T Bancshares, Inc. - FORM 10-K

Attached files

file	filename
EX-32.1 - EX-32.1 - T Bancshares, Inc.	ex32-1.htm
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-10.6 - EX-10.6 - T Bancshares, Inc.	ex10-6.htm
EX-23 - EX-23 - T Bancshares, Inc.	ex23.htm
EX-21 - EX-21 - T Bancshares, Inc.	ex21.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10−K

x ANNUAL REPORT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2015

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________to ___________.

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 Number)

16200 Dallas Parkway, Suite 190, Dallas, Texas 75248		(972) 720-9000
(Address of principal executive offices) (ZIP Code)		Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x

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 for shorter period that the registrant was required to file 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 for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

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 Act). Yes ¨ No x

As of June 30, 2015, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting common stock held by non-affiliates was $23.5 million.

The number of common shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 4,037,907 shares of the Company’s Common Stock ($0.01 par value per share) were outstanding as of March 29, 2016

DOCUMENTS INCORPORATED BY REFERENCE

Specified portions of the registrant’s definitive Proxy Statement relating to the registrant’s 2016 Annual Meeting of Shareholders, which is to be filed pursuant to Regulation 14A within 120 days after the end of the registrant’s fiscal year ended December 31, 2015, are incorporated by reference in Part III of this Annual Report on Form 10-K.

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TABLE OF CONTENTS

PART I		3
	Item 1. Business	4
	Item 1A. Risk Factors	19
	Item 2. Properties	25
	Item 3. Legal Proceedings	26
	Item 4. Mine Safety Disclosures	26

PART II		27
	Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities	27
	Item 6. Select Financial Data	28
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	43
	Item 8. Financial Statements and Supplementary Data	44
	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	76
	Item 9A. Controls and Procedures	76
	Item 9B. Other Information	76

PART III		77
	Item 10. Directors, Executive Officers, and Corporate Governance	77
	Item 11. Executive Compensation	77
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	77
	Item 13. Certain Relationships and Related Transactions and Director Independence	77
	Item 14. Principal Accountant Fees and Services	77

PART IV		78
	Item 15. Exhibits and Financial Statement Schedules	78

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PART I

CAUTIONARY STATEMENT REGARDING

FORWARD-LOOKING STATEMENTS

This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this Form 10-K, words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project,” and similar expressions, as they relate to us or our management, identify forward-looking statements. These forward-looking statements are based on information currently available to our management. Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors, including but not limited, to those listed in “Item 1A-Risk Factors” and the following:

•

general economic conditions, including our local, state and national real estate markets and employment trends;

•

volatility and disruption in national and international financial markets;

•

government intervention in the U. S. financial system including the effects of recent legislative, tax, accounting and regulatory actions and reforms, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act, the Consumer Financial Protection Bureau and the Basel III Rules;

•

political instability;

•

the ability of the Federal government to deal with any slowdown of the national economy and the fiscal cliff;

•

competition from other financial institutions and financial holding companies;

•

the effects of and changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);

•

changes in the demand for loans;

•

fluctuations in the value of collateral securing our loan portfolio and in the level of the allowance for loan losses;

•

the accuracy of our estimates of future loan losses;

•

the accuracy of our estimates and assumptions regarding the performance of our securities portfolio;

•

soundness of other financial institutions with which we have transactions;

•

inflation, interest rate, market and monetary fluctuations;

•

changes in consumer spending, borrowing and savings habits;

•

our ability to attract deposits;

•

changes in our liquidity position;

•

changes in the reliability of our vendors, internal control system or information systems;

•

our ability to attract and retain qualified employees;

	•		consequences of continued bank mergers and acquisitions in our market area, resulting in fewer but much larger and stronger competitors;
	•		expansion of our operations, including branch openings, new product offerings and expansion into new markets;

•

changes in our compensation and benefit plans; and

•

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

Such statements reflect the current views of our management with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this paragraph. We undertake no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

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Item 1. Business.

General

T Bancshares, Inc. (the “Company,” “we,” “us,” or “our,” hereafter) was incorporated under the laws of the State of Texas on December 23, 2002 to serve as the bank holding company for T Bank, N.A., a national association (the “Bank”), which opened on November 2, 2004. The Bank operates through a main office located at 16200 Dallas Parkway, Dallas, Texas. Other than its ownership of the Bank, the Company conducts no material business.

As of December 31, 2015, the Company had, on a consolidated basis, approximately $176.9 million in assets, $137.6 million in total loans and $137.0 million in deposits.

The Bank is a full-service commercial bank offering a broad range of commercial and consumer banking services to small- to medium-sized businesses, single-family residential and commercial contractors and consumers. Lending services include commercial loans to small to medium-sized businesses and professional concerns as well as consumers. The Bank offers a wide range of deposit services including demand deposits, regular savings accounts, money market accounts, individual retirement accounts, and certificates of deposit with fixed rates and a range of maturity options. The Bank also offers wealth management and trust services. These services are provided through a variety of delivery systems including automated teller machines, mobile banking and Internet banking. During the fourth quarter of 2012, the Bank added the Small Business Administration (“SBA”) division, with loan production offices in various states.

Market Area

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. We also serve on a national scale certain niche markets that include loans to dentists and small business lending under programs through the U.S. Small Business Administration and the U.S. Department of Agriculture.

Competition

The market for financial services is rapidly changing and intensely competitive and is likely to become more competitive as the number and types of market entrants increases. The Bank competes in both lending and attracting funds with other commercial banks, savings and loan associations, credit unions, consumer finance companies, pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking firms, asset-based nonbank lenders, government agencies and certain other non-financial institutions, including retail stores, which may offer more favorable financing alternatives than the Bank.

Lending Services

Lending Policy

We offer a full range of lending products, including commercial loans to small- to medium-sized businesses and professional concerns, real estate loans and consumer loans. We compete for these loans with competitors who are well established in our primary market area and have greater resources and lending limits. As a result, we currently have to offer more flexible pricing and terms to attract borrowers.

The Bank’s delegations of authority, which are approved by the Board of Directors, provide for various levels of officer lending authority. The Bank has an independent review that evaluates the quality of loans on a periodic basis and determines if loans are originated in accordance with the guidelines established by the Board of Directors. Additionally, our Board of Directors has formed a Directors’ Loan Committee with members determined by board resolution to provide the following oversight:

	·	ensure compliance with loan policy, procedures and guidelines as well as appropriate regulatory requirements;
	·	approve loans with net bank exposure over $2,000,000;
	·	monitor delinquent, non-accrual loans and classified loans;
	·	monitor loan portfolio concentrations and quality through a variety of metrics;
	·	monitor our loan servicing and review systems; and
	·	review the adequacy of the loan loss reserve.

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We follow a conservative lending policy, but one which we believe permits prudent risks to assist businesses and consumers in our lending market. Interest rates vary depending on our cost of funds, the loan maturity, the degree of risk and other loan terms. The Bank does not make any loans to any of its directors, executive officers or their affiliates.

Lending Limits

The Bank’s lending activities are subject to a variety of lending limits. Differing limits apply based on the type of loan or the nature of the borrower, including the borrower’s relationship to the Bank. In general, however, the Bank is able to loan any one borrower a maximum amount equal to either:

	·	15% of the Bank’s capital and surplus and allowance for loan losses; or
	·	25% of its capital and surplus and allowance for loan losses if the amount that exceeds 15% is secured by cash or readily marketable collateral, as determined by reliable and continuously available price quotations; or
	·	any amount when the loan is fully secured by a segregated deposit at the Bank and the Bank has perfected its security interest in the deposit.

These legal limits will increase or decrease as the Bank’s capital increases or decreases as a result of its earnings or losses, among other reasons.

Credit Risks

The principal economic risk associated with each category of loans that the Bank makes is the creditworthiness of the borrower. Borrower creditworthiness is affected by general economic conditions and the strength of the relevant business market segment. General economic factors affecting a borrower’s ability to repay include interest, inflation and employment rates, as well as other factors affecting a borrower’s customers, suppliers and employees. The well-established financial institutions in our primary service area currently make proportionately more loans to medium- to large-sized businesses than the Bank. Many of the Bank’s anticipated commercial loans will likely be made to small- to medium-sized businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers.

Commercial and Industrial Loans

Loans for commercial purposes in various lines of businesses are a major component of the Bank’s loan portfolio. The targets in the commercial loan markets are retail establishments, professional service providers, in particular dentists, and small-to-medium-sized businesses. The terms of these loans vary by purpose and by type of underlying collateral, if any. The commercial loans primarily are underwritten on the basis of the borrower’s ability to service the loan from income and their creditworthiness. The Bank will typically make equipment loans for a term of ten years or less at fixed or variable rates, with the loan fully amortized over the term. Loans to support working capital will typically have terms not exceeding one year and will usually be secured by accounts receivable, inventory or personal guarantees of the principals of the business. For loans secured by accounts receivable or inventory, principal will typically be repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal will typically be repaid over the term of the loan or due at maturity.

Commercial lending generally involves greater credit risk than residential mortgage or consumer lending, and involves risks that are different from those associated with commercial real estate lending. Although commercial loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default may represent an insufficient source of repayment because equipment and other business assets may, among other things, be obsolete or of limited use. Accordingly, the repayment of a commercial loan depends primarily on the creditworthiness and projected cash flow of the borrower (and any guarantors), while liquidation of collateral is considered a secondary source of repayment.

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Real Estate Loans

The Bank makes commercial real estate loans, construction and development loans, owner occupied commercial real estate loans to small businesses, and residential real estate loans. On some of these loans, the Bank takes a security interest in real estate as a prudent practice and measure and not as the principal collateral for the loan.

	·	Commercial real estate. Commercial owner occupied real estate loan terms generally are limited to fifteen years or less while commercial rental property real estate loan terms generally are limited to thirty years, although payments may be structured on a longer amortization basis. Interest rates may be fixed or adjustable, although rates typically are not fixed for loans with maturity dates exceeding 120 months. The Bank generally charges an origination fee for its services. The Bank generally requires personal guarantees from the principal owners of the property supported by a review by the Bank’s management of the principal owners’ personal financial statements. Risks associated with commercial real estate loans include fluctuations in the value of real estate, new job creation trends, tenant vacancy rates and the quality of the borrower’s management. The Bank limits its risk by analyzing borrowers’ cash flow and collateral value on an ongoing basis.
	·	Construction and development loans. We make construction and development loans on a pre-sold and speculative basis. If the borrower has entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a pre-sold basis. If the borrower has not entered into an agreement to sell the property prior to beginning construction, then the loan is considered to be on a speculative basis. Construction and development loans are generally made with a term of six to 12 months and interest is paid monthly. The ratio of the loan principal to the value of the collateral as established by independent appraisal typically will not exceed industry standards and applicable regulations. Speculative loans are based on the borrower’s financial strength and cash flow position. Loan proceeds will be disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector. Risks associated with construction loans include, without limitation, fluctuations in the value of real estate, the financial condition of the buyer on a presold basis and of the builder on a speculative basis, and new job creation trends.
	·	Residential real estate. The Bank’s residential real estate loans consist of loans to acquire and renovate existing homes for subsequent re-sale, residential new construction loans, residential loans purchased in the secondary market, and traditional mortgage lending for one-to-four family residences which are primarily non-owner occupied rental properties. The Bank offers primarily adjustable rate mortgages. All loans are made in accordance with the Bank’s appraisal and loan policy with the ratio of the loan principal to the value of collateral as established by independent appraisal generally not exceeding 80%. We believe these loan-to-value ratios are sufficient to compensate for fluctuations in real estate market value and to minimize losses that could result from a downturn in the residential real estate market.

Government Enhanced Small Business Lending

The Bank originates and services commercial and real estate loans under programs guaranteed by the U.S. Small Business Administration and the U.S. Department of Agriculture. The principal balance of these loans is generally guaranteed 75% by these agencies. These loans generally offer borrowers more flexible terms and conditions than may be available for conventional commercial loans. Examples of more flexible terms include longer amortization periods, lower required down payments, and less borrower operating history. These loans are generally secured by equipment, real estate, and other tangible collateral. Loan-to-value ratios may, in some instances, be higher than conventional loans. Loans secured by business assets that do not include real estate have terms that are generally ten years or less and are fully amortizing. Loans secured by real estate as the principal collateral are generally twenty five years or less and are also fully amortizing. Most loans are adjustable rate loans but may be fixed for the term of the loan. Repayment of the loans is based on an analysis of the borrower’s ability to generate sufficient income from operations. This analysis may rely more heavily on projected future earnings than on conventional loans. The Bank also analyzes the industry sector to determine the feasibility of the projected income.

There is an active secondary market for the guaranteed portion of these loans. Because the guaranteed portion carries the full faith and credit guarantee of the U.S. Government, the lower investor required yield on that portion of the loan generally creates a premium at the time of the sale.

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Consumer Installment Loans

On a limited basis, the Bank makes loans to individuals for personal, family and household purposes, including secured and unsecured installment and term loans. These loans are typically to the principals and employees of our business customers. Repayment of consumer loans depends upon the borrower’s financial stability and is more likely to be adversely affected by divorce, job loss, illness and personal hardships than repayment of other loans. Because many consumer loans are secured by depreciable assets such as boats, cars and trailers, the loan should be amortized over the useful life of the asset. The loan officer will review the borrower’s past credit history, past income level, debt history and, when applicable, cash flow and determine the impact of all these factors on the ability of the borrower to make future payments as agreed. The principal competitors for consumer loans are the established banks and finance companies in our market.

Portfolio Composition

The following table sets forth the composition of the Bank’s loan portfolio at December 31, 2015. Loan balances do not include undisbursed loan proceeds, unearned income, sold guaranteed portions of loans held for sale, or allowance for loan losses.

	Portfolio Percentage at December 31, 2015
Commercial and industrial		51	%
Real Estate – residential		5	%
Real Estate - commercial		12	%
Real Estate – construction		7	%
SBA 7a		16	%
SBA 504		5	%
USDA		2	%
Consumer installment		1	%
Other		1	%
		100	%

Investments

The Bank invests a portion of its assets in U.S. Treasuries, U.S. government agencies, mortgage-backed securities, direct obligations of quasi government agencies including Fannie Mae, Freddie Mac, and the Federal Home Loan Bank, and federal funds sold. No investment in any of those instruments exceeds any applicable limitation imposed by law or regulation. The Bank’s investments are managed in relation to loan demand and deposit growth, and are generally used to provide for the investment of excess funds at minimal risks while providing liquidity to fund increases in loan demand or to offset deposit fluctuations. The Bank’s Asset-Liability Committee reviews the investment portfolio on an ongoing basis in order to ensure that the investments conform to the Bank’s policy as set by the Board of Directors.

Deposit Services

Deposits are the major source of the Bank’s funds for lending and other investment activities. Additionally, we also generate funds from loan principal repayments and prepayments. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. The Bank considers the majority of its regular savings, demand, NOW, and money market deposit accounts to be core deposits. These accounts comprised approximately 48% of the Bank’s total deposits at December 31, 2015. The Bank’s remaining deposits were composed of time deposits less than $100,000, which comprised 3% of total deposits, and time deposits of $100,000 and greater, which comprised approximately 49% of total deposits at December 31, 2015. The Bank believes it is very competitive in the types of accounts and interest rates we offer on deposit accounts, in particular money market accounts and time deposits. We actively solicit these deposits through personal solicitation by our officers and directors, advertisements published in the local media, and through our Internet banking strategy.

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Trust Services

Since August 2006, the Bank has offered traditional fiduciary services, such as serving as executor, trustee, agent, administrator or custodian for individuals, nonprofit organizations, employee benefit plans and organizations. The Bank’s trust department works with our customers and their financial advisors to define objectives, goals and strategies for their investment portfolios and tailor their investment portfolios accordingly. As of December 31, 2015, the Bank had approximately $1.1 billion in trust assets under management.

Other Banking Services

Other banking services currently offered or anticipated include cashier’s checks, travelers’ checks, direct deposit of payroll and Social Security payments, bank-by-mail, remote check deposits, automated teller machine cards and debit cards. The Bank offers full service personal and business internet banking which includes remote deposit for both consumers and businesses, bill payment, electronic transfer of funds between financial institutions, as well as traditional internet services such as balance inquiries and internal funds transfers. The Bank provides a courier and mobile banking concierge service throughout the Dallas/Fort Worth Metroplex and offers its customers free usage of any automated teller machine in the world through its debit card.

Employees

The success of the Bank depends, in significant part, on its ability to attract, retain and motivate highly qualified management and other personnel, for whom competition is intense. The Bank currently has 39 full-time equivalent employees. None of the Bank’s employees are represented by a collective bargaining agreement. The Bank believes that its relations with its employees are good.

Employees are covered by a comprehensive employee benefit program which provides for, among other benefits, 401(k) Plan, hospitalization and major medical insurance, disability insurance, and life insurance. Such employee benefits are considered by management to be generally competitive with employee benefits provided by other similar employers in the Bank’s geographic market area.

Other Available Information

We file or furnish with the Securities and Exchange Commission (the “SEC”) annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934. You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site at www.sec.gov that contains our reports, proxy statements, and other information that we file electronically with the SEC.

In addition, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other reports required by Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through our Internet website, www.tbank.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Form 10-K.

SUPERVISION AND REGULATION

General

Set forth below is a description of the significant elements of the laws and regulations applicable to the Company and the Bank. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Moreover, these statutes, regulations and policies are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or its principal subsidiary, the Bank, could have a material effect on our business.

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Regulatory Agencies

As a registered bank holding company, the Company is subject to the supervision and regulation of the Federal Reserve and, acting under delegated authority, the Federal Reserve Bank of Dallas (the “Reserve Bank”) pursuant to the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”). As a national bank, the Bank is subject to the supervision and regulation of the Office of the Comptroller of the Currency (the “Comptroller”).

Bank Holding Company Regulation

Bank Holding Company Act. As a registered bank holding company, the Company is required to furnish to the Federal Reserve annual and quarterly reports of its operations and may also be required to furnish such additional information and reports as the Federal Reserve or the Reserve Bank may require.

Under the Bank Holding Company Act, the Company must obtain the prior approval of the Federal Reserve or, acting under delegated authority, the Reserve Bank before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company.

Under the Bank Holding Company Act, any company must obtain approval of the Federal Reserve prior to acquiring control of the Company or the Bank. For purposes of the Bank Holding Company Act, “control” is defined as ownership of 25% or more of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank.

Change in Bank Control Act. The Change in Bank Control Act of 1978, as amended (the “Change in Bank Control Act”), and the related regulations of the Federal Reserve require any person or groups of persons acting in concert (except for companies required to make application under the Bank Holding Company Act), to file a written notice with the Federal Reserve or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of the Company. The Change in Bank Control Act defines “control” as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934, as amended, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.

Permitted Activities. The Bank Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, and various non-bank activities that are deemed to be closely related to banking. The activities of the Company are subject to these legal and regulatory limitations under the Bank Holding Company Act and the implementing regulations of the Federal Reserve.

A bank holding company may also elect to become a “financial holding company,” by which a qualified parent holding company of a banking institution may engage, directly or through its non-bank subsidiaries, in any activity that is financial in nature or incidental to such financial activity or in any other activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. A bank holding company will be able to successfully elect to be regulated as a financial holding company if all of its depository institution subsidiaries meet certain prescribed standards pertaining to management, capital adequacy and compliance with the Community Reinvestment Act of 1977, as amended (the “Community Reinvestment Act”), such as being “well-capitalized” and “well-managed,” and must have a Community Reinvestment Act rating of at least “satisfactory.” Financial holding companies remain subject to regulation and oversight by the Federal Reserve. The Company believes that the Bank, which is the Company’s sole depository institution subsidiary, presently satisfies all of the requirements that must be met to enable the Company to successfully elect to become a financial holding company. However, the Company has no current intention of seeking to become a financial holding company. Such a course of action may become necessary or appropriate at some time in the future depending upon the Company’s strategic plan.

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Source of Strength. Under the Federal Reserve’s “source of strength” doctrine, a bank holding company is required to act as a source of financial and managerial strength to any subsidiary bank. The holding company is expected to commit resources to support a subsidiary bank, including at times when the holding company may not be in a financial position to provide such support. A bank holding company’s failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve’s regulations, or both. The source-of-strength doctrine most directly affects bank holding companies in situations where the bank holding company’s subsidiary bank fails to maintain adequate capital levels. This doctrine was codified by the Dodd-Frank Act, but the Federal Reserve has not yet adopted regulations to implement this requirement.

Sound banking practice. The Federal Reserve also has the power to order a bank holding company to terminate any activity or investment, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or investment or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any subsidiary bank of the bank holding company.

Bank holding companies are not permitted to engage in unsound banking practices. For example, the Federal Reserve’s Regulation Y requires a bank holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the company’s consolidated net worth. There is an exception for bank holding companies that are well-managed, well capitalized, and not subject to any unresolved supervisory issues. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company could not impair its subsidiary bank’s soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve believed it not prudent to do so.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”) expanded the Federal Reserve’s authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations. FIRREA increased the amount of civil money penalties which the Federal Reserve can assess for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.0 million for each day the activity continues. FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed.

Dividends. Consistent with its policy that bank holding companies should serve as a source of financial strength for their subsidiary banks, the Federal Reserve has stated that, as a matter of prudent banking, a bank holding company generally should not maintain a rate of distributions to shareholders unless its available net income has been sufficient to fully fund the distributions, and the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. In addition, we are subject to certain restrictions on the making of distributions as a result of the requirement that the Bank maintain an adequate level of capital as described below. As a Texas corporation, we are restricted under the Texas Business Organizations Code from paying dividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the dividends exceed our surplus or if after giving effect to the dividends, we would be insolvent.

Anti-tying restrictions. Bank holding companies and affiliates are prohibited from tying the provision of services, such as extensions of credit, to other services offered by a holding company or its affiliates.

Bank Regulation

Federal and state laws and regulations that govern banks have the effect of, among other things, regulating the scope of business, investments, cash reserves, the purpose and nature of loans, the maximum interest rate chargeable on loans, the amount of dividends declared, and required capitalization ratios.

National Banking Associations. Banks organized as national banking associations under the National Bank Act are subject to regulation and examination by the Comptroller. The supervision and regulation by the Office of the Comptroller of the Currency (the “OCC” or “Comptroller”) of banks is primarily intended to protect the interests of depositors. The National Bank Act:

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requires each national banking association to maintain reserves against deposits,

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restricts the nature and amount of loans that may be made and the interest that may be charged, and

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restricts investments and other activities.

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Deposit Insurance. The FDIC insures the deposits of federally insured banks, such as the Bank, and thrifts, up to prescribed statutory limits for each depositor through the Deposit Insurance Fund (DIF) and safeguards the safety and soundness of the banking and thrift industries. The Dodd-Frank Act set the standard maximum deposit insurance amount to $250,000. The amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.

The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. In connection with the Dodd-Frank Act’s requirements that insurance assessments be based on assets, the FDIC redefined its deposit insurance premium assessment base to be an institution’s average consolidated total assets minus average tangible equity, and revised its deposit insurance assessment rate schedule in light of this change in the assessment base. At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required. If there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be required to pay higher FDIC insurance premiums. Any future increases in FDIC insurance premiums may have a material and adverse effect on the Company’s earnings.

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Payment of Dividends. The Company is a legal entity separate and distinct from the Bank. The Company receives most of its revenue from dividends paid to the Company by the Bank. Described below are some of the laws and regulations that apply when the Bank pays or paid dividends.

National banks are required by federal law to obtain the prior approval of the OCC to declare and pay dividends if the total of all dividends declared in any calendar year would exceed the total of (1) such bank’s net profits (as defined and interpreted by regulation) for that year plus (2) its retained net profits (as defined and interpreted by regulation) for the preceding two calendar years, less any required transfers to surplus. In addition, these banks may only pay dividends to the extent that retained net profits (including the portion transferred to surplus) exceed bad debts (as defined by regulation).

To pay dividends, the Bank must maintain adequate capital above regulatory guidelines. In addition, if the applicable regulatory authority believes that a bank under its jurisdiction is engaged in, or is about to engage in, an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), the regulatory authorities may require, after notice and hearing, that such bank cease and desist from the unsafe practice. The FDIC and the OCC have each indicated paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice. The Federal Reserve, the Comptroller and the FDIC have issued policy statements that recommend that bank holding companies and insured banks should generally only pay dividends to the extent net income is sufficient to cover both cash dividends and a rate of earnings retention consistent with capital needs, asset quality and overall financial condition. No undercapitalized institution may pay a dividend.

Capital Requirements

The federal banking agencies have adopted risk-based capital guidelines for bank holding companies and banks that are expected to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $1.0 billion or more. Under these capital guidelines, banking organizations are required to maintain certain minimum capital ratios, which are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. In general, the dollar amounts of assets and certain off-balance sheet items are “risk-adjusted” and assigned to various risk categories. In addition to such risk adjusted capital requirements, banking organizations are also required to maintain an additional minimum “leverage” capital ratio, which is calculated on the basis of average total assets without any adjustment for risk being made to the value of the assets. Qualifying capital is classified depending on the type of capital as follows:

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•	“Tier 1 capital” consists of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. In determining bank holding company compliance with holding company level capital requirements, qualifying Tier 1 capital may count trust preferred securities, subject to certain criteria and quantitative limits for inclusion of restricted core capital elements in Tier 1 capital provided that the bank holding company has total assets of less than $15.0 billion and such trust preferred securities were issued before May 19, 2010;
•	“Tier 2 capital” includes, among other things, hybrid capital instruments, perpetual debt, mandatory convertible debt securities, qualifying term subordinated debt, preferred stock that does not qualify as Tier 1 capital, and a limited amount of allowance for loan and lease losses; and
•	“Tier 3 capital” consists of qualifying unsecured subordinated debt.

Pursuant to federal regulations, banks and bank holding companies, with more than $1 billion in consolidated assets, must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. The federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well capitalized, in which case the affected institution may no longer be deemed well capitalized and may be subject to restrictions on various activities, including a bank’s ability to accept or renew brokered deposits.

On July 2, 2013, the Federal Reserve, and on July 9, 2013, the FDIC and OCC, adopted a final rule that implements the Basel III changes to the international regulatory capital framework, referred to as the “Basel III Rules.” The Basel III Rules apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Basel III Rules apply only to large, complex financial institutions, substantial portions of the Basel III Rules apply to the Company and our subsidiary bank. The Basel III Rules include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.

The Basel III Rules include higher risk-based and leverage capital ratio requirements and redefine what constitutes “capital” for purposes of calculating those ratios. Among the most important changes are stricter eligibility criteria for regulatory capital instruments that would disallow the inclusion of instruments, such as trust preferred securities (other than grandfathered trust preferred securities such as those issued by the Company), in Tier 1 capital going forward and new constraints on the inclusion of minority interests, mortgage-servicing assets, deferred tax assets and certain investments in the capital of unconsolidated financial institutions. The Basel III Rules also introduced a common equity Tier 1 (“CET1”) risk-based capital ratio. CET1 capital consists of retained earnings and common stock instruments, subject to certain adjustments. In addition, the rule requires that most regulatory capital deductions be made from CET1 capital.

The Basel III Rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added to the capital requirements, results in the following minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of 7.0%, (ii) a Tier 1 risk-based capital ratio of 8.5%, and (iii) a total risk-based capital ratio of 10.5%. The capital conservation buffer requirement is to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on certain activities including payment of dividends, share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio.

The Basel III minimum capital ratio requirements as applicable to the Company and the Bank after the full phase-in period are summarized in the table below.

	BASEL III Minimum for Capital Adequacy Requirements			BASEL III Additional Capital Conservation Buffer			BASEL III Ratio with Capital Conservation Buffer
Total Risk Based Capital (total capital to risk weighted assets)		8.0	%		2.5	%		10.5	%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)		6.0	%		2.5	%		8.5	%
Tier 1 Leverage Ratio (tier 1 to average assets)		4.0	%		-	%		4.0	%
Common Equity Tier 1 Risk Based ( CET1 to risk weighted assets)		4.5	%		2.5	%		7.0	%

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The Basel III Rules also revise the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including our subsidiary bank, if their capital levels do not meet certain thresholds. These revisions are to be effective January 1, 2015. The prompt correction action rules now include CET1 capital component and increase certain other capital requirements for the various thresholds. As of January 1, 2015, insured depository institutions are required to meet the following capital levels in order to qualify as “well capitalized:” (i) a Total risk-based capital ratio of 10%(unchanged from current rules); (ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%); (iii) a Tier 1 leverage ratio of 5% (unchanged from current rules); and (iv) a CET1 risk-based capital ratio of 6.5%. Accordingly, a financial institution may be considered “well capitalized” under the prompt corrective action framework, but not satisfy the fully phased-in Basel III capital ratios.

The Federal Reserve may also set higher capital requirements for holding companies whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The bank regulatory agencies could impose higher capital requirements to meet “well-capitalized” standards and any future regulatory change could impose higher capital standards as a routine matter. The Company’s regulatory capital ratios and those of the Bank are in excess of the levels established for “well capitalized” institutions under the Basel III Rules.

The Basel III Rules set forth certain changes in the methods of calculating certain risk-weighted assets, which in turn will affect the calculation of risk-based ratios. Under the Basel III Rules, higher or more sensitive risk weights are assigned to various categories of assets, including, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on non-accrual, foreign exposures and certain corporate exposures. In addition, these Rules include greater recognition of collateral and guarantees and revised capital treatment for derivatives and repo-style transactions.

In addition, the Basel III Rules include certain exemptions to address concerns about the regulatory burden on community banks. For example, banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in Tier 1 capital prior to May 19, 2010 on a permanent basis, without any phase out. Community banks may also elect on a one time basis in their March 31, 2015 quarterly filings to permanently opt-out out of the requirement to include most accumulated other comprehensive income (“AOCI”) components in the calculation of CET1 capital and, in effect, retain the AOCI treatment under the current capital rules. Under the Basel III Rules, the Company made such election to exclude AOCI from capital.

Overall, the Basel III Rules provides some important concessions for smaller, less complex financial institutions.

The Basel III Rules generally became effective January 1, 2015. The conservation buffer will be phased in beginning in 2016 and will take full effect on January 1, 2019. Although the Company began complying with the Basel III Rules on January 1, 2015, management believes the Company satisfied the higher capital ratios imposed by Basel III, in addition to the revised “well capitalized” requirements under the revised prompt corrective actions rules discussed above, as of December 31, 2015. The Company has complied with the final Basel III Rules since January 1, 2015.

Prompt Corrective Action

The federal banking agencies have issued regulations pursuant to the FDIA defining five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. A bank that may otherwise meet the minimum requirements to be classified as well-capitalized, adequately capitalized, or undercapitalized may be treated instead as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Under the prompt corrective action regulations, a bank that is deemed to be undercapitalized or in a lesser capital category will be required to submit to its primary federal banking regulator a capital restoration plan and to comply with the plan. The Basel III Rules revise the prompt corrective action framework. See “Capital Requirements” above.

Any bank holding company that controls a subsidiary bank that has been required to submit a capital restoration plan will be required to provide assurances of compliance by the bank with the capital restoration plan, subject to limitations on the bank holding company’s aggregate liability in connection with providing such required assurances. Failure to restore capital under a capital restoration plan can result in the bank being placed into receivership if it becomes critically undercapitalized. A bank subject to prompt corrective action also may affect its parent holding company in other ways. These include possible restrictions or prohibitions on dividends or subordinated debt payments to the parent holding company by the bank, as well as limitations on other transactions between the bank and the parent holding company. In addition, the Federal Reserve may impose restrictions on the ability of the bank holding company itself to pay dividends, or require divestiture of holding company affiliates that pose a significant risk to the subsidiary bank, or require divestiture of the undercapitalized subsidiary bank. At each successive lower capital category, an insured bank may be subject to increased operating restrictions by its primary federal banking regulator.

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Interstate Banking and Branching

Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 amended the Federal Deposit Insurance Act and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opts out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo.

However, under the Dodd-Frank Act, the national branching requirements have been relaxed and national banks and state banks are able to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. The Comptroller accepts applications for interstate merger and branching transactions, subject to certain limitations on ages of the banks to be acquired and the total amount of deposits within the state a bank or financial holding company may control. Since our primary service area is Texas, we do not expect that the ability to operate in other states will have any material impact on our growth strategy. We may, however, face increased competition from out-of-state banks that branch or make acquisitions in our primary markets in Texas.

Community Reinvestment Act

The Community Reinvestment Act requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC and the Commissioner is to evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on us. Additionally, the Bank must publicly disclose the terms of various Community Reinvestment Act-related agreements. The Bank received a rating of “satisfactory” on its most recent Community Reinvestment Act examination.

Restrictions on Transactions with Affiliates and Loans to Insiders

The Bank is subject to the provisions of Section 23A and 23B of the Federal Reserve Act (the “Affiliates Act”), as such provisions are made applicable to state non-member banks by Section 18(i) of the Federal Deposit Insurance Act. Affiliates of a bank include, among other entities, the bank’s holding company and companies that are under common control with the bank.

These provisions place limits on the amount of:

loans or extensions of credit to affiliates;

investment in affiliates;

assets that may be purchase from affiliates, except for real and personal property exempted by the Federal Reserve;

	·	the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
	·	the guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of the Bank’s capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements. The Bank must also comply with other provisions designed to avoid the purchase or acquisition of low-quality assets from affiliates. The Dodd-Frank Act expanded the scope of Section 23A, which now includes investment funds managed by an institution as an affiliate, as well as other procedural and substantive hurdles.

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The Bank is also subject to Section 23B of the Federal Reserve Act which, among other things, prohibits the Bank from engaging in any transaction with an affiliate unless the transaction is on terms substantially the same, or at least as favorable to the Bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Under federal law, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, (2) must follow credit underwriting procedures at least as stringent as those applicable to comparable transactions with third parties, and (3) must not involve more than the normal risk of repayment or present other unfavorable features. The Dodd-Frank Act expanded coverage of transactions with insiders by including credit exposure arising from derivative transactions (which are also covered by the expansion of Section 23A). The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal shareholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution’s capital, it is approved in advance by a majority of the disinterested directors.

Concentrated Commercial Real Estate Lending Regulations

The federal banking agencies, including the Comptroller have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm nonresidential properties (excluding loans secured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or more of total capital and the bank’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. On December 18, 2015, the federal banking agencies jointly issued a “Statement on Prudent Risk Management for Commercial Real Estate Lending”. As of December 31, 2015, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and believes its credit administration to be consistent with the recently published policy statement.

The Dodd-Frank Wall Street Reform and Consumer Protection Act

On July 21, 2010, President Obama signed into law the Dodd-Frank Act, which implements significant changes to the regulation of the financial services industry. Among other reforms discussed throughout this section, the Dodd-Frank Act includes the following provisions that have affected or are likely to affect us:

•	Repeal of the federal prohibitions on the payment of interest on demand deposits effective July 21, 2011, thereby permitting, but not requiring, depository institutions to pay interest on business transaction and other accounts.

•	Imposition of comprehensive regulation of the over-the-counter derivatives market, including provisions that effectively prohibit insured depository institutions from conducting certain derivatives activities from within the institution.

•	Implementation of corporate governance revisions, including executive compensation reporting obligations for financial institutions with total assets of more than $1.0 billion and executive compensation disclosure and proxy access requirements for all publicly traded companies.

•	Increase in the Federal Reserve’s examination authority with respect to bank holding companies’ non-banking subsidiaries.

•	Limitations on the amount of any interchange fee charged by a debit card issuer to be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, the Federal Reserve set the interchange rate cap at $0.24 per transaction. While these restrictions do not apply to banks like the Bank with less than $10 billion in assets, the rule could affect the competitiveness of debit cards issued by smaller banks. We believe that market forces may erode the effectiveness of this exemption now that merchants can select more than one network for transaction routing.

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Significant increases in the regulation of mortgage lending and servicing by banks and nonbanks. In particular, requirements that mortgage originators act in the best interests of a consumer and seek to ensure that a consumer will have the capacity to repay a loan that the consumer enters into; requirements that mortgage originators be properly qualified, registered and licensed and comply with any regulations designed by the Federal Reserve to monitor their operations; mandates of comprehensive additional and enhanced residential mortgage loan related disclosures, both prior to loan origination and after; mandates of additional appraisal practices for loans secured by residential dwellings including potential additional appraisals at the banks cost; mandates of additional collection and reporting requirements on transactions that are reportable under the Home Mortgage Disclosure Act; additional restrictions on the compensation of loan originators; and requirements that mortgage loan securitizers retain a certain amount of risk (as established by the regulatory agencies). However, mortgages that conform to the new regulatory standards as “qualified residential mortgages” will not be subject to risk retention requirements.

Although the majority of the Dodd-Frank Act’s rulemaking requirements have been met with finalized rules, approximately one-third of the rulemaking requirements are either still in the proposal stage or have not yet been proposed. Accordingly, it is difficult to anticipate the impact this expansive legislation will have on the Company, its customers and the financial industry generally.

Consumer Financial Protection Bureau

The Consumer Financial Protection Bureau (“CFPB”) was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts, including the Equal Credit Opportunity Act, Truth-in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), Fair Credit Reporting Act, Home Mortgage Disclosure Act, Truth in Savings Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. Banking institutions with total assets of $10.0 billion or less, such as the Bank, remain subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws and such additional regulations as may be adopted by the CFPB.

On January 10, 2013, the CFPB released its final “Ability-to-Repay/Qualified Mortgage” rules, which amended TILA’s implementation regulation, Regulation Z. Regulation Z currently prohibits a creditor from making a higher-priced mortgage loan without regard to the consumer's ability to repay the loan. The final rule implements sections 1411 and 1412 of the Dodd-Frank Act, which generally require creditors to make a reasonable, good faith determination of a consumer’s ability to repay any consumer credit transaction secured by a dwelling (excluding an open-end credit plan, timeshare plan, reverse mortgage, or temporary loan) and establishes certain protections from liability under this requirement for “qualified mortgages.” The final rule also implements section 1414 of the Dodd-Frank Act, which limits prepayment penalties. Finally, the final rule requires creditors to retain evidence of compliance with the rule for three years after a covered loan is consummated. This rule became effective January 10, 2014. The CFPB allowed for a small creditor exemption for banks with assets under $2 billion and that originate less than 500 mortgage loans in 2015. Beginning January 1, 2016, the small creditor exemption will be allowed for banks with assets under $2 billion and that originate less than 2,000 mortgage loans.

On November 20, 2013, pursuant to section 1032(f) of the Dodd-Frank Act, the CFPB issued the Know Before You Owe TILA/RESPA Integrated Disclosure Rule (“TRID”), which combined the disclosure required under TILA and sections 4 and 5 of RESPA, into a single, integrated disclosure for mortgage loan transactions covered by those laws. TRID, which requires the use if a Loan Estimate that must be delivered of places in the mail no later than the third business day after receiving the consumer’s application and a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation, became effective for application received on or after October 3, 2015 for applicable closed-end consumer credit transaction subject to TRID. All other mortgage loan transactions continue to use the Good Faith Estimate and the Initial Truth-in-Lending Disclosure at application and the HUD-1 Settlement Statement and the Final-in Lending Disclosure at closing. TRID also has new tolerance requirements and record retention requirement. Of note, the credit must retain evidence of compliance with the Loan Estimate requirements, including providing the Loan Estimate, and the Closing Disclosure requirements for three years after the later of the date of consummation, the date disclosures are required to be made or the date the action is required to be taken. Additionally, the creditor must retain copies of the Closing Disclosure, including all documents related to the Closing Disclosure, for five years after consummation.

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Technology Risk Management and Consumer Privacy

State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with outside vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes exposes a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.

Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to ensure the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information.

Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution’s ability to disclose nonpublic personal information about customers to nonaffiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank’s information sharing practices. Banks that share nonpublic personal information about customers with nonaffiliated third parties must also provide customers with an opt-out notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third party for use in marketing.

Other Operations and Consumer Compliance Laws

The Bank must comply with numerous federal anti-money laundering and consumer protection statutes and implement regulations, including but not limited to the Truth in Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, the USA PATRIOT Act of 2001, the Bank Secrecy Act, the Community Reinvestment Act, the Equal Credit Opportunity Act, the Truth in Lending Act, the National Flood Insurance Act and various other federal and state privacy protection laws. Failure to comply in any material respect with any of these laws could subject the Bank to lawsuits and could also result in administrative penalties, including fines and reimbursements. The Company and the Bank are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply in any material respect with any of these laws and regulations could subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.

Regulation Z. On April 5, 2011, the Federal Reserve’s Final Rule on Loan Originator Compensation and Steering (Regulation Z) became final. Regulation Z is more commonly known as regulation that implements the Truth in Lending Act. Regulation Z address two components of mortgage lending, i.e., loans secured by a dwelling, and implements restrictions and guidelines for: (a) prohibited payments to loan originators and (b) prohibitions on steering. Under Regulation Z, a creditor is prohibited from paying, directly or indirectly, compensation to a mortgage broker or any other loan originator that is based on a mortgage transaction’s terms or conditions, except the amount of credit extended, which is deemed not to be a transaction term or condition. In addition, Regulation Z prohibits a loan originator from “steering” a consumer to a lender or a loan that offers less favorable terms in order to increase the loan originator’s compensation, unless the loan is in the consumer’s interest. Regulation Z also contains a record-retention provision requiring that, for each transaction subject to Regulation Z, the financial institution must maintain records of the compensation it provided to the loan originator for that transaction as well as the compensation agreement in effect on the date the interest rate was set for the transaction. These records must be maintained for two years.

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UDAP and UDAAP. Recently, banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act—the primary federal law that prohibits unfair or deceptive acts or practices and unfair methods of competition in or affecting commerce (“UDAP” or “FTC Act”). “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with the UDAP law. However, the UDAP provisions have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices” (“UDAAP”), which has been delegated to the CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

Other regulation. The Bank’s operations are also subject to various federal and state laws such as:

	·	the federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
	·	the Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
	·	the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
	·	the Fair Credit Reporting Act of 1978 and its amendment, the Fair and Accurate Credit Transactions Act of 2003, governing the use and provision of information to credit reporting agencies;
	·	the Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
	·	the rules and regulations of the various federal agencies charged with the responsibility of implementing these federal laws.
	·	the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
	·	the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Regulatory Reform and Legislation

From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the Company or our subsidiaries could have a material effect on the Company’s business, financial condition and results of operations.

Effect of governmental monetary policies.

The commercial banking business is affected not only by general economic conditions but also by the fiscal and monetary policies of the Federal Reserve. Some of the instruments of fiscal and monetary policy available to the Federal Reserve include changes in the discount rate on member bank borrowings, the fluctuating availability of borrowings at the “discount window,” open market operations, the imposition of and changes in reserve requirements against member banks’ deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the placing of limits on interest rates that member banks may pay on time and savings deposits. Such policies influence to a significant extent the overall growth of bank loans, investments, and deposits and the interest rates charged on loans or paid on time and savings deposits. We cannot predict the nature of future fiscal and monetary policies and the effect of such policies on the future business and our earnings.

All of the above laws and regulations add significantly to the cost of operating the Bank and thus have a negative impact on our profitability. It should also be noted that there has been a tremendous expansion experienced in recent years by certain financial service providers that are not subject to the same rules and regulations as the Company or the Bank. These institutions, because they are not so highly regulated, have a competitive advantage over us and may continue to draw large amounts of funds away from traditional banking institutions, with a continuing adverse effect on the banking industry in general.

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Item 1A. Risk Factors.

An investment in our common stock involves certain risks. Our business, financial condition, operating results and cash flows can be impacted by a number of factors. These important factors could cause actual results to differ materially from those expressed or implied by these forward-looking statements, including our plans, objectives, expectations and intentions and other factors discussed in the risk factors, described below. You should carefully consider the following risk factors and all other information contained in this Report. The risks and uncertainties described below may not be the only ones we face. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may impair our business. If any of the events described in the following risk factors occur, our business, results of operations and financial condition could be materially adversely affected. The value or market price of our common stock could decline due to any of these identified or other risks, and you could lose all or part of your investment.

Our results of operation and financial condition would be adversely affected if our allowance for loan losses is not sufficient to absorb actual losses.

Experience in the banking industry indicates that a portion of our loans in all categories of our lending business will become delinquent, and some may only be partially repaid or may never be repaid at all. Our methodology for establishing the adequacy of the allowance for loan losses depends on subjective application of risk grades as indicators of borrowers’ ability to repay. Deterioration in general economic conditions and unforeseen risks affecting customers may have an adverse effect on borrowers’ capacity to repay timely their obligations before risk grades could reflect those changing conditions. In times of improving credit quality, with growth in our loan portfolio, the allowance for loan losses may decrease as a percent of total loans. Changes in economic and market conditions may increase the risk that the allowance would become inadequate if borrowers experience economic and other conditions adverse to their businesses. Maintaining the adequacy of our allowance for loan losses may require that we make significant and unanticipated increases in our provisions for loan losses, which would materially affect our results of operations and capital adequacy. Recognizing that many of our loans individually represent a significant percentage of our total allowance for loan losses, adverse collection experience in a relatively small number of loans could require an increase in our allowance.

Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. The regulatory agencies may require us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and to recognize further loan charge-offs based upon their judgments, which may be different from ours. Any increase in the allowance for loan losses required by these regulatory agencies could have a negative effect on our results of operations and financial condition.

Failure to implement our business strategies may adversely affect our financial performance.

We have developed a business plan that details the strategies we intend to implement in our efforts to achieve profitable operations. If we cannot implement our business 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. Even if our business strategies are successfully implemented, we cannot assure you that our strategies will have the favorable impact that we anticipate. Furthermore, while we believe that our business plan is reasonable and that our strategies will enable us to execute our business plan, we have no control over the future occurrence of certain events upon which our business plan and strategies are based, particularly general and local economic conditions that may affect the Bank’s loan-to-deposit ratio, total deposits, the rate of deposit growth, cost of funding, the level of earning assets and interest-related revenues and expenses.

We are subject to liquidity risk.

The Company requires liquidity to meet our deposit and other obligations as they come due. The Company’s access to funding sources in amounts adequate to finance its activities or on terms that are acceptable to it could be impaired by factors that affect it specifically or the financial services industry or economy generally. Factors that could reduce its access to liquidity sources include a downturn in the Texas market, difficult credit markets or adverse regulatory actions against the Company. The Company’s access to deposits may also be affected by the liquidity needs of its depositors. In particular, a substantial majority of the Company’s liabilities are demand, savings, interest checking and money market deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial portion of its assets are loans, which cannot be called or sold in the same time frame. The Company may not be able to replace maturing deposits and advances as necessary in the future, especially if a large number of its depositors sought to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could have a material adverse effect on the Company’s business, financial condition and result of operations.

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The Company’s accounting estimates and risk management processes rely on analytical and forecasting models.

The processes the Company uses to estimate its probable loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on the Company’s financial condition and results of operations, depends upon the use of analytical and forecasting models. These models reflect assumptions that may not be accurate, particularly in times of market stress or other unforeseen circumstances. Even if these assumptions are adequate, the models may prove to be inadequate or inaccurate because of other flaws in their design or their implementation. If the models the Company uses for interest rate risk and asset-liability management are inadequate, the Company may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models the Company uses for determining its probable loan losses are inadequate, the allowance for loan losses may not be sufficient to support future charge-offs. If the models the Company uses to measure the fair value of financial instruments are inadequate, the fair value of such financial instruments may fluctuate unexpectedly or may not accurately reflect what the Company could realize upon sale or settlement of such financial instruments. Any such failure in the Company’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operations.

We may elect or be compelled to seek additional capital, but that capital may not be available or it may be dilutive.

Our ability to raise capital in the future, if needed, will depend on conditions in the capital markets, which are outside our control, and on our financial performance. Accordingly, we cannot be assured of our ability to raise capital when needed, on favorable terms or at all. If we cannot raise additional capital when needed, we will be subject to increased regulatory supervision and the imposition of restrictions on our growth and business. These outcomes could negatively impact our ability to operate or further expand our operations through acquisitions or the establishment of additional branches and may result in increases in operating expenses and reductions in revenues that could have a material adverse effect on our financial condition and results of operations. In addition, in order to raise additional capital, we may need to issue shares of our common stock that would dilute the book value of our common stock and reduce our shareholders’ percentage ownership interest to the extent they do not participate in future offerings. Also, if we are unable to raise additional capital, we may be required to take alterative actions which may include the sale of income-producing assets to meet our capital requirements, which could have an adverse impact on our results of operations and ability to generate income.

We may be subject to more stringent capital and liquidity requirements which would adversely affect our net income and future growth.

On July 2, 2013, the Federal Reserve, and on July 9, 2013, the FDIC and OCC, adopted a final rule that implements the Basel III changes to the international regulatory capital framework and revises the U.S. risk-based and leverage capital requirements for U.S. banking organizations to strengthen identified areas of weakness in capital rules and to address relevant provisions of the Dodd-Frank Act.

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. The final rule increases capital ratios for all banking organizations and introduces a “capital conservation buffer” which is in addition to each capital ratio. If a banking organization dips into its capital conservation buffer, it may be restricted in its ability to pay dividends and discretionary bonus payments to its executive officers. The final rule assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on non-accrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. We exercised the one-time option in the first quarter of 2015 to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculation in order to reduce the impact of market volatility on our regulatory capital levels. The final rule also includes changes in what constitutes regulatory capital, some of which are subject to a two-year transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to a two-year transition period.

The final rule became effective for us on January 1, 2015. As of December 31, 2015, we met all of these new requirements, including the full capital conservation buffer.

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Although we currently cannot predict the specific impact and long-term effects that Basel III will have on our Company and the banking industry more generally, the Company is now required to maintain higher regulatory capital levels which could impact our operations, net income and ability to grow. Furthermore, if the Company fails to comply with the minimum capital requirements, our regulators may take formal or informal actions against us which could restrict our future growth or operations.

The Company’s use of appraisals in deciding whether to make a loan on or secured by real property does not ensure the value of the real property collateral.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and an error in fact or judgment could adversely affect the reliability of an appraisal. In addition, events occurring after the initial appraisal may cause the value of the real estate to decrease. As a result of any of these factors, the value of collateral backing a loan may be less than supposed, and if a default occurs, we may not recover the outstanding balance of the loan.

The Company is subject to environmental risks associated with owning real estate or collateral.

The cost of cleaning up or paying damages and penalties associated with environmental problems could increase the Company’s operating expenses. When a borrower defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. The Company may also take over the management of commercial properties whose owners have defaulted on loans. The Company also owns and leases premises where branches and other bank facilities are located. While the Company’s lending, foreclosure and facilities policies and guidelines are intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the properties that the Company may own, acquire, manage or occupy. Environmental laws could force the Company to clean up the properties at the Company’s expense. It may cost much more to clean a property than the property is worth and it may be difficult or impossible to sell contaminated properties. The Company could also be liable for pollution generated by a borrower’s operations if the Company takes a role in managing those operations after a default.

The success of our trust services is dependent upon market fluctuations and a non-diversified source for its growth.

Since August 2006, we have offered traditional fiduciary services such as serving as executor, trustee, agent, administrator or custodian for individuals, nonprofit organizations, employee benefit plans and organizations. As of December 31, 2015, the Bank had approximately $1.1 billion in trust assets under management. To date, virtually all of the growth in our assets under management relates to a registered investment advisor who has advised its clients of the existence of our trust services. We have not compensated the registered investment advisor in any way for making its clients aware of our trust services and cannot assure you that the investment advisor will continue to notify its clients of our trust services or that those clients will open trust accounts at the Bank. Furthermore, the level of assets under management is significantly impacted by the market value of the assets. In addition, we are subject to regulatory supervision with respect to these trust services that may restrain our growth and profitability.

Certain of our investment advisory and wealth management contracts are subject to termination on short notice, and termination of a significant number of investment advisory contracts could have a material adverse impact on our revenue.

Certain of our investment advisory and wealth management clients can terminate their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons, including investment performance, changes in prevailing interest rates, inflation, changes in investment preferences of clients, changes in our reputation in the marketplace, change in management or control of clients, loss of key investment management personnel and financial market performance. We cannot be certain that our trust operations will be able to retain all of its clients. If its clients terminate their investment advisory and wealth management contracts, our trust operations, and consequently we, could lose a substantial portion of our revenues and liquidity.

We have a loan concentration related to the acquisition and financing of dental practices.

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. We had no charge-offs during 2015 in our dental portfolio assets. At December 31, 2015, our loan portfolio included $61.6 million of loans, approximately 43.7% of our total funded loans, to the dental industry, including practice acquisition loans, dental equipment loans, and dental facility loans. Although we had no charge-offs during 2015 in our dental portfolio assets, during 2014, we had net loan charge-offs of $1.1 million, representing 1.7% of year end dental portfolio assets. We believe that these loans are conservatively underwritten to credit worthy borrowers and are diversified geographically. However, to the extent that there is a decline in the dental industry in general, we may incur significant losses in our loan portfolio as a result of this concentration.

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Our operations are significantly affected by interest rate levels.

Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. Like most financial institutions, we are affected by changes in general interest rate levels, which are currently at record low levels, and by other economic factors beyond our control. Prolonged periods of unusually low interest rates may have an adverse effect on earnings by reducing the value of demand deposits, shareholders’ equity and fixed rate liabilities with rates higher than available earning assets. Interest rate risk can result from mismatches between the dollar amount of repricing or maturing assets and liabilities and from mismatches in the timing and rate at which our assets and liabilities reprice.

Although we have implemented strategies which we believe reduce the potential effects of changes in interest rates on our results of operations, these strategies will not always be successful. In addition, any substantial and prolonged increase in market interest rates could reduce our customers’ desire to borrow money from us or adversely affect their ability to repay their outstanding loans by increasing their costs since a significant portion of our loans have adjustable interest rates that reset periodically. If our borrowers’ ability to repay is affected, our level of non-performing assets would increase and the amount of interest earned on loans will decrease, thereby having an adverse effect on operating results. Any of these events could adversely affect our results of operations or financial condition.

We face intense competition from a variety of competitors.

We face competition for deposits, loans, and other financial services from other community banks, regional banks, out-of-state and in-state national banks, savings banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services, including consumer finance companies, securities brokerage firms, insurance companies, mutual funds, and other lending sources and alternative investment providers. Some of these financial institutions and financial services organizations are not subject to the same degree of regulation as we are. For example, we face increased competition due to the Gramm-Leach-Bliley Act, which allows insurance firms, securities firms, and other non-traditional financial companies to provide traditional banking services. The banking business in our target banking market and the surrounding areas has become increasingly competitive over the past several years, and we expect the level of competition to continue to increase. Many of these competitors have been in business for many years, have established customers, are larger, have substantially higher lending limits than we do, and are able to offer certain services that we do not provide. In addition, many of these entities have greater capital resources than we have, which among other things may allow them to price their services at levels more favorable to the customer or to provide larger credit facilities.

We believe that the Bank will be a successful competitor in the area’s financial services market. An inability to compete effectively with other financial institutions serving our target banking market could have a material adverse effect on the Bank’s growth and profitability.

We compete in an industry that continually experiences technological change, and we may not be able to compete effectively with other banking institutions with greater resources.

The banking industry continues to undergo rapid technological changes with frequent introduction of new technology-driven products and services. In addition to providing better service to customers, the effective use of technology increases efficiency and enables us to reduce costs. Our future success depends in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional operating efficiencies. Many of our competitors have substantially greater resources to invest in technological improvements. Such technology may permit competitors to perform certain functions at a lower cost than we can. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these to our customers. Our inability to do so could have a material adverse effect on our ability to compete effectively in our market and also on our business, financial condition, and results of operations.

Our legal lending limits may impair our ability to attract borrowers and ability to compete with larger financial institutions.

Our per customer lending limit at December 31, 2015 was approximately $4.2 million, subject to further reduction based on regulatory criteria. Accordingly, the size of loans which we can offer to potential customers is less than the size which many of our competitors with larger lending limits are able to offer. This limit has affected and will continue to affect our ability to seek relationships with larger businesses in our market area. We accommodate loans in excess of our lending limit through the sale of portions of such loans to other banks. However, we may not be successful in attracting or maintaining customers seeking larger loans or in selling portions of such larger loans on terms that are favorable to us.

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An economic downturn, especially one affecting our primary service area, could diminish the quality of our loan portfolio, reduce our deposit base, and negatively affect our financial performance.

Adverse economic developments can impact the collectability of loans and the sustainability of our core deposits and may negatively impact our earnings and financial condition. In addition, the banking industry in general is affected by economic conditions such as inflation, recession, unemployment, and other factors beyond our control. A prolonged economic recession or other economic dislocation could cause increases in non-performing assets and impair the values of real estate collateral, thereby causing operating losses, decreasing liquidity, and eroding capital. Factors that adversely affect the economy in our local banking market could reduce our deposit base and the demand for our products and services, which may decrease our earnings capability.

Curtailment of government guaranteed loan programs could affect a segment of our business.

A major segment of our business consists of originating and periodically selling government guaranteed loans, in particular those guaranteed by the U.S. Department of Agriculture (“USDA”) and the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the loan programs. Non-governmental programs could replace government programs for some borrowers, but the terms might not be equally acceptable. Therefore, if these changes occur, the volume of loans to small businesses, industrial and agricultural borrowers of the types that now qualify for government guaranteed loans could decline. Also, the profitability of these loans could decline. As the funding of the guaranteed portion of 7(a) loans has historically been a major portion of our business, a long-term decrease in the funding for the 7(a) loan program may have an unfavorable impact on our future performance and results of operations.

Monetary policy and other economic factors could adversely affect the Bank’s profitability.

Our results of operations may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate market values, rapid changes in interest rates, and the monetary and fiscal policies of the federal government. Our profitability is dependent to a large extent on our net interest income, which is the difference between interest income we earn as a result of interest paid to us on loans and investments and interest we pay to third parties such as our depositors and those from whom we borrow funds. As with most banking institutions, our net interest spread is affected by general economic conditions and other factors that influence market interest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities may be affected differently by a given change in interest rates. As a result, an increase or decrease in rates could have a material adverse effect on our net income, capital and liquidity. While we take measures to reduce interest-rate risk, these measures may not adequately minimize exposure to interest-rate risk.

We are subject to extensive government regulation and supervision, which could constrain our growth and profitability.

The Company is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests of shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Federal and state statutes and related regulations, including tax policy and corporate governance rules, can significantly affect the way in which bank holding companies, and public companies in general, conduct business.

Changes to federal or state statutes, regulations or regulatory and tax policies, including changes in interpretation or implementation of new and existing statutes, regulations or policies, or new laws, regulation could affect the Company in substantial and unpredictable ways, including subjecting the Company to additional operating, tax, governance and compliance costs, increasing the Company’s deposit insurance premiums, limiting the types of assets the Company may be allowed to hold, limiting the types of financial services and products the Company may offer and/or increasing competition from other non-bank providers of financial services.

The Dodd-Frank Act, implements significant changes to the regulation of the financial services industry and includes many reforms and provisions that have affected or are likely to affect the Company. Many aspects of the Dodd-Frank Act are subject to rulemaking by various regulatory agencies and will take effect over several years, making it difficult at this time to anticipate the overall financial impact of this expansive legislation on the Company, its customers or the financial industry generally.

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The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of the “Federal consumer financial laws, and to prevent evasions thereof,” with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service (“UDAAP authority”). The ongoing broad rulemaking powers of the CFPB and its UDAAP authority have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services.

The Bank is subject to federal and state fair lending laws, and failure to comply with these laws could lead to material penalties. Federal and state fair lending laws and regulations, such as the Equal Credit Opportunity Act and the Fair Housing Act, impose nondiscriminatory lending requirements on financial institutions. The Department of Justice, CFPB and other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. A successful challenge to the Bank’s performance under the fair lending laws and regulations could adversely impact the Bank’s rating under the Community Reinvestment Act and result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could negatively impact the Bank’s reputation, business, financial condition and results of operations.

See the section entitled “Supervision and Regulation” contained in Item 1, “Business,” for additional information regarding the supervisory and regulatory issues facing the Company.

The recent repeal of federal prohibitions on payment of interest on demand deposits could increase our interest expense.

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, some financial institutions have commenced offering interest on demand deposits to compete for customers. The Company does not yet know what interest rates other institutions may offer as market interest rates begin to increase. The Company’s interest expense will increase and its net interest margin will decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

System failure or cybersecurity breaches of our network security could subject us to increased operating costs as well as litigation and other potential losses.

The computer systems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic event. Any damage or failure that causes an interruption in our operations could have an adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect the computer systems and network infrastructure utilized by us, including our Internet banking activities, against damage from physical break-ins, cybersecurity breaches and other disruptive problems caused by the Internet or other users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us, damage our reputation and inhibit current and potential customers from our Internet banking services. To date interruptions of our computer system have been infrequent and have not had a material impact on our operations. Each year, we add additional security measures to our computer systems and network infrastructure to mitigate the possibility of cybersecurity breaches including firewalls and penetration testing. We continue to investigate cost effective measures as well as insurance protection.

Furthermore, our customers could incorrectly blame the Company and terminate their accounts with the Company for a cyber-incident which occurred on their own system or with that of an unrelated third party. In addition, a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability.

Finally, on February 12, 2013, the Obama Administration released an executive order, Improving Critical Infrastructure Cybersecurity, referred to as the Executive Order, which is focused primarily on government actions to support critical infrastructure owners and operators in protecting their systems and networks from cyber threats. The Executive Order also will steer certain private sector companies to comply voluntarily with the Cybersecurity Framework. In response to the Executive Order, the FFIEC has published cybersecurity guidance on its website, along with observations from recent cybersecurity assessments. These assessments were conducted with the goal of identifying gaps in the regulators' examination procedures and training that can be used to strengthen the oversight of cybersecurity readiness. The implementation of any recommended guidance could require us to incur additional costs.

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Breakdowns in our internal controls and procedures could have an adverse effect on us.

We believe our internal control system as currently documented and functioning is adequate to provide reasonable assurance over our internal controls. Nevertheless, because of the inherent limitation in administering a cost effective control system, misstatements due to error or fraud may occur and not be detected. Breakdowns in our internal controls and procedures could occur in the future, and any such breakdowns could have an adverse effect on us. See “Item 9A – Controls and Procedures” for additional information.

RISKS RELATED TO OUR COMMON STOCK

Our common stock is thinly traded and, therefore, you may have difficulty selling shares.

The Company’s common stock is traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “TBNC”; however, we have no ability to ensure that an active market will exist in the future or that shares can be liquidated without delay. The average daily trading volume in our stock during 2015 was 967 shares.

We do not anticipate paying dividends for the foreseeable future.

We do not anticipate dividends will be paid on our common stock for the foreseeable future. The Company is largely dependent upon dividends paid by the Bank to provide funds to pay cash dividends if and when the board of directors may declare such dividends. Our future earnings may not be sufficient to satisfy regulatory requirements and permit the legal payment of dividends to shareholders at any time in the future. Even if we could legally declare dividends, the amount and timing of such dividends would be at the sole discretion of our board of directors.

The market price of our common stock may be volatile.

The market price of our common stock is subject to fluctuations as a result of a variety of factors, including the following:

quarterly variations in our operating results or those of other banking institutions;

changes in national and regional economic conditions, financial markets or the banking industry; and

other developments affecting us or other financial institutions.

The trading volume of our common stock is limited, which may increase the volatility of the market price for our stock. In addition, the stock market has experienced significant price and volume fluctuations in recent years. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons not necessarily related to the operating performance of these companies.

An investment in our common stock is not an insured deposit.

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this Report. As a result, if you acquire our common stock, you may lose some or all of your investment.

Item 2. Properties.

Our main office is in a two story, 33,000 square foot commercial office building located at 16200 Dallas Parkway, Dallas, Texas 75248. During the second quarter of 2013, the Bank acquired the building and relocated its main office to that location in May 2014. The Bank occupies approximately 11,000 square feet of the space, or 33% of the building, and currently leases approximately 64% to tenants.

We also have office space located at 850 E. Highway 114, Southlake, Texas, which is approximately 15 miles northwest of the main office. The space is 2,245 square feet on the second floor of a two story, commercial building in a developed commercial center. The lease for our office began on February 1, 2007 and is for a term of 120 months. The lease also calls for the Bank to pay for a pro rata share of operating and tax costs above a certain base amount. On May 1, 2013, the Bank entered into a sub-lease agreement covering its entire space located at 850 E. Highway 114, Southlake, Texas. The term of the sub-lease runs concurrently with the term of the Bank’s primary lease ending on February 28, 2017. Management believes that the principal terms of the leases are consistent with prevailing market terms and conditions and that these facilities are in good condition and adequate to meet our current needs.

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Item 3. Legal Proceedings.

The Bank is involved, from time to time, as plaintiff or defendant in various legal actions arising in the normal course of its business. Based on the information presently available, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business’s financial condition or results of operations of the Company on a consolidated basis.

Item 4. Mine Safety Disclosures.

Not applicable.

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PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is quoted on the OTCBB under the symbol “TBNC”. The table below gives the high and low bid information for the last two fiscal years. The bid information in the table was obtained from the OTCBB and reflects inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. There may have been other transactions in our common stock of which we are not aware.

	High		Low
2015
Fourth Quarter	$	7.35	$	6.80
Third Quarter	$	7.01	$	6.70
Second Quarter	$	7.30	$	6.80
First Quarter	$	7.00	$	6.22

2014
Fourth Quarter	$	6.40	$	6.05
Third Quarter	$	6.50	$	5.75
Second Quarter	$	5.75	$	4.83
First Quarter	$	5.10	$	4.70

On March 15, 2016, we had 310 holders of record of our common stock.

Dividends

It is the policy of our Board of Directors to reinvest earnings for such period of time as is necessary to ensure our successful operations. There are no current plans to initiate payment of cash dividends, and future dividends will depend on our earnings, capital and regulatory requirements, financial condition, and other factors considered relevant by our Board of Directors. In addition, we are subject to regulatory restrictions on our payment of dividends. For more information regarding the Company’s ability to pay dividends, please refer to the “Supervision and Regulation” section under Item 1.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2015 , segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, is presented in the table below.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a)		Weighted average exercise price of outstanding options, warrants, and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a))
Equity compensation plans approved by security holders:
2005 Stock Incentive Plan (1)		102,000	$	7.28		-
2015 Stock Incentive Plan		180,000		7.15		90,000
Equity compensation plans not approved by security holders:
2014 Non-employee Directors’ Common Stock Plan		-		-		92,025

(1)	The 2005 Stock Incentive Plan has expired and no new awards may be issued.

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Item 6. Selected Financial Data.

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. Please see “Item 1—Business—Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. You should read the following discussion in conjunction with our audited consolidated financial statements and the notes to our audited consolidated financial statements included elsewhere in this report. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Item 1A—Risk Factors” and included in other portions of this report.

Introduction

We are a bank holding company headquartered in Dallas, Texas, offering a broad array of banking services through our wholly owned banking subsidiary, T Bank, N.A.

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 on November 2, 2004.

Business Strategy

We believe we can effectively compete as a community bank in our market area and the niche markets we serve. We focus our marketing efforts in three areas. We serve our local geographic market which is the Dallas - Fort Worth metropolitan area. We serve the dental and other health professional industries through a centralized loan and deposit platform that operates out of our main office in Dallas, Texas. Since the fourth quarter, 2012, we have served the small business community by offering loans guaranteed by the SBA as well as the USDA. We are registered in Colorado and Oregon as a lender and our employees maintain home offices in those states from which we originate and underwrite those loans. We anticipate that these loans will eventually be originated nationwide.

We offer a broad range of commercial and consumer banking services primarily to small to medium-sized businesses and their employees. Because of our technological capabilities, including worldwide free automated teller machine (“ATM”) withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, we believe we can be the primary bank for most customers no matter where they are located. We believe that meeting the needs of our customers and making their banking experience more efficient leads to increased customer loyalty. In addition to our traditional banking services, we offer trust services to individuals and benefit plans.

We are able to utilize relatively low cost deposits provided by our trust activities to fund additional loan growth. The amount of deposits available to us while maintaining full FDIC insurance protection for our trust customers has consistently exceeded $22 million for the last three years. We anticipate the trust custodial deposits to be relatively low cost and comparable to the rate we pay non-trust customers on money market account balances.

The Bank’s goals are as follows:

sustain profitability;

maintain controlled growth by focusing on increasing our loan and deposit market share by providing personalized customer service;

closely manage yields on earning assets and rates on interest-bearing liabilities;

continue focusing on noninterest income opportunities including our trust business;

maintain our positive working relationship with our regulators;

control noninterest expenses; and,

maintain strong asset quality.

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2015 Executive Overview

Financial Highlights

The following were significant factors related to 2015 results as compared to 2014.

Net income for 2015 was $3.3 million, or $0.81 per diluted common share, compared to $3.0 million, or $0.75 per diluted common share in 2014. Net income before income tax for 2015 was $5.1 million compared to $4.8 million for 2014. The Company recorded income tax expense of $1.8 million and $1.7 million for years ended 2015 and 2014, respectively. For the year ended December 31, 2015, return on average assets was 1.93% and return on average equity was 13.37%. For the year ended December 31, 2014, return on average assets was 1.93% and return on average equity was 14.65%.

Net interest income increased $312,000 for the year ending 2015 to $7.4 million, compared to $7.1 million for the year ending 2014. Net interest margin decreased to 4.6% for 2015, compared to 4.8% for 2014.

Non-interest income increased $288,000 in 2015, which was primarily due to an increase of $508,000 in trust management fees and $186,000 in loan servicing fees, offset by a decrease of $383,000 in gain on sale of loans.

Non-interest expense increased $782,000 in 2015, which included an increase of $543,000 in salaries and employee benefits and $511,000 increase in trust consulting fees, offset by a decrease of $291,000 in occupancy expense.

There was no provision for loan losses in 2015. The Company recorded a provision for loan losses of $492,000 for the year ended December 31, 2014. The Company had net charge-offs of $131,000 and $1.1 million for the years ended December 31, 2015 and 2014, respectively.

Total assets at December 31, 2015 increased $13.8 million, or 8.5%, to $176.9 million, compared to $163.1 million at December 31, 2014. This increase was primarily due to an increase in real estate and SBA loans. Our loans held for investment increased $13.2 million, or 10.6%, to $137.6 million as of December 31, 2015, compared to $124.4 million as of December 31, 2014. At December 31, 2015, a receivable of $2.0 million was recorded for one SBA loan that was sold as of December 31, 2015, but the sales proceeds were not received until January 2016.

Non-performing assets, net of SBA guaranteed loans, decreased $152,000, or 25.6%, from $595,000 as of December 31, 2014, to $443,000 as of December 31, 2015. Ratios of non-performing assets, net of SBA guaranteed loans, as a percentage of total assets decreased from 0.4% at December 31, 2014 to 0.3% at December 31, 2015.

Critical Accounting Policies

The Company’s financial condition and results of operations are sensitive to accounting measurements and estimates of matters that are inherently uncertain. When applying accounting policies in areas that are subjective in nature, the Company must use its best judgment to arrive at the carrying value of certain assets. The following accounting policies are identified by management as being critical to the results of operations:

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required by considering the collectability of loans based on historical experience and the borrower’s ability to repay, the nature and volume of the portfolio, information about specific borrower situations and the estimated value of any underlying collateral, economic conditions and other factors. The allowance consists of general and specific reserves. The specific component relates to loans that are individually evaluated and determined to be impaired. This evaluation is often based on significant estimates and assumptions due to the level of subjectivity and judgment necessary to account for highly uncertain matters of the susceptibility of such matters to change. The general component relates to the entire group of loans that are evaluated in the aggregate based primarily on industry historical loss experience adjusted for current economic factors. To the extent actual loan losses differ materially from management’s estimate of these subjective factors, loan growth/run-off accelerates, or the mix of loan types changes, the level of the provision for loan loss, and related allowance can, and will, fluctuate. As of December 31, 2015, the allowance for loan losses was $1.6 million, which represented approximately 1.14% of total loans.

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Securities available for sale

Securities available for sale are evaluated periodically to determine whether a decline in their value is other than temporary. The term "other than temporary" is not intended to indicate a permanent decline in value. Rather, it means that the prospects for near term recovery of value are not necessarily favorable, or that there is a lack of evidence to support fair values equal to, or greater than, the carrying value of the security.

The initial indication of other than temporary impairment (“OTTI”) for both debt and equity securities is a decline in the market value below the amount recorded for an investment, and the severity and duration of the decline. In determining whether an impairment is other than temporary, we consider the length of time and the extent to which the market value has been below cost, recent events specific to the issuer, including investment downgrades by rating agencies and economic conditions of its industry, our intent to sell the investment, and if it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. For marketable equity securities, we also consider the issuer’s financial condition, capital strength, and near−term prospects. For debt securities and for perpetual preferred securities that are treated as debt securities for the purpose of OTTI analysis, we also consider the cause of the price decline (general level of interest rates and industry− and issuer−specific factors), the issuer’s financial condition, near−term prospects and current ability to make future payments in a timely manner, the issuer’s ability to service debt, and any change in agencies’ ratings at evaluation date from acquisition date and any likely imminent action. Once a decline in value is determined to be other than temporary, the security is segmented into credit− and noncredit−related components. Any impairment adjustment due to identified credit−related components is recorded as an adjustment to current period earnings, while noncredit−related fair value adjustments are recorded through other comprehensive income. In situations where we intend to sell or it is more likely than not that we will be required to sell the security, the entire OTTI loss must be recognized in earnings.

Income taxes

Deferred tax assets and liabilities are the expected future tax amounts for the temporary difference between carrying amounts and tax basis of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Prior to 2013, the Company had provided a 100% valuation allowance for its net deferred tax asset due to the Company’s recent net operating loss history. No valuation allowance for deferred tax assets was recorded at December 31, 2015 and 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 for the years 2012 through 2015. Positions taken by the Company in preparing the consolidated federal tax return are subject to the review of the Internal Revenue Service or to reinterpretation based on management’s ongoing assessment of facts and evolving case law, and as such, positions taken by management could result in a material adjustment to the financial statements.

Periodically and in the ordinary course of business, we are involved in inquiries and reviews by tax authorities that normally require management to provide supplemental information to support certain tax positions we take in our tax returns. Uncertain tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Management believes it has taken appropriate positions on its tax returns, although the ultimate outcome of any tax review cannot be predicted with certainty. Still, the final outcome of these matters may be different than what is reflected in the current and historical financial statements.

Loan income recognition

Interest income on loans is accrued at the contractual rate based on the principal outstanding. Loan origination fees are deferred and amortized as a yield adjustment over the contractual loan terms. Accrual of interest is discontinued when its receipt is in doubt, which typically occurs when a loan becomes impaired. Any interest accrued to income in the year when interest accruals are discontinued is generally reversed. Management may elect to continue the accrual of interest when a loan is in the process of collection and the estimated fair value of the collateral is sufficient to satisfy the principal balance and accrued interest. Loans are returned to accrual status once the doubt concerning collectability has been removed and the borrower has demonstrated the ability to pay and remain current. Payments on non-accrual loans are generally applied to principal.

Real estate acquired through foreclosure

We record foreclosed real estate assets at the lower of cost or estimated fair value on the acquisition date and at the lower of such initial amount or estimated fair value less estimated selling costs thereafter. Estimated fair value is based upon many subjective factors, including location and condition of the property and current economic conditions, among other things. Because the calculation of fair value relies on estimates and judgments relating to inherently uncertain events, results may differ from our estimates.

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Write-downs on foreclosed real estate assets at the time of transfer are made through the allowance for loan losses. Write-downs subsequent to transfer are included in our noninterest expenses, along with operating income, net of related expenses of such properties and gains or losses realized upon disposition.

Stock based compensation

The fair value of the Company’s employee stock options is estimated at the date of grant using the Modified Black-Scholes-Merton option pricing model. In calculating the fair value of the options, management makes assumptions regarding the risk-free rate of return, the expected volatility of our common stock and the expected life of the options.

For the years ended December 31, 2015 and 2014, we recorded expense of $40,000 and $25,000, respectively, for outstanding option grants.

For the year ended December 31, 2015, 7,975 service shares of Company’s common stock were awarded to the directors. Stock compensation expense of $58,000 was recorded. There were no service shares awarded for the year ended December 31, 2014.

Fair value of financial instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Related party transactions

The Company has deposits of certain officers, directors and their affiliated companies, and also purchases corporate and health insurance from certain directors affiliated companies. Details of related party activity are presented in Note 13 of the accompanying Consolidated Financial Statements.

Recent Accounting Pronouncements

Please refer to Note 1 of the accompanying Consolidated Financial Statements for information related to the adoption of new accounting standards and the effect of newly issued but not yet effective accounting standards.

Financial Condition

Investment Securities

The primary purpose of the Bank’s investment portfolio is to provide a source of earnings for liquidity management purposes, to provide collateral to pledge against borrowings, and to control interest rate risk. In managing the portfolio, the Bank seeks to attain the objectives of safety of principal, liquidity, diversification, and maximized return on investment.

At December 31, 2015, securities available for sale consisted of U.S. government agencies and mortgage-backed securities guaranteed by U.S. government agencies. The Company has no securities held to maturity. Restricted securities consisted of Federal Reserve Bank of Dallas (“FRB”) stock, having an amortized cost and fair value of $570,000 as of December 31, 2015, and Federal Home Loan Bank of Dallas (“FHLB”) stock, having an amortized cost and fair value of $475,500 as of December 31, 2015. The weighted average yield for the securities was 2.16% for the year ended December 31, 2015.

At December 31, 2014, securities available for sale consisted of U.S. government agencies and mortgage-backed securities guaranteed by U.S. government agencies. The Company had no securities held to maturity. Restricted securities consisted of FRB stock, having an amortized cost and fair value of $570,000 as of December 31, 2014, and FHLB stock, having an amortized cost and fair value of $468,500 as of December 31, 2014. The weighted average yield for the securities was 2.37% for the year ended December 31, 2014.

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The following presents the amortized cost and fair values of the securities portfolio at December 31, 2015 and 2014:

	As of December 31,
	2015				2014
(In thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	9,155	$	9,162	$	5,561	$	5,543
Mortgage-backed securities		3,284		3,290		3,251		3,251
Securities, restricted:
Other		1,046		1,046		1,038		1,038
Total	$	13,485	$	13,498	$	9,850	$	9,832

The following tables summarize the maturity distribution schedule with corresponding weighted-average yields of securities available for sale as of December 31, 2015. Yields are calculated based on amortized cost. Mortgage-backed securities are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations. Other securities classified as restricted include stock in the FRB and the FHLB, which have no maturity date. These securities have been included in the total column only and are not included in the total yield.

	Maturing
	One Year or Less					After One Year Through Five Years					After Five Years Through Ten Years					After Ten Years					Total
(In thousands, except percentages)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
Securities available for sale:
U.S. government agencies	$	-		-	%	$	-		-	%	$	7,492		2.17	%	$	1,663		3.51	%	$	9,155		2.41	%
Mortgage-backed securities		-		-			490		2.05			1,306		2.70			1,488		2.25			3,284		2.40
Securities, restricted:
Other		-		-			-		-			-		-			-		-			1,046		-
Total	$	-		-	%	$	490		2.05	%	$	8,798		2.25	%	$	3,151		2.92	%	$	13,485		2.41	%

Loan Portfolio Composition

Total loans held for investment increased $13.3 million, or 10.4%, to $140.8 million at December 31, 2015, compared to $127.5 million at December 31, 2014. Commercial and industrial loans comprise the largest group of loans in our portfolio amounting to $71.6 million, or 50.8% of the total loan portfolio, at December 31, 2015, which is down from $72.7 million, or 57.0% of the total loan portfolio, at December 31, 2014. At December 31, 2015, SBA loans totaled $28.9 million, or 20.5% of the total loan portfolio, compared to $21.6 million, or 17.0%, at December 31, 2014. At December 31, 2015, commercial real estate loans totaled $27.1 million, or 19.2% of the total loan portfolio, compared to $26.6 million, or 20.8%, at December 31, 2014. The following table sets forth the composition of our loans held for investment:

	As of December 31,
(In thousands, except percentages)	2015				2014
Commercial and industrial	$	71,562	50.8	%	$	72,711	57.0	%
Consumer installment		2,049	1.5	%		1,578	1.2	%
Real estate – residential		6,851	4.9	%		1,993	1.6	%
Real estate – commercial		16,736	11.9	%		21,084	16.5	%
Real estate – construction and land		10,322	7.3	%		5,477	4.3	%
SBA 7(a) unguaranteed portion		22,596	16.0	%		15,755	12.4	%
SBA 504		6,349	4.5	%		5,839	4.6	%
USDA		2,787	2.0	%		2,054	1.6	%
Other		1,542	1.1	%		1,000	0.8	%
Total Loans	$	140,794	100.0	%	$	127,491	100.0	%

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The Company records the guaranteed portion of the SBA 7(a) and USDA loans as held for sale at the lower of cost or market value. Loans held for sale totaled $6.4 million and $5.2 million at December 31, 2015 and 2014, respectively.

Loan concentrations are considered to exist when there are amounts loaned to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At December 31, 2015, our loan portfolio included $61.6 million of loans, approximately 43.7% of our total funded loans, to the dental industry, as compared to $62.5 million, or 49.0% of total funded loans, at December 31, 2014. We believe that these loans are to credit worthy borrowers and are diversified geographically. As new loans are generated to replace loans which have been paid off or reduced balances as a result of payments, the percentage of the total loan portfolio creating the foregoing concentration may remain constant thereby continuing the risk associated with industry concentration.

As of December 31, 2015, 44.2% of the loan portfolio, or $62.3 million, matures or re-prices within one year or less. The following table presents the contractual maturity ranges for commercial, consumer and real estate loans outstanding at December 31, 2015 and 2014, and also presents for each maturity range the portion of loans that have fixed interest rates or variable interest rates over the life of the loan in accordance with changes in the interest rate environment as represented by the base rate:

	As of December 31, 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	$	15,928		$	11,710		$	24,657		$	19,267		$	-		$	71,562
Consumer installment		1,230			221			-			598			-			2,049
Real estate – residential		2,054			4,703			94			-			-			6,851
Real estate – commercial		3,841			4,371			3,085			3,295			2,144			16,736
Real estate – construction and land		7,177			3,145			-			-			-			10,322
SBA 7(a) unguaranteed portion		22,371			-			156			69			-			22,596
SBA 504		6,349			-			-			-			-			6,349
USDA		1,808			-			979			-			-			2,787
Other		1,542			-			-			-			-			1,542
Total	$	62,300		$	24,150		$	28,971		$	23,229		$	2,144		$	140,794

	As of December 31, 2014
			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	$	7,373		$	11,956		$	24,698		$	28,189		$	495		$	72,711
Consumer installment		1,189			389			-			-			-			1,578
Real estate – residential		366			1,445			108			74			-			1,993
Real estate – commercial		4,594			3,954			4,354			6,464			1,718			21,084
Real estate – construction and land		3,059			581			768			1,069			-			5,477
SBA 7(a) unguaranteed portion		15,679			-			-			76			-			15,755
SBA 504		5,839			-			-			-			-			5,839
USDA		1,061			-			993			-			-			2,054
Other		1,000			-			-			-			-			1,000
Total	$	40,160		$	18,325		$	30,921		$	35,872		$	2,213		$	127,491

Scheduled contractual principal repayments of loans do not reflect the actual life of such assets. The average life of loans is less than their average contractual terms due to prepayments.

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Non-performing Assets

Our primary business is making commercial, real estate, and consumer loans. That activity entails potential loan losses, the magnitude of which depends on a variety of economic factors affecting borrowers which are beyond our control. While we have instituted underwriting guidelines and policies and credit review procedures to protect us from avoidable credit losses, some losses will inevitably occur.

Non-performing assets include non-accrual loans, loans 90 days past due and still accruing, OREO and other repossessed assets. Non-performing assets, net of SBA guaranteed loans, decreased $152,000 to $443,000 at December 31, 2015, as compared to $595,000 at December 31, 2014. Non-accrual loans include two commercial and industrial loans totaling $443,000 and one SBA loan totaling $477,000 at December 31, 2015, as compared to two commercial and industrial loans totaling $595,000 at December 31, 2014. During the second quarter of 2015, the Company repurchased the guaranteed portion of a defaulted SBA loan with a balance of $477,000. After the foreclosure process is complete, the Company expects that the SBA will reimburse this amount. There were no foreclosed assets at December 31, 2015 and 2014.

Loans are placed on non-accrual status when management has concerns relating to the ability to collect the loan principal and interest and generally when such loans are 90 days or more past due. A loan is considered impaired when it is probable that not all principal and interest amounts will be collected according to the loan contract.

Foreclosed assets represent property acquired as the result of borrower defaults on loans. Foreclosed assets are recorded at estimated fair value, less estimated selling costs, at the time of foreclosure. Write-downs occurring at foreclosure are charged against the allowance for possible loan losses. On an ongoing basis, properties are appraised as required by market indications and applicable regulations. Write-downs are provided for subsequent declines in value and are included in other non-interest expense along with other expenses related to maintaining the properties.

The following table sets forth certain information regarding non-performing assets and restructured loans by type, including ratios of such loans to total assets as of the dates indicated:

	As of December 31,
(In thousands, except percentages)	2015						2014
Allocated:	Amount			Loan Category to Total Assets			Amount		Loan Category to Total Assets
Commercial and industrial	$	443			0.25	%	$	595		0.36	%
SBA		477			0.27			-		-
Total non-accrual loans		920			0.52			595		0.36
SBA guaranteed portion		(477	)		(0.27	)		-		-
Total non-accrual loans, net		443			0.25			595		0.36
Loans past due 90 days and accruing		-			-			-		-
Foreclosed assets		-			-			-		-
Total non-performing assets	$	443			0.25	%	$	595		0.36	%
Restructured loans on non-accrual	$	381			0.22	%	$	501		0.31	%

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 $80,000 and $147,000 during the years ended December 31, 2015 and 2014, respectively. If interest on impaired loans had been recognized on a full accrual basis during the years ended December 31, 2015 and 2014, income would have increased by approximately $54,000 and $31,000, respectively.

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. Modifications of terms that could potentially qualify as a troubled debt restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, either forgiveness of principal or accrued interest. As of December 31, 2015 and 2014, we had one loan totaling $381,000 and $501,000, respectively, considered to be a troubled debt restructuring which was on non-accrual.

There were no loans past due 90 days and still accruing interest at December 31, 2015 and 2014.

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Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At December 31, 2015, we had three borrower relationships with loans of this type totaling $372,000, which were not included in non-accrual or restructured loans.

Credit Risk Management

Credit risk is the risk of loss arising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, repayment sources, the nature of the underlying collateral, and other support given current events, conditions, and expectations. We attempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and application of lending procedures, including the holding of adequate collateral and the maintenance of compensating balances. However, we seek to rely primarily on the cash flow of our borrowers as the principal source of repayment. Although credit policies and evaluation processes are designed to minimize our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the risk characteristics of our loan portfolio, as well as general and regional economic conditions.

We provide for loan losses through the establishment of an allowance for loan losses by provisions charged against earnings. Our allowance represents an estimated reserve for existing losses in the loan portfolio. We deploy a systematic methodology for determining our allowance that includes a quarterly review process, risk rating, and adjustment to our allowance. We classify our portfolios as either consumer or commercial and monitor credit risk separately as discussed below. We evaluate the adequacy of our allowance continually based on a review of all significant loans, with a particular emphasis on non-accruing, past due, and other loans that we believe require special attention.

The allowance consists of two elements: (1) specific reserves and valuation allowances for individual credits; (2) general reserves for types or portfolios of loans based on a number of quantitative factors such as loss history and industry default rates, as well as several qualitative factors that are the judgement of management. All outstanding loans are considered in evaluating the adequacy of the allowance.

Allowance for Loan Losses

The allowance for loan losses is a valuation allowance for credit losses in the loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance. The analysis is based on sound, reliable and well documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio.

In estimating the specific and general exposure to loss on impaired loans, we have considered a number of factors, including the borrower’s character, overall financial condition, resources and payment record, the prospects for support from any financially responsible guarantors, and the realizable value of any collateral.

We also consider other internal and external factors when determining the allowance for loan losses, which include, but are not limited to, changes in national and local economic conditions, loan portfolio concentrations, and trends in the loan portfolio.

Senior management and the Directors’ Loan Committee review this calculation and the underlying assumptions on a routine basis not less frequently than quarterly.

The allowance for loan losses totaled $1.6 million and $1.7 million at December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, the Bank had charge-offs of $159,000, compared to $1.2 million for the year ended December 31, 2014. The total reserve percentage decreased to 1.14% at year-end 2015 from 1.33% of loans at December 31, 2014. The decrease was primarily the result of a reduction in classified assets from the prior year and decreased loss history during 2015.

Based on an analysis performed by management at December 31, 2015, the allowance for loan losses is considered to be adequate to cover estimated loan losses in the portfolio as of that date. However, management’s judgment is based upon a number of assumptions about future events, which are believed to be reasonable, but which may or may not prove valid. Thus, charge-offs in future periods may exceed the allowance for loan losses or significant additional increases in the allowance for loan losses may be required.

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The table below presents a summary of our loan loss experience for the past five years:

(In thousands, except percentages)	2015			2014			2013			2012			2011
Balance at January 1,	$	1,695		$	2,318		$	1,338		$	1,352		$	1,754
Charge-offs:
Commercial and industrial		-			1,138			225			24			262
Consumer installment		-			17			1			-			-
SBA 7(a)		159			-			-			-			-
Total charge-offs		159			1,155			226			24			262
Recoveries:
Commercial and industrial		22			34			3			125			13
Consumer installment		-			-			-			26			3
Real estate – construction and land		6			6			6			27			57
Total recoveries		28			40			9			178			73
Net charge-offs (recoveries)		131			1,115			217			(154	)		189
Provision (credit) for loan losses		-			492			1,197			(168	)		(213	)
Balance at December 31,	$	1,564		$	1,695		$	2,318		$	1,338		$	1,352

Loans at year-end	$	140,794		$	127,491		$	115,559		$	94,396		$	83,712
Average loans		143,005			131,995			106,527			86,876			89,725

Net charge-offs (recoveries)/average loans		0.09	%		0.84	%		0.20	%		-0.18	%		0.21	%
Allowance for loan losses/year-end loans		1.14			1.33			2.05			1.42			1.61
Total provision (credit) for loan losses/average loans		0.00	%		0.37	%		1.12	%		-0.19	%		-0.24	%

The following table sets forth the specific allocation of the allowance for years ended December 31, 2015 and 2014 and the percentage of allocated possible loan losses in each category to total gross loans:

	As of December 31,
(In thousands, except percentages)	2015					2014
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	878		50.8	%	$	918		57.0	%
Consumer installment		26		1.5			20		1.2
Real estate – residential		86		4.9			25		1.6
Real estate – commercial		210		11.9			265		16.5
Real estate – construction and land		130		7.3			69		4.3
SBA		214		20.5			344		17.0
USDA		-		2.0			41		1.6
Other		20		1.1			13		0.8
Total allowance for loan losses	$	1,564		100.0	%	$	1,695		100.0	%

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Sources of Funds

General

Deposits, loan and investment security repayments and prepayments, proceeds from the sale of securities, and cash flows generated from operations are the primary sources of our funds for lending, investing, and other general purposes. Loan repayments are generally a relatively stable source of funds, while deposit inflows and outflows tend to fluctuate with prevailing interests rates, markets and economic conditions, and competition.

Deposits

Deposits are attracted principally from our primary geographic market area with the exception of time deposits, which, due to the Bank’s attractive rates, are attracted from across the nation. The Bank offers a broad selection of deposit products, including demand deposit accounts, NOW accounts, money market accounts, regular savings accounts, term certificates of deposit and retirement savings plans (such as IRAs). Deposit account terms vary, with the primary differences being the minimum balance required, the time period the funds must remain on deposit, and the associated interest rates. Management sets the deposit interest rates periodically based on a review of deposit flows and a survey of rates among competitors and other financial institutions. The Bank relies primarily on customer service and long-standing relationships with customers to attract and retain deposits; however, market interest rates and rates offered by competing financial institutions significantly affect the Bank’s ability to attract and retain deposits.

The following table sets forth our average deposit account balances, the percentage of each type of deposit to total deposits, and average cost of funds for each category of deposits:

	As of December 31,
	2015								2014
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	24,161		17.2	%		-	%	$	20,526		16.3	%		-	%
NOW accounts		5,093		3.6			0.27			4,588		3.6			0.31
Money market accounts		37,867		26.9			0.49			34,214		27.1			0.49
Savings accounts		5,038		3.6			0.50			2,774		2.2			0.50
Time deposits $100,000 and over		64,545		45.9			0.94			59,889		47.5			0.84
Time deposits under $100,000		3,919		2.8			1.05			4,131		3.3			1.04
Total deposits	$	140,623		100.0	%		0.62	%	$	126,122		100.0	%		0.59	%

The following table presents maturity of our time deposits of $100,000 or more at December 31, 2015 and 2014:

	As of December 31,
(In thousands)	2015		2014
Three months or less	$	18,884	$	15,146
Over three months through six months		6,763		6,701
Over six months through twelve months		19,967		16,167
Over twelve months		20,924		21,383
Total	$	66,538	$	59,397

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Liquidity

Our liquidity relates to our ability to maintain a steady flow of funds to support our ongoing operating, investing and financing activities. Our Board establishes policies and analyzes and manages liquidity to ensure that adequate funds are available to meet normal operating requirements in addition to unexpected customer demands for funds, such as high levels of deposit withdrawals or loan demand, in a timely and cost-effective manner. The most important factor in the preservation of liquidity is maintaining public confidence that facilitates the retention and growth of a large, stable supply of core deposits and funds. Ultimately, public confidence is generated through profitable operations, sound credit quality and a strong capital position. Liquidity management is viewed from a long-term and a short-term perspective as well as from an asset and liability perspective. We monitor liquidity through a regular review of loan and deposit maturities and forecasts, incorporating this information into a detailed projected cash flow model.

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

The Bank had cash and cash equivalents of $8.7 million, or 4.9% of total assets, at December 31, 2015. In addition to the on balance sheet liquidity available, the Bank has lines of credit with the FHLB and the FRB, which provide the Bank with a source of off-balance sheet liquidity. As of December 31, 2015, the Bank’s established credit line with the FHLB was $21.7 million, or 12.3% of assets, of which $10.0 million was utilized. The established credit line with the FRB was $16.0 million, or 9.0% of assets, of which none was utilized or outstanding at December 31, 2015. The Bank’s trust operations serve in a fiduciary capacity for approximately $1.1 billion in total market value of assets as of December 31, 2015. Some of these custody assets are invested in cash. This cash is maintained either in a third party money market mutual fund (invested predominately in U.S. Treasury securities and other high grade investments) or in a Bank money market account. Only cash which is fully insured by the FDIC is maintained at the Bank. This cash can be moved readily between the Bank and the third party money market mutual fund. As of December 31, 2015, there was $25.6 million of cash at the third party money market mutual fund available to transfer to the Bank which would be fully FDIC insured for the trust customers of the Bank.

Capital Resources and Regulatory Capital Requirements

Shareholders’ equity increased $3.4 million during 2015 to $27.2 million at December 31, 2015 from $23.8 million at December 31, 2014. The increase was due to net income of $3.3 million in 2015, a $98,000 increase in additional paid-in capital related to stock compensation expense, and by a $22,000 net after-tax increase in the market value of the securities available for sale.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken could have a direct material effect on the Bank’s and, accordingly, the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The regulatory capital ratios as of December 31, 2015 were calculated under Basel III rules and the regulatory capital ratios as of December 31, 2014 were calculated under Basel I rules. As of December 31, 2015, the Company’s capital ratios exceeded the new requirements specified in the Basel III rules.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).

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To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.

(In thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2015
Total Capital (to Risk Weighted Assets)	$	27,813		18.33	%	$	12,139		8.00	%	$	15,173		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		26,249		17.30			9,104		6.00			12,139		8.00

Common Equity Tier 1 (to Risk Weighted Assets)		26,249		17.30			6,828		4.50			9,863		6.50

Tier 1 Capital (to Average Assets)		26,249		15.02			6,994		4.00			8,742		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

Off-Balance Sheet Arrangements and Contractual Obligations

We are a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. Our exposure to credit loss in the event of non-performance 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. We use the same credit policies in making commitments and conditional obligations as we do 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 amount of credit extended is based on management’s credit evaluation of the customer and, if deemed necessary, may require collateral.

Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. At December 31, 2015, we had commitments to extend credit and standby letters of credit of approximately $18.7 million and $10,000, respectively.

The following is a summary of our contractual obligations, including certain on-balance-sheet obligations, at December 31, 2015:

	As of December 31, 2015
(In thousands)	Less than One Year		One to Three Years		Over Three to Five Years		Over Five Years		Total
Undisbursed loan commitments	$	7,860	$	200	$	119	$	10,561	$	18,740
Standby letters of credit		10		-		-		-		10
Operating leases		69		6		-		-		75
Time deposits		48,173		20,730		1,702		-		70,605
Borrowed funds		10,000		-		-		-		10,000
Total	$	66,112	$	20,936	$	1,821	$	10,561	$	99,430

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Results of Operations

Our operating results depend primarily on our net interest income. Net interest income is the difference between interest income, principally from loan, lease and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. 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.

While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond the control of the Company, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the United States government, its agencies and various other governmental regulatory authorities.

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.

	2015 vs 2014
	Increase (Decrease) Due to Change in
(In thousands)	Yield/ Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	1		$	2		$	3
Securities		(23	)		(2	)		(25	)
Loans, net of unearned discount (1)		(160	)		621			461
Total earning assets		(182	)		621		439

NOW		(1	)		1			-
Money market		-			18			18
Savings		-			11			11
Time deposits $100,000 and over		61			44			105
Time deposits under $100,000		-			(2	)		(2	)
Borrowed funds		5			(10	)		(5	)
Total interest-bearing liabilities		65			62			127
Changes in net interest income	$	(247	)	$	559		$	312

	2014 vs 2013
	Increase (Decrease) Due to Change in
(In thousands)	Yield/ Rate			Average Volume			Total
Interest-bearing deposits and federal funds sold	$	(1	)	$	2		$	1
Securities		1			(1	)		-
Loans, net of unearned discount (1)		(350	)		1,468			1,118
Total earning assets		(350	)		1,469		1,119

NOW		2			4			6
Money market		5			27			32
Savings		-			10			10
Time deposits $100,000 and over		37			145			182
Time deposits under $100,000		(6	)		4			(2	)
Borrowed funds		2			(7	)		(5	)
Total interest-bearing liabilities		40			183			223
Changes in net interest income	$	(390	)	$	1,286		$	896

(1)	Average loans include non-accrual.

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Net interest income for the year ended December 31, 2015 increased $312,000, or 4.4%, compared to 2014. The increase was primarily the result of an increase in the average volume of loans, partly offset by a decrease in the net interest margin. The average volume of loans increased $11.0 million, or 8.3%, in 2015. Net interest margin decreased 3.2% to 4.61% for 2015 from 4.76% for 2014. The average yield for loans decreased to 5.64% for 2015, compared to 5.76% for 2014. The average rate paid on interest-bearing liabilities increased to 0.73% for 2015, compared to 0.66% for 2014.

Net interest income for the year ended December 31, 2014 increased $896,000, or 14.4%, compared to 2013. The increase was primarily the result of an increase in the average volume of loans, partly offset by a decrease in the net interest margin. The average volume of loans increased $25.5 million, or 23.9%, in 2014. Net interest margin decreased 5.7% to 4.76% for 2014 from 5.05% for 2013. The average yield for loans decreased to 5.76% for 2014, compared to 6.09% for 2013. The average rate paid on interest-bearing liabilities increased to 0.66% for 2014, compared to 0.57% for 2013.

The following table sets forth our average balances of assets, liabilities and shareholders’ equity, in addition to the major components of net interest income and our net interest margin for the years ended December 31, 2015 and 2014.

	Twelve Months Ended December 31,
	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)	$	143,005		$	8,066		5.64	%	$	131,995		$	7,605		5.76	%
Interest-bearing deposits and
federal funds sold		7,589			20		0.26	%		6,628			17		0.25	%
Securities		10,951			236		2.16	%		11,033			261		2.37	%
Total earning assets		161,545			8,322		5.15	%		149,656			7,883		5.27	%
Cash and other assets		10,848								9,616
Allowance for loan losses		(1,627	)							(1,741	)
Total assets	$	170,766							$	157,531

Interest-bearing liabilities
NOW accounts	$	5,093			14		0.27	%	$	4,588			14		0.31	%
Money market accounts		37,867			186		0.49	%		34,214			168		0.49	%
Savings accounts		5,038			25		0.50	%		2,774			14		0.50	%
Time deposits $100,000 and over		64,545			606		0.94	%		59,889			501		0.84	%
Time deposits under $100,000		3,919			41		1.05	%		4,131			43		1.04	%
Total interest-bearing deposits		116,462			872		0.75	%		105,596			740		0.70	%
Borrowed funds		3,691			7		0.19	%		8,893			12		0.13	%
Total interest-bearing liabilities		120,153			879		0.73	%		114,489			752		0.66	%
Non-interest-bearing deposits		24,161								20,526
Other liabilities		1,816								1,785
Shareholders’ equity		24,636								20,731
Total liabilities and shareholders’ equity	$	170,766							$	157,531

Net interest income				$	7,443							$	7,131
Net interest spread							4.42	%							4.61	%
Net interest margin							4.61	%							4.76	%

1) Includes non-accrual loans

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Provision for Loan Losses

We established a provision for loan losses, which is charged to operations, at a level we believe to be appropriate to absorb probable losses in the loan portfolio. For additional information concerning this determination, see the section of this discussion and analysis captioned “Allowance for Loan Losses.”

There was no provision for loan losses recorded in 2015. The provision for loan losses totaled $492,000 in 2014. See the section captioned “Allowance for Loan Losses” elsewhere in this discussion for further analysis of the provision for loan losses.

Non-interest Income

The components of non-interest income for the years ended December 31, 2015 and 2014 were as follows:

	Year ended December 31,
(In thousands)	2015			2014
Trust income	$	12,104		$	11,596
Gain on sale of loans		1,949			2,332
Loan servicing fees, net		448			262
Service fees and other income		68			84
Rental income		309			318
Loss on sale of securities		(1	)		(3	)
	$	14,877		$	14,589

Non-interest income for the year-ended December 31, 2015 increased $288,000 or 2.0%, compared to the same period in 2014. Changes in the various components of non-interest income are discussed in more detail below.

Trust income increased $508,000, or 4.4%, for the year ended December 31, 2015, compared to the same period in 2014. The increase was primarily 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 $400,000 for 2015. 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 $383,000, or 16.4%, for the year ended December 31, 2015, compared to the same period in 2014. The decrease was a result of a lower amount of loans sold in 2015 from 2014. The Company sold $21.2 million of SBA and USDA loans during 2015, compared to $24.0 million in 2014.

Loan servicing fees, net of servicing asset amortization increased $186,000, or 71.0% for the year ended December 31, 2015, compared to the same period in 2014. The increase is related to the increase in SBA and USDA loans sold with servicing retained.

Service fees and other income decreased $16,000, or 19.0% for the year ended December 31, 2015, compared to the same period in 2014. The decrease is primarily related to a $12,000 gain on sale of other real estate owned recorded in 2014.

Rental income decreased $9,000, or 2.8%, for the year ended December 31, 2015, compared to the same period in 2014.

During 2015, the Company purchased $190 million of available-for-sale securities, and subsequently sold $100 million, which resulted in a loss of $1,000. The other $90 million subsequently matured, resulting in no gain or loss. The securities were purchased in connection with the Company’s tax planning for Texas franchise tax.

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Non-interest Expenses

The components of non-interest expense for the years ended December 31, 2015 and 2014 were as follows:

	Year ended December 31,
(In thousands)	2015		2014
Salaries and employee benefits	$	4,628	$	4,085
Occupancy and equipment		852		1,143
Trust expenses		9,708		9,197
Professional fees		412		386
Data processing		852		787
Other expense		772		844
	$	17,224	$	16,442

Non-interest expense for the year ended December 31, 2015 increased $782,000, or 4.8%, compared to the same period in 2014. Changes in the various components of non-interest expense are discussed in more detail below.

Salaries and employee benefits increased $543,000, or 13.3%, for the year ended December 31, 2015, compared to the same period in 2014. The increase is due to increase in staff, primarily in the loan production and operational support areas of the Company, increase in incentive bonuses and stock-based compensation, and normal annual merit increases.

Occupancy and equipment expense decreased $291,000, or 25.5% for the year ended December 31, 2015, compared to the same period in 2014. The decrease was 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. Trust expense increased $511,000, or 5.6%, for the year ended December 31, 2015, compared to the same period in 2014. 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 year ended December 31, 2014 increased $26,000, or 6.7%, compared to the same period in 2014. The increase was due to increase in audit fees of $17,000 and consulting fees of $12,000, offset by decrease in legal fees.

Data processing fees increased $65,000, or 8.3% for the year ended December 31, 2015, compared to the same period in 2014. The increase was related to additional monthly fees pertaining to enhancements to the Company’s internet customer platform.

Other expenses for the year ended December 31, 2015 decreased $72,000, or 8.5%, compared to the same period in 2014. The decrease in other expenses was primarily due to decreases in advertising expense, OREO expense, FDIC assessment expense among other things, partly offset by increase in employee recruitment expense.

Income Taxes

The income tax provision for the years ended December 31, 2015 and 2014 was $1.8 million and $1.7 million, respectively. The effective tax rate was 35% and 36% for 2015 and 2014, respectively.

Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of tax computed by applying statutory federal and state income tax rates before income taxes, can be found in Note 10 “Income Taxes” to the consolidated financial statements of this annual report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

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

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Item 8. Financial Statements and Supplementary Data

INDEX TO FINANCIAL STATEMENTS

	Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	45

FINANCIAL STATEMENTS

Consolidated Balance Sheets	46

Consolidated Statements of Income	47

Consolidated Statements of Comprehensive Income	48

Consolidated Statements of Changes in Shareholders’ Equity	49

Consolidated Statements of Cash Flows	50

Notes to Consolidated Financial Statements	51

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

T Bancshares, Inc.

Dallas, Texas

We have audited the accompanying consolidated balance sheets of T Bancshares, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2015. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of T Bancshares, Inc. as of December 31, 2015 and 2014 and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ WHITLEY PENN LLP

Dallas, Texas

March 29, 2016

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T BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2015 and 2014

(In thousands, except share amounts)	2015		2014
ASSETS
Cash and due from banks	$	1,592	$	801
Interest-bearing deposits		6,687		5,588
Federal funds sold		431		543
Total cash and cash equivalents		8,710		6,932
Securities available for sale at estimated fair value		12,452		8,794
Securities, restricted at cost		1,046		1,038
Loans held for sale		6,365		5,158
Loans, net of allowance for loan losses of $1,564 and $1,695, respectively		137,648		124,405
Bank premises and equipment, net		4,497		4,552
Deferred tax assets, net		527		798
Receivable for loans sold		1,972		8,185
Other assets		3,712		3,221
Total assets	$	176,929	$	163,083

LIABILITIES
Demand deposits:
Non-interest-bearing	$	24,138	$	22,786
Interest-bearing		42,292		39,585
Time deposits $100,000 and over		66,538		59,397
Time deposits under $100,000		4,067		3,966
Total deposits		137,035		125,734
Borrowed funds		10,000		10,000
Other liabilities		2,684		3,552
Total liabilities		149,719		139,286

SHAREHOLDERS’ EQUITY
Common Stock, $ .01 par value; 10,000,000 shares authorized; 4,037,907 and 4,029,932 shares issued and outstanding at December 31, 2015 and 2014, respectively		40		40
Additional paid-in capital		22,762		22,664
Retained earnings		4,398		1,105
Accumulated other comprehensive income (loss)		10		(12	)
Total shareholders’ equity		27,210		23,797
Total liabilities and shareholders' equity	$	176,929	$	163,083

See accompanying notes to consolidated financial statements.

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T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2015 and 2014

(In thousands, except per share data)	2015			2014
Interest Income
Loan, including fees	$	8,066		$	7,605
Securities		236			261
Federal funds sold		1			1
Interest-bearing deposits		19			16
Total interest income		8,322			7,883
Interest Expense
Deposits		872			740
Borrowed funds		7			12
Total interest expense		879			752
Net interest income		7,443			7,131
Provision for loan losses		-			492
Net interest income after provision for loan losses		7,443			6,639
Non-interest Income
Trust income		12,104			11,596
Gain on sale of loans		1,949			2,332
Loan servicing fees, net		448			262
Service fees and other income		68			84
Rental income		309			318
Loss on sale of securities		(1	)		(3	)
Total non-interest income		14,877			14,589
Non-interest Expense
Salaries and employee benefits		4,628			4,085
Occupancy and equipment		852			1,143
Trust expenses		9,708			9,197
Professional fees		412			386
Data processing		852			787
Other		772			844
Total non-interest expense		17,224			16,442
Income before income taxes		5,096			4,786
Income tax expense		1,803			1,748
Net Income	$	3,293		$	3,038

Earnings per common share:
Basic		0.82			0.75
Diluted		0.81			0.75
Weighted average common shares outstanding		4,034,105			4,025,614
Weighted average diluted shares outstanding		4,043,876			4,034,283

See accompanying notes to consolidated financial statements.

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T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

YEARS ENDED DECEMBER 31, 2015 and 2014

(In thousands)	2015		2014
Net Income	$	3,293	$	3,038
Other comprehensive income:
Change in unrealized gain on investment securities available-for-sale		32		287
Reclassification adjustment for realized loss on sale included in net income		1		3
Total other comprehensive income, before tax effect		33		290
Tax effect		11		(3	)
Other comprehensive income		22		293
Comprehensive income	$	3,315	$	3,331

See accompanying notes to consolidated financial statements.

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T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2015 and 2014

(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						3,038						3,038
Other comprehensive income		-		-		-			293			293
Exercise of stock options		-		8		-			-			8
Stock based compensation		-		25		-			-			25
BALANCE, December 31, 2014	$	40	$	22,664	$	1,105		$	(12	)	$	23,797
Net income		-		-		3,293			-			3,293
Other comprehensive income		-		-		-			22			22
Issuance of 7,975 shares in connection with the directors’ common stock plan		-		58		-			-			58
Stock based compensation		-		40		-			-			40
BALANCE, December 31, 2015	$	40	$	22,762	$	4,398		$	10		$	27,210

See accompanying notes to consolidated financial statements.

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T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2015 and 2014

(In thousands)	2015			2014
Cash Flows from Operating Activities
Net income	$	3,293		$	3,038
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		-			492
Depreciation and amortization		226			207
Accretion of discount on loans		(146	)		(80	)
Securities premium amortization (discount accretion), net		(11	)		36
Net loss on sale of securities		1			3
Net gain on sale of real estate owned		-			(12	)
Origination of loans held for sale		(23,239	)		(27,748	)
Proceeds from payments and sales of loans held for sale		23,488			26,395
Net gain on sale of loans		(1,949	)		(2,332	)
Stock based compensation		98			25
Receivable for sold loans		6,213			(720	)
Deferred income taxes		261			503
Servicing asset amortization		125			62
Net change in:
Other assets		(123	)		(405	)
Other liabilities		(868	)		1,252
Net cash provided by operating activities		7,369			716
Cash Flows from Investing Activities
Purchase of securities available for sale		(195,501	)		(199,999	)
Principal payments, calls and maturities of securities available for sale		1,885			728
Proceeds from sale of securities available for sale		190,000			199,996
Purchase of securities, restricted		(8,342	)		(2,680	)
Proceeds from sale of securities, restricted		8,334			2,871
Net change in loans		(13,097	)		(12,536	)
Proceeds from sale of other real estate owned		-			761
Purchases of premises and equipment		(171	)		(2,308	)
Net cash used in investing activities		(16,892	)		(13,167	)
Cash Flows from Financing Activities
Net change in demand deposits		4,059			12,022
Net change in time deposits		7,242			7,909
Proceeds from stock options exercised		-			8
Proceeds from borrowed funds		248,634			442,523
Repayment of borrowed funds		(248,634	)		(448,523	)
Net cash provided by financing activities		11,301			13,939
Net change in cash and cash equivalents		1,778			1,488
Cash and cash equivalents at beginning of year		6,932			5,444
Cash and cash equivalents at end of year	$	8,710		$	6,932

Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest	$	878		$	747
Income taxes	$	2,020		$	625

See accompanying notes to consolidated financial statements.

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NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

T Bancshares, Inc. (the “Company”) is a bank holding company headquartered in Dallas, Texas. The consolidated financial statements include the accounts of T Bancshares, Inc. and its wholly owned subsidiary, T Bank, N.A. (the “Bank”). The Company’s financial condition and operating results principally reflect those of the Bank. All intercompany transactions and balances are eliminated in consolidation.

The Bank serves its local geographic market which includes Dallas, Tarrant, Denton, Collin and Rockwall counties which encompass an area commonly referred to as the Dallas/Fort Worth Metroplex. The Bank also serves the dental and other health professional industries through a centralized loan and deposit platform that operates out of its main office in Dallas, Texas. In addition, the Bank serves the small business community by offering loans guaranteed by the Small Business Administration (“SBA”) and the U.S. Department of Agriculture (“USDA”).

The Bank offers a broad range of commercial and consumer banking services primarily to small to medium-sized businesses and their employees. Because of the Bank’s technological capabilities, including worldwide free ATM withdrawals, sophisticated on-line banking capabilities, electronic funds transfer capabilities, and economical remote deposit solutions, most customers can be served regardless of their geographic location.

At December 31, 2015, the Bank’s loan portfolio consisted of approximately $61.6 million, or 43.7% of the loan portfolio, in loans to dentists and dental practices. Substantially all loans are secured by specific collateral, including business assets, consumer assets, and commercial real estate.

The Bank also offers traditional fiduciary services primarily to clients of Cain Watters & Associates P.C. The Bank, Cain Watters & Associates P.C., and III:I Financial Management Research, L.P. have entered into an advisory services agreement related to the trust operations.

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period, as well as the disclosures provided. Changes in assumptions or in market conditions could significantly affect the estimates. The determination of the allowance for loan losses, the fair value of stock options, the fair values of financial instruments and other real estate owned, and the status of contingencies are particularly susceptible to significant change in recorded amounts.

Cash and Cash Equivalents

The Company maintains its cash in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to significant credit risk on cash and cash equivalents.

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, deposits with other financial institutions, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions.

Trust Assets

Property held for customers in a fiduciary capacity, other than trust cash on deposit at the Bank, is not included in the accompanying consolidated financial statements since such items are not assets of the Company.

Securities

Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses reported as a component of other comprehensive income, net of tax. Securities held for resale are classified as trading and are carried at fair value, with changes in unrealized holding gains and losses included in income. Management determines the appropriate classification of securities at the time of purchase.

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Securities with limited marketability, such as stock in the FRB and the FHLB, are carried at cost. The Company has investments in stock of the FRB and the FHLB as is required for participation in the services offered. These investments are classified as restricted and are recorded at cost.

Interest income includes amortization of purchase premiums and accretion of purchase discounts. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments. Gains and losses are recorded on the trade date and determined using the specific identification method. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the impairment related to credit losses. The amount of impairment related to other factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, and (iii) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery of amortized cost.

Loans Held for Sale

Loans which are originated or purchased and are intended for sale in the secondary market are carried at the lower of cost or estimated fair value determined on an aggregate basis. Valuation adjustments, if any, are recognized through a valuation allowance by charges to non-interest income and direct loan origination costs and fees are deferred at origination of the loan and are recognized in noninterest income upon sale of the loan. Loans held for sale are comprised of the guaranteed portion of SBA and USDA loans. The Company did not incur a lower of cost or market valuation provision in the years ended December 31, 2015 and 2014.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest, unearned discount, deferred loan fees, and allowance for loan losses. Interest income is accrued on the unpaid principal balance. Discount on acquired loans and loan origination fees are deferred and recognized in interest income using the level-yield method without anticipating prepayments.

Interest income on commercial business and commercial real estate loans is discontinued when the loan becomes 90 days delinquent unless the credit is well secured and in process of collection. Unsecured consumer loans are generally charged off when the loan becomes 90 days past due. Consumer loans secured by collateral other than real estate are charged off after a review of all factors affecting the ability to collect on the loan, including the borrower’s history, overall financial condition, resources, guarantor support, and the realizable value of any collateral. However, any consumer loan past due 180 days is charged off. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on non-accrual are reversed against interest income. Interest received on such loans is accounted for on a cash-basis or cost-recovery method, until qualifying for return to accrual basis. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

The allowance consists of general and specific reserves. The specific component relates to loans that are individually evaluated and determined to be impaired. This amount of allowance is often based on variables affecting valuation, appraisals of collateral, evaluations of performance and status, and the amounts and timing of future cash flows expected to be received. The general component relates to the entire group of loans that are evaluated in the aggregate based primarily on industry historical loss experience adjusted for current economic factors. To the extent actual loan losses differ materially from management’s estimate of these subjective factors, loan growth/run-off accelerates, or the mix of loan types changes, the level of the provision for loan loss, and related allowance can, and will, fluctuate.

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A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include, among others, payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loan impairment on loans is generally based upon the present value of the expected future cash flows discounted at the loan’s initial effective interest rate, unless the loans are collateral dependent, in which case loan impairment is based upon the fair value of collateral less estimated selling costs.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 10 years. Leasehold improvements are depreciated over the lease term or estimated life, whichever is shorter. Repair and maintenance costs are expensed as incurred.

Foreclosed Assets

Assets acquired through or instead of loan foreclosure are held for sale and are initially recorded at fair value less estimated selling costs when acquired, establishing a new cost basis. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions. The Company had no foreclosed assets at December 31, 2015 and 2014.

Servicing Rights

The guaranteed portion of certain SBA and USDA loans can be sold into the secondary market. Servicing rights are recognized as separate assets when loans are sold with servicing retained. Servicing rights are amortized in proportion to, and over the period of, estimated future net servicing income. The Company uses industry prepayment statistics in estimating the expected life of the loans. Management evaluates its servicing rights for impairment quarterly. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Fair value is determined using discounted future cash flows calculated on a loan-by-loan basis and aggregated by predominate risk characteristics. The initial servicing rights and resulting gain on sale are calculated based on the difference between the best actual par and premium bids on an individual loan basis.

Stock Based Compensation

At December 31, 2015 and 2014, the Company has a share-based employee compensation plan, which is described more fully in Note 11.

Advertising Costs

Advertising costs are expensed as incurred. For the year ended December 31, 2015 and 2014, advertising expense totaled $21,000 and $55,000, respectively, which is in included in non-interest expense in the Consolidated Statements of Income.

Income Taxes

The Company accounts for income taxes utilizing the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

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The Company accounts for uncertainties in income taxes in accordance with current accounting guidance which prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Benefits from tax positions should be recognized in the financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority that would have full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. No uncertain tax positions have been recognized.

The Company files income tax returns in the U.S. federal jurisdiction and state jurisdictions, as applicable. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years before 2012.

Earnings Per Share

Basic earnings per share is computed by dividing net income applicable to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares and common share equivalents. Common share equivalents consist of stock options and warrants and are computed using the treasury stock method. Warrants of 96,750 expired on November 2, 2014. The Company had no outstanding warrants at December 31, 2015 and 2014.

Outstanding stock options of 19,000 were considered in the diluted earnings per share computations for the year ended December 31, 2015, however the remaining 409,000 outstanding options 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 year ended December 31, 2014, however the remaining 214,000 outstanding options were not considered in the per share computation because their effect was anti-dilutive.

Comprehensive Income

Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes net unrealized gains and losses on available for sale securities, which are recognized as a separate component of equity. Accumulated comprehensive income (loss), net for the years ended December 31, 2015 and 2014 is reported in the accompanying consolidated statements of comprehensive income.

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (i) the assets have been isolated from the Company, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Fair Value of Financial Instruments

Reclassifications

Certain items in prior financial statements have been reclassified to provide more comparative information. These reclassifications had no effect on net income or shareholders’ equity.

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Recent Accounting Pronouncements

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 was originally going to be effective for the Company on January 1, 2017; however, the Financial Accounting Standards Board (“FASB”) recently issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606) – Deferral of the Effective Date” which deferred the effective date of ASU 2014-09 to January 1, 2018. ASU 2014-09 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 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 U.S. 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.

Accounting Standards Update (ASU) 2016-1, No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-1, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (viii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. ASU 2016-1 is effective for the Company on January 1, 2018 and is not expected to have a significant impact on the Company’s financial statements.

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NOTE 2. SECURITIES

Year-end securities consisted of the following:

	December 31, 2015
(In thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Securities available for sale:
U.S. government agencies	$	9,155	$	70	$	63	$	9,162
Mortgage-backed securities		3,284		30		24		3,290
Total securities available for sale	$	12,439	$	100	$	87	$	12,452

Securities, restricted:
Other	$	1,046	$	-	$	-	$	1,046

	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 by U.S. government-sponsored agencies. Securities, restricted consists of FRB and FHLB stock which are carried at cost.

Securities with a fair value of $982,000 and $1.2 million at December 31, 2015 and 2014, respectively, were pledged to the Company’s trust department. Securities with a fair value of $699,000 and $840,000 at December 31, 2015 and 2014, respectively, were pledged to the FRB. Securities with a fair value of $10.8 million and $6.8 million at December 31, 2015 and 2014, respectively, were pledged to secure borrowings at the FHLB.

Certain investments in debt securities are reported in the financial statement at an amount less than their historical cost. The table below indicates the length of time individual investment securities have been in a continuous loss position as of December 31, 2015 and 2014:

	December 31, 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	$	5,005	$	32	$	970	$	31	$	5,975	$	63
Mortgage-backed securities		1,981		24		-		-		1,981		24
Total	$	6,986	$	56	$	970	$	31	$	7,956	$	87

	December 31, 2014
	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	$	-	$	-	$	2,897	$	94	$	2,897	$	94
Mortgage-backed securities		383		-		1,705		12		2,088		12
Total	$	383	$	-	$	4,602	$	106	$	4,985	$	106

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The number of investment positions in this unrealized loss position totaled nine at December 31, 2015. The Company does not believe these unrealized losses are “other than temporary” as (i) it does not have the intent to sell the securities prior to recovery and/or maturity and, (ii) it is more likely than not that the Company will not have to sell the securities prior to recovery and/or maturity. In making this determination, the Company also considers the length of time and extent to which fair value has been less than cost and the financial condition of the issuer. The unrealized losses noted are primarily interest rate related due to the level of interest rates at December 31, 2015 compared to the time of purchase. The Company has reviewed the ratings of the issuers and has not identified any issues related to the ultimate repayment of principal as a result of credit concerns on these securities. The Company’s mortgage related securities are backed by GNMA and FNMA or are collateralized by securities backed by these agencies.

As of December 31, 2015, management does not have the intent to sell any of the securities classified as available for sale in the table above and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of amortized cost. Any unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe any of the securities are impaired due to reasons of credit quality. Accordingly, as of December 31, 2015, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s consolidated statements of income.

Sale of securities available-for-sale were as follows:

(In thousands)	2015			2014
Proceeds from sales	$	190,000		$	199,996
Gross realized gains		-			-
Gross realized losses		(1	)		(3	)

The amortized cost and estimated fair value of securities available for sale, at December 31, 2015 and 2014 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.

	December 31, 2015
(In thousands)	Amortized Cost		Estimated Fair Value
Due after one years through five years	$	1,038	$	1,033
Due after five years through ten years		6,453		6,434
Due after ten years		1,663		1,694
Mortgage-backed securities		3,285		3,291
Total	$	12,439	$	12,452

	December 31, 2014
(In thousands)	Amortized Cost		Estimated Fair Value
Due after five years through ten years	$	4,780	$	4,703
Due after ten years		781		840
Mortgage-backed securities		3,251		3,251
Total	$	8,812	$	8,794

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NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans held for investment are as follows:

(In thousands)	December 31, 2015			December 31, 2014
Commercial and industrial	$	71,562		$	72,711
Consumer installment		2,049			1,578
Real estate – residential		6,851			1,993
Real estate – commercial		16,736			21,084
Real estate – construction and land		10,322			5,477
SBA:
SBA 7(a) unguaranteed portion		22,596			15,755
SBA 504		6,349			5,839
USDA		2,787			2,054
Other		1,542			1,000
Gross Loans		140,794			127,491
Less:
Allowance for loan losses		1,564			1,695
Deferred loan costs		(292	)		(153	)
Discount on loans		1,874			1,544
Net loans	$	137,648		$	124,405

At December 31, 2015, our loan portfolio included $61.6 million of loans, approximately 43.7% of our total funded loans, to the dental industry, as compared to $62.5 million, or 49.0% of total funded loans, at December 31, 2014. We believe that these loans are to credit worthy borrowers and are diversified geographically.

Periodically, the Company purchases participation interests in residential 1-4 family real estate mortgage loans that are partially or fully government guaranteed from a third party who is an approved Ginnie Mae securities issuer (the “Issuer”). Under the arrangement with the Issuer, in the event the Issuer subsequently pools the loans into a newly issued Ginnie Mae security, the Bank is entitled to receive a fractional percentage varying between 10% and 25% of the ultimate sales price of the securities over the Bank’s basis in the participation interest net of any unearned discount at the time of the securitization. If the loans are not securitized by the Issuer, the discount is accreted to interest income on a level-yield method over the life of the loans. During the year ended December 31, 2015, the Company purchased participation interest in one loan for $173,700 at a discount of $5,200. The Company did not purchase any participation interests during the year ended December 31, 2014. There were no loans securitized during the years ended December 31, 2015 and 2014 and as a result no gain was recognized. At December 31, 2015 and 2014, the unearned discount was $248,000 and $331,000, respectively.

During the last quarter of 2012, the Bank expanded its lending services to serve the small business community by offering 7(a) loans guaranteed by the SBA, loans promulgated under the SBA’s 504 loan program, and loans guaranteed by the USDA. These loans are generally guaranteed by the Agencies up to 75% to 80% of the principal balance. The Company records the guaranteed portion of the loans as held for sale. The Company periodically sells the guaranteed portion of selected SBA and USDA loans into the secondary market, on a servicing-retained basis. In calculating gain on the sale of 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 year ended December 31, 2015, the Company sold $21.2 million of SBA loans, resulting in a gain on sale of loans of $1.9 million. For the year ended December 31, 2014, the Company sold $24.0 million of SBA and USDA loans and recognized a gain of $2.3 million. In connection with the sales, the Company recorded a servicing asset of $493,000 and $647,000 for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, the Company had $6.4 million of SBA loans held for sale. As of December 31, 2014, the Company had $5.2 million of SBA and USDA loans held for sale.

During December 2015, the Bank sold one SBA loan that did not settle until January 2016. At December 31, 2015, the Bank recorded a receivable for the loans sold of $2.0 million, which consists of $1.8 million for the principal balance of the loan and $188,000 for the premium amount.

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During December 2014, the Bank sold four SBA loans that did not settle until January 2015. At December 31, 2014, the Bank recorded a receivable for the loans sold of $8.2 million, which consists of $7.3 million for the principal balance of the loans and $859,000 for the premium amount.

Loan Origination/Risk Management.

The Bank maintains written loan origination policies, procedures, and processes which 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 Bank 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. Credit worthiness of individual borrowers and guarantors is established through the use of credit reports and credit scores.

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 Bank originates SBA loans which are sometimes sold into the secondary market. The Bank 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 Bank offers are the basic 7(a) Loan Guaranty and the Certified Development Company (“CDC”), a Section 504 (“504”) program.

The 7(a) 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 depending on loan size. The Bank is required by the SBA to retain a contractual minimum of 5% on all SBA 7(a) loans. The SBA 7(a) loans are generally variable interest rate loans. Gains recognized by the Bank 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 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 Bank 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 75%. 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 have maturities up to 30 years and the rates can be fixed or variable.

Construction and land development loans are evaluated based on the borrower’s and guarantor’s credit worthiness, 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.

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

Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. A loan may be returned to accrual status when all the principal and interest amounts contractually due are brought current and future principal and interest amounts contractually due are reasonably assured, which is typically evidenced by a sustained period (at least six months) of repayment performance by the borrower.

Year-end non-accrual loans and restructured loans, segregated by class of loans, were as follows:

	December 31,			December 31,
(In thousands)	2015			2014
Non-accrual loans:
Commercial and industrial	$	443		$	595
SBA		477			-
Total non-accrual loans		920			595
SBA guaranteed portion		(477	)		-
Total non-accrual loans, net		443			595
Restructured loans:
Commercial and industrial	$	381		$	501

During the second quarter of 2015, the Company repurchased the guaranteed portion of a defaulted SBA loan with a balance of $477,000, which is on non-accrual. It is expected that the SBA will reimburse the Company for this amount after the foreclosure and collection process is complete.

The restructuring of a loan is considered a “troubled debt restructuring” 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 or 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 years ended December 31, 2015 and 2014.

As of December 31, 2015, the Company had one commercial and industrial loan restructuring for $381,000 which is on non-accrual, with related allowance for loan losses of $2,000, identified as troubled debt restructuring. The modification consisted of extending the amortization period and reducing the interest rate to a below market interest rate.

There were no troubled debt restructurings that defaulted under the modified terms during the years ended December 31, 2015 and 2014. A default for purposes of this disclosure is a troubled debt restructured loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

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

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.

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

(In thousands)	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2015
Commercial and industrial	$	908	$	-	$	678	$	678	$	26	$	1,431	$	73
Real estate – commercial		137		137		-		137		-		146		7
SBA		477		477		-		477		-		159		-
Total	$	1,522	$	614	$	678	$	1,292	$	26	$	1,736	$	80

December 31, 2014
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

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:

											Total 90
	30-89 Days		Greater Than		Total		Total		Total		Days Past Due
(In thousands)	Past Due		90 Days		Past Due		Current		Loans		Still Accruing
December 31, 2015
Commercial and industrial	$	555	$	-	$	555	$	71,007	$	71,562	$	-
Consumer installment		-		-		-		2,049		2,049		-
Real estate – residential		-		-		-		6,851		6,851		-
Real estate – commercial		-		-		-		16,736		16,736		-
Real estate – construction and land		-		-		-		10,322		10,322		-
SBA		-		477		477		28,468		28,945		-
USDA		-		-		-		2,787		2,787		-
Other		-		-		-		1,542		1,542		-
Total	$	555	$	477	$	1,032	$	139,762	$	140,794	$	-

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	$	-

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.

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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. No significant changes were made to the loan risk grading system definitions and allowance for loan loss methodology during the past year. 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 Bank. 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 twelve 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.

Credit 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 a serious 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.

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

(In thousands)	Pass		Pass- Watch		Special Mention		Substandard		Doubtful		Total
December 31, 2015
Commercial and industrial	$	70,539	$	-	$	345	$	678	$	-	$	71,562
Consumer installment		2,049		-		-		-		-		2,049
Real estate – residential		6,851		-		-		-		-		6,851
Real estate – commercial		16,599		-		-		137		-		16,736
Real estate – construction and land		9,607		-		715		-		-		10,322
SBA		28,468		-		-		477		-		28,945
USDA		2,787		-		-		-		-		2,787
Other		1,542		-		-		-		-		1,542
Total	$	138,442	$	-	$	1,060	$	1,292	$	-	$	140,794

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

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The activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2015 and 2014, and the change for the years then ended 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.

(In thousands)	Commercial and Industrial			Consumer Installment			Real Estate Residential		Real Estate Commercial			Real Estate Construction and Land			SBA			USDA			Other		Total
December 31, 2015
Beginning Balance	$	918		$	20		$	25	$	265		$	69		$	344		$	41		$	13	$	1,695
Provision (credit) for loan losses		(62	)		6			61		(55	)		55			29			(41	)		7		-
Charge-offs		-			-			-		-			-			(159	)		-			-		(159	)
Recoveries		22			-			-		-			6			-			-			-		28
Net (charge-offs) recoveries		22			-			-		-			6			(159	)		-			-		(131	)
Ending balance	$	878		$	26		$	86	$	210		$	130		$	214		$	-		$	20	$	1,564

Period-end amount allocated to:
Loans individually evaluated for impairment	$	26		$	-		$	-	$	-		$	-		$	-		$	-		$	-	$	26
Loans collectively evaluated for impairment		852			26			86		210			130			214			-			20		1,538
Ending balance	$	878		$	26		$	86	$	210		$	130		$	214		$	-		$	20	$	1,564

December 31, 2014
Beginning Balance	$	1,805		$	24		$	20	$	209		$	74		$	166		$	20		$	-	$	2,318
Provision (credit) for loan losses		217			13			5		56			(11	)		178			21			13		492
Charge-offs		(1,138	)		(17	)		-		-			-			-			-			-		(1,155	)
Recoveries		34			-			-		-			6			-			-			-		40
Net (charge-offs) recoveries		(1,104	)		(17	)		-		-			6			-			-			-		(1,115	)
Ending balance	$	918		$	20		$	25	$	265		$	69		$	344		$	41		$	13	$	1,695

Period-end amount allocated to:
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

The Company’s recorded investment in loans as of December 31, 2015 and 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		Total
December 31, 2015
Loans individually evaluated for impairment	$	678	$	-	$	-	$	137	$	-	$	477	$	-	$	-	$	1,292
Loans collectively evaluated for impairment		70,884		2,049		6,851		16,599		10,322		28,468		2,787		1,542		139,502
Ending balance	$	71,562	$	2,049	$	6,851	$	16,736	$	10,322	$	28,945	$	2,787	$	1,542	$	140,794

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

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NOTE 4. BANK PREMISES AND EQUIPMENT

Year-end premises and equipment were as follows:

(In thousands)	December 31, 2015		December 31, 2014
Land	$	676	$	676
Building		1,279		1,279
Building improvement		2,493		2,415
Furniture and equipment		1,173		1,078
Leasehold improvements		159		159
Construction in progress		-		2
		5,780		5,609
Less: accumulated depreciation		1,283		1,057
Balance at end of period	$	4,497	$	4,552

Depreciation expense, including amortization of leasehold improvements, was $226,000 and $207,000 for the years ended December 31, 2015 and 2014, respectively.

The Company owns a two story, 33,000 square foot commercial office building. The building is approximately 64% leased and the Bank occupies approximately 11,000 square feet of the space, or 33% of the building.

On May 1, 2013, the Bank entered into a sub-lease agreement covering its space located at 850 Hwy 114, Southlake, Texas. The term of the sub-lease runs concurrently with the term of the Bank’s primary lease ending on February 28, 2017. The monthly lease payment pursuant to the sub-lease is $5,240. The Bank’s monthly payment under the primary lease is $5,785.

NOTE 5. OTHER REAL ESTATE AND OTHER ASSETS

Other assets as of December 31, 2015 and 2014 were as follows:

(In thousands)	December 31, 2015		December 31, 2014
Loan servicing rights	$	1,518	$	1,150
Accounts receivable – trust fees		1,028		1,066
Accrued interest receivable		504		478
Prepaid assets		387		358
Other		275		169
Total	$	3,712	$	3,221

The Company had no Other Real Estate Owned (“OREO”) as of December 31, 2015 and 2014.

SBA and USDA loans sold which the Company retains the servicing for others are not included in the accompanying consolidated balance sheets. The risks inherent in loan servicing assets relate primarily to changes in prepayments that result from shifts in loan interest rates. The unpaid principal balances of SBA and USDA loans serviced for others were $75.8 million and $57.2 million at December 31, 2015 and 2014, respectively.

During the year ended December 31, 2015, loan servicing assets of $493,000 were added and $125,000 was amortized to non-interest income. During the year ended December 31, 2014, loan servicing assets of $647,000 were added and $62,000 was amortized to non-interest income.

There was no valuation allowance necessary to adjust the aggregate cost basis of the loan servicing asset to fair market value as of December 31, 2015 and 2014.

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NOTE 6. DEPOSITS

Time deposits of $250,000 and over totaled $22.5 million and $24.0 million at December 31, 2015 and 2014, respectively.

Deposits at December 31, 2015 and 2014 are summarized as follows:

(In thousands)	As of December 31, 2015				As of December 31, 2014
Non-interest bearing demand	$	24,138	18	%	$	22,786	18	%
Interest-bearing demand (NOW)		3,283	2			5,833	5
Money market accounts		33,474	24			30,599	24
Savings accounts		5,535	4			3,153	3
Time deposits $100,000 and over		66,538	49			59,397	47
Time deposits under $100,000		4,067	3			3,966	3
Total	$	137,035	100	%	$	125,734	100	%

At December 31, 2015, the scheduled maturities of time deposits were as follows:

(In thousands)
2016	$	48,173
2017		15,033
2018		5,697
2019		1,393
2020		298
2021		11
Total	$	70,605

The aggregate amount of demand deposit overdrafts that have been reclassified as loans at December 31, 2015 and 2014 was insignificant.

NOTE 7. BORROWED FUNDS

The Company has a blanket lien credit line with the FHLB with borrowing capacity of $21.7 million secured by commercial loans and securities with collateral values of $11.2 million and $10.5 million, respectively. The Company had one outstanding overnight advance for $10.0 million at December 31, 2015, with a fixed interest rate of 0.31% and maturity date of January 4, 2016. The advance was renewed at a fixed interest rate of 0.38% and maturity date of January 5, 2016. At maturity the Company determines its borrowing needs and renews the advance accordingly at varying terms ranging from one to seven days. 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 14, 2015.

The Company also has a credit line with the FRB with borrowing capacity of $16.0 million, secured by commercial loans and securities with collateral value of $15.3 million and $671,000, respectively. There were no outstanding borrowings at December 31, 2015 or December 31, 2014.

NOTE 8. OTHER LIABILITIES

Other liabilities as of December 31, 2015 and December 31, 2014, were as follows:

(In thousands)	December 31, 2015		December 31, 2014
Trust advisor fees payable	$	1,487	$	1,496
Incentive compensation		295		319
Data processing		81		114
Federal income tax payable		546		932
Audit fees		-		52
Franchise & property taxes		8		14
Interest payable		24		22
Legal		3		6
Other accruals		240		597
	$	2,684	$	3,552

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NOTE 9. BENEFIT PLANS

The Company funds certain costs for medical benefits in amounts determined at the discretion of management. The Company has a retirement savings 401(k) plan covering substantially all employees. The Company made matching employee contributions during the years ended December 31, 2015 and 2014. An employee may contribute up to 6% of his or her annual 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 were $126,000 and $97,000 for the years ended December 31, 2015 and 2014, respectively.

NOTE 10. INCOME TAXES

The provision (benefit) for income taxes consists of the following:

(In thousands)	2015			2014
Current:
Federal	$	1,544		$	1,227
State		(1	)		18
Total current		1,543			1,245
Deferred federal		260			503
Income tax expense	$	1,803		$	1,748

The effective tax rate differs from the U. S. statutory tax rate due to the following for 2015 and 2014:

	2015		2014
U.S. statutory rate	34.0	%	34.0	%
Other	1.4	%	2.0	%
Effective tax rate	35.4	%	36.0	%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows:

(In thousands)	2015			2014
Deferred tax assets:
Allowance for loan losses	$	532		$	576
Stock-based compensation		-			93
Net deferred loan fees		-			41
Non-accrual loan interest		27			-
Accrued liabilities		101			109
Net unrealized loss on securities available-for-sale		-			6
Total deferred tax assets		660			825
Deferred tax liabilities:
Net deferred loan costs		(86	)		-
Depreciation and amortization		(42	)		(27	)
Net unrealized gain on securities available-for-sale		(5	)		-
Total deferred tax liabilities		(133	)		(27	)
Net deferred tax asset	$	527		$	798

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. In assessing the realization rate of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. No valuation allowance for deferred tax assets was recorded at December 31, 2015 and 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 for the years ended December 31, 2015 and 2014.

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NOTE 11. STOCK COMPENSATION PLANS

At December 31, 2015, the Company had three stock-based compensation plans (the 2005 Stock Incentive Plan, the 2015 Stock Incentive Plan, and the 2014 Non-employee Directors’ Common Stock Plan). The 2005 Stock Incentive Plan expired during the third quarter of 2015, and therefore no additional awards may be issued under this plan.

Stock Incentive Plans

The stock incentive plans are designed to provide the Company with the flexibility to grant incentive stock options and non-qualified stock options to its executive and other officers. The purpose of the plans are to provide increased incentive for key employees to render services and to exert maximum effort for the success of the Company. The Company accounts for stock-based employee compensation plans using the fair value-based method of accounting. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model. Expected volatilities are based on historical volatility of the Company’s stock. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk-free rate for the period within the contractual life of the stock option is based upon the U.S. Treasury yield curve at the date of grant. The Company recorded $40,000 and $25,000 in compensation expense for the years ended December 31, 2015 and 2014, respectively, in connection with the stock incentive plans.

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. No options were granted during 2015 under this plan. The Company granted 31,000 stock options during 2014. A summary of the assumptions used in calculating the fair value of option awards during the year ended December 31, 2014 are as follows:

	December 31, 2014
Expected life in years	$	10.0
Risk-free interest rate		1.70	%
Expected volatility		85.1	%
Dividend yield		0.0	%
Fair value per option	$	4.22

As of December 31, 2015 and 2014, options to purchase a total of 102,000 and 233,000 shares, respectively, under its 2005 Plan were outstanding with an average exercise price of $7.38 and $8.86, respectively. These options vest 20% annually through March 2019. As of December 31, 2015 there was $85,000 of total unrecognized compensation cost related to non-vested equity-based compensation awards expected to vest, with an average vesting period of 3.2 years.

The following is a summary of activity in the 2005 Plan for the year-ended December 31:

	2015						2014
	Number of Shares Underlying Options		Weighted Average Exercise Prices		Weighted Average Contractual Life in Years		Number of Shares Underlying Options			Weighted Average Exercise Prices		Weighted Average Contractual Life in Years
Outstanding at beginning of the year		233,000	$	8.86				210,000		$	9.12
Granted		-		-				31,000			5.04
Exercised		-		-				(8,000	)		1.01
Expired/forfeited		131,000		10.00				-			-

Outstanding at end of period		102,000	$	7.38		4.1		233,000		$	8.86		2.6
Exercisable at end of period		77,200	$	8.14				196,600		$	9.65
Available for grant at end of period		-						8,000

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The weighted-average grant date fair value of the options for the years ended December 31, 2015 and 2014 was $3.33 and $2.65, respectively.

Aggregate intrinsic value of the outstanding stock options and exercisable stock options under the 2005 Plan at December 31, 2015, was $163,000 and $115,000, respectively. Aggregate intrinsic value of the outstanding stock options and exercisable stock options under the 2005 Plan 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 $7.00 and $6.25 at December 31, 2015 and 2014, respectively, and the exercise price multiplied by the number of options outstanding. There were no stock options exercised during 2015. There were 8,000 stock options exercised during 2014. Proceeds from exercise was $8,080 and intrinsic value was $39,920.

All options carry exercise prices ranging from $1.01 to $13.00. At December 31, 2015, there were 77,200 exercisable options, of which 42,000 shares had no intrinsic value as the exercise price exceeded the stock price.

The shareholders of the Company approved the 2015 Stock Incentive Plan (the “2015 Plan”) at the annual shareholder meeting held on June 24, 2015. The 2015 Plan authorized 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 Company granted 180,000 stock options with an exercise price of $7.15 during the fourth quarter of 2015. A summary of the assumptions used in calculating the fair value of the option awards are as follows:

	December 31, 2015
Expected life in years	$	10.0
Risk-free interest rate		1.35	%
Expected volatility		19.3	%
Dividend yield		0.0	%
Fair value per option	$	2.10

These options vest 20% annually through October 2020. As of December 31, 2015 there was $365,000 of total unrecognized compensation cost related to non-vested equity-based compensation awards expected to vest, with an average vesting period of 4.8 years.

The following is a summary of activity in the 2015 Plan for the year-ended December 31, 2015:

	2015
	Number of Shares Underlying Options		Weighted Average Exercise Prices		Weighted Average Contractual Life in Years
Outstanding at beginning of the year		-	$	-
Granted		180,000		7.15
Exercised		-		-
Forfeited		-		-

Outstanding at end of period		180,000		7.15		9.8
Exercisable at end of period		-	$	-
Available for grant at end of period		90,000

The weighted-average grant date fair value of the options for the years ended December 31, 2015 was $2.10.

There was no intrinsic value of the outstanding stock options and exercisable stock options at December 31, 2015, as the exercise price exceeded the stock price.

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 was not approved by security holders. 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.

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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. There were no service shares granted to the non-employee directors during 2014.

NOTE 12. LOAN COMMITMENTS AND OTHER CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying balance sheets. The Company's exposure to credit loss in the event of non-performance 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.

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

(In thousands)	December 31, 2015		December 31, 2014
Undisbursed loan commitments	$	18,740	$	16,881
Standby letters of credit		10		10
	$	18,750	$	16,891

The Company has one non-cancelable office lease agreement, which expires in January 2017. The Company does not occupy this space, and receives rental payments under a sublease agreement which 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 years ended December 31, 2015 and 2014 totaled $66,000 and $147,000, respectively. The decrease in lease expense was due to the expiration of the lease of the Company’s prior office location which expired in May 2014. Future minimum lease payments due under non-cancelable operating leases at December 31, 2015 were as follows:

(In thousands)
2016	$	69
2017		6
	$	75

Aggregate future minimum rentals to be received under non-cancelable subleases greater than one year at December 31, 2015, were $68,000.

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. Aggregate future minimum rentals to be received under non-cancelable leases at December 31, 2015 were $1.1 million through 2023.

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.

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Employment Agreements

The Company has entered into employment agreements with four officers of the Bank, Steve Jones, Craig Barnes, Ken Bramlage and Patrick Howard. The agreements are for an initial one-year term and are automatically renewable for an additional one-year term unless either party elects not to renew.

NOTE 13. RELATED PARTIES

The Company purchased corporate insurance through an insurance agency in which one of its principals is also a director and organizer of the Company. Premiums paid totaled $135,000 and $140,000 for the years ended December 31, 2015 and 2014, respectively. In management’s opinion, such transactions were made in the ordinary course of business and were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

The Company purchased employee benefit insurance through an insurance agency in which one of its principals is also a director and organizer of the Company. During the years ended December 31, 2015 and 2014 those premiums totaled $456,000 and $369,000 respectively. In management’s opinion, such transactions were made in the ordinary course of business and were made on substantially the same terms as those prevailing at the time for comparable transactions with other persons.

At December 31, 2015 and 2014, certain officers, directors and their affiliated companies had depository accounts with the Bank totaling approximately $6.9 million and $11.1 million, respectively. None of those deposit accounts have terms more favorable than those available to any other depositor.

The Company had no loans to officers, directors and their affiliated companies during 2015 and 2014.

NOTE 14. REGULATORY MATTERS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s and, accordingly, the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore, the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of tier 1 capital (as defined) to average assets (as defined). To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, tier 1 risk-based, and tier 1 leverage ratios as set forth in the table. Management believes, as of December 31, 2015 and 2014, that the Bank meets all capital adequacy requirements to which it is subject.

As of the most recent notification from our primary regulator categorized the bank subsidiary as well-capitalized. To be categorized as well-capitalized, we must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table.

(In thousands)	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2015
Total Capital (to Risk Weighted Assets)	$	27,813		18.33	%	$	12,139		8.00	%	$	15,173		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		26,249		17.30			9,104		6.00			12,139		8.00

Common Equity Tier 1 (to Risk Weighted Assets)		26,249		17.30			6,828		4.50			9,863		6.50

Tier 1 Capital (to Average Assets)		26,249		15.02			6,994		4.00			8,742		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

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At December 31, 2015, approximately $7.4 million was available for the declaration of dividends by the Bank to the Company without prior approval of regulatory agencies.

NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS

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.

The following table summarizes financial assets measured at fair value on a recurring basis as of December 31, 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 December 31, 2015
Securities available for sale:
U.S. government agencies	$	-	$	9,162	$	-	$	9,162
Mortgage-backed securities		-		3,290		-		3,290

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

Market valuations of our investment securities which are classified as level 2 are provided by an independent third party. The fair values are determined by using several sources for valuing fixed income securities. Their techniques include pricing models that vary based on the type of asset being valued and incorporate available trade, bid and other market information. In accordance with the fair value hierarchy, the market valuation sources include observable market inputs and are therefore considered Level 2 inputs for purposes of determining the fair values.

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 December 31, 2015, no assets for which fair value is measured on a recurring basis transferred between any levels of the hierarchy.

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Certain financial assets and financial liabilities are measured at fair value on a nonrecurring 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 include:

At December 31, 2015, impaired loans with a carrying value of $678,000 were reduced by specific valuation allowances totaling $26,000 resulting in a net fair value of $652,000, 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 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 discounts for collateral-dependent impaired loans.

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 35% for 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 and USDA loans and are reported at the lower of cost or estimated fair value. Fair value for SBA and USDA loans is based on market indications available in the market. There were no impairments reported for the periods presented.

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, were 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, were 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 year ended December 31, 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.

In connection with the sale of $21.2 million in loans during 2015, the Company added a servicing asset of $493,000, and amortized $125,000 using the amortization method for the treatment of servicing. 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 in 2015, the discount rate ranged from 7.3% to 9.4% and the combined prepayment and default rates ranged from 8.6% to 10.2%.

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In connection with the sale of $24.0 million in loans during 2014, the Company added a servicing asset of $647,000, and amortized $62,000 using the amortization method for the treatment of servicing. 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 in 2014, the discount rate ranged from 6.8% to 8.9% and the combined prepayment and default rates ranged from 8.4% to 9.7%.

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

	December 31, 2015
(In thousands)	Carrying Amount		Estimated Fair Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	8,710	$	8,710
Level 2 inputs:
Securities available for sale		12,452		12,452
Securities, restricted		1,046		1,046
Loans held for sale		6,365		6,365
Loans, net		137,648		138,419
Accrued interest receivable		504		504
Receivable for sold loans		1,972		1,972
Level 3 inputs:
Servicing asset		1,518		1,518
Financial liabilities:
Level 1 inputs:
Non-interest bearing deposits		24,138		24,908
Level 2 inputs:
Interest bearing deposits		112,897		112,141
Borrowed funds		10,000		10,000
Accrued interest payable		24		24

	December 31, 2014
(In thousands)	Carrying Amount		Estimated 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

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NOTE 16. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

T BANCSHARES, INC.

CONDENSED BALANCE SHEETS

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

Cash and due from banks	$	770	$	863
Accounts receivable		61		31
Investment in subsidiary		26,379		22,931

Total assets	$	27,210	$	23,825

LIABILITIES AND CAPITAL

Accounts payable		-		28
Capital		27,210		23,797

Total liabilities and capital	$	27,210	$	23,825

T BANCSHARES, INC.

CONDENSED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31,

(In thousands)	2015			2014
Equity in income from subsidiary	$	3,426		$	3,126

Non-interest expense:
Professional and administrative		103			94
Stock based compensation		98			25
Total non-interest expense		201			119
Income before income taxes		3,225			3,007
Income tax benefit		(68	)		(31	)
Net Income	$	3,293		$	3,038

T BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)	2015		2014
Net Income	$	3,293	$	3,038
Other comprehensive income:
Change in unrealized gain on investment securities available-for-sale		32		287
Reclassification adjustment for realized loss on sale included in net income		1		3
Total other comprehensive income, before tax effect		33		290
Tax effect		11		(3	)
Other comprehensive income		22		293
Comprehensive income	$	3,315	$	3,331

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NOTE 16. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS cont’d

T BANCSHARES, INC.

CONDENSED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31,

(In thousands)	2015			2014
Cash Flows from Operating Activities
Net income	$	3,293		$	3,038
Adjustments to reconcile net income to net cash used in operating activities:
Equity in income of Bank		(3,426	)		(3,126	)
Stock based compensation		98			25
Net change in other assets		(30	)		(31	)
Net change in other liabilities		(28	)		28
Net cash used in operating activities		(93	)		(66	)

Cash Flows from Investing Activities		-			-

Cash Flows from Financing Activities
Net proceeds from stock options exercised		-			8
Net change in cash and cash equivalents		(93	)		(58	)
Cash and cash equivalents at beginning of period		863			921

Cash and cash equivalents at end of period	$	770		$	863

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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

As of the end of the period covered by this Annual Report on Form 10-K, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure Controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the principal executive officer and principal 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.

Management’s Report on Internal Control over Financial Reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Securities and Exchange Act of 1934. The Company’s internal control over financial reporting system is designed to provide reasonable assurance to management and the Board of Directors regarding the reliability of the Company’s financial reporting and the preparation of published financial statements in accordance with generally accepted accounting principles.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to the financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2014, utilizing the framework established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 1992 and was updated in 2013. Based on this assessment, management believes that as of December 31, 2015, the Company’s internal controls over financial reporting are effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisitions, use, or disposition of the Company’s assets that could have a material affect on the Company’s financial statements are prevented or timely detected.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

There have been no changes in our internal controls over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers, and Corporate Governance

Information concerning the Company’s directors and executive officers will appear in the Company’s Proxy Statement for the 2016 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A on or before April 30, 2016 (the” Proxy Statement”), under the caption “Election of Directors” and “Executive Officers.” Such information is incorporated herein by reference.

Information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, will appear in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” Such information is incorporated herein by reference.

We have adopted a Code of Conduct and Conflicts of Interest, which is applicable to all directors, officers and employees of the Company and the Bank. A discussion of our Code of Conduct and Conflicts of Interest will appear in the Company’s Proxy Statement under the caption “Code of Conduct.” Such information is incorporated herein by reference and is posted to the Company’s website under “About T Bank – Shareholders”.

Item 11. Executive Compensation

Information concerning executive compensation will appear in the Proxy Statement under the caption “Executive Compensation.” Such information is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

Information concerning security ownership of certain beneficial owners and management will appear in the Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management.” Such information is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence

Information concerning certain relationships and related transactions will appear in the Proxy Statement under the caption “Certain Relationships and Related Transactions.” Such information is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

Information concerning principal accounting fees and services will appear in the Proxy Statement under the caption “Principal Auditor Fees and Services.” Such information is incorporated herein by reference.

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PART IV

Item 15. Exhibits and Financial Statement Schedules.

Exhibit No.		Description of Exhibit

3.1		Articles of Incorporation (1)
3.2		Bylaws (2)
10.1		T Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) 2005 Incentive Plan (3)(4)
10.2		Form of Incentive Stock Option Agreement (3)(4)
10.3		Form of Non-Qualified Stock Option Agreement (3)(4)
10.4		T Bancshares, Inc. (f/k/a First Metroplex Capital, Inc.) Organizers’ Warrant Agreement dated November 2, 2004 (5)
10.5		Employment Agreement by and between T Bancshares, Inc., T Bank N.A., and Patrick Howard (4)(6)
10.6		Employment Agreement by and between T Bancshares, Inc. and Steve Jones (4)*
10.7 10.8 10.9		Employment Agreement by and between T Bancshares, Inc., T Bank N.A., and Ken Bramlage (4)(6) Employment Agreement by and between T Bancshares, Inc., T Bank N.A., and Craig Barnes (4)(6) Amendment to Employment Agreement by and between T Bancshares, Inc., T Bank N.A., and Patrick Howard dated March 31, 2014 (4)(7)
10.10		2014 Non-employee Directors’ Common Stock Plan (4)*
10.11		2015 Stock Incentive Plan (4)(8)
10.12		Form of Stock Option Agreement (4)*
21		Subsidiaries of T Bancshares, Inc. *
23		Consent of Whitley Penn*
31.1		Rule 13a-14(a) Certification of Chief Executive Officer*
31.2		Rule 13a-14(a) Certification of Chief Financial Officer*
32.1		Certification Pursuant to Rule 14d-14(b) of the Securities Exchange Act*
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*

(1)		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).
(2)		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).
(3)		Incorporated by reference from the Registration Statement on Form S-8 filed by the Registrant with the SEC on September 20, 2005 (Registration No. 333-128456).
(4)		Indicates a compensatory plan or contract.
(5)		Incorporated by reference from the Registration Statement on Form SB-2 filed by the Registrant with the SEC on December 15, 2003 and as amended on June 11, 2007 (Registration No. 333-111153).
(6)		Incorporated by reference from the Annual Report on Form 10-KSB filed by Registrant with the SEC on April 1, 2013 (File No. 000-51297).
(7)		Incorporated by reference from the Annual Report on Form 10-KSB filed by Registrant with the SEC on March 31, 2014 (File No. 000-52197).
(8)		Incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A filed by Registrant with the SEC on April 30, 2015 (File No. 000-51297).
*		Filed Herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Dated:	March 29, 2016	By:	/s/ Patrick Howard
			Patrick Howard

			President & Chief Executive Officer (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

SIGNATURE	TITLE	DATE

/s/ Patrick Howard	Director and Principal Executive	March 29, 2016
Patrick Howard	Officer

/s/ Ken Bramlage	Principal Financial Officer and	March 29, 2016
Ken Bramlage	Principal Accounting Officer

/s/ Stanley E. Allred	Director	March 29, 2016
Stanley E. Allred

/s/ Dan Basso	Director	March 29, 2016
Dan Basso

/s/ Frankie Basso	Director	March 29, 2016
Frankie Basso

/s/ David Carstens	Director	March 29, 2016
David Carstens

/s/ Ron Denheyer	Director	March 29, 2016
Ron Denheyer

/s/ Eric Langford	Director	March 29, 2016
Eric Langford

/s/ Charles M. Mapes, III	Director	March 29, 2016
Charles M. Mapes, III

/s/ Thomas McDougal	Director	March 29, 2016
Thomas McDougal, DDS

/s/ Gordon R. Youngblood	Director	March 29, 2016
Gordon R. Youngblood

/s/ Steven Jones	Director	March 29, 2016
Steven Jones

T Bancshares, Inc. - FORM 10-K - March 29, 2016

Attached files

T Bancshares, Inc. Reports