UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549

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~~2016

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)

(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)

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

SecuritiesIndicate registeredby pursuantcheck tomark Sectionif 12(b)the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:. NoneYes ☐ No ☒

SecuritiesIndicate registeredby check mark if the registrant is not required to file reports pursuant to Section 1213 or 15(gd) of the Act:. CommonYes Stock,☐ parNo value $0.01☒

Indicate by check mark ifwhether the registrant is(1) ahas well-knownfiled seasonedall issuer,reports asrequired definedto inbe Rulefiled 405by 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 ¨ ☒ No x☐

Indicate by check mark ifwhether the registrant ishas notsubmitted electronically and posted on its corporate web site, if any, every Interactive Data File required to filebe reportssubmitted and posted pursuant to SectionRule 13405 orof 15Regulation S-T (d)§232.405 of this chapter) during the Actpreceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ ☒ No x ☐

Indicate by check mark whetherif thedisclosure registrantof (1)delinquent hasfilers filedpursuant all reports required to beItem filed405 byof SectionRegulation 13S-K or 15(d)§229.405 of thethis Securitieschapter) Exchangeis Actnot ofcontained 1934herein duringand thewill precedingnot 12be monthscontained, (orto forthe shorterbest periodof thatregistrant’s theknowledge, registrantin wasdefinitive requiredproxy toor fileinformation suchstatements reports),incorporated andby (2)reference hasin beenPart subjectIII toof suchthis filingForm requirements10-K foror theany pastamendment 90to daysForm 10-K. Yes x No ¨☒

Indicate by check mark whether the registrant ~~has~~is ~~submitted~~a ~~electronically~~large ~~and~~accelerated ~~posted~~filer, onan ~~its~~accelerated ~~corporate web site~~filer, ifa ~~any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S~~non-Taccelerated ~~(§232.405~~filer, ~~of this chapter) during the preceding 12 months (~~or ~~for~~a ~~such~~smaller ~~shorter~~reporting ~~period that the registrant was required to submit and post such files)~~company. ~~Yes x No ¨~~

~~Indicate~~Large byaccelerated ~~check~~filer ~~mark~~☐ ifAccelerated ~~disclosure~~filer of☐ ~~delinquent filers pursuant to Item 405 of Regulation S~~Non-Kaccelerated ~~(§229.405~~filer of☐ ~~this~~Smaller ~~chapter)~~reporting iscompany 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 largeshell acceleratedcompany filer,(as andefined acceleratedin filer,Rule a non12b-accelerated2 filer,of orthe aAct). smallerYes reporting☐ company.No ☒

LargeAs acceleratedof filerJune ¨30, Accelerated2016, filerthe ¨last Nonbusiness day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-acceleratedvoting filercommon ¨stock Smallerheld reportingby companynon-affiliates xwas $23.2 million.

IndicateThe bynumber checkof markcommon whethershares outstanding of each of the registrant’s isclasses aof shellcommon companystock, (as definedof inthe Rulelatest 12b-2practicable date: 4,051,657 shares of the Act)Company’s Common Stock ($0. Yes01 ¨ No xpar value per share) were outstanding as of March 29, 2017.

AsDOCUMENTS ofINCORPORATED June 30,BY 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.REFERENCE

TheSpecified numberportions of commonthe shares outstandingregistrant’s ofdefinitive eachProxy ofStatement relating to the registrant’s classes2017Annual Meeting of common stockShareholders, aswhich ofis theto latestbe practicablefiled date:pursuant 4,037,907to sharesRegulation 14A within 120 days after the end of the Companyregistrant’s Commonfiscal Stockyear ($0.01ended parDecember value31, per2016, share)are wereincorporated outstandingby asreference in Part III of Marchthis 29,Annual 2016Report on Form 10-K.

~~DOCUMENTS~~TABLE ~~INCORPORATED~~OF ~~BY REFERENCE~~CONTENTS

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.


PART I		3
	Item 1. Business	4
	Item 1A. Risk Factors	16
	Item 2. Properties	23
	Item 3. Legal Proceedings	24
	Item 4. Mine Safety Disclosures	24

PART II		25
	Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities	25
	Item 6. Select Financial Data	25
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk	42
	Item 8. Financial Statements and Supplementary Data	43
	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	77
	Item 9A. Controls and Procedures	77
	Item 9B. Other Information	77

PART III		78
	Item 10. Directors, Executive Officers, and Corporate Governance	78
	Item 11. Executive Compensation	78
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	78
	Item 13. Certain Relationships and Related Transactions and Director Independence	79
	Item 14. Principal Accountant Fees and Services	79

PART IV		80
	Item 15. Exhibits and Financial Statement Schedules	80
	Item 16. Form 10-K Summary	80

TABLEPART OF CONTENTSI

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

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

TableThis Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) contains certain forward-looking statements within the meaning of ContentsSection 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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:

~~PART~~• Igeneral 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.

~~CAUTIONARY~~Such ~~STATEMENT~~statements ~~REGARDING~~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, except as required by law.

~~FORWARD-LOOKING STATEMENTS~~3

ThisTable 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:Contents

•Item ~~general~~1. ~~economic conditions, including our local, state and national real estate markets and employment trends;~~Business.

• volatility and disruption in national and international financial markets;General

•T governmentBancshares, interventionInc. in (the U.“Company,” S.“we,” financial“us,” systemor including“our”) was incorporated under the effectslaws of recentthe legislative,State tax,of accountingTexas andon regulatoryDecember actions23, and2002 reforms,to suchserve as the Dodd-Frankbank Wallholding Streetcompany Reformfor andT ConsumerBank, ProtectionN.A., Acta national association (the “Dodd-Frank ActBank”), thewhich Jumpstartopened Ouron BusinessNovember Startups2, Act2004. The Bank operates through a main office located at 16200 Dallas Parkway, theDallas, ConsumerTexas. FinancialOther Protectionthan Bureauits andownership of the BaselBank, IIIthe Rules;Company conducts no material business.

•The politicalBank instability;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.

•As theof abilityDecember of31, 2016, the FederalCompany governmenthad, toon deala withconsolidated anybasis, slowdownapproximately of$213.1 themillion nationalin economyassets, $158.7 million in total loans and the$174.7 fiscalmillion cliff;in deposits.

•Definitive competitionAgreement fromwith otherTectonic financialAcquisition, institutions and financial holding companies;Inc.

•On November 10, 2016, the effectsCompany ofentered into an Agreement and changesPlan inof tradeMerger (the “Merger Agreement”) with T Acquisition, monetaryInc. (“Parent”), and fiscaljoined policiesin andby lawsTectonic Advisors, includingLLC interest(“Tectonic”), ratepursuant policiesto ofwhich Parent will acquire the BoardCompany through the merger of Governorsa wholly-owned subsidiary of theParent Federalwith Reserveand Systeminto the Company (the “Federal ReserveMerger”);, with the Company surviving the Merger.

•In changesconnection with the Merger, holders of the Company’s common stock will be entitled to receive an amount in cash consisting of two payments that, based on the demandCompany’s forAdjusted loans;Equity (as defined in the Merger Agreement) at December 31, 2016, would have totaled approximately $10.3036 per share:

•· ~~fluctuations~~Special Dividend. The first payment is a special dividend to be paid by The Company to each holder of record of common stock as of a date just prior to closing in an amount by which the ~~value~~Company’s Adjusted Equity as of ~~collateral~~a ~~securing~~date ~~our~~just ~~loan~~prior ~~portfolio~~to ~~and~~closing inexceeds $20,000,000. Based on the ~~level~~Company’s estimated, unaudited shareholders’ equity as of December 31, 2016, the ~~allowance~~special ~~for~~dividend ~~loan~~would have equaled approximately $2.2761 per share. The special dividend will increase (or decrease) based on the Company’s net income (or net losses;) from December 31, 2016 to a date just prior to closing.

•· Per Share Merger Consideration. The second payment is the ~~accuracy~~per share merger consideration to be paid by Parent for each share of ~~our~~T ~~estimates~~Bancshares common stock issued and outstanding immediately prior to the effect time of ~~future~~the ~~loan~~Merger ~~losses;~~equal to approximately $8.0275 per share, subject to adjustment.

•The ~~the~~Merger ~~accuracy~~was approved by shareholders of ~~our~~the ~~estimates~~Company on March 10, 2017 and ~~assumptions~~is ~~regarding~~subject to customary closing conditions, including the ~~performance~~receipt of ~~our~~regulatory ~~securities portfolio;~~approvals.

•The soundnessMerger ofis othercurrently financialexpected institutionsto withbe whichcompleted wein havethe transactions;second quarter of 2017.

•Market inflation, interest rate, market and monetary fluctuations;Area

•Our changesprincipal inbanking consumermarkets spendinginclude Dallas, borrowingTarrant, Denton, Collin and savingsRockwall habits;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.

• our ability to attract deposits;Competition

•The changesmarket 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 ourboth liquiditylending position;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.

~~• changes in the reliability of our vendors, internal control system or information systems;~~4

•Table ourof ability to attract and retain qualified employees;Contents

•Lending 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;Services

•Lending changes in our compensation and benefit plans; andPolicy

•We naturaloffer disastersa andfull adverserange weather, acts of terrorismlending products, anincluding outbreakcommercial ofloans hostilitiesto orsmall- otherto internationalmedium-sized orbusinesses domesticand calamitiesprofessional concerns, real estate loans and otherconsumer mattersloans. beyondWe compete for these loans with competitors who are well established in our controlprimary market area and have greater resources and lending limits. As a result, we currently offer more flexible pricing and terms to attract borrowers.

SuchThe statementsBank’s reflectdelegations the current views of ourauthority, managementwhich with respect to future events and are subjectapproved toby thesethe andBoard otherof risksDirectors, uncertaintiesprovide andfor assumptionsvarious relatinglevels toof ourofficer operations,lending resultsauthority. ofThe operations,Bank growthhas strategyan andindependent liquidity.review Allthat subsequentevaluates writtenthe andquality oralof forward-lookingloans statementson attributablea toperiodic usbasis orand personsdetermines actingif onloans ourare behalforiginated arein expresslyaccordance qualifiedwith inthe theirguidelines entiretyestablished by thisthe paragraph.Board Weof undertakeDirectors. noAdditionally, obligationour toBoard publiclyof updateDirectors orhas otherwiseformed revisea anyDirectors’ forward-lookingLoan statements,Committee whetherwith asmembers adetermined resultby ofboard newresolution information,to futureprovide eventsthe orfollowing otherwise.oversight:

3· 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.

TableWe 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 Contentsfunds, 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.

ItemLending 1. Business.Limits

GeneralThe 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:

T· ~~Bancshares,~~15% ~~Inc.~~of (the ~~“Company,”~~Bank’s ~~“we,”~~capital ~~“us,”~~and orsurplus ~~“our,”~~and ~~hereafter)~~allowance ~~was~~for ~~incorporated~~loan ~~under~~losses; ~~the~~or ~~laws~~· 25% of ~~the~~its ~~State~~capital ofand ~~Texas~~surplus onand ~~December~~allowance ~~23,~~for ~~2002~~loan tolosses ~~serve~~if as the ~~bank~~amount ~~holding~~that ~~company~~exceeds ~~for~~15% Tis ~~Bank,~~secured ~~N.A.,~~by acash ~~national~~or ~~association~~readily ~~(the~~marketable ~~“Bank”)~~collateral, ~~which~~as ~~opened~~determined onby ~~November~~reliable 2,and ~~2004.~~continuously ~~The~~available ~~Bank~~price ~~operates~~quotations; ~~through~~or a· ~~main~~any ~~office~~amount ~~located~~when atthe ~~16200~~loan ~~Dallas~~is ~~Parkway,~~fully ~~Dallas,~~secured ~~Texas. Other~~by ~~than~~a ~~its~~segregated ~~ownership~~deposit ofat the Bank, and the ~~Company~~Bank ~~conducts~~has noperfected ~~material~~its ~~business~~security interest in the deposit.

AsThese oflegal Decemberlimits 31,will 2015,increase theor Companydecrease had,as onthe aBank’s consolidatedcapital basis,increases approximatelyor $176.9decreases millionas ina assets,result $137.6of millionits inearnings totalor loanslosses, andamong $137.0other million in depositsreasons.

TheCredit 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.Risks

MarketThe Areaprincipal 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.

OurCommercial principal banking markets include Dallas, Tarrant, Denton, Collin and RockwallIndustrial 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.Loans

CompetitionLoans 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.

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.5

LendingTable Servicesof Contents

LendingCommercial Policylending 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. 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.

WeReal offerEstate 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.Loans

The Bank’s delegationsmakes ofowner authority,occupied whichand arenon-owner approvedoccupied bycommercial thereal Boardestate of Directorsloans, provideresidential forand variouscommercial levelsconstruction of officer lending authority. The Bank has an independent review that evaluates the quality of loans on a periodic basis and determinesdevelopment if loans are originated in accordance with the guidelines established by the Board of Directors. Additionally, ourand Boardresidential ofreal Directorsestate has formed a Directors’ Loan Committee with members determined by board resolution to provide the following oversight:loans.

· ~~ensure~~Commercial ~~compliance~~real ~~with~~estate. Commercial real estate loan ~~policy~~terms generally are limited to 25 years or less. Interest rates may be fixed or adjustable, ~~procedures~~although ~~and~~rates ~~guidelines~~typically asare ~~well~~not asfixed ~~appropriate~~for ~~regulatory~~loans ~~requirements;~~with maturity dates exceeding 10 years. 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, tenant vacancy rates and the quality of the borrower’s management. · ~~approve~~Construction and development loans. ~~with~~We ~~net~~make ~~bank~~construction ~~exposure~~and ~~over~~development $2loans on owner occupied real estate,~~000~~ pre-sold or leased,~~000;~~ ·and ~~monitor~~speculative ~~delinquent~~basis. If the borrower has entered into an agreement to sell or lease the property prior to beginning construction, ~~non~~then the loan is considered to be pre-~~accrual~~sold ~~loans~~or leased. If the borrower has not entered into an agreement to sell or lease the property prior to beginning construction, then the loan is considered to be speculative. Construction and ~~classified~~development loans; ·are ~~monitor~~generally made with a 12 to 18 months and interest is paid monthly. The ratio of the loan ~~portfolio~~principal ~~concentrations~~to the value of the collateral as established by independent appraisal typically will not exceed industry standards and ~~quality~~applicable ~~through~~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 ~~variety~~presold basis and of ~~metrics;~~the ·borrower ~~monitor~~on ~~our~~a ~~loan~~speculative ~~servicing~~basis, and ~~review~~the ~~systems;~~ability of the borrower and/or the borrower’s contractor(s) to complete the project timely and within the estimated budget. · ~~review~~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 ~~adequacy~~secondary market, residential rental properties, and on a limited basis, traditional mortgage lending for one-to-four family owner occupied property. All loans are made in accordance with the Bank’s appraisal and loan policy with the ratio of the loan ~~loss~~principal ~~reserve~~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.

4Government Enhanced Small Business Lending

TableThe 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 ContentsAgriculture. The principal balance of these loans is generally guaranteed 75% by these agencies. These loans generally offer borrowers more flexible terms and conditions not 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.

WeThere followis aan conservativeactive lendingsecondary policy,market butfor onethe whichguaranteed weportion believeof permitsthese prudentloans. risksBecause tothe assistguaranteed businessesportion andcarries consumersthe infull ourfaith lendingand market.credit Interestguarantee rates vary depending on our cost of funds, the loanU.S. maturityGovernment, the degreelower ofinvestor riskrequired andyield otheron loanthat terms.portion Theof Bankthe doesloan notgenerally makecreates anya loanspremium toat anythe time of itsthe directors, executive officers or their affiliatessale.

~~Lending Limits~~6

TheTable 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:Contents

·Consumer 15%Installment 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.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 legalloans limitsare willtypically increaseto orthe decreaseprincipals asand employees of our business customers. Repayment of consumer loans depends upon the Bankborrower’s capitalfinancial increasesstability orand decreasesis 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 aboats, resultcars and trailers, the loan should be amortized over the useful life of itsthe earningsasset. orThe lossesloan officer will review the borrower’s past credit history, amongpast otherincome reasonslevel, 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.

CreditPortfolio RisksComposition

The principalfollowing economictable risksets associatedforth withthe eachcomposition category of loans that the Bank’s makesloan isportfolio theat creditworthinessDecember of31, the borrower2016. BorrowerLoan creditworthinessbalances isdo affectednot 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,undisbursed inflationloan and employment ratesproceeds, asunearned well as other factors affecting a borrower’s customersincome, supplierssold andguaranteed employees.portions 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 willheld likelyfor be made to small- to medium-sized businesses that may be less able to withstand competitivesale, economicor andallowance financialfor pressuresloan than larger borrowerslosses.

Commercial and Industrial Loans

	Portfolio Percentage at December 31, 2016
Commercial and industrial		51	%
Real Estate – residential		4	%
Real Estate - commercial		12	%
Real Estate – construction		4	%
SBA 7a		19	%
SBA 504		6	%
USDA		2	%
Consumer installment		2	%
		100	%

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.Investments

CommercialThe lendingBank generallyinvests involvesa greaterportion creditof riskits thanassets residentialin U.S. Treasuries, U.S. government agency securities, mortgage-backed orsecurities, consumerdirect lendingobligations of quasi government agencies including Fannie Mae, Freddie Mac, and involvesthe risksFederal thatHome areLoan differentBank, fromProperty thoseAssessed associatedClean withEnergy commercialassets realand estatefederal lendingfunds sold. AlthoughNo commercialinvestment loansin mayany beof collateralizedthose instruments exceeds any applicable limitation imposed by equipmentlaw or otherregulation. businessThe assets,Bank’s theinvestments liquidationare ofmanaged collateral in therelation eventto ofloan ademand borrowerand defaultdeposit maygrowth, representand anare insufficientgenerally sourceused to provide for the investment of repaymentexcess becausefunds equipmentat andminimal otherrisks businesswhile assetsproviding may,liquidity amongto otherfund things,increases bein obsoleteloan demand or ofto limitedoffset usedeposit fluctuations. Accordingly,The theBank’s repaymentAsset-Liability ofCommittee areviews commercialthe loaninvestment dependsportfolio primarily on thean creditworthinessongoing andbasis projectedin cashorder flowto ofensure that the borrowerinvestments (andconform anyto guarantors),the whileBank’s liquidationpolicy ofas collateralset isby consideredthe aBoard secondary source of repaymentDirectors.

5Deposit Services

TableDeposits are the major source of Contentsthe 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 55% of the Bank’s total deposits at December 31, 2016. The Bank’s remaining deposits were composed of time deposits less than $100,000, which comprised 2% of total deposits, and time deposits of $100,000 and greater, which comprised approximately 43% of total deposits at December 31, 2016. 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, through deposit referral services, and through our Internet banking strategy.

RealTrust Estate LoansServices

The Bank makesoffers commercialtraditional realfiduciary estate loansservices, constructionsuch andas developmentserving loansas executor, ownertrustee, occupiedagent, commercialadministrator realor estatecustodian loansfor toindividuals, smallnonprofit businessesorganizations, andemployee residentialbenefit realplans estateand loansorganizations. OnThe someBank’s oftrust thesedepartment loans,works thewith Bankour takescustomers aand securitytheir interestfinancial inadvisors realto estatedefine asobjectives, agoals prudentand practicestrategies andfor measuretheir investment portfolios and nottailor astheir theinvestment principalportfolios collateralaccordingly. forAs of December 31, 2016, the loanBank had approximately $1.2 billion in trust assets under management.

· 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.7

GovernmentTable Enhancedof Small Business LendingContents

TheOther BankBanking 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.Services

ThereOther isbanking anservices activecurrently secondaryoffered marketor foranticipated theinclude guaranteedcashier’s portionchecks, travelers’ checks, direct deposit of thesepayroll loans.and BecauseSocial theSecurity guaranteedpayments, portionbank-by-mail, carriesremote thecheck deposits, automated teller machine cards and debit cards. The Bank offers full faithservice personal and creditbusiness guaranteeinternet banking which includes remote deposit for both consumers and businesses, bill payment, electronic transfer of thefunds U.S.between Governmentfinancial institutions, theas lowerwell investoras requiredtraditional yieldinternet onservices thatsuch portionas ofbalance theinquiries loanand generallyinternal createsfunds transfers. The Bank provides a premiumcourier atand mobile banking concierge service throughout the timeDallas/Fort Worth Metroplex and offers its customers free usage of any automated teller machine in the saleworld through its debit card.

6Employees

TableThe success of Contentsthe 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 42 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.

ConsumerOther InstallmentAvailable LoansInformation

OnWe afile limitedor basis,furnish with the BankSecurities makesand loansExchange toCommission individuals(the for“SEC”) personal,annual familyreports andon householdForm purposes10-K, includingquarterly securedreports andon unsecuredForm installment10-Q, andcurrent termreports loans.on TheseForm loans8-K, areproxy typicallystatements toand theother principalsreports andrequired employeesby ofSection our13(a) businessor customers.15(d) Repayment of consumerthe loansExchange dependsAct. uponYou themay borrower’sread financialand stabilitycopy andany ismaterials morewe likelyfile towith bethe adverselySEC affectedat bythe divorce,SEC’s jobPublic loss,Reference illnessRoom andat personal100 hardshipsF thanStreet, repaymentNE, ofWashington, otherD.C. loans20549. BecauseYou manymay consumerobtain loansinformation areon securedthe byoperation depreciableof assets such as boats, cars and trailers, the loanPublic shouldReference beRoom amortizedby overcalling the usefulSEC lifeat of the asset1-800-SEC-0330. The loanSEC officermaintains willan reviewInternet thesite borrower’sat pastwww.sec.gov creditthat history,contains pastour income levelreports, debtproxy history andstatements, when applicable, cash flow and determineother theinformation impactthat ofwe allfile theseelectronically factorswith on the ability of the borrower to make future payments as agreedSEC. The principal competitors for consumer loans are the established banks and finance companies in our market.

PortfolioIn Compositionaddition, 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 Exchange Act 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 on or accessible through our website are not intended to be incorporated into this Form 10-K.

TheSUPERVISION followingAND 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.REGULATION

	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	%

General

InvestmentsSet 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, notwithstanding the recent presidential election, 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.

TheRegulatory 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.Agencies

DepositAs Servicesa 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”).

Deposits are the major source of the Bank’s fundsHolding forCompany 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.Regulation

7Bank 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.

~~Table of Contents~~8

TrustTable Servicesof Contents

SinceUnder Augustthe 2006Bank Holding Company Act, the BankCompany hasmust offeredobtain traditionalthe fiduciaryprior services,approval suchof asthe servingFederal asReserve executoror, trustee,acting agent,under administratordelegated orauthority, custodianthe forReserve individuals,Bank nonprofitbefore organizations,(1) employeeacquiring benefitdirect plansor andindirect organizations.ownership Theor Bank’scontrol trustof departmentany worksclass withof ourvoting customerssecurities andof theirany financialbank advisorsor tobank defineholding objectivescompany if, goalsafter andthe strategiesacquisition, forthe theirCompany investmentwould portfoliosdirectly andor tailorindirectly theirown investmentor portfolioscontrol accordingly.5% Asor more of Decemberthe 31,class; 2015,(2) acquiring all or substantially all of the Bankassets hadof approximatelyanother $1.1bank billionor inbank trustholding assetscompany; underor management(3) merging or consolidating with another bank holding company.

OtherUnder Bankingthe ServicesBank 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.

OtherChange bankingin servicesBank currentlyControl offeredAct. orThe anticipatedChange includein cashier’sBank checksControl Act of 1978, travelers’as checksamended (the “Change in Bank Control Act”), directand depositthe related regulations of payrollthe andFederal SocialReserve Securityrequire payments,any bank-by-mail,person remoteor checkgroups deposits,of automatedpersons telleracting machinein cardsconcert and(except debitfor cards.companies Therequired to make application under the Bank offersHolding fullCompany serviceAct), personalto andfile businessa internetwritten bankingnotice whichwith includesthe remoteFederal depositReserve foror, bothacting consumersunder anddelegated businessesauthority, billthe paymentappropriate Federal Reserve Bank, electronicbefore transferthe person or group acquires control of fundsthe betweenCompany. financialThe institutions,Change asin wellBank Control Act defines “control” as traditionalthe internetdirect servicesor suchindirect aspower balanceto inquiriesvote and25% internalor fundsmore transfersof any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. TheA rebuttable presumption of control arises under the Change in Bank providesControl Act where a courierperson andor mobilegroup bankingcontrols concierge10% serviceor throughoutmore, thebut Dallas/Fortless Worththan Metroplex25%, andof offersa itsclass customersof freethe usagevoting stock of anya automatedcompany telleror machineinsured inbank which is a reporting company under the worldExchange throughAct, itssuch debitas cardthe Company, or such ownership interest is greater than the ownership interest held by any other person or group.

EmployeesPermitted 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.

TheA successbank ofholding thecompany Bankmay dependsalso elect to become a “financial holding company,” inby significantwhich parta qualified parent holding company of a banking institution may engage, ondirectly or through its abilitynon-bank subsidiaries, in any activity that is financial in nature or incidental to attract,such retainfinancial activity or in any other activity that is complementary to a financial activity and motivatedoes highlynot qualifiedpose 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 othercompliance personnelwith the Community Reinvestment Act of 1977, foras whomamended competition(the is“Community intense.Reinvestment TheAct”), Banksuch currentlyas hasbeing 39“well-capitalized” fulland “well-timemanaged,” equivalentand employees.must Nonehave 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 employeessole aredepository representedinstitution bysubsidiary, presently satisfies all of the requirements that must be met to enable the Company to successfully elect to become a collectivefinancial bargainingholding agreementcompany. TheHowever, Bankthe believesCompany thathas itsno relationscurrent withintention itsof employeesseeking areto goodbecome 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.

EmployeesSource areof coveredStrength. byUnder athe comprehensiveFederal employeeReserve’s benefit“source programof whichstrength” provides fordoctrine, amonga otherbank benefits,holding 401(k)company Plan,is hospitalizationrequired andto majoract medicalas insurance,a disabilitysource insurance,of financial and lifemanagerial insurancestrength to any subsidiary bank. SuchThe employeeholding benefitscompany areis consideredexpected byto managementcommit resources to support a subsidiary bank, including at times when the holding company may not be generallyin competitivea withfinancial employeeposition benefitsto providedprovide bysuch othersupport. similarA employersbank 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 Bankbank holding company’s geographicsubsidiary marketbank areafails 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.

OtherSound Availablebanking Informationpractice. 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.

WeBank fileholding orcompanies furnishare withnot thepermitted Securitiesto andengage Exchangein Commissionunsound (thebanking “SEC”)practices. annualFor reports on Form 10-Kexample, quarterlythe reportsFederal onReserve’s FormRegulation 10-Q,Y currentrequires reportsa onbank Formholding 8-K,company proxyto statementsgive andthe otherFederal reportsReserve requiredprior bynotice Sectionof 13(a)any redemption or 15(d)repurchase of its own equity securities, if the Securitiesconsideration Exchangeto Actbe ofpaid, 1934.together Youwith maythe readconsideration andpaid copyfor any materialsrepurchases wein filethe withpreceding theyear, SECis atequal to 10% or more of the SECcompany’s Publicconsolidated Referencenet Roomworth. atThere 100is Fan Street,exception NEfor bank holding companies that are well-managed, Washingtonwell capitalized, D.C.and 20549.not Yousubject mayto obtainany informationunresolved onsupervisory theissues. operationThe ofFederal Reserve may oppose the Publictransaction Referenceif Roomit bybelieves callingthat the SECtransaction atwould 1-800-SEC-0330.constitute Thean SECunsafe maintainsor anunsound Internetpractice siteor atwould wwwviolate any law or regulation.sec.gov that containsAs ouranother reportsexample, proxya statements,holding andcompany othercould informationnot thatimpair weits filesubsidiary electronicallybank’s withsoundness by causing it to make funds available to non-banking subsidiaries or their customers if the SECFederal Reserve believed it not prudent to do so.

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.9

SUPERVISIONTable ANDof REGULATIONContents

GeneralThe 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.

SetDividends. forthConsistent belowwith isits policy that bank holding companies should serve as a descriptionsource of financial strength for their subsidiary banks, the significantFederal elementsReserve has stated that, as a matter of theprudent lawsbanking, anda regulationsbank applicableholding tocompany thegenerally Companyshould andnot themaintain Bank.a Therate descriptionof isdistributions qualifiedto inshareholders unless its entiretyavailable bynet referenceincome has been sufficient to fully fund the fulldistributions, textand the prospective rate of earnings retention appears consistent with the statutesbank holding company’s capital needs, regulationsasset quality, and policiesoverall thatfinancial are describedcondition. MoreoverIn addition, thesewe statutes,are regulationssubject andto policiescertain arerestrictions continuallyon underthe reviewmaking byof distributions as a result of the U.S.requirement Congressthat andthe stateBank legislaturesmaintain andan federaladequate andlevel stateof regulatorycapital agenciesas described below. AAs changea inTexas statutescorporation, regulationswe orare regulatoryrestricted policiesunder applicablethe toTexas theBusiness CompanyOrganizations orCode itsfrom principalpaying subsidiarydividends under certain conditions. Under Texas law, we cannot pay dividends to shareholders if the Bank,dividends couldexceed haveour asurplus materialor if after giving effect onto ourthe businessdividends, we would be insolvent.

8Anti-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.

TableBank of ContentsRegulation

RegulatoryFederal Agenciesand 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.

AsNational aBanking registeredAssociations. bankBanks holdingorganized company,as thenational Companybanking isassociations subjectunder to the supervisionNational andBank regulationAct ofare thesubject Federalto Reserveregulation and, actingexamination underby delegated authority, the FederalComptroller. ReserveThe Banksupervision ofand Dallasregulation (by the “ReserveOffice Bank”)of pursuant to the BankComptroller Holding Company Act of 1956,the asCurrency amended (the “BankOCC” Holdingor Company Act“Comptroller”). As aof nationalbanks bank, the Bank is subjectprimarily intended to theprotect supervision and regulation of the Officeinterests of thedepositors. ComptrollerThe ofNational theBank Currency (the “Comptroller”).Act:

~~Bank~~· ~~Holding~~requires ~~Company~~each ~~Regulation~~national banking association to maintain reserves against deposits, · restricts the nature and amount of loans that may be made and the interest that may be charged, and · restricts investments and other activities.

BankDeposit HoldingInsurance. CompanyThe Act. AsFDIC ainsures registeredthe bankdeposits holdingof companyfederally insured banks, such as the CompanyBank, isand requiredthrifts, up to furnishprescribed tostatutory limits for each depositor through the FederalDeposit ReserveInsurance annualFund (DIF) and quarterlysafeguards reportsthe safety and soundness of itsthe operationsbanking and maythrift alsoindustries. beThe requiredDodd-Frank Act set the standard maximum deposit insurance amount to furnish$250,000. suchThe additionalamount informationof andFDIC reportsassessments paid by each insured depository institution is based on its relative risk of default as themeasured Federalby Reserveregulatory orcapital ratios and other supervisory factors. In accordance with the ReserveDodd-Frank BankAct, maythe requireFDIC insurance premium is based on an institution’s total assets minus its Tier 1 capital.

UnderIn October 2010, the BankFDIC Holdingadopted Companya Act,new theDIF Companyrestoration mustplan obtainto ensure that the priorfund approvalreserve ofratio thereaches Federal1.35% Reserveby orSeptember 30, acting2020, underas delegatedrequired authority,by the ReserveDodd-Frank BankAct. beforeIn (1)August acquiring2016, directthe orFDIC indirectannounced ownershipthat orthe controlDIF ofreserve anyratio classhad ofsurpassed voting1.15% securitiesas of anyJune bank30, or2016. bankAs holdinga company ifresult, afterbeginning in the acquisitionthird quarter of 2016, the Companyrange wouldof directlyinitial orassessment indirectlyranges ownfor orall controlinstitutions 5%were oradjusted moredownward. After the effect of potential base-rate adjustments, the class;total (2)base acquiringassessment allrate orwas substantiallyreduced allfor insured institutions of theless than $10 billion in total assets to a range of another1.5 bankto or30 bankbasis holdingpoints company;on oran (3)annualized mergingbasis. orThis consolidatingadjustment withresulted anotherin banka holdingslightly companylower cost for the Bank in 2016.

UnderAt theleast Bank Holding Company Actsemi-annually, any company must obtain approval of the FederalFDIC Reservewill priorupdate toits acquiringloss controland ofincome theprojections Companyfor or the Bank.DIF Forand, purposesif of the Bank Holding Company Actneeded, “control”will isincrease definedor asdecrease ownershipassessment ofrates, 25%following ornotice-and-comment morerulemaking, ofif anyrequired. classIf ofthere votingare securitiesadditional ofbank the Company or thefinancial Bank,institution thefailures abilityor toif control the electionFDIC ofotherwise adetermines majorityto ofincrease theassessment directorsrates, or the exerciseBank ofmay abe controllingrequired influenceto overpay managementhigher orFDIC policiesinsurance of the Company or the Bankpremiums.

ChangeUnder in Bank Control Act. The Change in Bank Control Act of 1978, as amended (the “Change in Bank Control Act”)FDIA, and the relatedFDIC regulationsmay ofterminate thedeposit Federalinsurance Reserveupon 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 writtenfinding noticethat with the Federalinstitution Reservehas or,engaged actingin underunsafe delegatedand authority,unsound the appropriate Federal Reserve Bankpractices, beforeis the person or group acquires control of the Company. The Change in Bankan Controlunsafe Act defines “control” as the direct or indirectunsound powercondition to votecontinue 25%operations, or morehas ofviolated any classapplicable 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 morelaw, but less than 25%regulation, of a class of the voting stock of a company or insured bank which is a reporting company under the Securities Exchange Act of 1934rule, asorder amended, such as the Company, or suchcondition ownershipimposed interestby is greater than the ownership interest held by any other person or groupFDIC.

PermittedPayment Activities. The Bank Holding Company Act also limits the investments and activities of bank holding companiesDividends. InThe general,Company a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a companylegal thatentity isseparate notand adistinct bank or a bank holding company or from engagingthe directlyBank. orThe indirectlyCompany inreceives activitiesmost other than those of banking, managing or controlling banks, providing services for its subsidiaries,revenue andfrom variousdividends non-bankpaid activities that are deemed to bethe closelyCompany relatedby tothe bankingBank. TheDescribed activitiesbelow of the Company are subjectsome toof thesethe legallaws and regulatoryregulations limitationsthat underapply when the Bank Holdingpays Companyor Actpaid and the implementing regulations of the Federal Reservedividends.

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.10

9Table of Contents

TableNational banks are required by federal law to obtain the prior approval of Contentsthe 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).

SourceTo ofpay Strength. Underdividends, the FederalBank Reserve’smust “sourcemaintain ofadequate strength”capital doctrine,above aregulatory bankguidelines. holdingIn companyaddition, isif requiredthe toapplicable actregulatory asauthority believes that a sourcebank ofunder financialits andjurisdiction managerialis strengthengaged in, or is about to anyengage subsidiaryin, bank.an Theunsafe holdingor companyunsound ispractice expected(which, todepending commiton resourcesthe tofinancial supportcondition aof subsidiarythe bank, includingcould atinclude timesthe whenpayment of dividends), the holdingregulatory companyauthorities may notrequire, beafter innotice aand financialhearing, positionthat tosuch providebank suchcease supportand desist from the unsafe practice. AThe bankFDIC holdingand companythe OCC have each indicated paying dividends that deplete a bank’s failurecapital base to meetan itsinadequate source-of-strengthlevel obligationswould maybe constitute an unsafe and unsound banking practice. orThe aFederal violationReserve, of the FederalComptroller Reserve’sand regulations,the orFDIC both.have Theissued source-of-strengthpolicy doctrinestatements mostthat directlyrecommend affectsthat bank holding companies inand situationsinsured wherebanks theshould bankgenerally holdingonly company’spay subsidiarydividends bankto failsthe extent net income is sufficient to maintaincover adequateboth capitalcash levels.dividends Thisand doctrinea wasrate codifiedof byearnings theretention Dodd-Frankconsistent Actwith capital needs, butasset thequality Federaland Reserveoverall hasfinancial notcondition. yetNo adoptedundercapitalized regulationsinstitution tomay implementpay thisa requirementdividend.

SoundCapital 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.Requirements

BankThe federal banking agencies have adopted risk-based capital guidelines for bank holding companies areand notbanks permittedthat are expected to engageprovide ina unsoundmeasure bankingof practices.capital Forthat example,reflects the Federaldegree Reserve’sof Regulationrisk Yassociated requireswith a bankbanking holdingorganization’s companyoperations tofor giveboth transactions reported on the Federalbalance Reservesheet prioras noticeassets, ofsuch anyas redemptionloans, orand repurchasethose ofrecorded itsas ownoff-balance equitysheet securitiesitems, ifsuch theas considerationcommitments, letters of credit and recourse arrangements. The risk based guidelines apply on a consolidated basis to bebank paid,holding togethercompanies with theconsolidated considerationassets paidof for$1.0 anybillion repurchasesor inmore. theUnder precedingthese yearcapital guidelines, isbanking equalorganizations are required to 10%maintain orcertain moreminimum ofcapital theratios, company’swhich consolidatedare netobtained worth.by Theredividing isits anqualifying exceptioncapital forby bankits holdingtotal companiesrisk-adjusted thatassets areand welloff-managed,balance wellsheet capitalizeditems. In general, andthe notdollar subjectamounts toof anyassets unresolvedand supervisorycertain issues.off-balance Thesheet Federalitems Reserveare may“risk-adjusted” opposeand theassigned transactionto ifvarious itrisk believescategories. thatIn theaddition transactionto wouldsuch constituterisk anadjusted unsafecapital orrequirements, unsoundbanking practiceorganizations orare wouldalso violaterequired anyto lawmaintain oran regulation.additional Asminimum another“leverage” examplecapital ratio, awhich holdingis companycalculated couldon notthe impairbasis itsof subsidiaryaverage bank’stotal soundnessassets bywithout causingany itadjustment tofor makerisk fundsbeing availablemade to non-bankingthe subsidiariesvalue orof theirthe customersassets. ifQualifying thecapital Federalis Reserveclassified believeddepending iton notthe prudenttype toof docapital so.as follows:

~~The~~· ~~Financial~~“Tier ~~Institutions~~1 ~~Reform~~capital” consists of common equity, ~~Recovery~~retained ~~and~~earnings, ~~Enforcement~~qualifying ~~Act~~non-cumulative perpetual preferred stock, a limited amount of ~~1989~~qualifying ~~(“FIRREA”)~~cumulative ~~expanded~~perpetual ~~the~~preferred ~~Federal~~stock ~~Reserve’s~~and ~~authority~~minority tointerests ~~prohibit~~in ~~activities~~the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. In determining bank holding ~~companies~~company ~~and~~compliance ~~their~~with ~~non-banking~~holding ~~subsidiaries~~company ~~which~~level ~~represent~~capital ~~unsafe~~requirements, ~~and~~qualifying ~~unsound~~Tier ~~banking~~1 ~~practices~~capital ormay ~~which~~count ~~constitute~~trust ~~violations~~preferred ofsecurities, ~~laws~~subject orto ~~regulations.~~certain ~~FIRREA~~criteria ~~increased~~and ~~the~~quantitative ~~amount~~limits for inclusion of ~~civil~~restricted ~~money~~core ~~penalties~~capital ~~which~~elements in Tier 1 capital provided that the ~~Federal~~bank ~~Reserve~~holding ~~can~~company ~~assess~~has ~~for~~total ~~activities~~assets ~~conducted~~of onless athan ~~knowing~~$15.0 billion and ~~reckless~~such ~~basis~~trust preferred securities were issued before May 19, if2010; ~~those~~· ~~activities~~“Tier ~~caused~~2 acapital” ~~substantial~~includes, ~~loss~~among toother athings, ~~depository~~hybrid ~~institution.~~capital ~~The~~instruments, ~~penalties~~perpetual ~~can~~debt, bemandatory asconvertible ~~high~~debt assecurities, ~~$1.0~~qualifying ~~million~~term ~~for~~subordinated ~~each~~debt, ~~day~~preferred ~~the~~stock ~~activity~~that ~~continues.~~does ~~FIRREA~~not ~~also~~qualify ~~expanded~~as ~~the~~Tier ~~scope~~1 capital, and a limited amount of ~~individuals~~allowance for loan and ~~entities~~lease ~~against~~losses; ~~which~~and ~~such~~· ~~penalties~~“Tier ~~may~~3 becapital” ~~assessed~~consists of qualifying unsecured subordinated debt.

Dividends. ConsistentPursuant withto itsfederal policyregulations, thatbanks and bank holding companies, shouldwith servemore asthan a$1 sourcebillion ofin financialconsolidated strength for their subsidiary banksassets, themust Federalmaintain Reservecapital haslevels statedcommensurate that,with asthe alevel matter of prudentrisk banking,to awhich bankthey holdingare companyexposed, generallyincluding shouldthe notvolume maintainand aseverity rate of distributionsproblem toloans. shareholdersThe unlessfederal itsbanking availableagencies netmay incomechange hasexisting beencapital sufficientguidelines toor fullyadopt fundnew thecapital distributions,guidelines andin the prospectivefuture rateand ofhave earningsrequired retentionmany appearsbanks consistentand with the bank holding company’scompanies capital needs, asset quality, and overall financial condition. In addition, we are subject to certainenforcement restrictionsactions onto themaintain makingcapital ofratios distributionsin asexcess a result of the requirementminimum thatratios theotherwise Bankrequired maintainto anbe adequatedeemed levelwell of capital as described below. As a Texas corporationcapitalized, wein arewhich restrictedcase under the Texasaffected Businessinstitution Organizationsmay Codeno fromlonger payingbe dividendsdeemed underwell certaincapitalized conditions.and Undermay Texasbe law,subject we cannot pay dividends to shareholdersrestrictions ifon thevarious dividendsactivities, exceedincluding oura surplusbank’s orability if after giving effect to theaccept dividends,or werenew wouldbrokered be insolventdeposits.

Anti-tyingOn restrictions. BankJuly holding2, companies2013, the Federal Reserve, and affiliateson areJuly prohibited9, from2013, tyingthe FDIC and OCC, adopted a final rule that implements the provisionBasel ofIII serviceschanges to the international regulatory capital framework, suchreferred to as extensionsthe “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 creditthe Basel III Rules apply only to large, complex financial institutions, substantial portions of the Basel III Rules apply to otherthe servicesCompany offeredand our subsidiary bank. The Basel III Rules include requirements contemplated by athe holdingDodd-Frank companyAct oras itswell affiliatesas certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010.

BankThe RegulationBasel 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.

FederalThe andBasel stateIII lawsRules andalso regulationsestablish thata govern“capital banksconservation havebuffer” of 2.5% above the effectnew ofregulatory minimum risk-based capital requirements. The conservation buffer, amongwhen otheradded thingsto the capital requirements, regulatingresults in the scopefollowing minimum ratios: (i) a common equity Tier 1 risk-based capital ratio of business7.0%, investments,(ii) casha reserves,Tier the1 purposerisk-based andcapital natureratio of loans8.5%, and (iii) a total risk-based capital ratio of 10.5%. The implementation of the maximumcapital interestconservation ratebuffer chargeablebegan on loansJanuary 1, the2016 at 0.625% of risk-weighted assets and will increase by that amount each subsequent January 1 until fully implemented on January 1, 2019. An institution would be subject to limitations on certain activities including payment of dividends declared, share repurchases and requireddiscretionary capitalizationbonuses ratiosto executive officers if its capital level is below the buffered ratio.

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:11

•Table requiresof each national banking association to maintain reserves against deposits,Contents

•The restrictsBasel theIII natureminimum andcapital amountratio ofrequirements loansas thatapplicable mayto bethe madeCompany and the interestBank thatafter maythe befull charged,phase-in andperiod are summarized in the table below.

• restricts investments and other activities.

	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	%

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 were effective January 1, 2015. The prompt correction action rules now include the 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. As of December 31, 2016, 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.

TableThe ofFederal ContentsReserve 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.

Deposit Insurance. The FDICBasel insuresIII Rules set forth certain changes in the depositsmethods of federallycalculating insuredcertain banksrisk-weighted assets, suchwhich asaffects the Bank,calculation andof thrifts,risk-based upratios. toUnder prescribedthe statutoryBasel limitsIII forRules, eachhigher depositoror throughmore thesensitive Depositrisk Insuranceweights Fundare (DIF)assigned andto safeguardsvarious thecategories safetyof andassets, soundnessincluding, ofcertain credit facilities that finance the bankingacquisition, anddevelopment thriftor industries.construction Theof Dodd-Frankreal Actproperty, setcertain theexposures standardor maximumcredits depositthat insuranceare amount90 todays $250,000.past Thedue amountor ofon FDICnon-accrual, assessmentsforeign paidexposures byand eachcertain insuredcorporate depositoryexposures. institutionIn isaddition, basedthese onRules itsinclude relativegreater riskrecognition of defaultcollateral asand measuredguarantees byand regulatoryrevised capital ratiostreatment andfor otherderivatives supervisoryand factorsrepo-style transactions.

ThePrompt BankCorrective 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.Action

UnderThe 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 FDIClevel mayof terminateits depositcapital insuranceratios: uponwell-capitalized, aadequately-capitalized, findingundercapitalized, significantly undercapitalized, and critically undercapitalized. A bank that may otherwise meet the institutionminimum hasrequirements engagedto be classified as well-capitalized, adequately capitalized, or undercapitalized may be treated instead as though it were in unsafethe next lower capital category if the appropriate federal banking agency, after notice and unsoundopportunity practicesfor hearing, isdetermines inthat an unsafe or unsound condition, toor continuean operations,unsafe or hasunsound violatedpractice, anywarrants applicablesuch law,treatment. regulation,Under rulethe prompt corrective action regulations, ordera bank that is deemed to be undercapitalized or conditionin imposeda bylesser capital category will be required to submit to its primary federal banking regulator a capital restoration plan and to comply with the FDICplan. The Basel III Rules revise the prompt corrective action framework. See “Capital Requirements” above.

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.12

NationalTable 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).Contents

ToAny paybank dividends,holding thecompany Bankthat mustcontrols maintaina adequatesubsidiary bank that has been required to submit a capital aboverestoration regulatoryplan guidelines.will Inbe addition,required ifto provide assurances of compliance by the applicablebank regulatorywith authoritythe believescapital thatrestoration aplan, banksubject underto itslimitations jurisdictionon isthe engagedbank holding company’s aggregate liability in, orconnection iswith aboutproviding tosuch engagerequired in,assurances. anFailure unsafeto orrestore unsoundcapital practiceunder (which,a dependingcapital onrestoration theplan financialcan conditionresult ofin the bank, couldbeing includeplaced theinto paymentreceivership ofif dividends),it thebecomes regulatorycritically authoritiesundercapitalized. mayA require,bank aftersubject noticeto andprompt hearing,corrective thataction suchalso bankmay ceaseaffect andits desistparent fromholding thecompany unsafein practiceother ways. TheThese FDICinclude andpossible therestrictions OCCor haveprohibitions eachon indicateddividends payingor dividendssubordinated thatdebt depletepayments ato the parent holding company by the bank’s, capitalas basewell toas anlimitations inadequateon levelother wouldtransactions bebetween anthe unsafebank and unsoundthe bankingparent practiceholding company. TheIn Federal Reserveaddition, the ComptrollerFederal andReserve themay FDICimpose haverestrictions issuedon policythe statementsability thatof recommendthe that bank holding companiescompany anditself insuredto bankspay shoulddividends, generallyor onlyrequire paydivestiture dividendsof toholding thecompany extentaffiliates netthat incomepose isa sufficientsignificant risk to coverthe bothsubsidiary cashbank, dividendsor andrequire adivestiture rate of earningsthe retentionundercapitalized consistentsubsidiary withbank. At each successive lower capital needscategory, assetan qualityinsured andbank overallmay financialbe condition.subject Noto undercapitalizedincreased institutionoperating mayrestrictions payby aits dividendprimary federal banking regulator.

CapitalInterstate RequirementsBanking and Branching

TheEffective federalJune banking1, agencies1997, havethe adopted riskRiegle-basedNeal capitalInterstate guidelinesBanking for bank holding companies and banksBranching thatEfficiency areAct expected to provide a measure of capital1994 thatamended reflects the degreeFederal ofDeposit riskInsurance associatedAct withand acertain bankingother organization’sstatutes operationsto forpermit bothstate transactionsand reportednational onbanks thewith balancedifferent sheethome asstates assets,to suchmerge asacross loans,state and those recorded as off-balance sheet itemslines, suchwith asapproval commitments, letters of creditthe andappropriate recoursefederal arrangements.banking Theagency, riskunless basedthe guidelineshome applystate onof a consolidatedparticipating basisbank tohad bankpassed holdinglegislation companiesprior withto consolidatedMay assets31, of1997 $1.0expressly billionprohibiting orinterstate moremergers. Under thesethe capitalRiegle-Neal guidelinesAct amendments, bankingonce organizationsa arestate requiredor tonational maintainbank certainhas minimumestablished capitalbranches ratios,in whicha arestate, obtainedthat bybank dividingmay itsestablish qualifyingand capitalacquire byadditional itsbranches totalat risk-adjustedany assetslocation andin off-balance sheet items. In general, the dollarstate amountsat ofwhich assetsany andbank certaininvolved off-balancein sheetthe itemsinterstate aremerger “risk-adjusted”transaction andcould assignedhave toestablished variousor riskacquired categories.branches Inunder additionapplicable tofederal suchor riskstate adjustedlaw. capitalIf requirements,a bankingstate organizationsopts areout alsoof requiredinterstate tobranching maintainwithin anthe additionalspecified minimumtime “leverage” capital ratioperiod, whichno isbank calculatedin on the basis of average total assets without any adjustmentother forstate riskmay beingestablish madea tobranch thein value of the assets.state Qualifyingwhich capitalhas isopted classifiedout, dependingwhether onthrough thean typeacquisition ofor capitalde as follows:novo.

11However, 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.

TableCommunity ofReinvestment ContentsAct

•The “TierCommunity 1Reinvestment capital”Act consistsrequires of common equitythat, retainedin earnings,connection qualifyingwith non-cumulativeexaminations perpetual preferred stock, a limited amount of qualifyingfinancial cumulativeinstitutions perpetualwithin preferredits stockjurisdiction, and minority interests in the equityFDIC accounts of consolidated subsidiaries, less goodwill and certainthe otherCommissioner intangibleis assets.to Inevaluate determiningthe bankrecord holdingof companyeach compliancefinancial withinstitution holdingin companymeeting levelthe capitalcredit requirements,needs qualifyingof Tierits 1local capital may count trust preferred securitiescommunity, subjectincluding tolow certain criteria and quantitativemoderate-income limitsneighborhoods. forThese inclusionfacts ofare restrictedalso coreconsidered capital elements in Tierevaluating 1mergers, capitalacquisitions, providedand thatapplications theto bankopen holdinga companybranch hasor total assets of less than $15facility.0 billionFailure andto suchadequately trustmeet preferredthese securitiescriteria werecould issuedimpose beforeadditional Mayrequirements 19,and 2010;limitations •on “Tierus. 2 capital” includesAdditionally, amongthe otherBank things,must hybridpublicly capitaldisclose instruments,the perpetualterms debt,of mandatoryvarious convertibleCommunity debtReinvestment securities,Act-related qualifyingagreements. termThe subordinatedBank debt,received preferred stock that does not qualify as Tier 1 capital, and a limitedrating amount of allowance for loan and lease losses; and • “Tiersatisfactory” 3on capital”its consistsmost ofrecent qualifyingCommunity unsecuredReinvestment subordinatedAct debtexamination.

PursuantRestrictions toon federalTransactions regulations, banks and bank holding companies, with moreAffiliates 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 severityLoans 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.Insiders

OnThe JulyBank 2,is 2013,subject to the Federalprovisions Reserve,of andSection on23A July 9, 2013, the FDIC and OCC,23B adoptedof a final rule that implements the BaselFederal IIIReserve changes to Act(the international“Affiliates regulatory capital frameworkAct”), referred to as thesuch “Baselprovisions IIIare Rules.”made Theapplicable Basel III Rules apply to bothstate depositorynon-member institutionsbanks andby Section 18(subjecti) toof certain exceptions not applicable to the Company)Federal theirDeposit holdingInsurance companiesAct. AlthoughAffiliates parts of thea Baselbank III Rules apply only to largeinclude, complexamong financialother institutionsentities, substantial portions of the Baselbank’s IIIholding Rulescompany apply to the Company and ourcompanies subsidiarythat bank.are Theunder Baselcommon IIIcontrol Ruleswith include requirements contemplated by the Dodd-Frank Act as well as certain standards initially adopted by the Basel Committee on Banking Supervision in December 2010bank.

TheThese Baselprovisions IIIplace Ruleslimits 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 inclusionamount 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~~loans ~~III~~or ~~Rules~~extensions ~~also establish a “capital conservation buffer”~~ of ~~2.5%~~credit ~~above the new regulatory minimum risk-based capital requirements. The conservation buffer, when added~~ to ~~the~~affiliates; ~~capital~~· ~~requirements,~~investment ~~results~~ in ~~the~~affiliates; ~~following~~· ~~minimum~~assets ~~ratios:~~that ~~(i)~~may abe ~~common~~purchase ~~equity~~from ~~Tier 1 risk-based capital ratio of 7.0%~~affiliates, ~~(ii)~~except afor ~~Tier~~real 1and ~~risk-based~~personal ~~capital~~property ~~ratio~~exempted ofby ~~8.5%,~~the ~~and~~Federal ~~(iii)~~Reserve; a· ~~total~~the ~~risk-based~~amount ~~capital ratio~~ of ~~10.5%.~~loans ~~The~~or ~~capital~~extensions ~~conservation~~of ~~buffer~~credit ~~requirement is~~ to bethird ~~phased~~parties incollateralized ~~beginning~~by inthe ~~January~~securities ~~2016~~or atobligations ~~0.625%~~ of ~~risk-weighted~~affiliates; ~~assets~~ and ~~will~~· ~~increase~~the byguarantee, ~~that~~acceptance ~~amount~~or ~~each~~letter ~~year~~of ~~until~~credit ~~fully~~issued ~~implemented in January 2019. An institution would be subject to limitations~~ on ~~certain~~behalf ~~activities including payment~~ of ~~dividends,~~an ~~share repurchases and discretionary bonuses to executive officers if its capital level is below the buffered ratio~~affiliate.

The Baseltotal IIIamount minimumof capitalthe ratioabove requirementstransactions is limited in amount, as applicableto any one affiliate, to 10% of the CompanyBank’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 aftermust also comply with other provisions designed to avoid the fullpurchase phaseor acquisition of low-inquality periodassets arefrom summarizedaffiliates. inThe Dodd-Frank Act expanded the tablescope belowof Section 23A, which now includes investment funds managed by an institution as an affiliate, as well as other procedural and substantive hurdles.

	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	%

12Table of Contents

TableThe Bank is also subject to Section 23B of Contentsthe 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.

TheUnder Baselfederal IIIlaw, Rulesthe Bank is also revisesubject theto promptrestrictions correctiveon actionextensions frameworkof credit to its executive officers, whichdirectors, isprincipal designedshareholders toand placetheir restrictionsrelated interests. These extensions of credit (1) must be made on insuredsubstantially depositorythe institutionssame terms, including ourinterest subsidiaryrates bankand collateral, ifas theirthose capitalprevailing levelsat dothe nottime meetfor certaincomparable thresholds.transactions Thesewith revisionsthird areparties, to(2) bemust effectivefollow Januarycredit 1,underwriting 2015.procedures Theat promptleast correctionas actionstringent rulesas nowthose includeapplicable CET1to capitalcomparable componenttransactions with third parties, and increase(3) certainmust othernot capitalinvolve requirementsmore forthan the variousnormal thresholds.risk As of Januaryrepayment 1,or 2015,present insuredother depositoryunfavorable institutionsfeatures. areThe requiredDodd-Frank toAct meetexpanded thecoverage followingof capitaltransactions levelswith ininsiders orderby toincluding qualifycredit asexposure “wellarising capitalized:”from derivative transactions (i)which aare Totalalso risk-basedcovered capitalby ratiothe expansion of 10%(unchangedSection from23A). currentThe rules);Dodd-Frank (ii)Act aprohibits Tieran 1insured risk-baseddepository capitalinstitution ratiofrom ofpurchasing 8%or (increasedselling froman 6%);asset (iii)to aan Tierexecutive 1officer, leveragedirector, ratioor ofprincipal 5%shareholder (unchangedor fromany currentrelated rules);interest andof (iv)such a CET1person) risk-basedunless capitalthe ratiotransaction ofis 6.5%.on Accordinglymarket terms, aand, financialif institutionthe maytransaction beexceeds considered10% “wellof capitalized” under the promptinstitution’s correctivecapital, actionit framework,is butapproved notin satisfyadvance theby fullya phased-inmajority Baselof IIIthe capitaldisinterested ratiosdirectors.

TheConcentrated FederalCommercial ReserveReal mayEstate alsoLending 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.Regulations

The Baselfederal IIIbanking Rulesagencies, setincluding forththe certainComptroller changeshave promulgated guidance governing financial institutions with concentrations in thecommercial methodsreal ofestate calculatinglending. certainThe risk-weightedguidance assets,provides whichthat a bank has a concentration in turncommercial willreal affectestate thelending calculationif of(i) risk-basedtotal ratios.reported Underloans thefor Baselconstruction, IIIland Rulesdevelopment, higherand other land represent 100% or more sensitiveof risktotal weightscapital areor assigned(ii) tototal variousreported categoriesloans ofsecured assets,by including,multifamily certainand creditnon-farm facilitiesnonresidential thatproperties finance(excluding theloans acquisitionsecured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or constructionmore of total capital and the bank’s commercial real property,estate certainloan exposuresportfolio has increased 50% or creditsmore thatduring arethe 90prior days36 pastmonths. dueIf ora onconcentration non-accrualis present, foreignmanagement exposuresmust employ heightened risk management practices that address the following key elements: including board and certainmanagement corporateoversight exposures.and Instrategic additionplanning, theseportfolio Rulesmanagement, includedevelopment greaterof recognitionunderwriting ofstandards, collateralrisk assessment and guaranteesmonitoring through market analysis and revisedstress testing, and maintenance of increased capital treatmentlevels 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 derivativesCommercial Real Estate Lending”. As of December 31, 2016, the Company did not exceed the levels to be considered to have a concentration in commercial real estate lending and repo-stylebelieves transactionsits credit administration to be consistent with the recently published policy statement.

InConsumer addition,Financial theProtection 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.Bureau

Overall,The Consumer Financial Protection Bureau (“CFPB”) was created under the BaselDodd-Frank IIIAct Rulesto providescentralize someresponsibility importantfor concessionsconsumer financial protection with broad rulemaking, supervision and enforcement authority for smallera 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, complexsuch as the Bank, remain subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial institutionsprotection laws and such additional regulations as may be adopted by the CFPB.

TheTechnology BaselRisk IIIManagement Rules generally became effective January 1, 2015. The conservation buffer will be phased in beginning in 2016 and willConsumer 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.Privacy

PromptState Correctiveand Actionfederal 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.

TheUnder federalSection banking501 agenciesof havethe issuedGramm-Leach-Bliley regulationsAct, pursuant to the FDIAfederal definingbanking fiveagencies categorieshave inestablished whichappropriate anstandards insuredfor depositoryfinancial institutioninstitutions willregarding be placed, based on the levelimplementation of itssafeguards capitalto ratios:ensure well-capitalized,the adequately-capitalized,security undercapitalized, significantly undercapitalized, and criticallyconfidentiality undercapitalized.of Acustomer bankrecords thatand mayinformation, otherwiseprotection meetagainst theany minimumanticipated requirementsthreats to be classified as well-capitalized, adequately capitalized, or undercapitalizedhazards mayto be treated instead as though it were in the nextsecurity loweror capitalintegrity categoryof ifsuch therecords appropriate federal banking agency, after notice and opportunityprotection foragainst hearing,unauthorized determinesaccess thatto an unsafe or unsounduse condition,of orsuch anrecords unsafe or unsoundinformation practice,in warrants such treatment. Under the prompt corrective action regulations, a bankway that iscould deemedresult toin besubstantial undercapitalizedharm or ininconvenience to a lessercustomer. capitalAmong categoryother willmatters, bethe requiredrules torequire submiteach bank to itsimplement primary federal banking regulator a capitalcomprehensive restorationwritten planinformation andsecurity toprogram complythat withincludes theadministrative, plan.technical Theand Baselphysical IIIsafeguards Rulesrelating reviseto thecustomer prompt corrective action frameworkinformation. 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.14

13Table of Contents

TableUnder the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of Contentsprivacy 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.

InterstateOther BankingOperations and BranchingConsumer Compliance Laws

EffectiveThe JuneBank 1,must 1997,comply thewith Rieglenumerous federal anti-Nealmoney Interstatelaundering Bankingand consumer protection statutes and Branchingimplement Efficiencyregulations, Actincluding ofbut 1994not amendedlimited to the FederalTruth Depositin InsuranceSavings Act, andElectronic certainFunds otherTransfer statutesAct, toExpedited permitFunds stateAvailability andAct, nationalthe banksUSA withPATRIOT differentAct homeof states2001, tothe mergeBank acrossSecrecy state linesAct, withthe approvalCommunity ofReinvestment Act, the appropriateEqual federalCredit bankingOpportunity agencyAct, unless the homeTruth statein ofLending aAct, participatingthe bankNational hadFlood passedInsurance legislationAct priorand tovarious Mayother 31,federal 1997and expresslystate prohibitingprivacy interstateprotection mergerslaws. UnderOn May 10, 2016, the Riegle-NealFinancial ActCrimes amendments,Enforcement onceNetwork issued a statefinal orrule nationalregarding bankcustomer hasdue establisheddiligence branchesrequirements for covered financial institutions in connection with their Bank Secrecy Act and Anti-Money Laundering policies. The final rule adds a state,requirement thatto bankunderstand maythe establishnature and acquirepurpose additionalof branchescustomer atrelationships anyand locationidentify the “beneficial owner” of legal entity customers. The formal implementation date is May 11, 2018. Failure to comply in theany statematerial atrespect whichwith any bankof involvedthese inlaws could subject the interstateBank mergerto transactionlawsuits and could havealso establishedresult orin acquiredadministrative branchespenalties, underincluding applicablefines and reimbursements. The Company and the Bank are also subject to federal orand state lawlaws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition. IfThese alaws stateand optsregulations outmandate ofcertain interstatedisclosure branchingrequirements withinand regulate the specifiedmanner timein periodwhich financial institutions must deal with customers when taking deposits, nomaking bankloans, collecting loans, and providing other services. Failure to comply in any othermaterial staterespect maywith establishany aof branchthese inlaws theand stateregulations whichcould hassubject optedthe outBank to various penalties, whetherincluding throughbut annot acquisitionlimited to enforcement actions, injunctions, fines or decriminal novopenalties, punitive damages to consumers, and the loss of certain contractual rights.

However,Regulation underZ. theOn Dodd-FrankApril Act5, 2011, the nationalFederal branchingReserve’s requirementsFinal haveRule beenon relaxedLoan andOriginator nationalCompensation banks and stateSteering banks(Regulation areZ) ablebecame tofinal. establishRegulation branchesZ inis anymore statecommonly ifknown thatas stateregulation wouldthat permitimplements the establishmentTruth in Lending Act. Regulation Z address two components of themortgage branchlending, i.e., loans secured by a statedwelling, bankand charteredimplements inrestrictions thatand state.guidelines Thefor: Comptroller(a) acceptsprohibited applicationspayments forto interstateloan mergeroriginators and branching(b) transactionsprohibitions on steering. Under Regulation Z, subjecta tocreditor certainis limitationsprohibited onfrom agespaying, ofdirectly theor banksindirectly, compensation to bea acquiredmortgage andbroker theor totalany other loan originator that is based on a mortgage transaction’s terms or conditions, except the amount of depositscredit withinextended, thewhich stateis deemed not to be a banktransaction term or financialcondition. holdingIn companyaddition, mayRegulation control.Z Sinceprohibits oura primaryloan serviceoriginator areafrom is“steering” Texas,a weconsumer doto nota expectlender or a loan that theoffers abilityless tofavorable operateterms in otherorder statesto willincrease havethe anyloan materialoriginator’s impactcompensation, onunless ourthe growthloan strategyis in the consumer’s interest. WeRegulation mayZ also contains a record-retention provision requiring that, howeverfor each transaction subject to Regulation Z, facethe increasedfinancial competitioninstitution frommust out-maintain records of-state banksthe compensation it provided to the loan originator for that branchtransaction oras makewell acquisitionsas the compensation agreement in oureffect primaryon marketsthe indate Texasthe interest rate was set for the transaction. These records must be maintained for two years.

CommunityUDAP Reinvestmentand 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.

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.15

RestrictionsTable onof Transactions with Affiliates and Loans to Insiders Contents

Other regulation. The Bank’s isoperations subject to the provisions of Section 23A and 23B of the Federal Reserve Act (the “Affiliates Act”), as such provisions are madealso applicablesubject to statevarious non-memberfederal 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 companiesstate thatlaws aresuch under common control with the bank.as:

~~These~~· ~~provisions~~the ~~place~~federal ~~limits~~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 ~~amount~~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 ~~loans~~Reform orand ~~extensions of credit to affiliates;~~Legislation

·From investmenttime to time, various legislative and regulatory initiatives are introduced in affiliates;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 assetsof thatgovernmental maymonetary be purchase from affiliates, except for real and personal property exempted by the Federal Reserve;policies.

·The commercial banking business is affected not only by general economic conditions but also by the amountfiscal and monetary policies of loansthe orFederal extensionsReserve. Some of creditthe instruments of fiscal and monetary policy available to thirdthe partiesFederal collateralizedReserve byinclude changes in the securitiesdiscount orrate obligationson 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 guaranteeoverall growth of bank loans, acceptanceinvestments, and deposits and the interest rates charged on loans or letterpaid on time and savings deposits. We cannot predict the nature of creditfuture issuedfiscal onand behalfmonetary policies and the effect of ansuch affiliatepolicies on the future business and our earnings.

TheAll total amount of the above transactionslaws isand limitedregulations inadd amount,significantly as to anythe onecost affiliate, to 10% of operating the Bank’s capital and surplusthus and,have asa tonegative allimpact affiliateson combined,our toprofitability. 20%It ofshould itsalso capitalbe andnoted surplus.that Inthere additionhas tobeen thea limitationtremendous onexpansion theexperienced amountin ofrecent theseyears transactions,by eachcertain offinancial theservice aboveproviders transactionsthat mustare alsonot meetsubject specifiedto collateralthe requirements.same Therules Bankand mustregulations alsoas complythe withCompany otheror provisionsthe designedBank. toThese avoidinstitutions, thebecause purchasethey orare acquisitionnot ofso low-qualityhighly assetsregulated, fromhave affiliates.a Thecompetitive Dodd-Frankadvantage Actover expandedus theand scopemay ofcontinue Sectionto 23A,draw whichlarge nowamounts includesof investment funds managedaway byfrom antraditional institutionbanking asinstitutions, anwith affiliate,a ascontinuing welladverse aseffect otheron proceduralthe andbanking substantiveindustry hurdlesin general.

14Item 1A. Risk Factors.

TableAn investment in our common stock involves certain risks. You should carefully consider the following risk factors and all other information contained in this Form 10-K. 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 Contentsthe 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.

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.16

UnderTable 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.Contents

ConcentratedOur Commercialallowance Realfor Estateloan Lendingloss Regulationsmay not be sufficient to absorb actual losses.

TheExperience federalin banking agencies, including the Comptrollerbanking haveindustry promulgatedindicates guidancethat governinga financialportion institutionsof withour concentrationsloans in commercialall realcategories estateof our lending. Thebusiness guidancewill providesbecome thatdelinquent, aand banksome hasmay aonly concentrationbe inpartially commercialrepaid realor estatemay lendingnever ifbe (i)repaid totalat reportedall. loansOur methodology for construction,establishing landthe development,adequacy and other land represent 100% or more of totalthe capitalallowance orfor (ii)loan totallosses reporteddepends loanson securedsubjective byapplication multifamilyof andrisk non-farmgrades nonresidentialas propertiesindicators (excludingof loansborrowers’ securedability byto owner-occupiedrepay. properties)Deterioration andin loansgeneral foreconomic construction,conditions land development, and otherunforeseen landrisks representaffecting 300%customers ormay morehave ofan totaladverse capitaleffect andon the bankborrowers’s commercialcapacity realto estaterepay loantimely portfoliotheir hasobligations increasedbefore 50%risk orgrades morecould duringreflect thethose priorchanging 36 monthsconditions. IfIn atimes concentrationof isimproving presentcredit quality, managementwith mustgrowth employin heightenedour riskloan managementportfolio, practicesthe thatallowance addressfor theloan followinglosses keymay elements:decrease includingas boarda andpercent managementof oversighttotal andloans. strategicChanges planning,in portfolioeconomic management,and developmentmarket ofconditions underwritingmay standards,increase the risk assessmentthat andthe monitoringallowance throughwould marketbecome analysisinadequate andif stressborrowers testing,experience economic and maintenanceother ofconditions increasedadverse capitalto levelstheir asbusinesses. neededMaintaining to support the leveladequacy of commercialour realallowance estatefor lending.loan Onlosses Decembermay 18,require 2015,that thewe federalmake bankingsignificant agenciesand jointlyunanticipated issuedincreases ain “Statementour onprovisions Prudentfor Riskloan Managementlosses, forwhich Commercialwould Realmaterially Estateaffect Lending”.our Asresults of Decemberoperations 31,and 2015,capital theadequacy. CompanyRecognizing didthat notmany exceedof theour levelsloans toindividually berepresent considereda tosignificant havepercentage aof concentrationour intotal commercialallowance realfor estateloan lendinglosses, andadverse believescollection itsexperience creditin administrationa torelatively besmall consistentnumber withof theloans recentlycould publishedrequire policyan statementincrease in our allowance.

Federal regulators, as an integral part of their respective supervisory functions, periodically review our allowance for loan losses. The Dodd-Frankregulatory Wallagencies Streetmay Reformrequire us to change classifications or grades on loans, increase the allowance for loan losses with large provisions for loan losses and Consumerto Protectionrecognize Actfurther 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.

OnFailure Julyto 21,implement 2010,our Presidentbusiness Obamastrategies signedmay intoadversely lawaffect theour Dodd-Frank Act, which implements significant changes to the regulation of the financial services industryperformance. Among other reforms discussed throughout this section, the Dodd-Frank Act includes the following provisions that have affected or are likely to affect us:

•We Repealhave ofdeveloped a business plan that details the federalstrategies prohibitionswe 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 paymentfavorable 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 interestcertain onevents demandupon depositswhich effectiveour Julybusiness 21plan and strategies are based, 2011particularly general and local economic conditions that may affect the Bank’s loan-to-deposit ratio, therebytotal permittingdeposits, butthe notrate requiringof deposit growth, depositorycost institutionsof tofunding, paythe interestlevel onof businessearning transactionassets and otherinterest-related accountsrevenues and expenses.

•The Impositionfailure ofto comprehensivecomplete regulation of the over-the-counterMerger derivativescould market,negatively includingimpact provisionsour that effectively prohibit insured depository institutions from conducting certain derivatives activities from within the institutionbusiness.

•There Implementationis no assurance that the conditions to the Merger will be satisfied in a timely manner, or at all, or that the Merger will occur. Further, there is no assurance that any event, change or other circumstances that could give rise to the termination of corporatethe governanceMerger revisionsAgreement will not occur. If the Merger is not completed, includingthe executiveshare compensationprice reportingof obligationsour forcommon financialstock institutionsmay withdrop totalto assetsthe extent that the current market price of moreour thancommon stock reflects an assumption that the Merger will be completed. In addition, if the Merger were not to occur, under certain circumstances defined in the Merger Agreement, such as the Company entering into a merger or acquisition agreement with another company, we may be required to pay a termination fee of $1.05 billionmillion. andCertain executivecosts compensationassociated disclosurewith the Merger, which were incurred subsequent to December 31, 2016, may be payable even if the Merger is not completed. Further, a failed transaction may result in negative publicity and proxya accessnegative requirementsimpression forof allus publiclyin tradedthe companiesinvestment community. There can be no assurance that our business, these relationships or our financial condition will not be negatively impacted, if the Merger is not completed.

•

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.

We are subject to liquidity risk.

15The 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.

~~Table of Contents~~17

•Table 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.Contents

AlthoughThe the majority of the Dodd-Frank ActCompany’s rulemakingaccounting requirementsestimates haveand beenrisk metmanagement withprocesses finalizedrely 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 theanalytical Company, its customers and theforecasting financial industry generallymodels.

ConsumerThe Financialprocesses Protectionthe BureauCompany 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.

TheWe Consumermay Financialelect Protectionor Bureaube (“CFPB”)compelled was created under the Dodd-Frank Act to centralizeseek responsibilityadditional for consumer financial protection with broad rulemakingcapital, supervisionbut and enforcement authority for a wide range of consumer protection laws that wouldcapital applymay tonot allbe banksavailable 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,it 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 CFPBdilutive.

OnOur Januaryability 10to raise capital in the future, 2013if needed, thewill CFPBdepend releasedon itsconditions finalin “Ability-to-Repay/Qualifiedthe Mortgage”capital rulesmarkets, which amendedare TILA’soutside implementationour regulationcontrol, Regulationand Z.on Regulationour Zfinancial currentlyperformance. prohibitsAccordingly, awe creditorcannot frombe makingassured aof higher-pricedour mortgageability loanto withoutraise regardcapital towhen theneeded, consumer'son abilityfavorable toterms repayor theat loanall. TheIf finalwe rulecannot implementsraise sectionsadditional 1411capital andwhen 1412 of the Dodd-Frank Actneeded, whichwe generallywill requirebe creditorssubject to makeincreased aregulatory reasonable,supervision goodand faiththe determinationimposition of arestrictions consumer’son abilityour togrowth repayand anybusiness. consumerThese creditoutcomes transactioncould securednegatively byimpact aour dwellingability (excludingto anoperate open-endor creditfurther plan,expand timeshareour plan,operations reversethrough mortgage,acquisitions or temporarythe loan)establishment of additional branches and establishesmay certainresult protectionsin fromincreases liabilityin underoperating thisexpenses requirementand forreductions “qualifiedin mortgages.”revenues Thethat finalcould rulehave alsoa implementsmaterial sectionadverse 1414effect ofon theour Dodd-Frankfinancial Act,condition whichand limitsresults prepaymentof penaltiesoperations. FinallyIn addition, thein finalorder ruleto requiresraise creditorsadditional capital, we may need to retainissue evidenceshares of complianceour withcommon thestock rulethat forwould threedilute yearsthe afterbook avalue coveredof loanour iscommon consummated.stock Thisand rulereduce becameour effectiveshareholders’ Januarypercentage 10,ownership 2014.interest Theto CFPBthe allowedextent forthey ado smallnot creditorparticipate exemptionin forfuture banksofferings. withAlso, assetsif underwe $2are billionunable andto thatraise originateadditional lesscapital, thanwe 500may mortgagebe loansrequired into 2015.take Beginningalterative Januaryactions 1,which 2016,may include the smallsale creditorof exemptionincome-producing willassets beto allowedmeet forour bankscapital withrequirements, assetswhich undercould $2have billionan andadverse thatimpact originateon lessour thanresults 2,000of mortgageoperations loansand ability to generate income.

OnWe Novembermay 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.more Allstringent othercapital mortgage loan transactions continue to use the Good Faith Estimate and theliquidity 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 andwhich recordwould retentionadversely requirement.affect Ofour note,net theincome credit must retain evidence of compliance with the Loan Estimate requirements, including providing the Loan Estimate, and thefuture 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 takengrowth. Additionally, the creditor must retain copies of the Closing Disclosure, including all documents related to the Closing Disclosure, for five years after consummation.

16The Basel III Rules establish 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 Basel III Rules increase capital ratios for all banking organizations and introduce 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 Basel III Rules assign 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 Basel III Rules also require 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 Basel III Rules also include 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.

TableThe Basel III Rules became effective for us on January 1, 2015. As of ContentsDecember 31, 2016, we were in compliance with all of these requirements, including the full capital conservation buffer.

TechnologyAlthough Riskwe Managementcurrently cannot predict the specific impact and Consumerlong-term Privacyeffects that the Basel III Rules 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.

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.18

UnderTable 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.Contents

UnderThe theCompany’s Gramm-Leach-Blileyuse Act, a financial institution must also provide its customers with a notice of privacyappraisals policiesin anddeciding practices.whether Sectionto 502make prohibits a financialloan institutionon fromor disclosingsecured nonpublicby personalreal informationproperty aboutdoes a customer to nonaffiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not electedensure to opt out of the disclosure.value 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 customerreal toproperty opt out of any such disclosure (with certain exceptions)collateral. 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.

OtherIn Operationsconsidering 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 Consumeran Complianceerror Lawsin 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 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 andis the Bank are also subject to federalenvironmental andrisks stateassociated 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 customersowning whenreal takingestate 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 rightscollateral.

RegulationThe Z.cost Onof April 5,cleaning 2011,up theor Federalpaying Reserve’sdamages Finaland Rulepenalties onassociated Loanwith Originatorenvironmental Compensationproblems andcould Steeringincrease (Regulationthe Z)Company’s becameoperating finalexpenses. RegulationWhen Za isborrower moredefaults commonlyon knowna asloan regulationsecured thatby implementsreal property, the TruthCompany inmay Lendingpurchase Act.the Regulationproperty Zin addressforeclosure twoor componentsaccept ofa mortgagedeed lending,to i.e.,the loansproperty securedsurrendered by athe dwelling,borrower. andThe implementsCompany restrictionsmay andalso guidelinestake for:over (a)the prohibitedmanagement paymentsof tocommercial loanproperties originatorswhose andowners (b)have prohibitionsdefaulted on steeringloans. UnderThe RegulationCompany Z,also aowns creditorand isleases prohibitedpremises fromwhere paying,branches directlyand or indirectly, compensation to a mortgage broker or any other loanbank originatorfacilities thatare islocated. basedWhile onthe a mortgage transactionCompany’s terms or conditionslending, exceptforeclosure theand amountfacilities ofpolicies creditand extended,guidelines whichare isintended deemed not to beexclude aproperties transactionwith terman orunreasonable condition.risk Inof additioncontamination, Regulationhazardous Zsubstances prohibitscould aexist loanon originatorsome fromof “steering”the aproperties consumerthat tothe aCompany lendermay orown, aacquire, loanmanage thator offersoccupy. lessEnvironmental favorablelaws termscould inforce order to increase the loanCompany originator’sto compensation,clean unlessup the loanproperties isat in the consumerCompany’s interestexpense. RegulationIt Zmay alsocost containsmuch amore record-retentionto provisionclean requiringa that,property forthan each transaction subject to Regulation Z, the financialproperty institutionis mustworth maintainand recordsit ofmay thebe compensationdifficult itor providedimpossible to thesell loancontaminated originatorproperties. forThe thatCompany transactioncould asalso wellbe asliable thefor compensationpollution agreementgenerated inby effecta onborrower’s theoperations dateif the interestCompany ratetakes wasa setrole forin themanaging transaction.those Theseoperations recordsafter musta be maintained for two yearsdefault.

17The success of our trust services is dependent upon market fluctuations and a non-diversified source for its growth.

TableWe offer traditional fiduciary services such as serving as executor, trustee, agent, administrator or custodian for individuals, nonprofit organizations, employee benefit plans and organizations. As of ContentsDecember 31, 2016, the Bank had approximately $1.2 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.

UDAPCertain andof UDAAP.our Recently,investment bankingadvisory regulatoryand agencieswealth havemanagement increasinglycontracts usedare asubject general consumer protection statute to addresstermination “unethical”on orshort otherwisenotice, “bad”and businesstermination practices that may not necessarily fall directly under the purview of a specificsignificant bankingnumber or consumer finance law. The law of choiceinvestment foradvisory enforcementcontracts againstcould 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 beena expandedmaterial underadverse theimpact Dodd-Frankon Actour to apply to “unfair, deceptive or abusive acts or practices” (“UDAAP”), which has been delegated to the CFPB for supervisionrevenue. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.

OtherCertain regulationof 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. TheWe Bank’scannot be certain that our trust operations arewill alsobe subjectable to various federalretain all of its clients. If its clients terminate their investment advisory and statewealth lawsmanagement suchcontracts, as:our trust operations, and consequently we, could lose a substantial portion of our revenues and liquidity.

RegulatoryLoan Reformconcentrations 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. At December 31, 2016, our loan portfolio included $71.6 million of loans, approximately 44.2% of our total funded loans, to the dental industry, including practice acquisition loans, dental equipment loans, and Legislationdental facility loans. We had one loan charge-off of $345,000, representing 0.5% of year end dental portfolio assets during 2016, and we had no charge-offs during 2015 in our 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.

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.19

EffectTable of governmental monetary policies.Contents

TheOur commercialoperations bankingare businesssignificantly is affected not only by generalinterest 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 depositslevels. 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.

AllOur ofprofitability theis abovedependent lawsto anda regulationslarge addextent significantlyon toour thenet costinterest ofincome, operatingwhich is the Bankdifference andbetween thusinterest haveincome we earn as a negativeresult impactof interest paid to us on ourloans profitability.and Itinvestments shouldand alsointerest bewe notedpay thatto therethird hasparties beensuch aas tremendousour expansiondepositors experiencedand inthose recentfrom yearswhom bywe certainborrow financialfunds. serviceLike providersmost thatfinancial areinstitutions, notwe subjectare toaffected theby samechanges rulesin andgeneral regulationsinterest asrate thelevels, Companywhich orare thecurrently Bank.at Theserecord institutionslow levels, becauseand theyby areother noteconomic sofactors highlybeyond regulated,our havecontrol. aProlonged competitiveperiods advantageof overunusually uslow andinterest rates may continuehave toan drawadverse largeeffect amountson ofearnings fundsby awayreducing fromthe traditionalvalue bankingof institutionsdemand deposits, shareholders’ equity and fixed rate liabilities with arates continuinghigher adversethan effectavailable onearning assets. Interest rate risk can result from mismatches between the bankingdollar industryamount of repricing or maturing assets and liabilities and from mismatches in generalthe timing and rate at which our assets and liabilities reprice.

18Although 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.

TableWe face intense competition from a variety of Contentscompetitors.

ItemWe 1Aface 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. Risk FactorsSome 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.

AnAlthough investmentwe inbelieve ourthat commonthe stockBank involveswill certain risks. Our business, financial condition, operating results and cash flows can be impacted by a numbersuccessful ofcompetitor factors.in Thesethe importantarea’s factorsfinancial couldservices cause actual results to differ materially from those expressed or implied by these forward-looking statementsmarket, including our plans,inability objectives,to expectationscompete andeffectively intentionswith and other factorsfinancial discussedinstitutions inserving 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.target Ifbanking 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 declinehave duea tomaterial anyadverse ofeffect theseon identifiedthe orBank’s othergrowth risks, and you could lose all or part of your investmentprofitability.

OurWe resultscompete ofin operationan andindustry financialthat conditioncontinually wouldexperiences betechnological adverselychange, affectedand ifwe ourmay allowancenot forbe loanable lossesto iscompete noteffectively sufficientwith toother absorbbanking actualinstitutions losseswith greater resources.

ExperienceThe in the banking industry indicatescontinues thatto aundergo portionrapid oftechnological ourchanges loanswith infrequent allintroduction categories of ournew lendingtechnology-driven businessproducts will become delinquent, and someservices. mayIn onlyaddition beto partiallyproviding repaidbetter orservice mayto nevercustomers, bethe repaideffective atuse all.of Ourtechnology methodologyincreases forefficiency establishingand theenables adequacyus ofto thereduce allowancecosts. forOur loanfuture lossessuccess depends onin subjectivepart applicationupon ofour riskability gradesto asaddress indicatorsthe needs of borrowers’our abilitycustomers toby repay.using Deteriorationtechnology into generalprovide economicproducts conditions and unforeseenservices risksthat affectingwill customerssatisfy maycustomer havedemands anfor adverseconvenience effectas onwell borrowers’as capacity to repaycreate timelyadditional theiroperating obligations before risk grades could reflect those changing conditionsefficiencies. InMany times of improvingour creditcompetitors quality,have withsubstantially growthgreater inresources ourto loaninvest portfolio,in thetechnological allowanceimprovements. forSuch loantechnology losses may decreasepermit ascompetitors ato percentperform ofcertain totalfunctions loans.at Changesa inlower economiccost andthan marketwe conditionscan. We may increasenot thebe riskable thatto theeffectively allowanceimplement wouldnew becometechnology-driven inadequateproducts ifand borrowersservices experienceor economicbe andsuccessful otherin conditionsmarketing adversethese to theirour businessescustomers. MaintainingOur theinability adequacyto ofdo ourso allowancecould forhave loana lossesmaterial mayadverse requireeffect thaton weour makeability significantto andcompete unanticipatedeffectively increases in our provisionsmarket for loan losses, which would materially affect our results of operations and capitalalso adequacy.on Recognizing that many of our loansbusiness, individuallyfinancial represent a significant percentage of our total allowance for loan lossescondition, adverseand collectionresults experience in a relatively small number of loans could require an increase in our allowanceoperations.

FederalOur regulators,legal aslending anlimits integralmay partimpair of their respective supervisory functions, periodically review our allowanceability forto loanattract losses.borrowers Theand regulatoryability agencies may require us to changecompete classifications or grades on loans, increase the allowance for loan losses with largelarger 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 conditioninstitutions.

FailureOur per customer lending limit at December 31, 2016 was approximately $4.8 million, subject to implementfurther 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 businesscompetitors strategieswith maylarger adverselylending limits are able to offer. This limit has affected and will continue to affect our financialability performanceto 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.

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.20

WeTable areof subject to liquidity risk.Contents

TheAn Companyeconomic requiresdownturn, liquidityespecially toone meetaffecting our depositprimary andservice otherarea, 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 bediminish impaired by factors that affect it specifically or the financialquality 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 itsour depositors.loan In particularportfolio, areduce substantialour majoritydeposit of the Company’s liabilities are demandbase, savings, interest checking and moneynegatively marketaffect deposits,our 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 operationsperformance.

19Adverse 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.

TableCurtailment of Contentsgovernment guaranteed loan programs could affect a segment of our business.

TheA Company’smajor accountingsegment estimatesof our business consists of originating and riskperiodically managementselling processesgovernment relyguaranteed 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 analyticalour future performance and forecastingresults modelsof operations.

TheMonetary processespolicy 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 marketeconomic measuresfactors 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 realizeadversely uponaffect sale or settlement of such financial instruments. Any such failure in the CompanyBank’s analytical or forecasting models could have a material adverse effect on the Company’s business, financial condition and results of operationsprofitability.

WeOur mayresults electof oroperations may be compelledmaterially 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 seeka additionallarge capitalextent on our net interest income, butwhich 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 capitalinfluence maymarket notinterest rates and our ability to respond to changes in such rates. At any given time, our assets and liabilities may be availableaffected differently by a given change in interest rates. As a result, an increase or itdecrease 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 benot dilutiveadequately minimize exposure to interest-rate risk.

OurWe 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 increasedextensive regulatorygovernment supervisionregulation 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 additionsupervision, 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 haveconstrain an adverse impact on our resultsgrowth of operations and ability to generate incomeprofitability.

WeThe mayCompany beis subject to moreextensive stringentfederal 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 liquiditygrowth, requirementsamong whichother wouldthings. adverselyFederal and state statutes and related regulations, including tax policy and corporate governance rules, can significantly affect ourthe netway incomein which bank holding companies, and futurepublic growthcompanies in general, conduct business.

OnChanges Julyto 2,federal 2013or state statutes, theregulations Federalor Reserve,regulatory and ontax July 9policies, 2013,including thechanges FDICin interpretation or implementation of new and OCCexisting statutes, adoptedregulations aor finalpolicies, ruleor thatnew implementslaws, theregulation Baselcould IIIaffect changesthe toCompany thein internationalsubstantial regulatoryand capitalunpredictable frameworkways, andincluding revisessubjecting the U.S.Company risk-basedto additional operating, tax, governance and leveragecompliance capitalcosts, requirementsincreasing forthe U.S.Company’s bankingdeposit organizationsinsurance topremiums, strengthenlimiting identifiedthe areastypes of weaknessassets inthe capitalCompany rulesmay andbe allowed to addresshold, relevantlimiting provisionsthe types of financial services and products the DoddCompany may offer and/or increasing competition from other non-Frankbank Actproviders of financial services.

The final rule establishes a stricter regulatory capital framework that requires banking organizations to hold more and higherDodd-qualityFrank capitalAct, toimplements actsignificant aschanges a financial cushion to absorbthe lossesregulation and help banking organizations better withstand periods of the financial stress.services Theindustry final rule increases capital ratios for all banking organizations and introducesincludes amany “capitalreforms 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 discretionaryprovisions bonus payments to its executive officers. The final rule assigns a higher risk weight (150%) to exposures that arehave moreaffected than 90 days past due or are onlikely non-accrual status and to certainaffect commercial real estate facilities that finance the acquisition,Company. developmentMany oraspects construction of realthe property. The final rule also requires unrealized gains and losses on certain “availableDodd-for-sale”Frank securitiesAct holdingsare subject to berulemaking includedby forvarious purposesregulatory ofagencies calculatingand regulatorywill capitaltake requirementseffect unlessover aseveral one-timeyears, opt-outmaking isit exercised.difficult Weat exercisedthis the one-time option in the first quarter of 2015 to permanentlyanticipate opt-out of the inclusionoverall offinancial accumulated other comprehensive income in our capital calculation in order to reduce the impact of marketthis volatilityexpansive legislation 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 additionCompany, Tierits 2customers capitalor is no longer limited to the amountfinancial ofindustry Tier 1 capital included in total capitalgenerally. 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.~~21

20Table of Contents

TableThe 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 Contentsthe “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.

AlthoughThe weBank currentlyis cannotsubject predictto thefederal specificand impactstate fair lending laws, and long-termfailure effectsto thatcomply Baselwith IIIthese willlaws havecould onlead ourto Companymaterial penalties. Federal and thestate bankingfair industrylending morelaws generallyand regulations, such as the CompanyEqual isCredit nowOpportunity requiredAct toand maintainthe higherFair regulatoryHousing capitalAct, levelsimpose whichnondiscriminatory couldlending impactrequirements ouron operationsfinancial institutions. The Department of Justice, netCFPB incomeand other federal and state agencies are responsible for enforcing these laws and regulations. Private parties may also have the ability to growchallenge an institution’s performance under fair lending laws in private class action litigation. Furthermore,A ifsuccessful challenge to the CompanyBank’s failsperformance tounder complythe withfair lending laws and regulations could adversely impact the minimumBank’s capitalrating requirementsunder the Community Reinvestment Act and result in a wide variety of sanctions, ourincluding regulatorsthe mayrequired takepayment formalof ordamages informaland actionscivil againstmoney uspenalties, injunctive relief, imposition of restrictions on merger and acquisition activity and restrictions on expansion activity, which could restrictnegatively ourimpact futurethe growthBank’s orreputation, business, financial condition and results of operations.

TheSee Company’sthe usesection ofentitled appraisals“Supervision inand decidingRegulation” whethercontained toin makeItem a1, loan“Business,” onfor oradditional securedinformation byregarding realthe propertysupervisory doesand notregulatory ensureissues thefacing value of the real property collateralCompany.

InThe consideringrepeal whether to make a loan secured by real property, we generally require an appraisal of thefederal property.prohibitions However,on anpayment appraisal is only an estimate of theinterest valueon ofdemand thedeposits property at the time the appraisal is made, and an error in fact or judgment could adverselyincrease affectour theinterest reliability of an appraisalexpense. 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.

TheAll Companyfederal isprohibitions subjecton the ability of financial institutions to environmentalpay risksinterest associatedon withdemand owningdeposit realaccounts estatewere repealed as part of the Dodd-Frank Act beginning on July 21, 2011. As a result, some financial institutions have commenced offering interest on demand deposits to compete for customers. If interest rates begin to rise, 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 collateralmaintain current customers, which could have a material adverse effect on the Company’s financial condition and results of operations.

TheSystem costfailure of cleaning up or payingcyber damagessecurity andbreaches penaltiesof associatedour withnetwork environmentalsecurity problems could increasesubject theus 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 theincreased propertyoperating surrenderedcosts byas thewell borrower.as Thelitigation 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 bankpotential facilities are locatedlosses. 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 successcomputer ofsystems and network infrastructure we use could be vulnerable to unforeseen hardware and cybersecurity issues. Our operations are dependent upon our trustability servicesto isprotect 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 marketour fluctuationsability to protect the computer systems and anetwork noninfrastructure utilized by us, including our Internet banking activities, against damage from physical break-diversifiedins, sourcecybersecurity forbreaches itsand growthother 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.

Since August 2006Furthermore, 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 assetscustomers undercould managementincorrectly relatesblame to a registered investment advisor who has advised its clients of the existenceCompany ofand ourterminate trusttheir services.accounts Wewith have not compensated the registeredCompany investment advisor in any way for makinga itscyber-incident clientswhich awareoccurred ofon ourtheir trustown servicessystem andor cannotwith assure you that the investment advisor will continue to notify its clients of ouran trustunrelated servicesthird or that those clients will open trust accounts at the Bankparty. Furthermore, the level of assets under management is significantly impacted by the market value of the assets. In addition, wea aresecurity subjectbreach tocould regulatoryalso supervisionsubject withus respect to theseadditional trustregulatory servicesscrutiny thatand mayexpose restrainus ourto growthcivil litigation and profitabilitypossible financial liability.

CertainFinally, ofthe ourObama investmentAdministration advisoryreleased 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 wealthoperators managementin contractsprotecting aretheir subjectsystems and networks from cyber threats. The Executive Order also will steer certain private sector companies to terminationcomply voluntarily with the Cybersecurity Framework. In response to the Executive Order, the FFIEC has published cybersecurity guidance on shortits noticewebsite, andalong terminationwith observations from recent cybersecurity assessments. These assessments were conducted with the goal of aidentifying significantgaps numberin the regulators’ examination procedures and training that can be used to strengthen the oversight of investmentcybersecurity advisoryreadiness. contractsThe couldimplementation haveof aany materialrecommended adverseguidance impactcould onrequire ourus revenueto incur additional costs.

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.22

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

LoanBreakdowns 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 dentalinternal portfoliocontrols 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 dentalprocedures facilitycould loans.have Althoughan weadverse hadeffect noon charge-offs during 2015 in our dental portfolio assets, during 2014, we had net loan charge-offs of $1us.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.

21We 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.

Our operationscommon arestock significantlyis affectedthinly bytraded interestand, ratetherefore, levelsyou may have difficulty selling shares.

OurThe profitabilityCompany’s iscommon dependentstock tois atraded large extent on ourthe netOver-the-Counter interestBulletin income,Board which(“OTCBB”) isunder the differencesymbol between“TBNC”; interesthowever, income we earnhave asno aability result of interest paid to usensure onthat loansan andactive investmentsmarket andwill interestexist wein paythe tofuture thirdor partiesthat suchshares ascan ourbe depositorsliquidated andwithout those from whom we borrow fundsdelay. LikeThe mostaverage financialdaily institutions,trading wevolume are affected by changes in general interest rate levels, which are currently at record low levels, and by other economic factors beyond our control.stock Prolongedduring periods2016 ofwas unusually low interest rates may have an adverse effect on earnings by reducing the value of demand deposits1,345 shareholders’ equity and fixed rate liabilities with rates higher than available earning assetsshares. 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.

AlthoughWe wedo have implemented strategies which we believe reduce the potential effects of changes in interest rates on our results of operations, these strategies will not alwaysanticipate bepaying successful.dividends Infor 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 amountforeseeable of interest earned on loans will decrease, thereby having an adverse effect on operating resultsfuture. Any of these events could adversely affect our results of operations or financial condition.

WeIf facethe intenseMerger competitiondoes fromnot aoccur, varietywe 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 competitorsdirectors 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.

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 andprice the surrounding areas has become increasingly competitive over the past several years, and we expect the level of competitionour tocommon continuestock 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 allowbe them to price their services at levels more favorable to the customer or to provide larger credit facilitiesvolatile.

WeThe believemarket thatprice theof Bankour willcommon bestock ais successfulsubject competitor in the area’s financial services market. An inability to competefluctuations effectivelyas witha otherresult financialof institutions serving our target banking market could have a materialvariety adverseof effectfactors, onincluding the Bank’s growth and profitability.following:

We· ~~compete~~quarterly variations in anour ~~industry~~operating ~~that~~results ~~continually~~or ~~experiences~~those ~~technological~~of ~~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~~in ~~frequent~~national ~~introduction of new technology-driven products~~ and ~~services.~~regional Ineconomic ~~addition to providing better service to customers~~conditions, ~~the~~financial ~~effective~~markets ~~use~~or ~~of technology increases efficiency and enables us to reduce costs. Our future success depends in part upon our ability to address~~ the ~~needs~~banking ofindustry; ~~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~~other ~~lending~~developments ~~limits~~affecting ~~may~~us ~~impair~~or ~~our~~other ~~ability to attract borrowers and ability to compete with larger~~ financial institutions.

OurThe pertrading customervolume lendingof limitour atcommon Decemberstock 31,is 2015 was approximately $4.2 millionlimited, subjectwhich tomay furtherincrease reduction based on regulatory criteria. Accordingly, the sizevolatility of loans which we can offer to potential customers is less than the sizemarket whichprice manyfor of our competitorsstock. withIn largeraddition, lendingthe limitsstock aremarket ablehas toexperienced offer.significant Thisprice limit has affected and willvolume continuefluctuations to affect our ability to seek relationships with larger businesses in ourrecent market areayears. WeThis accommodatevolatility loanshas inhad excessa ofsignificant oureffect lendingon limit through the salemarket ofprices portions of suchsecurities loansissued toby othermany banks.companies However,for wereasons may not benecessarily successfulrelated into attractingthe oroperating maintainingperformance customers seeking larger loans or in selling portions of suchthese larger loans on terms that are favorable to uscompanies.

22An investment in our common stock is not an insured deposit.

TableOur 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 Form 10-K. As a result, if you acquire our common stock, you may lose some or all of Contentsyour investment.

AnItem ~~economic~~2. ~~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~~Properties.

AdverseOur economicmain developmentsoffice canis impactin thea collectabilitytwo ofstory, loans and the sustainability of our core deposits and may negatively impact our earnings and financial condition. In addition33,000 thesquare bankingfoot industrycommercial inoffice generalbuilding islocated affectedat by16200 economicDallas conditions such as inflationParkway, recessionDallas, unemployment,Texas and other factors beyond our control75248. ADuring prolonged economic recession or other economic dislocation could cause increases in non-performing assets and impair the valuessecond quarter of real estate collateral2013, therebythe causingBank operatingacquired losses,the decreasingbuilding liquidity, and erodingrelocated capital.its Factorsmain thatoffice adverselyto affectthat thelocation economy in ourMay local2014. bankingThe marketBank couldoccupies reduceapproximately our11,000 depositsquare basefeet andof the demandspace, foror our33% productsof andthe servicesbuilding, whichand maycurrently decreaseleases ourapproximately earnings64% capabilityto tenants.

CurtailmentAs of governmentDecember guaranteed31, loan2016, programswe couldalso affectleased 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 segmenttwo story, commercial building in a developed commercial center. The lease for this office began on February 1, 2007 for a term of our120 businessmonths. 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 ran concurrently with the term of the Bank’s primary lease expiring on February 28, 2017. We did not renew the lease and sub-lease agreements.

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.23

MonetaryTable policyof and other economic factors could adversely affect the Bank’s profitability.Contents

~~Our~~Item 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 government3. ~~Our~~Legal 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 fundsProceedings. 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.

WeThe areBank subjectis involved, from time to extensivetime, governmentin regulationvarious andlegal supervisionactions arising in the normal course of its business. Based on the information presently available, whichmanagement couldbelieves constrainthat the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on our growthfinancial andcondition profitabilityor results of operations.

~~The~~Item ~~Company is subject to extensive federal and state regulation and supervision~~4. ~~Banking~~Mine ~~regulations~~Safety ~~are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the interests of shareholders~~Disclosures. 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.

ChangesNot 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 servicesapplicable.

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.24

23Table of Contents

TablePART of ContentsII

~~The~~Item ~~CFPB~~5. ~~was~~Market ~~created under the Dodd-Frank Act to centralize responsibility~~ for ~~consumer~~Registrant’s ~~financial~~Common ~~protection~~Equity ~~with broad rulemaking authority to administer~~ and ~~carry~~Related ~~out~~Shareholder ~~the~~Matters ~~purposes~~ and ~~objectives~~Issuer ofPurchases 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 aEquity ~~consumer financial product or service (“UDAAP authority”)~~Securities. 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.

TheMarket 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.Information

SeeOur thecommon sectionstock entitledis “Supervisionquoted andon Regulation”the containedOTCBB inunder Itemthe 1,symbol “Business,TBNC”. The table below gives the high and low bid information for additionalthe last two fiscal years. The bid information regardingin the supervisorytable was obtained from the OTCBB and regulatoryreflects issuesinter-dealer facingprices, thewithout Companyretail 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.

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

	High		Low
2016
Fourth Quarter	$	10.00	$	7.30
Third Quarter	$	7.60	$	7.00
Second Quarter	$	7.45	$	6.50
First Quarter	$	6.96	$	6.51

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

AllOn federalMarch 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 result15, 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 customers2017, whichwe couldhad have293 aholders materialof adverserecord effectof onour thecommon Company’s business, financial condition and results of operationsstock.

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

TheIt computeris systemsthe andpolicy networkof infrastructureour weBoard useof couldDirectors be vulnerable to unforeseenreinvest hardwareearnings andfor cybersecuritysuch issues.period Ourof operationstime areas dependentis uponnecessary our ability to protectensure our computersuccessful equipment against damage from fire, power loss, telecommunications failure or a similar catastrophic eventoperations. AnyOther damagethan or failure that causes an interruption in ourconnection operationswith couldthe have an adverse effect on our financial condition and results of operations. In additionMerger, ourthere operations are dependentno uponcurrent ourplans ability to protectinitiate thepayment computerof systemscash dividends, and networkfuture infrastructuredividends utilizedwill bydepend us,on including our Internet banking activitiesearnings, againstcapital damageand fromregulatory physical break-insrequirements, cybersecurityfinancial breachescondition, and other disruptivefactors problemsconsidered causedrelevant by theour InternetBoard orof other usersDirectors. SuchIn computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and network infrastructureaddition, whichwe mayare resultsubject in significant liability to us,regulatory damagerestrictions ouron reputation and inhibit current and potential customers from our Internetpayment banking services. To date interruptions of our computer system have been infrequent and have not had a material impact on our operationsdividends. EachFor year,more weinformation addregarding additionalthe securityCompany’s measuresability to ourpay computerdividends, systemsplease andrefer network infrastructure to mitigate the possibility“Supervision of cybersecurity breaches including firewalls and penetrationRegulation” testing.section Weunder continueItem to investigate cost effective measures as well as insurance protection1.

~~Furthermore,~~Item ~~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~~6. InSelected ~~addition,~~Financial ~~a security breach could also subject us to additional regulatory scrutiny and expose us to civil litigation and possible financial liability~~Data.

Finally,Because onwe Februaryare 12,a 2013,smaller thereporting Obama Administration released an executive ordercompany, Improvingdisclosure Criticalunder Infrastructurethis Cybersecurity,item referred to as the Executive Order, which is focusednot primarily on government actions to support critical infrastructure owners and operators in protecting their systems and networks from cyber threatsrequired. 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.

24Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

TableThis management’s discussion and analysis of Contentsfinancial 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 Form 10-K. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those listed under “Item 1A—Risk Factors.”

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

We believeare oura internalbank controlholding systemcompany asheadquartered currentlyin documentedDallas, and functioning is adequate to provide reasonable assurance over our internal controls. NeverthelessTexas, becauseoffering of the inherent limitation in administering a costbroad effectivearray controlof system,banking misstatementsservices duethrough to error or fraud may occur and not be detected. Breakdowns in our internalwholly controlsowned andbanking proceduressubsidiary, couldT occur in the futureBank, and any such breakdowns could have an adverse effect on usN. See “Item 9A – Controls and Procedures” for additional informationA.

~~RISKS RELATED TO OUR COMMON STOCK~~25

OurTable commonof stock is thinly traded and, therefore, you may have difficulty selling shares.Contents

TheBusiness 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.Strategy

We dobelieve notwe anticipatecan payingeffectively dividendscompete 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. We serve the small business community by offering loans guaranteed by the SBA as well as the USDA through a national network of employee Business Development Officers who operate from their homes or executive office suites. 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 foreseeableneeds futureof 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 doare notable anticipateto dividendsutilize willrelatively below paidcost ondeposits provided by our commontrust stockactivities forto thefund foreseeableadditional futureloan growth. The Companyamount isof largelydeposits dependentavailable uponto dividendsus paidwhile bymaintaining thefull BankFDIC toinsurance provideprotection fundsfor toour paytrust cashcustomers dividendshas ifconsistently andexceeded when$22 themillion boardfor ofthe directorslast maythree declare such dividendsyears. OurWe futureanticipate earningsthe maytrust notcustodial bedeposits sufficient to satisfybe regulatoryrelatively requirementslow cost and permitcomparable the legal payment of dividends to shareholders at any time in the future.rate Even if we couldpay legallynon-trust declarecustomers dividends,on themoney amountmarket andaccount timing of such dividends would be at the sole discretion of our board of directorsbalances.

The marketBank’s pricegoals ofare ouras common stock may be volatile.follows:

~~The~~· sustain profitability; · maintain controlled growth by focusing on increasing our loan and deposit market ~~price~~share ofby providing personalized customer service; · closely manage yields on earning assets and rates on interest-bearing liabilities; · continue focusing on noninterest income opportunities including our ~~common~~trust ~~stock~~business; is· ~~subject~~maintain toour ~~fluctuations~~positive asworking arelationship ~~result~~with ofour aregulators; ~~variety~~· ofcontrol ~~factors~~noninterest expenses; and, ~~including~~· ~~the~~maintain ~~following:~~strong asset quality.

·Definitive quarterlyAgreement variationswith inTectonic ourAcquisition, operating results or those of other banking institutions;Inc.

·On changesNovember in10, national2016, the Company entered into an Agreement and regionalPlan economicof conditionsMerger (the “Merger Agreement”) with T Acquisition, financialInc. markets(“Parent”), orand joined in by Tectonic Advisors, LLC (“Tectonic”), pursuant to which Parent will acquire the bankingCompany industry;through the merger of a wholly-owned subsidiary of Parent with and into the Company (the “Merger”), with the Company surviving the Merger.

·In otherconnection developmentswith affectingthe usMerger, orholders otherof financialthe institutionsCompany’s common stock will be entitled to receive an amount in cash consisting of two payments that, based on the Company’s Adjusted Equity (as defined in the Merger Agreement) at December 31, 2016, would have totaled approximately $10.3036 per share:

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.

	·	Special Dividend. The first payment is a special dividend to be paid by the Company to each holder of record of common stock as of a date just prior to closing in an amount by which the Company’s Adjusted Equity as of a date just prior to closing exceeds $20,000,000. Based on the Company’s estimated, unaudited shareholders’ equity as of December 31, 2016, the special dividend would have equaled approximately $2.2761 per share. The special dividend will increase (or decrease) based on the Company’s net income (or net losses) from December 31, 2016 to a date just prior to closing.
	·	Per Share Merger Consideration. The second payment is the per share merger consideration to be paid by Parent for each share of the Company’s common stock issued and outstanding immediately prior to the effect time of the Merger equal to approximately $8.0275 per share, subject to adjustment.

AnThe ~~investment~~Merger inis ~~our~~subject ~~common~~to ~~stock~~customary isclosing ~~not~~conditions, anincluding ~~insured~~the ~~deposit~~receipt of regulatory approvals and approval by the shareholders of the Company.

OurThe commonMerger stockwas isapproved notby ashareholders bankof deposit and, therefore, is not insured against loss by the FDIC,Company anyon otherMarch deposit insurance fund10, or2017 byand any other public or private entity. Investment in our common stock is inherentlysubject riskyto forcustomary theclosing reasons described in this “Risk Factors” section and elsewhere in this Report. As a resultconditions, ifincluding youthe acquirereceipt our common stock, you may lose some or all of yourregulatory investmentapprovals.

ItemThe 2Merger is currently expected to be completed in the second quarter of 2017. 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.26

WeTable 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.Contents

252016 Executive Overview

TableFinancial of ContentsHighlights

TheNet Bankincome isfor involved2016 was $4.0 million, fromor time$0.98 toper timediluted common share, ascompared plaintiffto $3.3 million, or defendant$0.81 per diluted common share in various2015. legalNet actionsincome arisingbefore inincome thetax normalfor course2016 ofwas its$6.2 businessmillion compared to $5.1 Basedmillion onfor the2015. informationThe presentlyCompany available,recorded managementincome believestax thatexpense theof ultimate$2.2 outcomemillion inand such$1.8 proceedingsmillion for years ended 2016 and 2015, inrespectively. For the aggregateyear ended December 31, will2016, notreturn haveon aaverage materialassets adversewas effect1.98% and return on average equity was 14.10%. For the business’syear financialended conditionDecember or31, results2015, ofreturn operationson ofaverage theassets Companywas 1.93% and return on aaverage consolidatedequity basiswas 13. 37%.

ItemNet interest income increased $1.5 million for the year ended December 31, 2016 to $8.9 million, compared to $7.4 million for the year ended December 31, 2015. Mine SafetyThe Disclosuresincrease was primarily due to an increase in average interest-earning assets during 2016. Net interest margin increased from 4.61% in 2015 to 4.64% in 2016.

NotNon-interest applicableincome decreased $1.0 million for the year ended December 31, 2016 to $13.9 million, compared to $14.9 million for the year ended December 31, 2015.The decrease was primarily due to a decrease of $1.9 million in trust management fees, offset by an increase of $1.1 million in gain on sale of loans.

26Non-interest expense decreased $1.2 million for the year ended December 31, 2016 to $16.0 million, compared to $17.2 million for the year ended December 31, 2015. The decrease was primarily due to a decrease of $2.0 million in trust consulting fees, offset by an increase of $700,000 in salaries and employee benefits.

TableThe Company recorded a provision for loan losses of Contents$589,000 for the year ended December 31, 2016.There was no provision for loan losses in 2015. The Company had net charge-offs of $458,000 and $131,000 for the years ended December 31, 2016 and 2015, respectively.

PARTTotal IIassets at December 31, 2016 increased $36.2 million, or 20.5%, to $213.1 million, compared to $176.9 million at December 31, 2015. This increase was due to an increase in commercial and SBA loans. Our loans held for investment increased $21.1 million, or 15.3%, to $158.7 million as of December 31, 2016, compared to $137.6 million as of December 31, 2015, along with an increase of $9.6 million in securities held to maturity and a $4.8 million increase in loans held for sale.

ItemThe 5book value of our common stock increased to $7. Market69 forper Registrant’sshare Commonat EquityDecember and31, Related2016, Shareholdercompared Mattersto and$6.74 Issuerper Purchasesshare ofat EquityDecember Securities31, 2015.

MarketNon-performing Informationassets, net of SBA guaranteed loans, decreased $404,000, from $443,000 as of December 31, 2015, to $39,000 as of December 31, 2016.

OurCritical commonAccounting 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.Policies

	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

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:

~~On March 15, 2016, we had 310 holders of record of our common stock.~~27

DividendsTable of Contents

ItAllowance is the policy of our Board of Directors to reinvest earnings for suchLoan 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.Losses

SecuritiesThe Authorizedallowance for Issuanceloan Underlosses Equityis Compensationa Plansvaluation 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, 2016, the allowance for loan losses was $1.7 million, which represented approximately 1.1% of total loans.

EquitySecurities Compensationavailable Planfor Informationsale

InformationSecurities regardingavailable stock-basedfor compensationsale awardsare outstandingevaluated andperiodically availableto fordetermine futurewhether grantsa asdecline of December 31,in 2015 their value is other than temporary. The term “other than temporary” is not intended to indicate a permanent decline in value. Rather, segregatedit betweenmeans stock-basedthat compensationthe plansprospects approvedfor bynear shareholdersterm andrecovery stock-basedof compensationvalue plansare not approvednecessarily by shareholdersfavorable, or that there is presenteda inlack of evidence to support fair values equal to, or greater than, the tablecarrying belowvalue of the security.

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

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.

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

27Deferred 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, 2016 and 2015, 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 2016. 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.

TablePeriodically and in the ordinary course of Contentsbusiness, 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.

~~Item 6. Selected Financial Data.~~28

BecauseTable theof registrant is a smaller reporting company, disclosure under this item is not required.Contents

ItemLoan 7. Management’sincome Discussion and Analysis of Financial Condition and Results of Operation.recognition

ThisInterest management’sincome discussionon andloans analysisis ofaccrued financialat conditionthe andcontractual resultsrate ofbased operationson containsthe forward-lookingprincipal statementsoutstanding. thatLoan involveorigination risksfees are deferred and uncertaintiesamortized as a yield adjustment over the contractual loan terms. PleaseAccrual seeof “Iteminterest 1—Business—Forward-Lookingis Statements”discontinued forwhen its receipt is in doubt, which typically occurs when a discussionloan ofbecomes impaired. Any interest accrued to income in the uncertainties,year riskswhen andinterest assumptionsaccruals associatedare withdiscontinued theseis statementsgenerally reversed. YouManagement shouldmay readelect to continue the followingaccrual discussionof ininterest conjunctionwhen witha ourloan auditedis consolidatedin financialthe statementsprocess of collection and the notesestimated tofair ourvalue auditedof consolidatedthe financialcollateral statementsis includedsufficient elsewhereto insatisfy thisthe report.principal Ourbalance actualand resultsaccrued mayinterest. differLoans materiallyare fromreturned thoseto discussedaccrual instatus once the forward-lookingdoubt statementsconcerning ascollectability ahas resultbeen ofremoved variousand factors,the includingborrower buthas notdemonstrated limitedthe ability to thosepay listedand underremain “Itemcurrent. 1A—RiskPayments Factors”on andnon-accrual includedloans inare othergenerally portionsapplied ofto this reportprincipal.

IntroductionReal estate acquired through foreclosure

We arerecord aforeclosed bankreal holdingestate companyassets headquarteredat inthe Dallaslower 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, Texasincluding location and condition of the property and current economic conditions, offeringamong aother broadthings. arrayBecause the calculation of bankingfair servicesvalue throughrelies ouron whollyestimates ownedand bankingjudgments subsidiary,relating Tto Bankinherently uncertain events, Nresults may differ from our estimates.A.

WeWrite-downs wereon incorporatedforeclosed underreal theestate lawsassets ofat the Statetime of Texastransfer onare Decembermade 23,through 2002the toallowance organizefor andloan servelosses. asWrite-downs thesubsequent holdingto companytransfer forare theincluded Bank.in Theour Banknoninterest openedexpenses, onalong Novemberwith 2operating income, 2004net of related expenses of such properties and gains or losses realized upon disposition.

BusinessStock Strategybased compensation

WeThe believefair wevalue canof effectivelythe competeCompany’s asemployee astock communityoptions bankis inestimated ourat market area and the nichedate marketsof wegrant serve.using We focus our marketing efforts in three areas. We serve our local geographic market which is the DallasModified Black-Scholes-Merton Fortoption Worthpricing metropolitan areamodel. WeIn servecalculating the dentalfair andvalue other health professional industries through a centralized loan and deposit platform that operates out of our main office in Dallas, Texas. Since the fourth quarteroptions, 2012,management wemakes haveassumptions servedregarding the smallrisk-free businessrate communityof byreturn, offering loans guaranteed by the SBAexpected asvolatility wellof as the USDA. We are registered in Colorado and Oregon as a lender and our employeescommon maintainstock home offices in those states from which we originate and underwritethe thoseexpected loans.life Weof anticipatethe that these loans will eventually be originated nationwideoptions.

WeFor offerthe ayears broadended rangeDecember of31, commercial2016 and consumer2015, bankingwe servicesrecorded primarilyexpense to small to medium-sized businesses and their employees. Because of our technological capabilities$102,000 includingand worldwide free automated teller machine (“ATM”) withdrawals$40, sophisticated on-line banking capabilities000, electronic funds transfer capabilitiesrespectively, and economical remote deposit solutions, we believe we can be the primary bank for mostoutstanding customersoption no matter where they are locatedgrants. 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.

WeFor arethe ableyears toended utilizeDecember relatively31, low2016 costand deposits2015, providedwe byrecorded ourexpense trust activities to fund additional loan growth. The amount of deposits$97,000 availableand to$58,000, usrespectively, while maintaining full FDIC insurance protection for ourservice trustshares customersof has consistently exceeded $22 million for the lastCompany’s threecommon years.stock Wewhich anticipatewere theawarded trust custodial deposits to bethe relativelydirectors lowin cost2016 and comparable2015 tototaling the13,750 rateand we7,975, pay non-trust customers on money market account balancesrespectively.

TheFair Bank’svalue goalsof arefinancial as follows:instruments

·Fair sustainvalues profitability;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.

·The closelyCompany managehas yieldsdeposits onof earningcertain assetsofficers, directors and ratestheir onaffiliated interest-bearingcompanies, liabilities;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 continueAccounting focusing on noninterest income opportunities including our trust business;Pronouncements

·Please maintainrefer ourto positiveNote working1 relationshipof withthe ouraccompanying regulators;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.

~~· control noninterest expenses; and,~~29

·Table maintainof strong asset quality.Contents

28Financial Condition

TableInvestment of ContentsSecurities

2015The Executiveprimary Overviewpurpose 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.

FinancialAt HighlightsDecember 31, 2016, securities available for sale consisted of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. Securities held to maturity consisted of Property Assessed Clean Energy investments. These investment contracts or bonds located in California and Florida, originate under a contractual obligation between the property owners, the local county administration, and a third-party administrator and sponsor. The assessments are created to fund the purchase and installation of energy saving improvements to the property such as solar panels. Generally, as a property assessment, the total assessment is repaid in installments over a period of 10 to 15 years by the then current property owner(s). Each installment is collected by the County Tax Collector where the property is located. The assessments are an obligation of the property. Each assessment is equal in priority to the other property taxes and assessments associated with the property, including local school, city, and county ad-valorem taxes. 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, 2016, and Federal Home Loan Bank of Dallas (“FHLB”) stock, having an amortized cost and fair value of $484,000 as of December 31, 2016. The weighted average yield for the securities was 3.55% for the year ended December 31, 2016.

At December 31, 2015, securities available for sale consisted of U.S. government agency securities and mortgage-backed securities guaranteed by U.S. government agencies. The followingCompany werehad significantno factorssecurities relatedheld to maturity. Restricted securities consisted of FRB stock, having an amortized cost and fair value of $570,000 as of December 31, 2015, resultsand FHLB stock, having an amortized cost and fair value of $475,500 as comparedof toDecember 201431, 2015. The weighted average yield for the securities was 2.16% for the year ended December 31, 2015.

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 Companyfollowing recordedpresents incomethe taxamortized expensecost of $1.8 million and $1.7fair millionvalues forof years ended 2015 and 2014, respectively. For the yearsecurities endedportfolio Decemberas 31,of 2015, return on average assets was 1.93% and return on average equity was 13.37%. For the yeardates ended December 31, 2014, return on average assets was 1.93% and return on average equity was 14.65%.indicated:

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.

	As of December 31,
	2016						2015
(In thousands)	Amortized Cost			Estimated Fair Value			Amortized Cost			Estimated Fair Value
Securities available for sale:
U.S. government agencies		$	8,247		$	7,961		$	9,155		$	9,162
Mortgage-backed securities			2,844			2,792			3,284			3,290
Securities held to maturity:
Property assessed clean energy			9,668			9,668			-			-
Securities, restricted:
Other			1,054			1,054			1,046			1,046
Total		$	21,813		$	21,475		$	13,485		$	13,498

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.30

Non-interestTable 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.Contents

ThereThe wasfollowing notables provisionsummarize forthe loanmaturity lossesdistribution inschedule 2015.with Thecorresponding Companyweighted-average recordedyields aof provisionsecurities available for loansale lossesand ofsecurities $492,000held forto thematurity yearas endedof December 31, 20142016. TheYields Companyare hadcalculated netbased chargeon amortized cost. Mortgage-offsbacked ofsecurities $131,000are andincluded $1in maturity categories based on their stated maturity date.1 millionExpected formaturities may differ from contractual maturities because issuers may have the yearsright endedto Decembercall 31,or 2015prepay obligations. Other securities classified as restricted include stock in the FRB and 2014the FHLB, respectivelywhich have no maturity date. These securities have been included in the total column only and are not included in the total yield.

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.

	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	$	-		-	%	$	1,019		1.00	%	$	6,686		2.23	%	$	542		3.94	%	$	8,247		2.19	%
Mortgage-backed securities		-		-			-		-			1,635		2.46			1,209		2.12			2,844		2.31
Total	$	-		-	%	$	1,019		1.00	%	$	8,321		2.28	%	$	1,751		2.68	%	$	11,091		2.22	%
Securities held to maturity:
Property assessed clean energy	$	-		-	%	$	370		4.53	%	$	4,522		5.84	%	$	4,776		7.18	%	$	9,668		6.46	%
Securities, restricted:
Other	$	-		-	%	$	-		-	%	$	-		-	%	$	-		-	%	$	1,054		-	%

Non-performingLoan assets,Portfolio 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.Composition

CriticalTotal Accountingloans Policiesheld for investment increased $21.1 million, or 15.0%, to $161.9 million at December 31, 2016, compared to $140.8 million at December 31, 2015. Commercial and industrial loans comprise the largest group of loans in our portfolio amounting to $81.9 million, or 50.6% of the total loan portfolio, at December 31, 2016, compared to $71.6 million, or 50.8% of the total loan portfolio, at December 31, 2015. At December 31, 2016, SBA loans totaled $39.7 million, or 24.6% of the total loan portfolio, compared to $28.9 million, or 20.8%, at December 31, 2015. At December 31, 2016, commercial real estate loans totaled $26.4 million, or 16.3% of the total loan portfolio, compared to $27.1 million, or 19.2%, at December 31, 2015. The following table sets forth the composition of our loans held for investment:

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:

	As of December 31,
(In thousands, except percentages)	2016				2015
Commercial and industrial	$	81,945	50.6	%	$	71,562	50.8	%
Consumer installment		3,749	2.3	%		2,049	1.5	%
Real estate – residential		6,531	4.0	%		6,851	4.9	%
Real estate – commercial		20,042	12.4	%		16,736	11.9	%
Real estate – construction and land		6,335	3.9	%		10,322	7.3	%
SBA 7(a) unguaranteed portion		29,859	18.5	%		22,596	16.0	%
SBA 504		9,825	6.1	%		6,349	4.5	%
USDA		3,589	2.2	%		2,787	2.0	%
Other		6	0.0	%		1,542	1.1	%
Total Loans	$	161,881	100.0	%	$	140,794	100.0	%

AllowanceThe Company records the guaranteed portion of the SBA 7(a) and USDA loans as held for Loansale Lossesat the lower of cost or market value. Loans held for sale totaled $11.2 million and $6.4 million at December 31, 2016 and 2015, respectively.

TheLoan allowanceconcentrations forare loanconsidered lossesto isexist awhen valuationthere allowanceare foramounts probableloaned incurredto creditmultiple losses,borrowers increasedengaged byin thesimilar provisionactivities forthat loanwould lossescause andthem decreasedto bybe charge-offssimilarly lessimpacted recoveries. Management estimates the allowance balance required by consideringeconomic theor collectabilityother ofconditions. loansAt basedDecember on31, historical experience and the borrower’s ability to repay2016, theour natureloan and volume of the portfolio, informationincluded about$71.6 specificmillion borrower situations and the estimated value of any underlying collateralloans, economicapproximately conditions and other factors44.2% The allowance consists of generalour andtotal specificfunded 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 leveldental ofindustry, subjectivityas andcompared judgment necessary to account$61.6 formillion, highlyor uncertain43.7% matters of thetotal susceptibilityfunded ofloans, suchat mattersDecember to31, change2015. TheWe generalbelieve componentthat relatesthese to the entire group of loans that are evaluatedto incredit theworthy aggregateborrowers basedand primarilyare ondiversified industry historical loss experience adjusted for current economic factorsgeographically. ToAs thenew extentloans actualare loangenerated lossesto differreplace materiallyloans fromwhich management’shave estimatebeen ofpaid these subjective factors, loan growth/run-off accelerates, or thereduced mixbalances ofas loana typesresult changesof payments, the levelpercentage of the provisiontotal for loan loss,portfolio andcreating relatedthe allowanceforegoing can,concentration andmay will,remain fluctuate.constant Asthereby ofcontinuing December 31, 2015, the allowancerisk forassociated loanwith lossesindustry was $1concentration.6 million, which represented approximately 1.14% of total loans.

2931

SecuritiesAs availableof December 31, 2016, 36.6% of the loan portfolio, or $59.3 million, matures or re-prices within one year or less. The following table presents the contractual maturity ranges for salecommercial, consumer and real estate loans outstanding at December 31, 2016 and 2015, 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:

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.

	As of December 31, 2016
			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	$	8,727	$	11,241	$	26,379	$	35,578	$	20	$	81,945
Consumer installment		885		2,125		-		739		-		3,749
Real estate – residential		1,272		4,846		309		104		-		6,531
Real estate – commercial		5,799		2,022		2,018		6,185		4,018		20,042
Real estate – construction and land		3,924		389		-		2,022		-		6,335
SBA 7(a) unguaranteed portion		28,489		-		948		422		-		29,859
SBA 504		7,616		-		2,209		-		-		9,825
USDA		2,624		-		965		-		-		3,589
Other		6		-		-		-		-		6
Total	$	59,342	$	20,623	$	32,828	$	45,050	$	4,038	$	161,881

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.

	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

IncomeScheduled taxescontractual 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.

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.32

PeriodicallyTable 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.Contents

LoanNon-performing income recognitionAssets

InterestOur incomeprimary onbusiness loans is accruedmaking atcommercial, thereal contractualestate, rateand basedconsumer on the principal outstandingloans. LoanThat originationactivity feesentails arepotential deferredloan andlosses, amortized as a yield adjustment over the contractualmagnitude loan terms. Accrual of interest is discontinued when its receipt is in doubt, which typicallydepends occurson when a loanvariety becomesof impaired.economic Anyfactors interestaffecting accruedborrowers towhich income in the year when interest accruals are discontinuedbeyond isour generally reversedcontrol. ManagementWhile maywe electhave toinstituted continueunderwriting theguidelines accrual of interest when a loan is in the process of collection and thepolicies estimated fair value of the collateral is sufficient to satisfy the principal balance and accruedcredit interest.review Loansprocedures are returned to accrualprotect statusus oncefrom theavoidable doubtcredit concerninglosses, collectabilitysome haslosses beenwill removedinevitably and the borrower has demonstrated the ability to pay and remain currentoccur. Payments on non-accrual loans are generally applied to principal.

RealNon-performing estateassets acquiredinclude throughnon-accrual foreclosureloans, loans 90 days past due and still accruing, OREO and other repossessed assets. Non-performing assets, net of SBA guaranteed loans, decreased $404,000 to $39,000 at December 31, 2016, as compared to $443,000 at December 31, 2015. Non-accrual loans include two commercial and industrial loans totaling $39,000 at December 31, 2016 as compared to two commercial and industrial loans totaling $443,000 and one SBA loan totaling $477,000 at December 31, 2015. During the second quarter of 2015, the Company repurchased the guaranteed portion of a defaulted SBA loan with a balance of $477,000. During the second quarter of 2016, the Company received proceeds from the SBA to pay off the loan. There were no foreclosed assets at December 31, 2016 and 2015.

WeLoans recordare foreclosedplaced realon estatenon-accrual assetsstatus atwhen themanagement lowerhas ofconcerns costrelating orto estimatedthe fairability valueto oncollect the acquisitionloan dateprincipal and atinterest theand lowergenerally ofwhen such initialloans amountare or90 estimateddays fairor valuemore lesspast estimated selling costs thereafterdue. EstimatedA fairloan value is basedconsidered uponimpaired manywhen subjectiveit factors,is includingprobable locationthat andnot conditionall ofprincipal the property and currentinterest economicamounts conditions,will amongbe othercollected things.according Becauseto the calculationloan of fair value relies on estimates and judgments relating to inherently uncertain events, results may differ from our estimatescontract.

30Foreclosed 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.

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

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.

	As of December 31,
(In thousands, except percentages)	2016					2015
Allocated:	Amount		Loan Category to Total Assets			Amount			Loan Category to Total Assets
Commercial and industrial	$	39		0.02	%	$	443			0.25	%
SBA		-		-			477			0.27
Total non-accrual loans		39		0.02			920			0.52
SBA guaranteed portion		-		-			(477	)		(0.27	)
Total non-accrual loans, net		39		0.02			443			0.25
Loans past due 90 days and accruing		-		-			-			-
Foreclosed assets		-		-			-			-
Total non-performing assets	$	39		0.02	%	$	443			0.25	%
Restructured loans on non-accrual	$	9		0.00	%	$	381			0.22	%

StockWe basedrecord compensationinterest 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 $30,000 and $80,000 during the years ended December 31, 2016 and 2015, respectively. If interest on impaired loans had been recognized on a full accrual basis during the years ended December 31, 2016 and 2015, income would have increased by approximately $34,000 and $54,000, respectively.

TheRestructured fairloans valueare ofconsidered “troubled debt restructurings” if due to the Companyborrower’s employeefinancial stockdifficulties, optionswe ishave estimatedgranted ata theconcession datethat we would not otherwise consider. This may include a transfer of grantreal usingestate or other assets from the Modifiedborrower, Black-Scholes-Mertona optionmodification pricingof model.loan Interms, calculatingor a combination of the fairtwo. valueModifications of theterms optionsthat could potentially qualify as a troubled debt restructuring include reduction of contractual interest rate, managementextension makesof assumptionsthe regardingmaturity date at a contractual interest rate lower than the risk-freecurrent market rate offor returnnew debt with similar risk, or a reduction of the expectedface volatilityamount of ourdebt, commoneither stockforgiveness andof theprincipal expectedor lifeaccrued interest. As of theDecember options31, 2016 and 2015, we had loans totaling $9,000 and $381,000, respectively, considered to be a troubled debt restructuring which were on non-accrual.

~~For the years ended December 31, 2015 and 2014, we recorded expense of $40,000 and $25,000, respectively, for outstanding option grants.~~33

ForTable 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.Contents

FairThere valuewere ofno financialloans instrumentspast due 90 days and still accruing interest at December 31, 2016 and 2015.

FairPotential valuesproblem loans consist of financialloans instrumentsthat are estimatedperforming usingin relevantaccordance marketwith informationcontractual andterms, otherbut assumptions,for aswhich morewe fullyhave disclosedconcerns inabout athe separateborrower’s noteability to comply with repayment terms because of the borrower’s potential financial difficulties. FairWe valuemonitor estimatesthese involveloans uncertaintiesclosely and mattersreview oftheir significantperformance judgmenton regardinga interestregular rates,basis. creditAt riskDecember 31, prepayments2016, andwe otherhad factors,three especiallyborrower inrelationships thewith absenceloans of broadthis marketstype fortotaling particular$366,000, items.which Changeswere innot assumptionsincluded or in marketnon-accrual conditionsor couldrestructured significantly affect the estimatesloans.

RelatedCredit partyRisk transactionsManagement

TheCredit Companyrisk hasis depositsthe risk of certainloss officersarising from the inability of a borrower to meet its obligations. We manage credit risk by evaluating the risk profile of the borrower, directorsrepayment sources, the nature of the underlying collateral, and theirother affiliatedsupport companiesgiven current events, conditions, and alsoexpectations. purchasesWe corporateattempt to manage the risk characteristics of our loan portfolio through various control processes, such as credit evaluation of borrowers, establishment of lending limits, and healthapplication insuranceof fromlending certainprocedures, directorsincluding affiliatedthe companiesholding of adequate collateral and the maintenance of compensating balances. DetailsHowever, we seek to rely primarily on the cash flow of relatedour partyborrowers activityas the principal source of repayment. Although credit policies and evaluation processes are presenteddesigned into Noteminimize 13our risk, management recognizes that loan losses will occur and the amount of these losses will fluctuate depending on the accompanyingrisk Consolidatedcharacteristics Financialof Statementsour loan portfolio, as well as general and regional economic conditions.

RecentWe Accountingprovide Pronouncementsfor 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.

PleaseThe referallowance toconsists Noteof two elements: (1) ofspecific thereserves accompanyingand Consolidatedvaluation Financialallowances Statementsfor individual credits; (2) general reserves for informationtypes relatedor toportfolios theof adoptionloans based on a number of newquantitative accountingfactors standardssuch as loss history and industry default rates, as well as several qualitative factors that are the effectjudgement of newlymanagement. issuedAll butoutstanding notloans yetare effectiveconsidered accountingin standardsevaluating the adequacy of the allowance.

FinancialAllowance Conditionfor Loan Losses

InvestmentThe Securitiesallowance 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, which includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” 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.

TheIn primaryestimating purpose of the Bank’sspecific investmentand portfoliogeneral isexposure to provideloss aon sourceimpaired of earnings for liquidity management purposesloans, towe providehave collateralconsidered toa pledgenumber againstof borrowingsfactors, andincluding tothe controlborrower’s interestcharacter, rateoverall risk.financial Incondition, managingresources theand portfoliopayment record, the Bankprospects seeksfor tosupport attainfrom theany objectivesfinancially ofresponsible safety of principalguarantors, liquidity,and diversification,the andrealizable maximizedvalue returnof onany investmentcollateral.

AtWe Decemberalso 31,consider 2015,other securitiesinternal available for sale consisted of U.S. government agencies and mortgage-backedexternal securitiesfactors guaranteedwhen bydetermining U.S.the governmentallowance agencies.for Theloan Company has no securities held to maturity. Restricted securities consisted of Federal Reserve Bank of Dallas (“FRB”) stocklosses, havingwhich an amortized cost and fair value of $570include,000 asbut ofare Decembernot 31,limited 2015to, andchanges Federalin Homenational Loan Bank of Dallas (“FHLB”) stock, having an amortized cost and fairlocal valueeconomic of $475conditions,500 asloan ofportfolio December 31concentrations, 2015.and Thetrends weightedin average yield for the securitiesloan was 2portfolio.16% for the year ended December 31, 2015.

AtSenior Decembermanagement 31, 2014, securities available for sale consisted of U.S. government agencies and mortgage-backedthe securitiesDirectors’ guaranteedLoan byCommittee U.S.review governmentthis agencies.calculation The Company had no securities held to maturity. Restricted securities consisted of FRB stock, having an amortized cost and fairthe valueunderlying ofassumptions $570,000on asa ofroutine Decemberbasis 31,not 2014,less andfrequently FHLBthan stock, having an amortized cost and fair value of $468,500 as of December 31, 2014quarterly. The weighted average yield for the securities was 2.37% for the year ended December 31, 2014.

The allowance for loan losses totaled $1.7 million and $1.6 million at December 31, 2016 and 2015, respectively. During the year ended December 31, 2016, the Company had charge-offs of $488,000, compared to $159,000 for the year ended December 31, 2015. The total reserve percentage decreased to 1.05% at December 31, 2016 from 1.14% of loans at December 31, 2015. The decrease was primarily the result of a reduction in classified assets from the prior year.

TableBased on an analysis performed by management at December 31, 2016, the allowance for loan losses is considered to be adequate to cover estimated loan losses in the portfolio as of Contentsthat 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.

~~The following presents the amortized cost and fair values of the securities portfolio at December 31, 2015 and 2014:~~34

	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 followingtable tablesbelow summarizepresents thea maturitysummary distributionof scheduleour withloan correspondingloss weighted-averageexperience 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 rightpast tofive 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.years:

	Maturing
(In thousands, except percentages)	2016			2015			2014			2013			2012
	One Year or Less						After One Year Through Five Years						After Five Years Through Ten Years						After Ten Years					Total
Balance at January 1,	$	1,564		$	1,695		$	2,318		$	1,338		$	1,352
(In thousands, except percentages)	Amount			Yield			Amount			Yield			Amount			Yield			Amount		Yield			Amount		Yield
Charge-offs:
Securities available for sale:
Commercial and industrial		391			-			1,138			225			24
U.S. government agencies	$	-			-	%	$	-			-	%	$	7,492			2.17	%	$	1,663		3.51	%	$	9,155		2.41	%
Consumer installment		97			-			17			1			-
Mortgage-backed securities		-			-			490			2.05			1,306			2.70			1,488		2.25			3,284		2.40
SBA 7(a)		-			159			-			-			-
Securities, restricted:
Total charge-offs		488			159			1,155			226			24
Other		-			-			-			-			-			-			-		-			1,046		-
Recoveries:
Total	$	-			-	%	$	490			2.05	%	$	8,798			2.25	%	$	3,151		2.92	%	$	13,485		2.41	%
Commercial and industrial		19			22			34			3			125
Consumer installment		-			-			-			-			26
Real estate – construction and land		10			6			6			6			27
SBA 7(a)		1			-			-			-			-
Total recoveries		30			28			40			9			178
Net charge-offs (recoveries)		458			131			1,115			217			(154	)
Provision (credit) for loan losses		589			-			492			1,197			(168	)
Balance at December 31,	$	1,695		$	1,564		$	1,695		$	2,318		$	1,338
Loans at year-end	$	161,881		$	140,794		$	127,491		$	115,559		$	94,396
Average loans		163,580			143,005			131,995			106,527			86,876
Net charge-offs (recoveries)/average loans		0.28	%		0.09	%		0.84	%		0.20	%		-0.18	%
Allowance for loan losses/year-end loans		1.05			1.14			1.33			2.05			1.42
Total provision (credit) for loan losses/average loans		0.36	%		0.00	%		0.37	%		1.12	%		-0.19	%

LoanThe Portfoliofollowing Compositiontable sets forth the allocation of the allowance for years ended December 31, 2016 and 2015 and the percentage of allocated possible loan losses in each category to total gross loans:

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)	2016					2015
Allocated:	Amount		Loan Category to Gross Loans			Amount		Loan Category to Gross Loans
Commercial and industrial	$	985		50.6	%	$	878		50.8	%
Consumer installment		17		2.3			26		1.5
Real estate – residential		79		4.0			86		4.9
Real estate – commercial		241		12.4			210		11.9
Real estate – construction and land		77		3.9			130		7.3
SBA		296		24.6			214		20.5
USDA		-		2.2			-		2.0
Other		-		-			20		1.1
Total allowance for loan losses	$	1,695		100.0	%	$	1,564		100.0	%

	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	%

32Table of Contents

TableSources of ContentsFunds

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.General

LoanDeposits, concentrationsloan areand consideredinvestment tosecurity existrepayments whenand 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 31prepayments, 2015,proceeds ourfrom loanthe portfoliosale included $61.6 million of loanssecurities, approximatelyand 43.7%cash offlows ourgenerated totalfrom fundedoperations loans,are to the dentalprimary industry,sources asof comparedour tofunds $62.5for millionlending, or 49.0% of total funded loansinvesting, at December 31, 2014. We believe that these loans are to credit worthy borrowers and areother diversifiedgeneral geographicallypurposes. AsLoan newrepayments loans are generatedgenerally toa replacerelatively loansstable whichsource have been paid off or reduced balances as a result of paymentsfunds, thewhile percentagedeposit ofinflows theand totaloutflows loantend portfolioto creatingfluctuate thewith foregoingprevailing concentrationinterests mayrates, remainmarkets constantand therebyeconomic continuingconditions, theand risk associated with industry concentrationcompetition.

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:Deposits

	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

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.

	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

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:

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.

	As of December 31,
	2016								2015
(In thousands, except percentages)	Average Balance		Percent of Deposits			Average Rate			Average Balance		Percent of Deposits			Average Rate
Non-interest-bearing deposits	$	28,760		17.3	%		-	%	$	24,161		17.2	%		-	%
NOW accounts		6,560		3.9			0.29			5,093		3.6			0.27
Money market accounts		39,318		23.7			0.48			37,867		26.9			0.49
Savings accounts		5,806		3.5			0.50			5,038		3.6			0.50
Time deposits $100,000 and over		81,746		49.2			1.08			64,545		45.9			0.94
Time deposits under $100,000		3,924		2.4			0.99			3,919		2.8			1.05
Total deposits	$	166,114		100.0	%		0.70	%	$	140,623		100.0	%		0.62	%

33The following table presents maturity of our time deposits of $100,000 or more at December 31, 2016 and 2015:

Table of Contents

	As of December 31,
(In thousands)	2016		2015
Three months or less	$	19,748	$	18,884
Over three months through six months		12,375		6,763
Over six months through twelve months		21,942		19,967
Over twelve months		20,246		20,924
Total	$	74,311	$	66,538

Non-performing AssetsLiquidity

Our primaryliquidity businessrelates isto makingour commercial,ability realto estatemaintain a steady flow of funds to support our ongoing operating, investing and consumerfinancing loansactivities. ThatOur activityBoard entailsestablishes potentialpolicies 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 lossesdemand, in a timely and cost-effective manner. The most important factor in the magnitudepreservation of whichliquidity dependsis onmaintaining apublic varietyconfidence that facilitates the retention and growth of economica factorslarge, affectingstable borrowerssupply whichof arecore beyonddeposits ourand controlfunds. WhileUltimately, wepublic haveconfidence institutedis underwritinggenerated guidelinesthrough profitable operations, sound credit quality and policiesa strong capital position. Liquidity management is viewed from a long-term and credita reviewshort-term proceduresperspective toas protectwell usas from avoidablean creditasset lossesand liability perspective. We monitor liquidity through a regular review of loan and deposit maturities and forecasts, someincorporating lossesthis willinformation inevitablyinto occura detailed projected cash flow model.

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 2014.36

LoansTable areof 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.Contents

ForeclosedThe assetsBank’s representprimary propertysources acquiredof asfunds thewill resultbe ofretail borrowerand defaultscommercial ondeposits, loans.loan Foreclosedrepayments, assetsmaturity areof recordedinvestment atsecurities, estimatedother fairshort-term valueborrowings, lessand estimatedother sellingfunds costs,provided atby theoperations. timeWhile ofscheduled foreclosure.loan Write-downsrepayments occurringand atmaturing foreclosureinvestments are chargedrelatively againstpredictable, thedeposit allowanceflows forand possible loan losses.prepayments Onare anmore ongoinginfluenced basisby interest rates, propertiesgeneral areeconomic appraisedconditions, asand requiredcompetition. byThe marketBank indicationswill andmaintain applicableinvestments regulations.in Write-downsliquid areassets providedbased upon management’s assessment of (1) the need for subsequentfunds, declines(2) inexpected valuedeposit andflows, are(3) includedyields inavailable otheron nonshort-interestterm expenseliquid alongassets, withand other(4) expensesobjectives relatedof tothe maintainingasset/liability themanagement propertiesprogram.

The followingBank tablehad setscash forthand certaincash informationequivalents regardingof non-performing$12.3 million, or 5.8% of total assets, at December 31, 2016. In addition to the on balance sheet liquidity available, the Bank has lines of credit with the FHLB and restructuredthe loansFRB, bywhich typeprovide the Bank with a source of off-balance sheet liquidity. As of December 31, including2016, ratiosthe Bank’s established credit line with the FHLB was $20.4 million, or 9.6% of suchassets, loansof towhich $6.0 million was utilized. The established credit line with the FRB was $16.3 million, or 7.7% of assets, of which none was utilized or outstanding at December 31, 2016. The Bank’s trust operations serve in a fiduciary capacity for approximately $1.2 billion in total market value of assets as of December 31, 2016. 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 datesFDIC indicated: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, 2016, there was $22.8 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.

	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	%

Capital Resources and Regulatory Capital Requirements

WeShareholders’ recordequity interestincreased payments$4.0 receivedmillion onduring impaired2016 loansto as$31.2 interestmillion incomeat unlessDecember collections31, of2016 thefrom remaining$27.2 recordedmillion investmentat areDecember placed on non-accrual31, at2015. whichThe timeincrease wewas recorddue paymentsto receivednet asincome reductions of principal$4.0 Wemillion recognizedin interest2016, incomeand ona impaired loans of approximately $80199,000 andincrease $147,000in duringadditional thepaid-in yearscapital endedrelated December 31,to 2015stock andcompensation 2014expense, respectively.offset Ifby interest on impaired loans had been recognized on a full accrual basis during the years ended December 31$233,000 2015net andafter-tax 2014,decrease incomein wouldthe havemarket increasedvalue byof approximatelythe $54,000securities andavailable $31,000,for respectivelysale.

RestructuredThe loansBank areis consideredsubject “troubledto debtvarious restructurings”regulatory ifcapital duerequirements toadministered by the borrower’sfederal financialbanking difficulties,agencies. weFailure haveto grantedmeet aminimum concessioncapital thatrequirements wecan wouldinitiate notcertain otherwisemandatory consider.and Thispossibly mayadditional includediscretionary aactions transferby ofregulators realthat, estateif orundertaken othercould assetshave froma direct material effect on the borrowerBank’s and, aaccordingly, modificationthe ofCompany’s loanfinancial terms,statements. orUnder acapital combinationadequacy ofguidelines and the two.regulatory Modificationsframework offor termsprompt thatcorrective couldaction, potentiallythe qualifyBank asmust ameet troubledspecific debtcapital restructuringguidelines includethat reductioninvolve quantitative measures of contractualthe interestBank’s rateassets, extensionliabilities ofand thecertain maturityoff-balance-sheet dateitems atas acalculated contractualunder interestregulatory rateaccounting lowerpractices. thanThe theBank’s currentcapital rateamounts forand newclassification debtare withalso similarsubject risk,to orqualitative ajudgments reductionby of the faceregulators amountabout of debtcomponents, eitherrisk forgivenessweightings ofand principalother orfactors. accruedThe interest.regulatory Ascapital ratios as of December 31, 20152016 and 2014,2015 wewere hadcalculated oneunder loanBasel totalingIII $381,000rules. andAs $501of December 31,000, respectively2016, consideredthe toCompany’s becapital aratios troubledexceeded debtthe restructuringnew whichrequirements wasspecified onin non-accrualthe Basel III rules.

ThereQuantitative weremeasures noestablished loansby pastregulations dueto 90ensure dayscapital adequacy require the Bank to maintain minimum amounts and stillratios accruing(set interestforth atin Decemberthe 31table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), 2015common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets, and 2014of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations).

34To be categorized as well-capitalized, the Bank must maintain minimum total risk-based, CET1 risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table.

Table of Contents

(In thousands)	Actual					Minimum Capital Required Under Basel III Requirements					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2016
Total Capital (to Risk Weighted Assets)	$	32,001		17.19	%	$	16,059		8.625	%	$	18,620		10.00	%

Tier 1 Capital (to Risk Weighted Assets)		30,306		16.28			12,335		6.625			14,896		8.00

Common Equity Tier 1 (to Risk Weighted Assets)		30,306		16.28			9,542		5.125			12,103		6.50

Tier 1 Capital (to Average Assets)		30,306		14.36			8,440		4.00			10,550		5.00

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

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.37

CreditTable Riskof ManagementContents

CreditOff-Balance riskSheet isArrangements 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 otherContractual 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.Obligations

We provideare fora loanparty lossesto throughfinancial instruments with off-balance sheet risk in the establishmentnormal course of anbusiness allowanceto formeet loanthe lossesfinancing byneeds provisionsof chargedits against earningscustomers. OurThese allowancefinancial representsinstruments aninclude estimatedcommitments reserveto forextend existingcredit lossesand instandby theletters loanof portfoliocredit. WeThese deployinstruments ainvolve, systematicto methodologyvarying fordegrees, determiningelements ourof allowancecredit thatrisk includesin aexcess quarterlyof reviewthe process,amount riskrecognized rating,in andthe adjustmentaccompanying balance sheets. Our exposure to ourcredit allowance.loss Wein classifythe ourevent portfoliosof asnon-performance eitherby consumerthe orother commercialparty andto monitorthe creditfinancial riskinstruments separatelyfor ascommitments discussedto below.extend Wecredit evaluateand thestandby adequacyletters of ourcredit allowanceis continuallyrepresented basedby onthe acontractual reviewamount of allthose significantinstruments. loans,We withuse athe particularsame emphasiscredit onpolicies non-accruing,in pastmaking due,commitments and otherconditional loansobligations thatas we believedo requirefor specialon-balance attentionsheet instruments.

TheCommitments allowanceto consistsextend ofcredit twoare elements:agreements (1)to specificlend reservesto anda valuationcustomer allowancesas forlong individualas credits;there (2)is generalno reservesviolation forof typesany orcondition portfoliosestablished ofin loansthe basedcontract. onCommitments agenerally numberhave offixed quantitativeexpiration factorsdates suchor asother losstermination historyclauses and industrymay defaultrequire rates,payment asof wella asfee. severalSince qualitativemany factorsof thatthe arecommitments may expire without being drawn upon, the judgementtotal ofcommitment managementamounts do not necessarily represent future cash requirements. AllThe outstandingamount loansof arecredit consideredextended inis evaluatingbased theon adequacymanagement’s credit evaluation of the allowancecustomer and, if deemed necessary, may require collateral.

AllowanceStandby forletters Loanof Lossescredit 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, 2016, we had commitments to extend credit and standby letters of credit of approximately $32.9 million and $10,000, respectively.

The allowancefollowing for loan losses is a valuationsummary allowanceof forour creditcontractual lossesobligations, inincluding thecertain loan portfolio. Management has adopted a methodology to properly analyze and determine an adequate loan loss allowance. The analysis is based on-balance-sheet soundobligations, reliableat andDecember well31, documented information and is designed to support an allowance that is adequate to absorb all estimated incurred losses in our loan portfolio.2016:

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.

	As of December 31, 2016
(In thousands)	Less than One Year		One to Three Years		Over Three to Five Years		Over Five Years		Total
Undisbursed loan commitments	$	6,403	$	2	$	40	$	26,423	$	32,868
Standby letters of credit		10		-		-		-		10
Operating leases		12		-		-		-		12
Time deposits		56,164		20,799		1,256		-		78,219
Borrowed funds		6,000		-		-		-		6,000
Total	$	68,589	$	20,801	$	1,296	$	26,423	$	117,109

WeResults alsoof 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.Operations

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

TheNet allowanceincome for loanthe lossesyear totaledended $1.6 million and $1.7 million at December 31, 20152016 andwas 2014, respectively$4.0 Duringmillion, thean

T Bancshares, Inc. (Exact name of registrant as specified in its charter)

SecuritiesIndicate registeredby pursuantcheck tomark Sectionif 12(b)the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act:. NoneYes ☐ No ☒

SecuritiesIndicate registeredby check mark if the registrant is not required to file reports pursuant to Section 1213 or 15(gd) of the Act:. CommonYes Stock,☐ parNo value $0.01☒

Indicate by check mark whether the registrant is a largeshell acceleratedcompany filer,(as andefined acceleratedin filer,Rule a non12b-accelerated2 filer,of orthe aAct). smallerYes reporting☐ company.No ☒

AsDOCUMENTS ofINCORPORATED June 30,BY 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.REFERENCE

Table of Contents

TABLEPART OF CONTENTSI

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

• volatility and disruption in national and international financial markets;General

•As theof abilityDecember of31, 2016, the FederalCompany governmenthad, toon deala withconsolidated anybasis, slowdownapproximately of$213.1 themillion nationalin economyassets, $158.7 million in total loans and the$174.7 fiscalmillion cliff;in deposits.

•Definitive competitionAgreement fromwith otherTectonic financialAcquisition, institutions and financial holding companies;Inc.

•The soundnessMerger ofis othercurrently financialexpected institutionsto withbe whichcompleted wein havethe transactions;second quarter of 2017.

•Market inflation, interest rate, market and monetary fluctuations;Area

• our ability to attract deposits;Competition

•Table ourof ability to attract and retain qualified employees;Contents

•Lending 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;Services

•Lending changes in our compensation and benefit plans; andPolicy

ItemLending 1. Business.Limits

AsThese oflegal Decemberlimits 31,will 2015,increase theor Companydecrease had,as onthe aBank’s consolidatedcapital basis,increases approximatelyor $176.9decreases millionas ina assets,result $137.6of millionits inearnings totalor loanslosses, andamong $137.0other million in depositsreasons.

LendingTable Servicesof Contents

4Government Enhanced Small Business Lending

CreditPortfolio RisksComposition

5Deposit Services

RealTrust Estate LoansServices

GovernmentTable Enhancedof Small Business LendingContents

6Employees

ConsumerOther InstallmentAvailable LoansInformation

TheSUPERVISION followingAND 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.REGULATION

General

TrustTable Servicesof Contents

SUPERVISIONTable ANDof REGULATIONContents

8Anti-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.

TableBank of ContentsRegulation

9Table of Contents

•Table requiresof each national banking association to maintain reserves against deposits,Contents

•The restrictsBasel theIII natureminimum andcapital amountratio ofrequirements loansas thatapplicable mayto bethe madeCompany and the interestBank thatafter maythe befull charged,phase-in andperiod are summarized in the table below.

CapitalInterstate RequirementsBanking and Branching

TableCommunity ofReinvestment ContentsAct

12Table of Contents

13Table of Contents

InterstateOther BankingOperations and BranchingConsumer Compliance Laws

RestrictionsTable onof Transactions with Affiliates and Loans to Insiders Contents

·Effect assetsof thatgovernmental maymonetary be purchase from affiliates, except for real and personal property exempted by the Federal Reserve;policies.

ConcentratedOur Commercialallowance Realfor Estateloan Lendingloss Regulationsmay not be sufficient to absorb actual losses.

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

Filing Compare · T Bancshares, Inc.