts. The two primary SBA loan programs that the Company offers are the basic 7(a) Loan Guaranty (“7(a)”) program and the Certified Development Company (“CDC”), a Section 504 (“504”) program.

The 7(a) program serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. Loan proceeds under this program can be used for most business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements and debt refinancing. Loan maturity is generally up to 10 years for working capital and up to 25 years for fixed assets. The 7(a) loan is approved and funded by a qualified lender, guaranteed by the SBA and subject to applicable regulations. In general, the SBA guarantees up to 75% of the loan amount. The Company is required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) program loans. The SBA 7(a) program loans are generally variable interest rate loans. Gains recognized by the Company on the sales of the guaranteed portion of these loans and the ongoing servicing income received are significant revenue sources for the Company. The servicing spread is 1% on the majority of SBA 7(a) program loans.

The 504 program is an economic development-financing program providing long-term, low down payment loans to expanding businesses. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100% SBA-guaranteed debenture) with a junior lien covering up to 40% of the total cost, and a contribution of at least 10% equity from the borrower. Debenture limits are $5.0 million for regular 504 loans and $5.5 million for those 504 loans that meet a public policy goal.

The SBA has designated the Bank as a “Preferred Lender.” As a Preferred Lender, the Bank has been delegated loan approval, closing and most servicing and liquidation authority responsibility from the SBA.

The Company also offers Business & Industry (“B&I”) program loans through the USDA. These loans are similar to the SBA product, except they are guaranteed by the USDA. The guaranteed amount is generally 80% on loan amounts up to $5.0 million. B&I loans are made to businesses in designated rural areas and are generally larger loans to larger businesses than the SBA 7(a) loans. Similar to the SBA 7(a) product, they can be sold into the secondary market. These loans can be utilized for rural commercial real estate and equipment. The loans can be up to 30 years or 360 months and the rates can be fixed or variable.

Construction and land development loans are evaluated based on the borrower’s and guarantor’s creditworthiness, past experience in the industry, track record and experience with the type of project being considered, and other factors. Collateral value is determined generally by independent appraisal utilizing multiple approaches to determine value based on property type.

For all loan types, including loans acquired through purchase participations, the Company establishes guidelines for its underwriting criteria, including collateral coverage ratios, global debt service coverage ratios, and maximum amortization or loan maturity terms.

At the portfolio level, the Company monitors concentrations of loans based on several criteria including loan type, collateral type, industry, geography, and other factors. The Company also performs periodic market research and economic analysis at a local geographic and national level. Based on this research, the Company may from time to time change the minimum or benchmark underwriting criteria applied to the above loan types.

The activity in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2015 and 2014 is presented below. Management has evaluated the adequacy of the allowance for loan losses by estimating the losses in various categories of the loan portfolio.

Table of Contents

(In thousands)	Commercial and Industrial			Consumer Installment			Real Estate Residential			Real Estate Commercial			Real Estate Construction and Land			SBA			USDA		Other		Unallocated			Total
Three months ended:
September 30,2015
Beginning Balance	$	979		$	23		$	86		$	258		$	101		$	82		$	-	$	-	$	34		$	1.563
Provision (credit) for loan losses		(95	)		6			(6	)		(11	)		(2	)		135			-		7		(34	)		-
Charge-offs		-			-			-			-			-			(18	)		-		-		-			(18	)
Recoveries		4			-			-			-			2			-			-		-		-			6
Net (charge-offs) recoveries		4			-			-			-			2			(18	)		-		-		-			(12	)
Ending balance	$	888		$	29		$	80		$	247		$	101		$	199		$	-	$	7	$	-		$	1,551

September 30,2014
Beginning Balance	$	1,098		$	25		$	20		$	250		$	97		$	232		$	20	$	-	$	-		$	1,742
Provision (credit) for loan losses		(118	)		12			4			53			(31	)		62			18		-		-			-
Charge-offs		(65	)		(16	)		-			-			-			-			-		-		-			(81	)
Recoveries		23			-			-			-			2			-			-		-		-			25
Net (charge-offs) recoveries		(42	)		(16	)		-			-			2			-			-		-		-			(56	)
Ending balance	$	938		$	21		$	24		$	303		$	68		$	294		$	38	$	-	$	-		$	1,686

(In thousands)	Commercial and Industrial			Consumer Installment			Real Estate Residential		Real Estate Commercial			Real Estate Construction and Land			SBA			USDA			Other			Unallocated		Total
Nine months ended:
September 30,2015
Beginning Balance	$	918		$	20		$	25	$	265		$	69		$	344		$	41		$	13		$	-	$	1,695
Provision (credit) for loan losses		(40	)		9			55		(18	)		27			14			(41	)		(6	)		-		-
Charge-offs		-			-			-		-			-			(159	)		-			-			-		(159	)
Recoveries		10			-			-		-			5			-			-			-			-		15
Net (charge-offs) recoveries		10			-			-		-			5			(159	)		-			-			-		(144	)
Ending balance	$	888		$	29		$	80	$	247		$	101		$	199		$	-		$	7		$	-	$	1,551

September 30,2014
Beginning Balance	$	1,805		$	24		$	20	$	209		$	74		$	166		$	20		$	-		$	-	$	2,318
Provision (credit) for loan losses		245			13			4		94			(10	)		128			18			-			-		492
Charge-offs		(1,138	)		(16	)		-		-			-			-			-			-			-		(1,154	)
Recoveries		26			-			-		-			4			-			-			-			-		30
Net (charge-offs) recoveries		(1,112	)		(16	)		-		-			4			-			-			-			-		(1,124	)
Ending balance	$	938		$	21		$	24	$	303		$	68		$	294		$	38		$	-		$	-	$	1,686

The Company’s allowance for loan losses as of September 30, 2015 and December, 31, 2014 by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

(In thousands)	Commercial and Industrial		Consumer Installment		Real Estate Residential		Real Estate Commercial		Real Estate Construction and Land		SBA		USDA		Other		Unallocated		Total
September 30, 2015
Loans individually evaluated For impairment	$	30	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	30
Loans collectively evaluated For impairment		858		29		80		247		101		199		-		7		-		1,521
Ending balance	$	888	$	29	$	80	$	247	$	101	$	199	$	-	$	7	$	-	$	1,551

December 31, 2014
Loans individually evaluated For impairment	$	70	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	70
Loans collectively evaluated For impairment		848		20		25		265		69		344		41		13		-		1,625
Ending balance	$	918	$	20	$	25	$	265	$	69	$	344	$	41	$	13	$	-	$	1,695

Table of Contents

The Company’s recorded investment in loans as of September 30, 2015 and December 31, 2014 related to each balance in the allowance for loan losses by portfolio segment and detailed on the basis of the Company’s impairment methodology was as follows:

(In thousands)	Commercial and Industrial		Consumer Installment		Real Estate Residential		Real Estate Commercial		Real Estate Construction and Land		SBA		USDA		Other		Unallocated		Total
September 30, 2015
Loans individually evaluated For impairment	$	1,291	$	-	$	-	$	141	$	-	$	-	$	-	$	-	$	-	$	1,432
Loans collectively evaluated For impairment		71,849		2,273		6,401		19,815		8,102		27,168		2,798		542		-		138,948
Ending balance	$	73,140	$	2,273	$	6,401	$	19,956	$	8,102	$	27,168	$	2,798	$	542	$	-	$	140,380

December 31, 2014
Loans individually evaluated For impairment	$	1,803	$	-	$	-	$	153	$	-	$	-	$	-	$	-	$	-	$	1,956
Loans collectively evaluated For impairment		70,908		1,578		1,993		20,931		5,477		21,594		2,054		1,000		-		125,535
Ending balance	$	72,711	$	1,578	$	1,993	$	21,084	$	5,477	$	21,594	$	2,054	$	1,000	$	-	$	127,491

At September 30, 2015 and December 31, 2014, there were $481,000 and $595,000, respectively, of commercial and industrial nonaccrual loans, net of government guarantees, and there were no loans contractually delinquent over 90 days and still accruing interest. During the second quarter of 2015, the Company repurchased the guaranteed portion of a defaulted SBA loan with a balance of $477,000. It is expected that the SBA will reimburse the Company for this amount after the foreclosure and collection process is complete.

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. If a loan is impaired, a specific valuation allowance is allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The Company’s impaired loans and related allowance are summarized in the following table:

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
(In thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
September 30, 2015											Nine Months Ended
Commercial and industrial	$	1,422	$	477	$	814	$	1,291	$	30	$	1,695	$	67
Real estate – commercial		141		141		-		141		-		148		5
Total	$	1,563	$	618	$	814	$	1,432	$	30	$	1,843	$	72

December 31, 2014											Year Ended
Commercial and industrial	$	1,836	$	-	$	1,803	$	1,803	$	70	$	2,370	$	134
Real estate – commercial		153		153		-		153		-		269		13
Total	$	1,989	$	153	$	1,803	$	1,956	$	70	$	2,639	$	147

Interest income is recognized on impaired loans unless collections of the remaining recorded investment are placed on nonaccrual, at which time we record payments received as reductions of principal. Interest that would have been recognized for the nine months ended September 30, 2015 and 2014 on non-accrual loans if performed in accordance with their original contract terms was not significant.

Restructured loans are considered “troubled debt restructurings” if due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modification of loan terms may include interest rate reductions below market interest rates, principal forgiveness, restructuring amortization schedules, reductions in collateral and other actions intended to minimize potential losses. There were no troubled debt restructurings during the three and nine months ended September 30, 2015 and 2014.

Table of Contents

There were no loans modified as a troubled debt restructuring within the previous 12 months and for which there was a payment default during the three or nine months ended September 30, 2015 and 2014. A default for purposes of this disclosure is a troubled debt restructuring in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

As of September 30, 2015 and December 31, 2014, the Company had no commitments to lend additional funds to loan customers whose terms have been modified in troubled debt restructurings.

As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators, including internal credit risk based on past experiences as well as external statistics and factors. Loans are graded in one of six categories: (i) pass, (ii) pass-watch, (iii) special mention, (iv) substandard, (v) doubtful, or (vi) loss. Loans graded as loss are charged-off.

The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on credits quarterly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit. The Company’s methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated pass are acceptable loans, appropriately underwritten, bearing an ordinary risk of loss to the Company. Loans in this category are loans to quality borrowers with financial statements presenting a good primary source as well as an adequate secondary source of repayment.

Credits rated pass-watch loans have been determined to require enhanced monitoring for potential weaknesses which require further investigation. They have no significant delinquency in the past 12 months. This rating causes the loan to be actively monitored with greater frequency than pass loans and allows appropriate downgrade transition if verifiable adverse events are confirmed. This category may also include loans that have improved in credit quality from special mention but are not yet considered pass loans.

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that the Company generally expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits rated more harshly.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and an evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss.

Loans classified loss are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this asset even though partial recovery may be affected in the future.

Table of Contents

The following summarizes the Company’s internal ratings of its loans:

			Pass-		Special
(In thousands)	Pass		Watch		Mention		Substandard		Doubtful		Total
September 30, 2015
Commercial and industrial	$	72,078	$	-	$	333	$	729	$	-	$	73,140
Consumer installment		2,273		-		-		-		-		2,273
Real estate – residential		6,401		-		-		-		-		6,401
Real estate – commercial		19,815		-		-		141		-		19,956
Real estate – construction and land		7,378		-		724		-		-		8,102
SBA		26,691		-		-		477		-		27,168
USDA		2,798		-		-		-		-		2,798
Other		542		-		-		-		-		542
Total	$	137,976	$	-	$	1,057	$	1,347	$	-	$	140,380

December 31, 2014
Commercial and industrial	$	68,350	$	2,272	$	1,209	$	880	$	-	$	72,711
Consumer installment		1,578		-		-		-		-		1,578
Real estate – residential		1,142		851		-		-		-		1,993
Real estate – commercial		20,366		-		565		153		-		21,084
Real estate – construction and land		4,571		149		757		-		-		5,477
SBA		21,594		-		-		-		-		21,594
USDA		2,054		-		-		-		-		2,054
Other		1,000		-		-		-		-		1,000
Total	$	120,655	$	3,272	$	2,531	$	1,033	$	-	$	127,491

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The Company’s past due loans are as follows:

	30-89 Days		Greater Than		Total		Total		Total		Days Past Due
(In thousands)	Past Due		90 Days		Past Due		Current		Loans		Still Accruing
September 30, 2015
Commercial and industrial	$	23	$	-	$	23	$	73,117	$	73,140	$	-
Consumer installment		-		-		-		2,273		2,273		-
Real estate – residential		-		-		-		6,401		6,401		-
Real estate – commercial		-		-		-		19,956		19,956		-
Real estate – construction and land		-		-		-		8,102		8,102		-
SBA		-		477		477		26,691		27,168		-
USDA		-		-		-		2,798		2,798		-
Other		-		-		-		542		542		-
Total	$	23	$	477	$	500	$	139,880	$	140,380	$	-

December 31, 2014
Commercial and industrial	$	276	$	-	$	276	$	72,435	$	72,711	$	-
Consumer installment		-		-		-		1,578		1,578		-
Real estate – residential		-		-		-		1,993		1,993		-
Real estate – commercial		-		-		-		21,084		21,084		-
Real estate – construction and land		-		-		-		5,477		5,477		-
SBA		-		-		-		21,594		21,594		-
USDA		-		-		-		2,054		2,054		-
Other		-		-		-		1,000		1,000		-
Total	$	276	$	-	$	276	$	127,215	$	127,491	$	-

Table of Contents

NOTE 5. RELATED PARTIES

Certain directors and officers of the Company have depository accounts with the Bank. None of those deposit accounts have terms more favorable than those available to any other depositor. No directors or officers have loans with the Company or the Bank.

NOTE 6. BANK PREMISES AND EQUIPMENT

The original cost and related accumulated depreciation at September 30, 2015 and December 31, 2014 were as follows:

(In thousands)	September 30, 2015		December 31, 2014
Land	$	676	$	676
Building		1,279		1,279
Building improvement		2,493		2,415
Furniture and equipment		1,166		1,078
Leasehold improvements		159		159
Construction in progress		-		2
		5,773		5,609
Less: accumulated depreciation		1,227		1,057
Balance at end of period	$	4,546	$	4,552

NOTE 7. OTHER ASSETS

Other assets consisted of the following at September 30, 2015 and December 31, 2014:

(In thousands)	September 30, 2015		December 31, 2014
Loan servicing rights	$	1,426	$	1,150
Accounts receivable – trust fees		1,040		1,066
Accrued interest receivable		463		478
Prepaid assets		406		358
Other		459		169
Total	$	3,794	$	3,221

For the three and nine months ended September 30, 2015, the Company sold $6.0 million and $16.5 million, respectively, of SBA 7(a) and USDA program loans, and recorded a loan servicing asset of $104,000 and $369,000, respectively. The Company has elected to use the amortizing method for the treatment of servicing assets. Amortization expense for the three and nine months ended September 30, 2015 was $39,000 and $93,000, respectively. In the event future prepayments exceed management’s estimates and future expected cash flows are inadequate to cover the servicing asset, impairment is recognized.

NOTE 8. DEPOSITS

Time deposits of $250,000 and over totaled $21.8 million and $24.0 million at September 30, 2015 and December 31, 2014, respectively.

Deposits are summarized as follows:

(In thousands)	As of September 30, 2015				As of December 31, 2014
Non-interest bearing demand	$	21,307	15	%	$	22,786	18	%
Interest-bearing demand (NOW)		4,245	3			5,833	5
Money market accounts		41,213	30			30,599	24
Savings accounts		6,025	4			3,153	3
Time deposits $100,000 and over		63,223	45			59,397	47
Time deposits under $100,000		4,033	3			3,966	3
Total	$	140,046	100	%	$	125,734	100	%

Table of Contents

At September 30, 2015, the scheduled maturities of time deposits were as follows:

(In thousands)
2015	$	8,246
2016		39,166
2017		13,854
2018		4,455
2019		1,388
2020		147
Total	$	67,256

NOTE 9. BORROWED FUNDS

The Company had no borrowed funds as of September 30, 2015. The Company had borrowed funds from the Federal Home Loan Bank of Dallas of $10.0 million as of December 31, 2014. As of September 30, 2015, the Company has a blanket lien credit line with the Federal Home Loan Bank of Dallas with borrowing capacity of $20.3 million secured by commercial loans and securities with collateral values of $12.7 million and $7.6 million, respectively. The Company had one outstanding advance for $10.0 million at December 31, 2014, with a fixed interest rate of 0.06% and maturity date of January 7, 2015. The advance was renewed at a fixed interest rate of 0.06% and maturity date of January 15, 2015. At maturity, we determine our borrowing needs and renew accordingly at varying terms ranging from one to 30 days.

The Company also has a credit line with the Federal Reserve Bank of Dallas with borrowing capacity of $18.9 million as of September 30, 2015, secured by commercial loans and securities with collateral value of $18.2 million and $746,000, respectively. There were no outstanding borrowings at September 30, 2015 or December 31, 2014.

NOTE 10. OTHER LIABILITIES

The following comprised other liabilities at September 30, 2015 and December 31, 2014:

(In thousands)	September 30, 2015		December 31, 2014
Trust advisor fees payable	$	1,469	$	1,496
Incentive compensation		285		319
Data processing		75		114
Federal income tax payable		2		932
Audit fees		68		52
Franchise & property taxes		60		14
Interest payable		27		22
Legal		6		6
Other accruals		300		597
	$	2,292	$	3,552

NOTE 11. INCOME TAXES

Income tax expense for the three months ended September 30, 2015 and 2014 was $483,000 and $612,000, respectively. The Company’s effective income tax rate was 35.4% and 34.5% for the three months ended September 30, 2015 and 2014, respectively. Income tax expense for the nine months ended September 30, 2015 and 2014 was $1.3 million and $1.1 million, respectively. The Company’s effective income tax rate was 33.4% and 35.4% for the nine months ended September 30, 2015 and 2014, respectively. Projections for continued levels of profitability will be reviewed quarterly and any necessary adjustments to the deferred tax assets will be recognized in the provision or benefit for income taxes.

Net deferred tax assets totaled $532,000 at September 30, 2015 and $798,000 at December 31, 2014. No valuation allowance was recorded against deferred tax assets at September 30, 2015 or December 31, 2014, as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by the Company’s earnings in prior years. Projections for continued levels of profitability will be reviewed quarterly and any necessary adjustments to the deferred tax assets will be recognized in the provision or benefit for income taxes.

Table of Contents

NOTE 12. EMPLOYEE BENEFITS

The Company has a retirement savings 401(k) plan covering substantially all employees. Employees may contribute up to 6% of their compensation with the Company matching 100% of the employee’s contribution on the first 1% of the employee’s compensation and 50% of the employee’s contribution on the next 5% of the employee’s compensation. Employer contributions charged to expense for the three months ended September 30, 2015 and 2014 totaled $30,000 and $26,000, respectively. Employer contributions charged to expense for the nine months ended September 30, 2015 and 2014 totaled $101,000 and $74,000, respectively.

NOTE 13. STOCK AND COMPENSATION PLANS

At September 30, 2015, the Company had three stock-based compensation plans outlined below.

2005 Stock Incentive Plan

The shareholders of the Company approved the 2005 Stock Incentive Plan (the “2005 Plan”) at the annual shareholder meeting held on June 2, 2005. The 2005 Plan authorized 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 2005 Plan is administered by the Board of Directors and had a term of 10 years. The 2005 Stock Incentive Plan expired during the current quarter and therefore no additional awards may be issued under this plan.

As of September 30, 2015, options to purchase a total of 102,000 shares of common stock were issued and outstanding with a weighted average exercise price of $7.38. These options vest through March 2019. As of December 31, 2014, options to purchase a total of 233,000 shares of common stock were issued and outstanding with a weighted average exercise price of $8.86. Outstanding stock options of 19,000 were considered in the diluted earnings per share computations for the three and nine months ended September 30, 2015. The remaining 83,000 outstanding options at September 30, 2015 were not considered in the per share computation because their effect was anti-dilutive. Outstanding stock options of 19,000 were considered in the diluted earnings per share computations for the three and nine months ended September 30, 2014. The remaining 214,000 outstanding options at September 30, 2014 were not considered in the per share computation because their effect was anti-dilutive.

The Company recorded $7,000 and $8,000 in compensation expense for the three months ended September 30, 2015 and 2014, respectively, and $21,000 and $17,000 in compensation expense for the nine months ended September 30, 2015 and 2014, respectively, in connection with the 2005 Plan.

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 Plan for the nine months ended September 30, 2015:

	Number of Shares Underlying Options		Weighted Average Exercise Prices
Outstanding at beginning of the period		233,000	$	8.86
Granted		-		-
Exercised		-		-
Expired / forfeited		131,000		10.00

Outstanding at end of period		102,000	$	7.38
Exercisable at end of period		77,200	$	8.14
Available for grant at end of period		-

The weighted average remaining contractual life of options outstanding at September 30, 2015 was 4.3 years.

Aggregate intrinsic value of the outstanding stock options and exercisable stock options at September 30, 2015, was $138,000 and $97,000, respectively. Aggregate intrinsic value of the outstanding stock options and exercisable stock options at December 31, 2014 was $116,000 and $54,000, respectively. Aggregate intrinsic value represents the difference between the Company’s closing stock price on the last trading day of the period, which was $6.70 and $6.25 at September 30, 2015 and December 31, 2014, respectively, and the exercise price, multiplied by the number of options outstanding. There were no stock options exercised during the three and nine months ended September 30, 2015. There were 8,000 stock options exercised for the year ended December 31, 2014.

Table of Contents

2015 Stock Incentive Plan

The shareholders of the Company approved the 2015 Stock Incentive Plan (the “2015 Plan”) at the Company’s annual shareholder meeting held on June 24, 2015. The 2015 Plan authorizes the granting of options to purchase up to 270,000 shares of common stock of the Company to employees of the Company and its subsidiaries. The 2015 Plan is designed to provide the Company with the flexibility to grant incentive stock options and non-qualified stock options to its executives and other officers. The purpose of the 2015 Plan is to provide increased incentive for key employees to render services and to exert maximum effort for the success of the Company.

The 2015 Plan is administered by the Board of Directors and has a term of 10 years. As of September 30, 2015, there were no options granted or outstanding under the 2015 Plan.

2014 Non-employee Directors’ Common Stock Plan

In December 2014, the Board of Directors approved the 2014 Non-employee Directors’ Common Stock Plan (the “2014 Plan”). The 2014 Plan is intended to promote the best interests of the Company and its shareholders by providing shares of the Company’s common stock to each non-employee director, for his or her service as a director (“service shares”), which shares are intended to promote an increased personal interest in the welfare of the Company by those individuals who are primarily responsible for shaping the long-range plans of the Company.

The 2014 Plan is administered by the Board of Directors. The number of service shares issuable under this plan shall not exceed 100,000. On June 24, 2015, the Company granted 7,975 service shares to the non-employee directors. The grant date fair value was $7.25 per share, resulting in stock compensation expense of approximately $58,000.

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 consolidated 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.

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 following table summarizes loan commitments as of September 30, 2015 and December 31, 2014:

(In thousands)	September 30, 2015		December 31, 2014
Undisbursed loan commitments	$	16,919	$	16,881
Standby letters of credit		10		10
	$	16,929	$	16,891

The Company has one non-cancelable office lease agreement that expires in January 2017. The Company does not occupy this space, and receives rental payments under a sublease agreement that expires on the same date as the office lease. The Company has no plans to renew the lease and sublease. The Company also leases various pieces of office equipment under short-term agreements. Lease expense for the nine months ended September 30, 2015 and 2014 was $7,000 and $80,000, respectively. The decrease in lease expense was due to the expiration of the lease of the Company’s prior office location in May 2014.

In addition, under an assignment and assumption agreement, the Company receives rental income from nine tenants in the building it is headquartered in, for office space the Company does not occupy. Rental income for the nine months ended September 30, 2015 and 2014 was $232,000 and $239,000, respectively.

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.

Table of Contents

Employment Agreements

The Company has entered into employment agreements with four officers of the Company, Steve Jones, Craig Barnes, Ken Bramlage and Patrick Howard. The agreements are for “at will” employment and may be terminated at any time in accordance with the terms of such employment agreements.

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 business, results of operations and financial condition. 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 GAAP, regulatory reporting requirements, and regulatory capital standards. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulatory capital standards 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 to risk-weighted assets, common equity Tier 1 capital to total risk-weighted assets, and of tier 1 capital to average assets. To be categorized as well-capitalized under the prompt corrective action framework, the Bank must maintain minimum total risk-based capital, tier 1 risk-based capital, common equity tier 1 risk-based capital and tier 1 leverage ratios as set forth in the table below.

(In thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2015
Total Capital (to Risk Weighted Assets)	$	27,080		18.06	%	$	11,995		8.00	%	$	14,994		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		25,529		17.03			8,996		6.00			11,995		8.00

Common Equity Tier 1 (to Risk Weighted Assets)		25,529		17.03			6,747		4.50			9,746		6.50

Tier 1 Capital (to Average Assets)		25,529		14.73			6,939		4.00			8,673		5.00

As of December 31, 2014
Total Capital (to Risk Weighted Assets)	$	24,638		17.56	%	$	11,224		8.00	%	$	14,030		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		22,943		16.35			5,612		4.00			8,418		6.00

Tier 1 Capital (to Average Assets)		22,943		13.89			6,609		4.00			8,261		5.00

As of September 30, 2015, capital levels for the Bank exceeded all capital adequacy requirements under the Basel III capital rules on a fully phased-in basis, as well as the minimum levels necessary to be considered “well capitalized.”

Banking regulations may limit the amount of dividends that may be paid. Approval by regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. Approval is also required if dividends declared exceed the net profits for that year combined with the retained net profits for the preceding two years. At September 30, 2015, approximately $6.6 million was available for the declaration of dividends by the Bank to the Company without prior approval of regulatory agencies and still maintain its “well capitalized” status.

Table of Contents

NOTE 16. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

T BANCSHARES, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(In thousands)	September 30, 2015		December 31, 2014
ASSETS

Cash and due from banks	$	786	$	863
Accounts receivable		49		31
Investment in subsidiary		25,704		22,931

Total assets	$	26,539	$	23,825

LIABILITIES AND CAPITAL

Accounts payable		-		28
Capital		26,539		23,797

Total liabilities and capital	$	26,539	$	23,825

T BANCSHARES, INC.

CONDENSED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015			2014		2015			2014
Equity in income from subsidiary	$	920		$	1,184	$	2,699		$	2,004

Noninterest expense:
Professional and administrative		37			13		87			56
Stock based compensation		7			8		79			17
Total noninterest expenses		44			21		166			73
Income before income taxes		876			1,163		2,533			1,931
Income tax benefit		(7	)		-		(56	)		-
Net Income	$	883		$	1,163	$	2,589		$	1,931

T BANCSHARES, INC.

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015		2014			2015		2014
Net Income	$	883	$	1,163		$	2,589	$	1,931
Other comprehensive income (loss):
Securities available for sale:
Change in net unrealized gain (loss) on investment securities available-for-sale		55		(5	)		73		227
Reclassification adjustment for loss on sale included in income		1		-			1		-
Other comprehensive income (loss)		56		(5	)		74		227
Comprehensive income	$	939	$	1,158		$	2,663	$	2,158

Table of Contents

T BANCSHARES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
(In thousands)	2015			2014
Cash Flows from Operating Activities
Net income	$	2,589		$	1,931
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of Bank		(2,699	)		(2,004	)
Stock based compensation		79			17
Net change in other assets		(18	)		-
Net change in other liabilities		(28	)		-
Net cash used in operating activities		(77	)		(56	)

Cash Flows from Investing Activities		-			-

Cash Flows from Financing Activities
Net proceeds from stock options exercised		-			8
Net change in cash and cash equivalents		(77	)		(48	)
Cash and cash equivalents at beginning of period		863			921

Cash and cash equivalents at end of period	$	786		$	873

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.

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.

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. The Company has no securities in the Level 1 or Level 3 inputs.

Table of Contents

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

(In thousands)	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
As of September 30, 2015
Securities available for sale:
U.S. government agencies	$	-	$	6,252	$	-	$	6,252
Mortgage-backed securities		-		3,429		-		3,429

As of December 31, 2014
Securities available for sale:
U.S. government agencies	$	-	$	5,543	$	-	$	5,543
Mortgage-backed securities		-		3,251		-		3,251

The Company considers transfers between the levels of the hierarchy to be recognized at the end of related reporting periods. From December 31, 2014 to September 30, 2015, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

Certain financial assets and financial liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods are discussed below.

At September 30, 2015, impaired loans with a carrying value of $814,000 were reduced by specific valuation allowances totaling $30,000, resulting in a net fair value of $784,000 based on Level 3 inputs. At December 31, 2014, impaired loans with a carrying value of $1.8 million were reduced by specific valuation allowances totaling $70,000 resulting in a net fair value of $1.7 million based on Level 3 inputs. The significant unobservable (Level 3) inputs used in the fair value measurement of impaired loans primarily relate to discounted cash flows using current market rates applied to the estimated life and credit risk.

The significant unobservable inputs (Level 3) used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to the specialized discounting criteria applied to the borrower’s reported amount of collateral. The amount of the collateral discount depends upon the condition and marketability of the collateral, as well as other factors which may affect the collectability of the loan. As the Company’s primary objective in the event of default would be to liquidate the collateral to settle the outstanding balance of the loan, collateral that is less marketable would receive a larger discount. During the reported periods, there were no loans discounted for cash flows.

The significant unobservable inputs (Level 3) used in the fair value measurement of cash flow impaired loans relate to discounted cash flows models using current market rates applied to the estimated life of the loan and credit risk adjustments. Future cash flows are discounted using current interest rates for similar credit risks. During the reported periods, the cash flow discounts ranged from 0% to 30% for three cash flow impaired loans.

Our assessment of the significance of a particular input to the Level 3 fair value measurements in their entirety requires judgment and considers factors specific to the assets. It is reasonably possible that a change in the estimated fair value for instruments measured using Level 3 inputs could occur in the future.

Loans held for sale include the guaranteed portion of SBA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA loans is based on market indications available in the market.

Non-financial assets measured at fair value on a non-recurring basis during the reported periods include other real estate owned (“OREO”) which, upon initial recognition, was re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense. Regulatory guidelines require the Company to reevaluate the fair value of OREO on at least an annual basis. The fair value of foreclosed assets, upon initial recognition and impairment, was re-measured using Level 2 inputs based on observable market data. Estimated fair value of OREO is based on appraisals. Appraisers are selected from the list of approved appraisers maintained by management.

For the nine months ended September 30, 2015 and 2014, there were no re-measurements of OREO.

The methods and assumptions used to estimate fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis are described as follows:

Carrying amount is the estimated fair value for cash and cash equivalents, restricted securities, accrued interest receivable and accrued interest payable. The estimated fair value of demand and savings deposits is the carrying amount since rates are regularly adjusted to market rates and amounts are payable on demand. For borrowed funds and variable rate loans or deposits that re-price frequently and fully, the estimated fair value is the carrying amount. 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. For loans held for sale, the estimated fair value is based on market indications for similar assets in the active market. The estimated fair value of other financial instruments and off-balance-sheet loan commitments approximate cost and are not considered significant to this presentation.

Table of Contents

In connection with the sale of $16.5 million in SBA and USDA guaranteed loans during the nine months ended September 30, 2015, the Company added a servicing asset of $369,000 and amortized $93,000 using the amortization method for the treatment of servicing. SBA and USDA loan servicing assets do not trade in an active, open market with readily observable prices. Accordingly, fair value is estimated using a discounted cash flow model having significant inputs of discount rate, prepayment speed and default rate. Due to the nature of the valuation inputs, servicing rights are classified within Level 3 of the hierarchy. For the asset recorded during the nine months ended September 30, 2015, the discount rate ranged from 7.3% to 9.4% and the combined prepayment and default rate ranged from 8.6% to 10.2%.

Carrying amount and estimated fair values of other financial instruments by level of valuation input were as follows:

	September 30, 2015
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	9,158	$	9,158
Level 2 inputs:
Securities available for sale		9,681		9,681
Securities, restricted		841		841
Loans held for sale		3,036		3,256
Loans, net		137,289		137,818
Accrued interest receivable		463		463
Level 3 inputs:
Servicing asset		1,426		1,426
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		21,307		21,307
Level 2 inputs:
Interest bearing deposits		118,739		117,818
Borrowed funds		-		-
Accrued interest payable		27		27

	December 31, 2014
	Carrying		Estimated
(In thousands)	Amount		Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	6,932	$	6,932
Level 2 inputs:
Securities available for sale		8,794		8,794
Securities, restricted		1,038		1,038
Loans held for sale		5,158		5,709
Loans, net		124,405		125,527
Accrued interest receivable		478		478
Receivable for sold loans		8,185		8,185
Level 3 inputs:
Servicing asset		1,150		1,150
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		22,786		22,786
Level 2 inputs:
Interest bearing deposits		102,948		102,530
Borrowed funds		10,000		10,000
Accrued interest payable		22		22

NOTE 18. SUBSEQUENT EVENT

On October 29, 2015, the Company granted to our employees incentive stock options totaling 180,000 pursuant to the 2015 Plan. The options were granted at an exercise price of $7.15 which was the closing sales price for our common stock on the date of grant.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis represents our consolidated financial condition as of September 30, 2015 and December 31, 2014, and our consolidated results of operations for the three and nine months ended September 30, 2015 and 2014. The discussion should be read in conjunction with our financial statements and the notes related thereto in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2014.

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 (the “Exchange Act”), including our expectations, intentions, beliefs, or strategies regarding the future. 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. It is important to note that our actual results may differ materially from those in or implied by such forward-looking statements due to the factors discussed under the section entitled “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2014, including the following:

if we are unable to implement our business plan and strategies, we will be hampered in our ability to develop business and serve our customers, which, in turn, could have an adverse effect on our financial performance;

we are subject to significant government regulation and legislation that increases the cost of doing business and inhibits our ability to compete including the potential impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Consumer Financial Protection Bureau and Basel III;

if we fail to retain our key employees, growth and profitability could be adversely affected;

if we fail to retain our trust customers, our non-interest income could be adversely affected;

we face substantial competition in our primary market area with respect to products and pricing;

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;

	·	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;
	·	our dependence on internal computer systems and the technology of outside service providers, as well as the potential impacts of third-party security breaches, subjects us to potential business disruptions or financial losses resulting from deliberate attacks or unintentional events;
	·	the Bank’s current legally mandated lending limits are lower than those of our competitors, which may impair our ability to attract borrowers;

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 Company to attract deposits;

changes in the general level of interest rates, inflation and other economic factors can affect the Company’s interest income by affecting the spread between interest-earning assets and interest-bearing liabilities;

changes in consumer spending, borrowing and savings habits;

Table of Contents

changes in the Company’s liquidity position;

natural disasters and adverse weather, acts of terrorism, an outbreak of hostilities or other international or domestic calamities, and other matters beyond our control;

our ability and intent to pay cash dividends;

our ability to raise additional capital on terms favorable to us or our ability to raise capital under terms which are not dilutive to existing shareholders; and

the beneficial ownership of a significant portion of our outstanding common stock by our directors and executive officers.

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, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise.

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 banking markets include Dallas, Tarrant, Denton, Collin and Rockwall counties which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. We currently operate through a main office located at 16200 Dallas Parkway, Dallas, Texas, as well as loan production offices located in the Phoenix, Arizona, Denver, Colorado, Greenville, South Carolina, Portland, Oregon, and Orlando, Florida markets. These offices originate loans throughout the United States. The offices are staffed by experienced bankers with significant experience in the origination, administration, and servicing of loans pursuant to programs promulgated by the SBA and the USDA. The Bank is a Preferred Lender Participant (“PLP”) in the SBA program.

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. The Bank opened for business on November 2, 2004.

The following discussion focuses on our financial condition at September 30, 2015 and December 31, 2014, and our results of operations for the three and nine months ended September 30, 2015 and 2014.

Table of Contents

Results of Operations

Key Performance Indicators at September 30, 2015

The following were key indicators of our performance and results of operations for the three and nine months ended September 30, 2015:

total assets were $168.9 million at the end of the third quarter of 2015, representing an increase of $5.8 million, or 3.6%, from $163.1 million at the end of 2014;

	·	total loans held for investment, net of allowance for loan losses and deferred loan fees, increased $12.9 million, or 10.4%, to $137.3 million at the end of the third quarter of 2015, compared to $124.4 million at the end of 2014;
	·	total loans held for sale, which consists primarily of the guaranteed portion of SBA 7(a) loans, decreased $2.2 million, or 42.3%, to $3.0 million at the end of the third quarter of 2015, compared to $5.2 million at the end of 2014;

	·	total deposits increased $14.3 million, or 11.4%, to $140.0 million at the end of the third quarter of 2015, compared to $125.7 million at the end of 2014;
	·	net income was $883,000 for the three months ended September 30, 2015, compared to $1.2 million for the same period in the prior year. The Company recognized income tax expense of $483,000 for the three months ended September 30, 2015, compared to $612,000 for the same period in the prior year. Net income was $2.6 million for the nine months ended September 30, 2015, compared to $1.9 million for the same period in the prior year. The Company recognized income tax expense of $1.3 million for the nine months ended September 30, 2015, compared to $1.1 million for the same period in 2014;
	·	return on average assets was 2.04% for the three and nine months ended September 30, 2015, compared to 1.66% and 2.85%, respectively, for the same periods in 2014. Return on average equity was 14.04% and 14.32% for the three and nine months ended September 30, 2015, respectively, compared to 21.93% and 12.72% for the same periods in 2014;

	·	total revenue decreased $200,000, or 3.3% to $5.9 million for the three months ended September 30, 2015, compared to $6.1 million for the same period in the prior year, and increased $1.3 million, or 8.0%, to $17.5 million for the nine months ended September 30, 2015, compared to $16.2 million for the same period in the prior year;
	·	tier 1 capital to average assets and total capital ratios for the Bank at September 30, 2015 were 14.73% and 18.06%, respectively, compared to 13.89% and 17.56%, respectively, at December 31, 2014; and

the book value of our stock increased to $6.57 at September 30, 2015, compared to $5.91 at December 31, 2014.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income, principally from loan 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.

Table of Contents

The following tables set forth our average balances of assets, liabilities and shareholders’ equity, in addition to the major components of net interest income and our net interest margin, for the three and nine months ended September 30, 2015 and 2014.

FINANCIAL SUMMARY

Consolidated Daily Average Balances, Average Yields and Rates

	Three Months Ended September 30,
	2015									2014
(In thousands, except percentages)	Average Balance			Interest			Average Yield			Average Balance			Interest			Average Yield
Interest-earning assets
Loans, net of unearned discount(1)	$	144,741		$	2,013			5.52	%	$	136,755		$	1,965			5.70	%
Interest-bearing deposits and federal funds sold		7,930			5			0.25	%		6,585			4			0.24	%
Securities		11,540			58			1.99	%		10,149			64			2.50	%
Total earning assets		164,211			2,076			5.02	%		153,489			2,033			5.25	%
Cash and other assets		10,782									10,069
Allowance for loan losses		(1,565	)								(1,724	)
Total assets	$	173,428								$	161,834

Interest-bearing liabilities
NOW accounts	$	5,182			4			0.31	%	$	5,212			4			0.30	%
Money market accounts		40,082			49			0.49	%		36,239			46			0.50	%
Savings accounts		5,902			7			0.47	%		3,016			4			0.53	%
Time deposits $100,000 and over		64,989			155			0.95	%		62,930			135			0.85	%
Time deposits under $100,000		4,015			11			1.09	%		4,278			11			1.02	%
Total interest-bearing deposits		120,170			226			0.75	%		111,675			200			0.71	%
Borrowed funds		1,522			-			0.00	%		6,913			3			0.17	%
Total interest-bearing liabilities		121,692			226			0.74	%		118,588			203			0.68	%
Non-interest-bearing deposits		24,764									19,992
Other liabilities		1,824									2,202
Shareholders’ equity		25,148									21,052
Total liabilities and shareholders’ equity	$	173,428								$	161,834

Net interest income					1,850									1,830
Net interest spread								4.28	%								4.58	%
Net interest margin								4.47	%								4.73	%

Provision for loan loss					-									-
Non-interest income					3,792									4,029
Non-interest expense					4,276									4,084
Income before income taxes					1,366									1,775
Income taxes expense					483									612
Net income				$	883								$	1,163

Earnings per share				$	0.22								$	0.29
Return on average equity					14.04	%								21.93	%
Return on average assets					2.04	%								2.85	%
Equity to assets ratio					14.50	%								13.01	%

(1)	Includes nonaccrual loans

Table of Contents

FINANCIAL SUMMARY

Consolidated Daily Average Balances, Average Yields and Rates

	Nine Months Ended September 30,
	2015									2014
(In thousands, except percentages)	Average Balance			Interest			Average Yield			Average Balance			Interest			Average Yield
Interest-earning assets
Loans, net of unearned discount(1)	$	142,768		$	6,024			5.64	%	$	130,253		$	5,598			5.75	%
Interest-bearing deposits and federal funds sold		7,035			13			0.25	%		6,553			12			0.24	%
Securities		10,339			174			2.25	%		10,329			197			2.55	%
Total earning assets		160,142			6,211			5.19	%		147,135			5,807			5.28	%
Cash and other assets		10,907									9,573
Allowance for loan losses		(1,651	)								(1,759	)
Total assets	$	169,398								$	154,949

Interest-bearing liabilities
NOW accounts	$	5,380			12			0.30	%	$	4,164			10			0.32	%
Money market accounts		36,976			136			0.49	%		33,831			124			0.49	%
Savings accounts		4,707			17			0.48	%		2,495			9			0.48	%
Time deposits $100,000 and over		64,709			450			0.93	%		59,748			369			0.83	%
Time deposits under $100,000		3,888			31			1.07	%		4,146			33			1.06	%
Total interest-bearing deposits		115,660			646			0.75	%		104,384			545			0.70	%
Borrowed funds		3,736			4			0.14	%		9,022			8			0.12	%
Total interest-bearing liabilities		119,396			650			0.73	%		113,406			553			0.65	%
Non-interest-bearing deposits		24,068									19,563
Other liabilities		1,831									1,733
Shareholders’ equity		24,103									20,247
Total liabilities and shareholders’ equity	$	169,398								$	154,949

Net interest income					5,561									5,254
Net interest spread								4.46	%								4.63	%
Net interest margin								4.64	%								4.78	%

Provision for loan loss					-									492
Non-interest income					11,301									10,415
Non-interest expense					12,975									12,190
Income before income taxes					3,887									2,987
Income taxes expense					1,298									1,056
Net income				$	2,589								$	1,931

Earnings per share				$	0.64								$	0.48
Return on average equity					14.32	%								12.72	%
Return on average assets					2.04	%								1.66	%
Equity to assets ratio					14.23	%								13.07	%

(1)	Includes nonaccrual loans

Table of Contents

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.

	Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
	Increase (Decrease) Due to Change in
(In thousands)	Yield/ Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	-		$	1		$	1
Securities		(13	)		7			(6	)
Loans, net of unearned discount (1)		(63	)		111			48
Total earning assets		(76	)		119			43

NOW		-			-			-
Money market		(2	)		5			3
Savings		-			3			3
Time deposits $100,000 and over		15			5			20
Time deposits under $100,000		1			(1	)		-
Borrowed funds		(3	)		-			(3	)
Total interest-bearing liabilities		11			12			23

Changes in net interest income	$	(87	)	$	107		$	20

(1)	Average loans include non-accrual.

Net interest income for the three months ended September 30, 2015 increased $20,000, or 1.1%, compared to the same period in the prior year. The increase was due to an increase in the average volume of interest-earning assets, partially offset by a decrease in the average interest yield of earning assets. Net interest margin decreased 26 basis points from 4.73% during the three months ended September 30, 2014 to 4.47% during the three months ended September 30, 2015. The decrease in net interest margin was the result of a decrease in the average yield on loans.

Total interest income for the three months ended September 30, 2015 increased $43,000, or 2.1%, compared to the same period in the prior year. Average interest-earning asset volume increased $10.7 million, or 7.0%, to $164.2 million for the three months ended September 30, 2015, compared to $153.5 million for the same period in the prior year, primarily due to the increase in the loan portfolio. The average interest yield of earning assets decreased 23 basis points to 5.02% during the three months ended September 30, 2015, compared to 5.25% for the same period in the prior year. The average yield on loans was 5.52% during the three months ended September 30, 2015 compared to 5.70% during the three months ended September 30, 2014.

Total interest expense for the three months ended September 30, 2015 increased $23,000, or 11.3%, compared to the same period in the prior year. The average cost of interest-bearing liabilities increased 6 basis points to 0.74% for the three months ended September 30, 2015, compared to 0.68% for the same period in the prior year. Average volume of interest-bearing liabilities increased $3.1 million to $121.7 million for the three months ended September 30, 2015, compared to $118.6 million for the same period in the prior year. Average interest-bearing deposits increased $8.5 million to $120.2 million for the three months ended September 30, 2015, compared to $111.7 million for the same period in the prior year. Average borrowed funds decreased $5.4 million to $1.5 million for the three months ended September 30, 2015, compared to $6.9 million for the same period in the prior year.

Table of Contents

	Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
	Increase (Decrease) Due to Change in
(In thousands)	Yield/ Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	-		$	1		$	1
Securities		(23	)		-			(23	)
Loans, net of unearned discount (1)		(102	)		528			426
Total earning assets		(125	)		529			404

NOW		(1	)		3			2
Money market		-			12			12
Savings		-			8			8
Time deposits $100,000 and over		47			34			81
Time deposits under $100,000		-			(2	)		(2	)
Borrowed funds		2			(6	)		(4	)
Total interest-bearing liabilities		48			49			97

Changes in net interest income	$	(173	)	$	480		$	307

(1)	Average loans include non-accrual.

Net interest income for the nine months ended September 30, 2015 increased $307,000, or 5.8%, compared to the same period in the prior year. The increase was due to an increase in the average volume of interest-earning assets, partially offset by a decrease in the average interest yield of earning assets, an increase in the average volume of interest-bearing liabilities and an increase in the average cost of interest-bearing liabilities. Net interest margin decreased 14 basis points from 4.78% during the nine months ended September 30, 2014 to 4.64% during the nine months ended September 30, 2015.

Total interest income for the nine months ended September 30, 2015 increased $404,000, or 7.0%, compared to the same period in the prior year. Average interest-earning asset volume increased $13.0 million, or 8.8%, to $160.1 million for the nine months ended September 30, 2015, compared to $147.1 million for the same period in the prior year, due to the increase in the loan portfolio. The average interest yield of earning assets decreased 9 basis points to 5.19% for the nine months ended September 30, 2015, compared to 5.28% for the same period in the prior year. The average yield on loans was 5.64% during the nine months ended September 30, 2015 compared to 5.75% during the nine months ended September 30, 2014.

Total interest expense for the nine months ended September 30, 2015 increased $97,000, or 17.5%, compared to same period in the prior year. The average cost of interest-bearing liabilities increased 8 basis points to 0.73% for the nine months ended September 30, 2015, compared to 0.65% for the same period in the prior year. Average volume of interest-bearing liabilities increased $6.0 million to $119.4 million for the nine months ended September 30, 2015, compared to $113.4 million for the same period in the prior year. Average interest-bearing deposits increased $11.3 million to $115.7 million for the nine months ended September 30, 2015, compared to $104.4 million for the same period in the prior year. Average borrowed funds decreased $5.3 million to $3.7 million for the nine months ended September 30, 2015, compared to $9.0 million for the same period in the prior year.

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.”

We did not record a provision for loan losses for the three or nine months ended September 30, 2015. For the three and nine months ended September 30, 2015, we had loan charge-offs of $18,000 and $159,000, respectively, and recoveries of $6,000 and $15,000, respectively. The charge-offs were for one SBA loan. We charged off $141,000 during the second quarter and the remaining $18,000 during the current quarter.

We did not record a provision for loan losses for the three months ended September 30, 2014. We had one loan charge-off of $81,000, and recoveries of $25,000 during the third quarter of 2014. For the nine months ended September 30, 2014, we recorded a provision of loan losses of $492,000, we had charge-offs of $1.2 million, primarily consisting of one dental loan which was charged-off during the first quarter of 2014, and recoveries of $30,000.

Table of Contents

Non-interest Income

The components of non-interest income were as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
(In thousands)	2015			2014		2015			2014
Trust income	$	3,017		$	2,902	$	9,146		$	8,549
Gain on sale of loans		568			949		1,552			1,386
Loan servicing fees, net		113			60		321			176
Service fees and other income		18			37		51			65
Rental income		77			81		232			239
Loss on sale of securities		(1	)		-		(1	)		-
	$	3,792		$	4,029	$	11,301		$	10,415

Non-interest income for the three months ended September 30, 2015 decreased $237,000, or 5.9%, compared to the same period in the prior year. The decrease was primarily due to a decrease in gain on sale of loans partially offset by an increase in trust income. Non-interest income for the nine months ended September 30, 2015 increased $886,000, or 8.5%, compared to the same period in the prior year. The increase was due to an increase in gain on sale of loans and trust income.

Trust income is earned on the value of managed and non-managed assets held in custody. For the three and nine months ended September 30, 2015, trust income increased $115,000, or 4.0%, and $597,000, or 7.0%, respectively, compared to the same periods in the prior year. These increases were due to a 5 basis point rate increase in the trustee/custodial fee, which was effective in September 2014, resulting in additional fee income of approximately $50,000 per month. The 5 basis point rate increase in the fee is passed on to the Bank’s registered investment advisor, and therefore there was a corresponding increase in trust expense included in non-interest expense. The remaining increase was a result of improvements in market values of assets in trust accounts during 2015.

Gain on sale of loans decreased $381,000 for the three months ended September 30, 2015, compared to the same period in the prior year, and increased $166,000, or 12.0%, for the nine months ended September 30, 2015, compared to the same period in the prior year. For the three months ended September 30, 2015 and 2014, the Company sold $6.0 million and $9.6 million, respectively, of loans held for sale resulting in gains on sale of loans of $568,000 and $949,000, respectively. For the nine months ended September 30, 2015 and 2014, the Company sold $16.5 million and $13.8 million, respectively, of loans held for sale resulting in gains on sale of loans of $1.6 million and $1.4 million, respectively.

Loan servicing fees, net of servicing asset amortization, increased $53,000, or 87.5%, and $145,000, or 82.4%, respectively, for the three and nine months ending September 30, 2015, compared to the same periods in the prior year. The increase was related to the increase in SBA loans sold during 2015 with servicing retained.

Service fees and other income for the three months and nine months ended September 30, 2015 decreased $19,000, or 51.0% and 14,000, or 21.5%, respectively, compared to the same periods in the prior year. The decrease is primarily related to a $12,000 gain on sale of other real estate owned recorded during the third quarter of 2014.

Rental income decreased $4,000, or 4.9%, and $7,000, or 2.9%, respectively, for the three and nine months ended September 30, 2015, compared to the same periods in the prior year.

During the third quarter of 2015, the Company sold available-for-sale securities which resulted in a loss of $1,000. There were no sales for the same period in the prior year.

Non-interest Expense

The components of non-interest expense were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(In thousands)	2015		2014		2015		2014
Salaries and employee benefits	$	1,099	$	981	$	3,459	$	3,051
Occupancy and equipment		212		344		632		928
Trust expenses		2,426		2,290		7,339		6,741
Professional fees		106		57		318		283
Data processing		215		199		632		593
Other expense		218		213		595		594
	$	4,276	$	4,084	$	12,975	$	12,190

Table of Contents

Non-interest expense for the three and nine months ended September 30, 2015 increased $192,000, or 4.7%, and $785,000, or 6.4%, respectively, compared to the same periods in the prior year.

Salaries and employee benefits for the three and nine months ended September 30, 2015 increased $118,000, or 12.0%, and $408,000, or 13.4%, respectively, compared to the same periods in the prior year. The increase was due to an increase in staff, primarily in the loan production area of the Company, increases in incentive bonuses due to increased loan production and annual merit increases.

Occupancy and equipment expenses for the three and nine months ended September 30, 2015 decreased $132,000, or 38.4%, and $296,000, or 31.9%, respectively, compared to the same periods in the prior year. The decrease was primarily due to the savings in rent related to the termination of the lease for the Company’s previous location in May of 2014, and also to a decrease in building maintenance and telecommunications costs.

Trust expenses are advisory fees paid to a fund advisor to advise the Company on the common trust funds managed by the Company and are based on the value of the assets held in custody. For the three and nine months ended September 30, 2015, trust expenses increased $136,000, or 5.9%, and $598,000, or 8.9%, respectively, compared to the same periods in the prior year. The increase is related to the 5 basis point rate increase in the trustee/custodial fee in September 2014 explained in non-interest income above, and also to improvements in market values of the assets during the past year.

Professional fees for the three and nine months ended September 30, 2015 increased $49,000, or 86.0%, and $35,000, or 12.4%, respectively, compared to the same periods in the prior year. The increase was primarily due to an increase in audit, tax and consulting fees.

Data processing fees for the three and nine months ended September 30, 2015 increased $16,000, or 8.0%, and $39,000, or 6.6%, respectively, compared to the same periods in the prior year. The increase was related to monthly fees pertaining to enhancements to the Company’s internet customer platform.

Other expenses for the three and nine months ended September 30, 2015 increased $5,000, or 2.3%, and $1,000, or 0.2%, respectively, compared to the same periods in the prior year. The increase was due to increases in donations expense and employee recruiting expense related to loan production personnel, offset by decreases in OREO expense, FDIC insurance premium, and other miscellaneous expenses.

Income Taxes

The Company recognized income tax expense of $483,000 and $1.3 million, for an effective income tax rate of 35.4% and 33.4%, respectively, for the three and nine months ended September 30, 2015, compared to $612,000 and $1.1 million, for an effective income tax rate of 34.5% and 35.4%, respectively, for the same periods in the prior year. The decrease in the effective tax rate for the nine months ended September 30, 2015 was due to a $40,000 benefit adjustment for 2014 taxes which was recognized during the second quarter of 2015.

Financial Condition

Our total assets as of September 30, 2015 increased $5.8 million to $168.9 million, compared to $163.1 million as of December 31, 2014, primarily as a result of an increase in total loans. Net loans held for investment increased $12.9 million, or 10.4%, to $137.3 million as of September 30, 2015, compared to $124.4 million as of December 31, 2014. Receivable for loans sold decreased $8.2 million, which was the balance at December 31, 2014. There was no receivable for loans sold at September 30, 2015. Total deposits increased $14.3 million, or 11.4%, to $140.0 million as of September 30, 2015, compared to $125.7 million as of December 31, 2014. Shareholders’ equity increased $2.7 million, or 11.3%, to $26.5 million as of September 30, 2015, compared to $23.8 million as of December 31, 2014.

Cash and Due From Banks

Cash and due from banks increased $627,000 to $1.4 million as of September 30, 2015, compared to $801,000 as of December 31, 2014. The increase is a result of ordinary variances in operating cash.

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

Interest-bearing deposits increased $1.5 million to $7.1 million as of September 30, 2015, compared to $5.6 million as of December 31, 2014. 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.

Table of Contents

As of September 30, 2015 and December 31, 2014, the Company held Federal Reserve Bank of Dallas stock of $570,000, and Federal Home Loan Bank of Dallas stock of $271,000 and $468,000, respectively. As of September 30, 2015 and December 31, 2014, we had government agency securities with amortized cost of $6.2 million and $5.6 million, respectively, and fair value of $6.3 million and $5.5 million, respectively. As of September 30, 2015 and December 31, 2014, we had mortgage-backed securities with amortized cost and fair value of $3.4 million and $3.3 million, respectively.

At September 30, 2015 and December 31, 2014, securities with fair value of $7.9 million and $6.8 million, respectively, were pledged against borrowed funds at the Federal Home Loan Bank of Dallas and securities with fair value of $1.0 million and $1.2 million, respectively, were pledged against trust deposit balances held at the Bank. One security was pledged against borrowed funds at the Federal Reserve Bank of Dallas at September 30, 2015 and December 31, 2014 with a fair value of $778,000 and $840,000, respectively.

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:

(In thousands)	September 30, 2015			December 31, 2014
Commercial and industrial	$	73,140		$	72,711
Consumer installment		2,273			1,578
Real estate – residential		6,401			1,993
Real estate – commercial		19,956			21,084
Real estate – construction and land		8,102			5,477
SBA:
SBA 7(a) unguaranteed portion		19,836			15,755
SBA 504		7,332			5,839
USDA		2,798			2,054
Other		542			1,000
Gross Loans		140,380			127,491
Less:
Allowance for loan losses		1,551			1,695
Deferred loan costs		(286	)		(153	)
Discount on loans		1,826			1,544
Net loans	$	137,289		$	124,405

As of September 30, 2015 and December 31, 2014, total loans held for investment were $137.3 million and $124.4 million, respectively. Total loans, net of deferred fees, discount and reserves as a percentage of total assets were 81.3% as of September 30, 2015 and 76.3% as of December 31, 2014.

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. As of September 30, 2015 and December 31, 2014, commercial loans totaled $73.1 million and $72.7 million, respectively, representing approximately 52.1% and 57.0% of our total funded loans, respectively.

Our consumer loan portfolio consists of personal lines of credit and loans to acquire personal assets such as automobiles. 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. As of September 30, 2015 and December 31, 2014, consumer loans totaled $2.3 million and $1.6 million, respectively, approximately 1.6% and 1.2%, respectively, of our total funded loans.

Our real estate loan portfolio is composed of construction loans and 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. Term mortgage loans are typically secured by commercial properties occupied by the borrower and typically have terms of three to ten years with both fixed and floating rates. At September 30, 2015 and December 31, 2014, real estate loans totaled $34.5 million and $28.6 million, respectively, approximately 24.6% and 22.4% of our total loans, respectively.

Table of Contents

Our SBA loan portfolio consists of loans guaranteed by the Small Business Administration (“SBA 7(a)”) and conventional loans promulgated under the SBA’s 504 loan program which serve the small business community. The SBA 7(a) loans are generally guaranteed by the SBA up to 75% of the principal balance. The guaranteed portion of these loans is readily marketable on a servicing-retained basis in an active national secondary market. The Company records the guaranteed portion of the loans as held for sale. As of September 30, 2015 and December 31, 2014, SBA loans held for investment totaled $27.2 million and $21.6 million, respectively, representing approximately 19.4% and 16.9% of our total funded loans, respectively.

Our USDA loan portfolio consists of loans guaranteed by the USDA which serve rural areas. USDA loans are guaranteed up to 90% of the principal balance. As of September 30, 2015 and December 31, 2014, USDA loans held for investment totaled $2.8 and $2.1 million, respectively, representing approximately 2.0% and 1.6% of our total funded 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. As of September 30, 2015, our commercial loan and real estate loan portfolio included $63.3 million of loans, approximately 45.2% of our total funded loans, to dental professionals. These loans were made 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.

The following table shows the maturity/reset date distribution and type of loan within our loan portfolio as of September 30, 2015:

	As of September 30, 2015
			Over 1 Year through 5 Years				Over 5 Years
(In thousands)	One Year or Less		Fixed Rate		Floating or Adjustable Rate		Fixed Rate		Floating or Adjustable Rate		Total
Commercial and industrial	$	6,630	$	11,880	$	35,557	$	19,073	$	-	$	73,140
Consumer installment		1,042		451		175		605		-		2,273
Real estate – residential		2,190		2,727		97		1,387		-		6,401
Real estate – commercial		5,002		3,986		2,364		5,376		3,228		19,956
Real estate – construction and land		5,201		532		747		1,622		-		8,102
SBA 7(a) unguaranteed portion		19,608		-		157		71		-		19,836
SBA 504		7,332		-		-		-		-		7,332
USDA		1,815		-		983		-		-		2,798
Other		542		-		-		-		-		542
Total	$	49,362	$	19,576	$	40,080	$	28,134	$	3,228	$	140,380

Non-performing Assets and Restructured Loans

Non-performing assets consist of loans on non-accrual status, loans 90 days or more past due and still accruing interest, loans that have been restructured resulting in a reduction or deferral of interest or principal, OREO, and other repossessed assets. As of September 30, 2015, we had no loans 90 days or more past due and still accruing interest and $481,000 in loans on non-accrual status, net of SBA guaranteed portion of $477,000. At December 31, 2014, we had no loans 90 days or more past due and still accruing interest and $595,000 in loans on non-accrual status. There was no OREO at September 30, 2015 and December 31, 2014. Total non-performing assets, net of SBA guaranteed portion, as of September 30, 2015 were $481,000, compared to $595,000 as of December 31, 2014.

During the second quarter of 2015, the Bank repurchased the guaranteed portion of a defaulted SBA loan with a balance of $477,000. After the foreclosure and collection process is complete, it is expected that the SBA will reimburse the Company for this amount.

Table of Contents

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 non-performing 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 “pass-watch” are those loans that have been determined to require enhanced monitoring for potential weaknesses which require further investigation. 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 non-accrual status, or have been restructured. Loans classified as “loss” are those loans that are in the process of being charged-off. At September 30, 2015, the Company had no pass-watch loans, $1.1 million in special mention loans, $1.3 million in substandard loans and no doubtful loans. At December 31, 2014, the Company had $3.3 million in pass-watch loans, $2.5 million in special mention loans, $1.0 million in substandard loans and no doubtful loans.

The following table sets forth certain information regarding non-accrual loans by type, loans past due 90 days and accruing, OREO and restructured loans accruing as of the dates indicated.

	September 30, 2015					December 31, 2014
(In thousands, except percentages)	Amount		Loan Category to Total Assets			Amount		Loan Category to Total Assets
Commercial and industrial	$	481		0.28	%	$	595		0.36	%
Total non-accrual loans	$	481		0.28	%	$	595		0.36	%
Loans past due 90 days and accruing		-		-			-		-
Foreclosed assets		-		-			-		-
Total non-performing assets	$	481		0.28	%	$	595		0.36	%
Restructured loans on non-accrual	$	411		0.24	%	$	595		0.36	%

We record interest payments received on impaired loans as interest income unless collections of the remaining recorded investment are placed on non-accrual, at which time we record payments received as reductions of principal. We recognized interest income on impaired loans of approximately $72,000 and $122,000 during the nine months ended September 30, 2015 and 2014, respectively. Interest not recognized on impaired loans during the three and nine months ended September 30, 2015 and 2014 was not significant.

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 $1.6 million, or 1.1% of total funded loans at September 30, 2015, and $1.7 million, or 1.3% of total funded loans at December 31, 2014. We did not record a provision for loan losses for the nine months ended September 30, 2015, and we recorded a provision for loan losses of $492,000 for the nine months ended September 30, 2014.

Credit and loan decisions are made by management and the Board of Directors in conformity with loan policies established by the Board of Directors. 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. We had one SBA loan charge-off of $159,000, and recoveries of $15,000 during the nine months ended September 30, 2015. For the nine months ended September 30, 2014, we had charge-offs of $1.2 million, primarily consisting of one dental loan, and recoveries of $30,000.

Table of Contents

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.

(In thousands, except percentages)	September 30, 2015					December 31, 2014
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	888		52.1	%	$	918		57.0	%
Consumer installment		29		1.6			20		1.2
Real estate – residential		80		4.6			25		1.6
Real estate – commercial		247		14.2			265		16.5
Real estate – construction and land		101		5.8			69		4.3
SBA		199		19.3			344		17.0
USDA		-		2.0			41		1.6
Other		7		0.4			13		0.8
Total allowance for loan losses	$	1,551		100.0	%	$	1,695		100.0	%

Deposits

Deposits are our primary source of funding. Total deposits at September 30, 2015 and December 31, 2014 were $140.0 million and $125.7 million, respectively. Total average deposits increased $15.8 million for the nine months ended September 30, 2015, to $139.7 million, compared to $123.9 million for the nine months ended September 30, 2014.

The following table shows the average deposit balances and average cost of funds for each category of deposits, for the periods ended September 30, 2015 and 2014:

	For the nine months ended September 30,
	2015								2014
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	24,068		17.2	%		0.00	%	$	19,563		15.8	%		0.00	%
NOW accounts		5,380		3.8			0.30			4,164		3.4			0.32
Money market accounts		36,976		26.5			0.49			33,831		27.3			0.49
Savings accounts		4,707		3.4			0.48			2,495		2.0			0.48
Time deposits $100,000 and over		64,709		46.3			0.93			59,748		48.2			0.83
Time deposits under $100,000		3,888		2.8			1.07			4,146		3.3			1.06
Total deposits	$	139,728		100.00	%		0.62	%	$	123,947		100.00	%		0.59	%

Table of Contents

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

(In thousands)	September 30, 2015		December 31, 2014
Three months or less	$	7,593	$	15,146
Over three months through six months		18,750		6,701
Over six months through twelve months		11,268		16,167
Over twelve months		25,612		21,383
Total	$	63,223	$	59,397

Shareholders’ Equity

As of September 30, 2015, shareholders’ equity increased to $26.5 million from $23.8 million as of December 31, 2014. The increase was due to comprehensive income of $2.7 million for the nine months ended September 30, 2015.

Off-Balance Sheet Arrangements

Neither the Company nor the Bank had any material off-balance sheet arrangements other than the Bank’s commitments to extend credit at September 30, 2015.

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.

In July 2013, the Office of the Comptroller of the Currency approved new rules on regulatory capital applicable to national banks, implementing the Basel III rules. The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more and higher quality capital to act as a financial cushion to absorb losses and help banking organizations better withstand periods of financial stress. Most banking organizations, including the Bank, were required to apply the new capital rules on January 1, 2015. The final rules set a new common equity tier 1 requirement and higher minimum tier 1 requirements for all banking organizations. They also place limits on capital distributions and certain discretionary bonus payments if a banking organization does not maintain a “capital conservation buffer” above minimum capital requirements, which will be phased in over a five-year period. Pursuant to the Basel III Notice of Proposed Rulemaking, community banks were given the option of a one-time election in their March 31, 2015 quarterly financial filings with the appropriate federal regulator to opt-out of the requirement to include most accumulated other comprehensive income (“AOCI”) components in the calculation of Common Equity Tier 1 capital and, in effect, retain the AOCI treatment under the current capital rules. The Company made the election to continue to exclude AOCI from capital in connection with its March 31, 2015 quarterly financial filing. The BASEL III capital ratio requirements as applicable to the Bank as of January 1, 2015 and after the full phase-in period of the capital conservation buffer, are summarized in the table below.

	BASEL III Minimum Capital Requirements			BASEL III Additional Capital Conservation Buffer			BASEL III Requirements with Capital Conservation Buffer(1)
Total Capital (to risk weighted assets)		8.0	%		2.5	%		10.5	%
Tier 1 Capital (to risk weighted assets)		6.0	%		2.5	%		8.5	%
Tier 1 Capital (to average assets) or Leverage ratio		4.0	%		-	%		4.0	%
Common Equity Tier 1 (to risk weighted assets)		4.5	%		2.5	%		7.0	%

(1) The capital conservation buffer is phased in over a five-year period with the increased capital ratios effective as of January 1, 2019.

Table of Contents

In addition, the rules revise the prompt corrective action framework to incorporate the new regulatory capital minimums, as set forth in the table below. They also enhance risk sensitivity and address weaknesses identified over recent years with the measure of risk weighted assets. The Bank’s implementation of the new rules on January 1, 2015 did not have a material impact on our capital needs. As of September 30, 2015, the Bank was “well capitalized” under the Basel III regulatory framework.

(In thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of September 30, 2015
Total Capital (to Risk Weighted Assets)	$	27,080		18.06	%	$	11,995		8.00	%	$	14,994		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		25,529		17.03			8,996		6.00			11,995		8.00

Common Equity Tier 1 (to Risk Weighted Assets)		25,529		17.03			6,747		4.50			9,746		6.50

Tier 1 Capital (to Average Assets)		25,529		14.73			6,939		4.00			8,673		5.00

As of December 31, 2014
Total Capital (to Risk Weighted Assets)	$	24,638		17.56	%	$	11,224		8.00	%	$	14,030		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		22,943		16.35			5,612		4.00			8,418		6.00

Tier 1 Capital (to Average Assets)		22,943		13.89			6,609		4.00			8,261		5.00

Liquidity Management

At September 30, 2015, the Company (excluding the Bank) had approximately $786,000 in cash. These funds can be used for Company operations, investment, for infusion into the Bank and other corporate activities. The primary source of liquidity for the Company is dividends paid by the Bank. Banking regulations limit the amount of dividends that may be paid. See Note 15 – Regulatory Matters to the financial statements included elsewhere in this report regarding dividends available for declaration.

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 are retail, custodial, and commercial deposits, loan sales and 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 maintains investments in liquid assets based upon management’s assessment of (1) the need for funds, (2) expected deposit flows, (3) yields available on short-term liquid assets, and (4) objectives of the asset/liability management program.

At September 30, 2015, we had outstanding loan origination commitments and unused commercial and retail lines of credit of $16.9 million and $10,000 in standby letters of credit. Certificates of deposit that are scheduled to mature within one year totaled $40.1 million at September 30, 2015.

Table of Contents

The Bank’s significant contractual obligations and other potential funding needs at September 30, 2015 consist of:

	As of September 30, 2015
(In thousands)	Less than One Year		One to Three Years		Over Three to Five Years		Over Five Years
Operating leases	$	69	$	23	$	-	$	-

Time deposits	$	40,119	$	25,603	$	1,534	$	-

As of September 30, 2015, the Company had cash and cash equivalents of $9.2 million, or 5.4% of total assets, and loans held for sale of $3.0 million, or 1.8% of total assets. Liquidity is also provided through the Bank’s lines of credit with the Federal Home Loan Bank of Dallas and the Federal Reserve Bank of Dallas, which provide the Bank with a source of off-balance sheet liquidity. As of September 30, 2015, the Bank’s borrowing capacity with the Federal Home Loan Bank of Dallas was $20.3 million, or 12.0% of assets, none of which was utilized at September 30, 2015. The Bank’s borrowing capacity with the Federal Reserve Bank of Dallas was $18.9 million, or 11.2% of assets, none of which was utilized at September 30, 2015.

As loan demand increases, greater pressure will be exerted on the Bank’s liquidity. As of September 30, 2015, the loan to deposit ratio was 98.1%. Through our trust department, we serve as trustee or custodian for $37.8 million in cash deposits held at BlackRock, Inc. in a money market fund. As of September 30, 2015, approximately $29.4 million could be held at the Bank in deposit accounts fully insured by the FDIC. With additional advances available from the Federal Home Loan Bank of Dallas and Federal Reserve Bank of Dallas and the custodial cash available through the Bank’s trust department, the Bank has off-balance sheet liquidity available of 40.6% of total assets as of September 30, 2015. We believe that the Bank has adequate liquidity to meet anticipated future funding needs.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, our principal executive officer and 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 Exchange Act, are procedures that are designed to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

Based upon their controls evaluation, our principal executive officer and principal financial officer have concluded that our Disclosure Controls are effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2015 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company is a party to various legal proceedings incident to its business. However, there are no material legal proceedings to which the Company is a party or of which any of its property is subject.

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None

Item 6. Exhibits and Financial Statement Schedules.

Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation (incorporated by reference from the Quarterly Report on Form 10-Q filed by Registrant with the SEC on August 14, 2007 (File No. 000-51297))
3.2		Bylaws (incorporated by reference from the Current Report on Form 8-K filed by Registrant with the SEC on April 30, 2008 (File No. 000-51297))
31.1		Rule 13a-14(a) Certification of Principal Executive Officer*
31.2		Rule 13a-14(a) Certification of Principal Financial Officer*
32		Section 1350 Certification*
101.INS		XBRL Instance Document*
101.SCH		XBRL Taxonomy Extension Schema Document*
101.CAL		XBRL Taxonomy Extension Label Calculation Linkbase Document*
101.LAB		XBRL Taxonomy Extension Label Linkbase Document*
101.PRE		XBRL Taxonomy Extension Presentation Linkbase*
101.DEF		XBRL Taxonomy Definition Linkbase*

*	Filed Herewith

Table of Contents

SIGNATURES

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

	T BANCSHARES, INC.

Date: November 12, 2015	By:	/s/ Patrick Howard

		Patrick Howard President and Chief Executive Officer/Principal Executive Officer

	By:	/s/ Ken Bramlage

		Ken Bramlage Executive Vice President and Chief Financial Officer/Principal Financial Officer

T Bancshares, Inc. - FORM 10-Q - November 12, 2015

Attached files

T Bancshares, Inc. Reports