Edgar Filing: SP Bancorp, Inc.

Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly Report Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2011


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 No. 001-34933

SP Bancorp, Inc.

(Exact name of registrant as specified in its charter)


Maryland		27-3347359

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

5224 W. Plano Parkway, Plano, Texas		75093

(Address of Principal Executive Offices)		Zip Code

(972) 931-5311

(Registrant’s telephone number)

N/A

(Former name or former address, if changed since last report)

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

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

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Shares of the Registrant’s common stock, par value $0.01 per share, issued and outstanding as of November 14, 2011 were 1,725,000.

SP Bancorp, Inc.
FORM 10-Q

Index


	Page

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited)		2

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)		3

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)		4

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)		5

Notes to Consolidated Financial Statements (Unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3. Quantitative and Qualitative Disclosures about Market Risk		42

Item 4. Controls and Procedures		42

Part II. Other Information

Item 1. Legal Proceedings		42

Item 1A. Risk Factors		42

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults upon Senior Securities		42

Item 4. [Reserved]		42

Item 5. Other Information		42

Item 6. Exhibits		43

Signatures		44

EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

SP Bancorp, Inc.

Consolidated Balance Sheets (Unaudited)
(In thousands)


	September 30,			December 31,
	2011			2010

ASSETS

Cash and due from banks	$	2,906		$	2,384
Federal funds sold		3,710			9,430

Total cash and cash equivalents		6,616			11,814

Securities available for sale (amortized cost of $27,612 at September 30, 2011 and $22,214 at December 31, 2010)		27,805			22,076
Fixed annuity investment		1,165			1,131
Loans held for sale		5,684			3,589
Loans, net of allowance for losses of $1,732 at September 30, 2011 and $2,136 at December 31, 2010		199,422			191,065
Accrued interest receivable		848			833
Other real estate owned (“OREO”)		2,182			—
Premises and equipment, net		4,430			4,637
Federal Home Loan Bank (“FHLB”) stock and other restricted stock, at cost		1,006			1,003
Bank-owned life insurance (“BOLI”)		6,135			—
Deferred tax assets		1,005			1,131
Other assets		2,514			1,538


Total assets	$	258,812		$	238,817


LIABILITIES AND STOCKHOLDERS’ EQUITY

Deposits:
Noninterest-bearing	$	10,658		$	5,738
Interest-bearing		198,881			182,506

Total deposits		209,539			188,244
Borrowings		13,981			15,987
Accrued interest payable		45			39
Other liabilities		2,353			2,443

Total liabilities		225,918			206,713


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued or outstanding		—			—
Common stock, par value $0.01 par value; 100,000,000 shares authorized; 1,725,000 shares issued and outstanding		17			17
Additional paid-In capital		15,292			15,290
Unallocated Employee Stock Ownership Plan (“ESOP”) shares		(1,001	)		(817	)
Retained earnings — substantially restricted		18,468			17,701
Accumulated other comprehensive income (loss)		118			(87	)

Total stockholders’ equity		32,894			32,104


Total liabilities and stockholders’ equity	$	258,812		$	238,817

See Notes to Consolidated Financial Statements.

SP Bancorp, Inc.

Consolidated Statements of Income (Unaudited)
(In thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010

Interest income:
Interest and fees on loans	$	2,667	$	2,481	$	7,856	$	7,244
Securities — taxable		80		61		279		251
Securities — nontaxable		61		19		131		48
Other interest — earning assets		23		46		77		139

Total interest income		2,831		2,607		8,343		7,682


Interest expense:
Deposit accounts		344		410		1,048		1,291
Borrowings		112		113		337		344

Total interest expense		456		523		1,385		1,635


Net interest income		2,375		2,084		6,958		6,047

Provision for loan losses		309		134		720		1,305


Net interest income after provision for loan losses		2,066		1,950		6,238		4,742


Noninterest income:
Service charges		317		379		951		1,138
Gain on sale of securities available for sale		120		—		322		128
Gain on sale of mortgage loans		354		293		883		471
Other		136		109		349		214

Total noninterest income		927		781		2,505		1,951


Noninterest expense:
Compensation and benefits		1,446		1,209		4,049		3,231
Occupancy costs		278		297		804		858
Equipment expense		63		53		194		164
Data processing expense		118		131		356		419
ATM expense		98		96		286		282
Professional and outside services		216		157		739		465
Stationery and supplies		16		30		82		89
Marketing		36		46		124		109
FDIC insurance assessments		30		92		200		226
Operations from OREO		47		1		178		1
Other		233		221		736		532

Total noninterest expense		2,581		2,333		7,748		6,376


Income before income tax expense		412		398		995		317

Income tax expense		80		151		228		112


Net income	$	332	$	247	$	767	$	205

Basic and diluted earnings per share	$	0.20		N/A	$	0.47		N/A


N/A		Not applicable.

See Notes to Consolidated Financial Statements.

SP Bancorp, Inc.

Consolidated Statements of Stockholders’ Equity (Unaudited)
(In thousands)


											Accumulated
			Additional			Unallocated					Other
	Common		Paid-In			ESOP			Retained		Comprehensive
	Stock		Capital			Shares			Earnings		Income (Loss)			Total

Balance, December 31, 2009	$	—	$	—		$	—		$	17,177	$	85		$	17,262


Comprehensive income:
Net income		—		—			—			205		—			205
Unrealized gain on securities available for sale, net of tax of $56		—		—			—			—		89			89

Total comprehensive income															294


Balance, September 30, 2010	$	—	$	—		$	—		$	17,382	$	174		$	17,556


Balance, December 31, 2010	$	17	$	15,290		$	(817	)	$	17,701	$	(87	)	$	32,104


Additional stock issuance costs		—		(15	)		—			—		—			(15	)

ESOP shares purchased in open market		—		—			(216	)		—		—			(216	)

ESOP shares allocated		—		17			32			—		—			49


Comprehensive income:
Net income		—		—			—			767		—			767
Unrealized gain on securities available for sale, net of tax of $126		—		—			—			—		205			205

Total comprehensive income															972


Balance, September 30, 2011	$	17	$	15,292		$	(1,001	)	$	18,468	$	118		$	32,894

See Notes to Consolidated Financial Statements.

SP Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)
(In thousands)


	Nine Months Ended September 30,
	2011			2010

Cash flows from operating activities:
Net income	$	767		$	205
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		266			299
Amortization of premiums on investments		402			145
ESOP expense		49			—
Provision for loan losses		720			1,305
Loss (gain) on sale of other real estate owned		11			(8	)
Gain on sale of securities available for sale		(322	)		(128	)
Gains on sales of mortgage loans		(883	)		(471	)
Proceeds from sale of mortgage loans		35,239			22,666
Loans originated for sale		(34,992	)		(27,955	)
Increase in cash surrender value of BOLI		(135	)		—
(Increase) decrease in accrued interest receivable		(15	)		12
Increase in other assets		(976	)		(2,064	)
Increase in fixed annuity investment		(34	)		(32	)
Decrease in accrued interest payable and other liabilities		(84	)		(138	)

Net cash provided by (used in) operating activities		13			(6,164	)


Cash flows from investing activities:
Purchase of securities available for sale		(31,637	)		(8,196	)
Maturities, calls and principal paydowns on securities available for sale		4,370			6,088
Proceeds from sale of securities available for sale		21,789			2,783
(Purchases) redemptions of FHLB stock		(3	)		653
Originations, net of loan repayments		(13,001	)		(7,025	)
Proceeds from sale of other real estate owned		272			38
Purchases of premises and equipment		(59	)		(124	)
Purchase of BOLI		(6,000	)		—

Net cash used in investing activities		(24,269	)		(5,783	)


Cash flows from financing activities:
Net increase in deposit accounts		21,295			25,572
Repayment of FHLB advances, net		(2,006	)		(6	)
ESOP shares purchased		(216	)		—
Additional stock issuance costs		(15	)		—

Net cash provided by financing activities		19,058			25,566


Net (decrease) increase in cash and cash equivalents		(5,198	)		13,619
Cash and cash equivalents at beginning of period		11,814			11,717

Cash and cash equivalents at end of period	$	6,616		$	25,336


Supplemental cash flow information:
Cash transactions:
Income taxes paid	$	650		$	313

Interest expense paid	$	1,379		$	1,630

Noncash transactions:
Transfers of loans to other real estate owned and repossessed assets	$	2,465		$	36

Transfers of loans held for portfolio to loans held for sale	$	1,459		$	—

See Notes to Consolidated Financial Statements.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Note 1. Summary of Significant Accounting Policies

General

SharePlus Federal Bank (the “Bank”), is a federal stock savings bank located in Plano, Texas. On October 29, 2010, SharePlus Federal Bank completed its conversion from a federal mutual savings bank to a federal capital stock savings bank. A new holding company, SP Bancorp, Inc. (the “Company”), was established as part of the conversion. The public offering was consummated through the sale and issuance by SP Bancorp, Inc. of 1,725,000 shares of common stock at $10 per share. Net proceeds of $14.5 million were raised in the stock offering, after deduction of conversion costs of $2.0 million and excluding $0.8 million which was loaned by the Company to a trust for the Employee Stock Ownership Plan (the “ESOP”).

The Bank operates as a full-service bank, including the acceptance of checking and savings deposits, and the origination of single-family mortgage and home equity loans, commercial real estate and business loans, automobile loans, and other personal loans. In addition to the Bank’s home office, the Bank has six branches, one of which is located near downtown Dallas, Texas; two are located near the Bank’s headquarters in Plano, Texas; two branches are located in Louisville, Kentucky; and the other branch is located in Irvine, California. The Bank is regulated by the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”).

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, SharePlus Federal Bank. The Company’s principal business is the business of the Bank. All significant intercompany accounts and transactions have been eliminated.

Interim Financial Statements

The financial statements of the Company at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 have been prepared in conformity with U.S. generally accepted accounting principles for interim financial information and predominant practices followed by the financial services industry; and are unaudited. However, in management’s opinion, the interim data at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 include all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of the results of the interim periods. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for loan losses.

Other Real Estate Owned (“OREO”)

OREO represents properties acquired through foreclosure or other proceedings and is initially recorded at fair value at the date of foreclosure less estimated costs of disposal, which establishes a new cost basis. After foreclosure, OREO is held for sale and is carried at the lower of cost or fair value less estimated costs of disposal. Any write down to fair value at the time of transfer to OREO is charged to the allowance for loan losses. Property is evaluated regularly to ensure the recorded amount is supported by its current fair value and valuation allowances to reduce the carrying amount to fair value less estimated costs to dispose are recorded as necessary.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Bank-Owned Life Insurance

Bank-owned life insurance is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received are reflected in noninterest income on the consolidated statements of income and are not subject to income taxes.

Basic and Diluted Earnings Per Share

Earnings per share are based upon the weighted-average shares outstanding. ESOP shares, which have been committed to be released, are considered outstanding.


	Three Months Ended		Nine Months Ended
	September 30, 2011		September 30, 2011

Net earnings	$	332	$	767

Weighted-average shares outstanding		1,631		1,638

Basic and diluted earnings per share	$	0.20	$	0.47

Earnings per share are not presented for the three and nine months ended September 30, 2010, since the stock offering was consummated subsequent to that date.

Recent Authoritative Accounting Guidance

In April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU 2011-02 clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The Company adopted ASU 2011-02, including the disclosures deferred by ASU 2011-01, for the reporting period ending September 30, 2011. In accordance with ASU 2011-02, the Company reassessed all restructurings that occurred on or after January 1, 2011. No additional loans were classified as troubled debt restructurings or additional allowance for loan losses was required under ASU 2011-02. Refer to Note 4 to Consolidated Financial Statements for the required disclosures of ASU 2011-02.

In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments improve consistency for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. generally accepted accounting principles and International Financial Reporting Standards. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Adoption of this new guidance is not expected to have any material impact on the Company’s consolidated financial statements.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220).” The amendments require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Adoption of this new guidance is not expected to have any material impact on the Company’s consolidated financial statements.

In September, 2011, the FASB issued ASU No. 2011-08, “Intangibles — Goodwill and Other (Topic 350) — Testing Goodwill for Impairment.” The ASU simplifies how an entity tests goodwill for impairment. The ASU allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance is not expected to materially impact the Company’s consolidated financial statements.

Note 2. Stock Conversion

On October 29, 2010, Share Plus Federal Bank completed its conversion from a federal mutual savings bank to a capital stock savings bank. A new holding company, SP Bancorp, Inc., was established as part of the conversion. The public offering was consummated through the sale and issuance by SP Bancorp, Inc. of 1,725,000 shares of common stock at $10 per share. Net proceeds of $14.5 million were raised in the stock offering, after deduction of conversion costs of $2.0 million and excluding $0.8 million which was loaned by the Company to a trust for the ESOP. The Bank’s ESOP is authorized to purchase up to 138,000 shares of common stock. The ESOP purchased 67,750 of those shares in the offering and 34,864 shares in the open market through September 30, 2011. The remaining 35,386 shares are expected to be purchased in the near term. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares released are allocated to each eligible participant based on the ratio of each such participant’s compensation, as defined in the ESOP, to the total compensation of all eligible plan participants. As the unearned shares are released from suspense, the Bank recognizes compensation expense equal to the fair value of the ESOP shares committed to be released during the year. To the extent that the fair value of the ESOP shares differs from the cost of such shares, the difference is charged or credited to equity as additional paid-in capital.

SP Bancorp, Inc.’s common stock is traded on the NASDAQ Capital Market under the symbol “SPBC.” Voting rights are held and exercised exclusively by the stockholders of the new holding company. Deposit account holders continue to be insured by the FDIC. A liquidation account was established in the amount of $17.0 million, which represented the Bank’s total equity capital as of March 31, 2010, the latest balance sheet date in the final prospectus used in the conversion. The liquidation account is maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held.

The Bank may not declare, pay a dividend on, or repurchase any of its capital stock, if the effect thereof would cause equity capital to be reduced below the liquidation account amount or regulatory capital requirements. Any purchase of the new holding company’s common stock will be conducted in accordance with applicable laws and regulations.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Note 3. Securities

Securities have been classified in the consolidated balance sheets according to management’s intent. At September 30, 2011 and December 31, 2010, all of the Company’s securities were classified as available for sale. The amortized cost of securities and their approximate fair values at September 30, 2011 and December 31, 2010 are as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value

Securities Available for Sale

September 30, 2011:
Municipal securities	$	7,785	$	179	$	—		$	7,964
Collateralized mortgage obligations guaranteed by FNMA and FHLMC		14,333		71		(67	)		14,337
Mortgage-backed securities guaranteed by SBA, FNMA, GNMA and FHLMC		5,494		30		(20	)		5,504


	$	27,612	$	280	$	(87	)	$	27,805


December 31, 2010:
Municipal securities	$	3,746	$	4	$	(165	)	$	3,585
Collateralized mortgage obligations guaranteed by FNMA and FHLMC		10,447		70		(29	)		10,488
Mortgage-backed securities guaranteed by SBA, FNMA, GNMA and FHLMC		8,021		29		(47	)		8,003


	$	22,214	$	103	$	(241	)	$	22,076

Mortgage-backed securities and collateralized mortgage obligations are backed by single-family mortgage loans. The Company does not hold any securities backed by commercial real estate loans.

For the nine months ended September 30, 2011, proceeds from sale of securities available for sale, gross gains and gross losses were $21,789, $322 and $0, respectively.

For the nine months ended September 30, 2010, proceeds from sale of securities available for sale, gross gains and gross losses were $2,783, $128 and $0, respectively.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Gross unrealized losses and fair values by investment category and length of time in a continuous unrealized loss position at September 30, 2011 and December 31, 2010 were as follows:


			Continuous Unrealized					Continuous Unrealized
			Losses Existing for					Losses Existing for
	Number of Security		Less than 12 Months					12 Months or Longer				Total
	Positions with		Market		Unrealized			Market		Unrealized		Market		Unrealized
	Unrealized losses		Value		Losses			Value		Losses		Value		Losses

September 30, 2011:

Collateralized mortgage obligations		5	$	7,449	$	(67	)	$	—	$	—	$	7,449	$	(67	)
Mortgage-backed securities		2		3,302		(20	)		—		—		3,302		(20	)


		7	$	10,751	$	(87	)	$	—	$	—	$	10,751	$	(87	)


December 31, 2010:

Municipal securities		9	$	2,690	$	(165	)	$	—	$	—	$	2,690	$	(165	)
Collateralized mortgage obligations		2		3,344		(29	)		—		—		3,344		(29	)
Mortgage-backed securities		3		6,073		(47	)		—		—		6,073		(47	)


		14	$	12,107	$	(241	)	$	—	$	—	$	12,107	$	(241	)

For all of the above securities available for sale, the gross unrealized losses are generally due to changes in interest rates. The gross unrealized losses were considered to be temporary as they reflected fair values on September 30, 2011 that are subject to change daily as interest rates fluctuate. The Company does not intend to sell these securities and it is more-likely-than-not that the Company will not be required to sell prior to anticipated recovery. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent of the Company to sell or whether it would be more-likely-than-not required to sell its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

The scheduled maturities of securities at September 30, 2011 and December 31, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2011				December 31, 2010
	Available for Sale				Available for Sale
	Amortized		Market		Amortized		Market
	Cost		Value		Cost		Value

After 5 years through 10 years	$	—	$	—	$	446	$	447
Due after 10 years		7,785		7,964		3,300		3,138

		7,785		7,964		3,746		3,585

Mortgage-backed securities and collateralized mortgage obligations		19,827		19,841		18,468		18,491


	$	27,612	$	27,805	$	22,214	$	22,076

Note 4. Loans and Allowance for Loan Losses

Loans at September 30, 2011 and December 31, 2010 consisted of the following:


	September 30,			December 31,
	2011			2010

Commercial business	$	4,719		$	2,473
Commercial real estate		34,388			29,303
One-to-four family		143,080			140,340
Home equity		9,586			10,112
Consumer		8,786			10,335

		200,559			192,563
Premiums, net		94			106
Deferred loan costs, net		501			532
Allowance for loan losses		(1,732	)		(2,136	)


	$	199,422		$	191,065

The Bank originates loans to individuals and businesses, geographically concentrated primarily near the Bank’s offices in Dallas and Plano, Texas. Loan balances, interest rates, loan terms and collateral requirements vary according to the type of loan offered and overall credit-worthiness of the potential borrower.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Commercial business. Commercial business loans are made to customers for the purpose of acquiring equipment and other general business purposes. Commercial business loans are made based primarily on the historical and projected cash flow of the borrower and, to a lesser extent, the underlying collateral. Commercial business loans generally carry higher risk of default since their repayment generally depends on the successful operation of the business and the sufficiency of collateral.

Commercial real estate. Commercial real estate loans are secured primarily by office buildings, retail centers, owner-occupied offices, condominiums, developed lots and land. Commercial real estate loans are underwritten based on the economic viability of the property and creditworthiness of the borrower, with emphasis given to projected cash flow as a percentage of debt service requirements. These loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. Repayment of loans secured by income-producing properties generally depends on the successful operation of the real estate project and may be subject to a greater extent to adverse market conditions and the general economy.

One-to-four family. One-to-four family loans are underwritten based on the applicant’s employment and credit history and the appraised value of the property.

Home equity. Home equity loans are underwritten similar to one-to-four family loans. Collateral value could be negatively impacted by declining real estate values.

Consumer. Consumer loans include automobile, signature and other consumer loans. Potential credit risks include rapidly depreciable assets, such as automobiles, which could adversely affect the value of the collateral.

On occasion, the Bank originates loans secured by single-family and home equity loans with high loan to value ratios exceeding 90 percent. These loans totaled $2,980 and $3,518 at September 30, 2011 and December 31, 2010, respectively.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Following is an age analysis of past due loans by loan class as of September 30, 2011 and December 31, 2010:


	Commercial		Commercial		One-to-Four		Home
	Business		Real Estate		Family		Equity		Consumer		Total

At September 30, 2011
Past Due:
30-59 days	$	—	$	—	$	228	$	—	$	15	$	243
60-89 days		—		—		954		—		—		954
90 days or more		319		—		468		139		—		926

Total past due		319		—		1,650		139		15		2,123
Current		4,400		34,388		141,430		9,447		8,771		198,436

Total loans	$	4,719	$	34,388	$	143,080	$	9,586	$	8,786	$	200,559


At December 31, 2010
Past Due:
30-59 days	$	—	$	1,844	$	1,675	$	38	$	49	$	3,606
60-89 days		—		—		309		13		3		325
90 days or more		125		2,498		1,704		101		20		4,448

Total past due		125		4,342		3,688		152		72		8,379
Current		2,348		24,961		136,652		9,960		10,263		184,184

Total loans	$	2,473	$	29,303	$	140,340	$	10,112	$	10,335	$	192,563

The Bank utilizes a nine-point internal risk rating system for commercial real estate and commercial business loans, which provides a comprehensive analysis of the credit risk inherent in each loan. The rating system provides for five pass ratings. Rating grades six through nine comprise the adversely rated credits.

The Bank classifies problem and potential problem loans for all loan types using the regulatory classifications of special mention, substandard, doubtful and loss, which for commercial real estate and commercial business loans correspond to the risk ratings of six, seven, eight and nine, respectively. The regulatory classifications are updated, when warranted.

A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans or portions of loans classified as loss, are those considered uncollectible and of such little value that their continuance is not warranted. Loans that do not expose the Bank to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve management’s close attention, are required to be designated as special mention.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Following is a summary of loans by grade or classification as of September 30, 2011 and December 31, 2010:


	Commercial		Commercial		One-to-Four		Home
	Business		Real Estate		Family		Equity		Consumer		Total

At September 30, 2011
Credit Quality Indicator:
Credit Risk Profile by Grade or Classification:
Pass	$	4,400	$	27,213	$	140,743	$	9,428	$	8,741	$	190,525
Special Mention		—		—		1,869		19		45		1,933
Substandard		319		7,175		468		139		—		8,101
Doubtful		—		—		—		—		—		—
Loss		—		—		—		—		—		—

Total	$	4,719	$	34,388	$	143,080	$	9,586	$	8,786	$	200,559


At December 31, 2010:
Credit Quality Indicator:
Credit Risk Profile by Grade or Classification:
Pass	$	2,088	$	17,760	$	137,601	$	9,969	$	10,175	$	177,593
Special Mention		—		1,607		1,036		42		138		2,823
Substandard		385		9,936		1,703		101		20		12,145
Doubtful		—		—		—		—		2		2
Loss		—		—		—		—		—		—

Total	$	2,473	$	29,303	$	140,340	$	10,112	$	10,335	$	192,563

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Impaired loans and nonperforming loans by loan class at September 30, 2011 and December 31, 2010 were summarized as follows:


	Commercial		Commercial		One-to-Four		Home
	Business		Real Estate		Family		Equity		Consumer		Total

At September 30, 2011
Impaired loans:
Impaired loans with an allowance for loan losses	$	119	$	—	$	259	$	72	$	—	$	450
Impaired loans with no allowance for loan losses		200		5,258		1,762		79		19		7,318

Total impaired loans	$	319	$	5,258	$	2,021	$	151	$	19	$	7,768

Unpaid principal balance of impaired loans	$	319	$	5,258	$	2,021	$	151	$	19	$	7,768
Allowance for loan losses on impaired loans	$	119	$	—	$	117	$	37	$	—	$	273
Average recorded investment in impaired loans	$	222	$	5,360	$	2,314	$	123	$	35	$	8,054

Nonperforming loans:
Nonaccrual loans	$	319	$	—	$	468	$	139	$	—	$	926
Loans past due 90 days and still accruing		—		—		—		—		—		—
Troubled debt restructurings (not included in nonaccrual loans)		—		5,258		708		7		106		6,079

	$	319	$	5,258	$	1,176	$	146	$	106	$	7,005


At December 31, 2010:
Impaired loans:
Impaired loans with an allowance for loan losses	$	125	$	2,498	$	1,035	$	33	$	7	$	3,698
Impaired loans with no allowance for loan losses		—		1,900		1,634		81		53		3,668

Total impaired loans	$	125	$	4,398	$	2,669	$	114	$	60	$	7,366

Unpaid principal balance of impaired loans	$	125	$	4,398	$	2,669	$	114	$	60	$	7,366
Allowance for loan losses on impaired loans	$	100	$	626	$	183	$	17	$	3	$	929
Average recorded investment in impaired loans	$	63	$	2,834	$	1,887	$	57	$	51	$	4,892

Nonperforming loans:
Nonaccrual loans	$	125	$	2,498	$	1,704	$	101	$	20	$	4,448
Loans past due 90 days and still accruing		—		—		—		—		—		—
Troubled debt restructurings (not included in nonaccrual loans)		—		—		841		7		149		997

	$	125	$	2,498	$	2,545	$	108	$	169	$	5,445

For the nine months ended September 30, 2011 and 2010, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $33 and $156, respectively. Interest income recognized on such loans for the nine months ended September 30, 2011 and 2010 was $18 and $15, respectively.

We establish a specific allowance when loans are determined to be impaired, including troubled debt restructurings. The allowance is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. The Company has allocated allowance for loan losses of $0 and $32 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2011 and December 31, 2010. The Company has not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings at September 30, 2011 and December 31, 2010.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

During the periods ended September 30, 2011 and 2010, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan were for periods ranging from nine months to five years. Modifications involving an extension of the maturity date were for periods ranging from three months to five years.

Following is a summary of troubled debt restructurings during the nine months ended September 30, 2011 and 2010 and loans that have been restructured during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2011 and 2010:


	Commercial		Commercial		One-to-Four		Home
	Business		Real Estate		Family		Equity		Consumer		Total

Troubled debt restructurings during the nine months ended September 30, 2011:
Number of contracts		—		3		2		—		2		7

Pre-restructuring outstanding recorded investment	$	—	$	5,581	$	483	$	—	$	12	$	6,076

Post-restructuring outstanding recorded investment	$	—	$	5,251	$	499	$	—	$	12	$	5,762


Troubled debt restructurings during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2011
Number of contracts		—		—		1		—		—		1

Recorded investment	$	—	$	—	$	71	$	—	$	—	$	71


Troubled debt restructurings during the nine months ended September 30, 2010:
Number of contracts		—		—		1		1		7		9

Pre-restructuring outstanding recorded investment	$	—	$	—	$	71	$	8	$	107	$	186

Post-restructuring outstanding recorded investment	$	—	$	—	$	71	$	8	$	131	$	210


Troubled debt restructurings during the previous twelve months that subsequently defaulted during the nine months ended September 30, 2010
Number of contracts		—		—		—		—		2		2

Recorded investment	$	—	$	—	$	—	$	—	$	11	$	11

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Following is a summary of the activity in the allowance for loan losses by loan class for the nine months ended September 30, 2011 and 2010 and total investment in loans at September 30, 2011, December 31, 2010 and September 30, 2010:


	Commercial			Commercial			One-to-Four			Home
	Business			Real Estate			Family			Equity		Consumer			Total

Nine Months Ended September 30, 2011:
Allowance for Loan Losses:
Balance, beginning of period	$	131		$	1,081		$	736		$	60	$	128		$	2,136
Provision for loan losses		187			186			333			30		(16	)		720
Loans charged to the allowance		(125	)		(697	)		(275	)		—		(40	)		(1,137	)
Recoveries of loans previously charged off		—			—			—			—		13			13

Balance, end of period	$	193		$	570		$	794		$	90	$	85		$	1,732

Ending balance: individually evaluated for impairment	$	119		$	—		$	117		$	37	$	—		$	273

Ending balance: collectively evaluated for impairment	$	74		$	570		$	677		$	53	$	85		$	1,459


At September 30, 2011:
Loans:
Ending balance	$	4,719		$	34,388		$	143,080		$	9,586	$	8,786		$	200,559

Ending balance individually evaluated for impairment	$	319		$	5,258		$	2,021		$	151	$	19		$	7,768

Ending balance collectively evaluated for impairment	$	4,400		$	29,130		$	141,059		$	9,435	$	8,767		$	192,791


At December 31, 2010:
Loans:
Ending balance	$	2,473		$	29,303		$	140,340		$	10,112	$	10,335		$	192,563

Ending balance individually evaluated for impairment	$	125		$	4,398		$	2,669		$	114	$	60		$	7,366

Ending balance collectively evaluated for impairment	$	2,348		$	24,905		$	137,671		$	9,998	$	10,275		$	185,197


At September 30, 2010:
Loans:
Ending balance	$	2,019		$	23,988		$	131,327		$	8,993	$	11,255		$	177,582

Ending balance individually evaluated for impairment	$	125		$	3,908		$	2,450		$	83	$	85		$	6,651

Ending balance collectively evaluated for impairment	$	1,894		$	20,080		$	128,877		$	8,910	$	11,170		$	170,931


Nine Months Ended September 30, 2010:
Allowance for Loan Losses:
Balance, beginning of period	$	12		$	293		$	455		$	33	$	147		$	940
Provision for loan losses		90			721			454			11		29			1,305
Loans charged to the allowance		—			—			(252	)		—		(55	)		(307	)
Recoveries of loans previously charged off		—			—			41			—		14			55

Balance, end of period	$	102		$	1,014		$	698		$	44	$	135		$	1,993

Ending balance: individually evaluated for impairment	$	25		$	604		$	183		$	—	$	6		$	818

Ending balance: collectively evaluated for impairment	$	77		$	410		$	515		$	44	$	129		$	1,175

The $585 decrease in the provision for loan losses for the nine months ended September 30, 2011 versus September 30, 2010 was primarily attributable to the recognition of a specific allowance of $604 on a commercial real estate loan during the nine months ended September 30, 2010.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

The Bank originated $34,992 and $27,955 in loans during the nine months ended September 30, 2011 and 2010, respectively, which were placed with various correspondent lending institutions. Proceeds on sales of these loans were $35,239 and $22,666 for the nine months ended September 30, 2011 and 2010, respectively. Gains on sales of these loans were $883 and $471 for the nine months ended September 30, 2011 and 2010, respectively. These loans were sold with servicing rights released.

Loans serviced for the benefit of others amounted to $2,570, $2,640 and $2,648 at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

Note 5. Borrowings

The Bank periodically borrows from the FHLB of Dallas. At September 30, 2011, the Bank had a total of thirteen such advances which totaled $13,981. These advances have various maturities ranging from November 17, 2011 through November 17, 2014 at interest rates from 1.38% to 3.09%.

At December 31, 2010, the Bank had a total of fourteen such advances which totaled $15,987. These advances have various maturities ranging from August 8, 2011 through November 17, 2014 at interest rates from 0.49% to 3.09%.

These advances are secured by FHLB of Dallas stock, real estate loans and securities of $121,025 and $116,532, at September 30, 2011 and December 31, 2010, respectively. The Bank had remaining credit available under the FHLB advance program of $106,892 and $100,332 at September 30, 2011 and December 31, 2010, respectively.

Note 6. Income Taxes

The effective tax rate was 22.9% for the nine months ended September 30, 2011, compared to 35.3% for the nine months ended September 30, 2010. The decrease in the effective tax rate was primarily attributable to certain factors, including permanent differences related to tax exempt income consisting of interest on municipal obligations and BOLI income.

There were no significant changes in deferred tax items during the nine months ended September 30, 2011.

Note 7. Financial Instruments With Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

At September 30, 2011 and December 31, 2010, the approximate amounts of these financial instruments were as follows:


	September 30,		December 31,
	2011		2010

Commitments to extend credit	$	21,041	$	14,315

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on managements’ credit evaluation of the counterparty. Collateral held varies but may include cattle, accounts receivable, inventory, property, single and multi-family residences, plant and equipment and income-producing commercial properties. At September 30, 2011 and December 31, 2010, commitments to fund fixed rate loans of $10,418 and $6,120, respectively, were included in the commitments to extend credit. Interest rates on these commitments to fund fixed rate loans ranged from 3.25% to 17.19% at September 30, 2011 and from 3.25% to 17.19% at December 31, 2010.

The Bank has not incurred any significant losses on its commitments in the nine months ended September 30, 2011 or 2010. Although the maximum exposure to loss is the amount of such commitments, management anticipates no material losses from such activities.

Note 8. Regulatory Capital

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

Quantitative measures established by regulation to ensure capital adequacy requires the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), of core capital (as defined) to adjusted tangible assets (as defined) and of tangible capital (as defined) to tangible assets. Management believes, as of September 30, 2011 and December 31, 2010, that the Bank meets all capital adequacy requirements to which it is subject.

At September 30, 2011 and December 31, 2010, the most recent regulatory notification categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

The following table sets forth the Bank’s capital ratios as of September 30, 2011 and December 31, 2010:


											Minimum To Be Well
						Minimum for Capital					Capitalized Under Prompt
	Actual					Adequacy Purposes					Corrective Action Provision
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of September 30, 2011:
Tangible capital to tangible assets	$	29,133		11.27	%		3,879		1.50	%		N/A		N/A
Total capital to risk weighted assets		30,644		17.39	%		14,100		8.00	%		17,626		10.00	%
Tier 1 capital to risk weighted assets		29,133		16.53	%		7,050		4.00	%		10,575		6.00	%
Tier 1 capital to average assets		29,133		11.27	%		10,344		4.00	%		12,930		5.00	%

As of December 31, 2010:
Tangible capital to tangible assets	$	28,129		11.78	%	$	3,581		1.50	%		N/A		N/A
Total capital to risk weighted assets		29,336		18.46	%		12,716		8.00	%	$	15,894		10.00	%
Tier 1 capital to risk weighted assets		28,129		17.70	%		6,358		4.00	%		9,537		6.00	%
Tier 1 capital to average assets		28,129		11.78	%		9,548		4.00	%		11,936		5.00	%

The following is a reconciliation of the Bank’s equity capital under U.S. generally accepted accounting principles to Tangible and Tier 1 capital and Total capital (as defined by the OCC) at September 30, 2011 and December 31, 2010:


	September 30,			December 31,
	2011			2010

Equity capital	$	29,251		$	28,292
Disallowed deferred tax asset		—			(250	)
Unrealized (gains) losses on securities, net		(118	)		87

Tangible and Tier 1 capital		29,133			28,129
Allowable general allowance for loan losses		1,511			1,207

Total capital	$	30,644		$	29,336

Note 9. Fair Value Measurements

Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (1) independent, (2) knowledgeable, (3) able to transact and (4) willing to transact.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

The guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.

The fair value hierarchy is as follows:

Level 1 Inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

The following table represents assets and liabilities reported on the consolidated balance sheet at their fair value as of September 30, 2011 and December 31, 2010 by level within the ASC 820 fair value measurement hierarchy:


			Fair Value Measurements at Reporting
			Date Using
			Quoted
			Prices in		Significant
	Assets/		Active Markets		Other		Significant
	Liabilities		for Identical		Observable		Unobservable
	Measured		Assets		Inputs		Inputs
	At Fair Value		(Level 1)		(Level 2)		(Level 3)

September 30, 2011:
Measured on a recurring basis:
Assets:
Securities available for sale:
Municipal securities	$	7,964	$	—	$	7,964	$	—
Collateralized mortgage obligations		14,337		—		14,337		—
Mortgage-backed securities		5,504		—		5,504		—

Measured on a nonrecurring basis:
Assets:
Impaired loans		177		—		—		177
Other real estate owned		2,182		—		—		2,182

December 31, 2010:
Measured on a recurring basis:
Assets:
Securities available for sale:
Municipal securities	$	3,585	$	—	$	3,585	$	—
Collateralized mortgage obligations		10,488		—		10,488		—
Mortgage-backed securities		8,003		—		8,003		—

Measured on a nonrecurring basis:
Assets:
Impaired loans		2,769		—		—		2,769

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available for sale are classified within Level 2 of the valuation hierarchy. The Company obtains fair value measurements for securities from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bond’s terms and conditions, among other things.

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis. The instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Certain impaired loans are reported at the fair value of underlying collateral if repayment is expected solely from the collateral. Other real estate owned is initially recorded at fair value less estimated costs of disposal, which establishes a new cost basis. During the nine months ended September 30, 2011, no adjustments were made to value other real estate owned subsequent to establishment of the initial cost basis. Collateral values are estimated using Level 2 inputs based on observable market data such as independent appraisals or level 3 inputs based on customized discounting.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

At September 30, 2011 and December 31, 2010, impaired loans (with allocated allowance for losses) had principal balances of $450 and $3,698, respectively, and allocated allowance for losses of $273 and $929, respectively. The allocated allowance for losses decreased due primarily to a partial charge-off of a loan secured by undeveloped land, which was foreclosed in February 2011 and a partial charge-off of a loan secured by a retail center that was foreclosed in July 2011.

Note 10. Disclosure About the Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010 were as follows:


	September 30,				December 31,
	2011				2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value

Financial assets:
Cash and cash equivalents	$	6,616	$	6,616	$	11,814	$	11,814
Securities available for sale		27,805		27,805		22,076		22,076
Fixed annuity investment		1,165		1,165		1,131		1,131
Restricted stock		1,006		1,006		1,003		1,003
Loans and loans held for sale		205,106		204,588		194,654		194,707
Accrued interest receivable		848		848		833		833

Financial liabilities:
Deposit accounts		209,539		205,816		188,244		183,738
Accrued interest payable		45		45		39		39
Borrowings		13,981		14,326		15,987		16,151

Off-balance sheet assets (liabilities):
Commitments to extend credit		—		—		—		—

Fair Values of Financial Instruments

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. ASC 820 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

SP Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)
(In thousands)

Cash and short-term instruments

The carrying amounts of cash and short-term instruments approximate their fair value.

Securities

See Note 9 to Consolidated Financial Statements for methods and assumptions used to estimate fair values for securities.

The carrying value of Federal Home Loan Bank stock and other restricted equities approximate fair value based on the redemption provisions of the Federal Home Loan Bank.

Fixed annuity investment

The carrying amount approximates fair value.

Loans and loans held for sale

For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Fair value of loans held for sale is based on commitments on hand from investors or prevailing market rates.

Deposits

The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate, fixed term money market accounts and variable-rate certificates of deposit (CD’s) approximate their fair values at the reporting date. Fair values for fixed-rate CD’s are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Advances from Federal Home Loan Bank

The fair value of advances from the Federal Home Loan Bank maturing within 90 days approximates carrying value. Fair value of other advances is based on the discounted value of contractual cash flows based on the Bank’s current incremental borrowing rate for similar borrowing arrangements.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Off-balance sheet instruments

Commitments to extend credit and standby letters of credit have short maturities and therefore have no significant fair value.


Item 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s discussion and analysis of financial condition and results of operations at September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 is intended to assist in understanding the financial condition and results of operations of the Company. The information contained in this section should be read in conjunction with the Unaudited Consolidated Financial Statements and the notes thereto, appearing in Part 1, Item 1 of this report.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

•

statements of our goals, intentions and expectations;

•

statements regarding our business plans, prospects, growth and operating strategies;

•

statements regarding the asset quality of our loan and investment portfolios; and

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Form 10-Q.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

•

general economic conditions, either nationally or in our market areas, that are worse than expected;

•

competition among depository and other financial institutions;

•

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

•

adverse changes in the securities markets;

•

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

•

our ability to enter new markets successfully and capitalize on growth opportunities;

•

our ability to successfully integrate acquired entities, if any;

•

changes in consumer spending, borrowing and savings habits;

•

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

•

changes in our organization, compensation and benefit plans;

•

changes in our financial condition or results of operations that reduce capital; and

•

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Overview

At September 30, 2011, we had total assets of $258.8 million, compared to $238.8 million at December 31, 2010. This increase was primarily the result of an increase in securities, investment in bank-owned life insurance and loans, funded by customer deposits and cash and cash equivalents.

During the three months ended September 30, 2011, we had net income of $332,000, compared to a net income of $247,000 for the three months ended September 30, 2010. Higher net income resulted from higher net interest income and noninterest income and lower tax expense, partially offset by higher noninterest expense and provision for loan losses. During the nine months ended September 30, 2011, we had net income of $767,000, compared to a net income of $205,000 for the nine months ended September 30, 2010. Higher net income resulted from a higher level of net interest income and noninterest income and a lower provision for loan losses, partially offset by higher noninterest expense and income tax expense.

Our results of operations depend mainly on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we incur on our deposits and, to a lesser extent, our borrowings. Results of operations are also affected by service charges and other fees, provision for loan losses, commissions, gains on sales of securities and loans and other income. Our noninterest expense consists primarily of compensation and benefits, occupancy costs, equipment expense, data processing, ATM expense, professional and outside services, FDIC insurance assessments, marketing and income tax expense.

Our results of operations are also significantly affected by general economic and competitive conditions (such as changes in energy prices which have an impact on our Texas market area), as well as changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

Critical Accounting Policies. There are no material changes to the critical accounting policies disclosed in SP Bancorp, Inc.’s Form 10-K dated December 31, 2010, as filed on March 29, 2011 with the Securities and Exchange Commission.

Economy. Like the national economy, the Texas economy has been very weak, but the Texas unemployment rate has been below the national rate for several months. The Dallas-Fort Worth Metroplex unemployment rate was virtually unchanged from a year ago at 8.4% in August 2011. The state’s seasonally adjusted unemployment rate rose from 8.1% in September 2010 to 8.5% in September 2011, and the corresponding U.S. rate decreased from 9.6% to 9.1% during the same period.

Comparison of Financial Condition at September 30, 2011 and December 31, 2010

Summary of Selected Balance Sheet Data.


	September 30,		December 31,		Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Total assets	$	258,812	$	238,817	$	19,995			8.37	%
Total cash and cash equivalents		6,616		11,814		(5,198	)		(44.00	)
Securities available for sale, at fair value		27,805		22,076		5,729			25.95
Loans held for sale		5,684		3,589		2,095			58.37
Loans, net		199,422		191,065		8,357			4.37
Other real estate owned		2,182		—		2,182		NM
Premises and equipment, net		4,430		4,637		(207	)		(4.46	)
Federal Home Loan Bank of Dallas stock and other restricted stock, at cost		1,006		1,003		3			0.30
Bank-owned life insurance		6,135		—		6,135		NM
Other assets (1)		5,532		4,633		899			19.40
Deposits		209,539		188,244		21,295			11.31
Borrowings		13,981		15,987		(2,006	)		(12.55	)
Stockholders’ equity		32,894		32,104		790			2.46


1)		Includes fixed annuity investment, accrued interest receivable, deferred tax assets and other assets.

NM		Not meaningful.

Total assets increased primarily as a result of an increase in securities, investment in bank-owned life insurance and loans, which were funded by customer deposits and cash and cash equivalents. In addition, certain loans were transferred to other real estate owned.

Net loans increased primarily in commercial real estate loans.

The BOLI investment was purchased to offset costs associated with benefit plans and to generate competitive investment returns. The BOLI investment was made equally between three insurance carriers, which had Standard & Poor’s ratings ranging from A+ to AA+.

Deposits increased primarily from deposit inflows from existing customers.

Stockholders’ equity increased primarily as a result of net income of $767,000 for the nine months ended September 30, 2011.

Comparison of Operating Results for the Three Months Ended September 30, 2011 and 2010

General. We recorded net income of $332,000 for the three months ended September 30, 2011, compared to net income of $247,000 for the same period last year. Net interest income increased by $291,000 to $2.4 million for the three months ended September 30, 2011 from $2.1 million for the three months ended September 30, 2010, noninterest income increased by $146,000 and income tax expense decreased by $71,000, which was partially offset by higher noninterest expense of $248,000 and provision for loan losses of $175,000.

Summary of Net Interest Income.


	Three Months Ended
	September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Interest income:
Interest and fees on loans	$	2,667	$	2,481	$	186			7.50	%
Securities — taxable		80		61		19			31.15
Securities — nontaxable		61		19		42			221.05
Other interest — earning assets		23		46		(23	)		(50.00	)

Total interest income		2,831		2,607		224			8.59


Interest expense:
Savings deposits		18		22		(4	)		(18.18	)
Money market		32		64		(32	)		(50.00	)
Demand deposit account		22		30		(8	)		(26.67	)
Certificates of deposit		272		294		(22	)		(7.48	)

Total deposits		344		410		(66	)		(16.10	)
Borrowings		112		113		(1	)		(0.88	)

Total interest expense		456		523		(67	)		(12.81	)


Net interest income	$	2,375	$	2,084	$	291			13.96	%

Summary of Average Yields, Average Rates and Average Balances.

Average Yields and Rates


	Three Months Ended September 30,						Increase
	2011			2010			(decrease)

Loans		5.35	%		5.76	%		(0.41	)%
Securities — taxable		1.53	%		2.05	%		(0.52	)
Securities — nontaxable		3.58	%		3.64	%		(0.06	)
Other interest — earning assets		0.52	%		0.59	%		(0.07	)

Total interest-earning assets		4.62	%		4.80	%		(0.18	)

Savings deposits		0.21	%		0.26	%		(0.05	)
Money market		0.30	%		0.67	%		(0.37	)
Demand deposit account		0.16	%		0.24	%		(0.08	)
Certificates of deposit		1.52	%		1.89	%		(0.37	)
Total deposits		0.67	%		0.89	%		(0.22	)
Borrowings		3.03	%		2.83	%		0.20

Total interest-bearing liabilities		0.83	%		1.04	%		(0.21	)

Net interest rate spread		3.79	%		3.76	%		0.03
Net interest margin		3.88	%		3.83	%		0.05	%

Average Balances


	Three Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Loans	$	199,556	$	172,201	$	27,355			15.89	%
Securities — taxable		20,973		11,893		9,080			76.35
Securities — nontaxable		6,807		2,089		4,718			225.85
Other interest — earning assets		17,524		31,224		(13,700	)		(43.88	)


Total interest-earning assets		244,860		217,407		27,453			12.63


Savings deposits		34,338		34,005		333			0.98
Money market		42,792		38,005		4,787			12.60
Demand deposit account		55,695		50,829		4,866			9.57
Certificates of deposit		71,421		62,253		9,168			14.73

Total deposits		204,246		185,092		19,154			10.35
Borrowings		14,802		15,985		(1,183	)		(7.40	)


Total interest-bearing liabilities		219,048		201,077		17,971			8.94


Net interest-earning assets	$	25,812	$	16,330	$	9,482			58.06	%

Interest Income. Interest income increased primarily due to proceeds from our common stock offering in October 2010 and increased customer deposits that were invested in loans, our highest earning asset.

Interest income and fees on loans increased as the increase in the average balance of loans more than offset a decrease in the average yield on our loans. The average yield on our loan portfolio decreased, reflecting a lower market interest rate environment.

Interest income on taxable securities increased primarily from an increase in our average balance, which more than offset the decrease in the average yield of our taxable securities. The decline in the average yield on our taxable securities portfolio resulted from lower market interest rates.

Interest Expense. Interest expense decreased as the decrease in the average cost of deposits more than offset the increase in the average balance of deposits. The average rate we paid on deposits decreased as we were able to reprice our deposits downward in the declining market interest rate environment. The increase in the average balance of our deposits resulted primarily from increases in the average balance of non-maturity deposits and certificates of deposit, reflecting our successful marketing efforts.

During the September 2011 quarter, we utilized deposits to a higher degree and relied less on overnight and short-term advances to fund loans.

Net Interest Income. Net interest income increased as our net interest-earning assets increased. The increase in our net interest-earning assets, interest rate spread and net interest margin was attributable primarily to proceeds from sale of our common stock that were invested in loans.

Provision for Loan Losses. We recorded a provision for loan losses of $309,000 for the three months ended September 30, 2011, compared to $134,000 for the same period in 2010. The increase was primarily attributable to an increase in the general allowance as a result of overall growth coupled with an increase in the historical loss ratios.

Summary of Noninterest Income.


	Three Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Noninterest income:
Service charges	$	317	$	379	$	(62	)		(16.36	)%
Gain on sale of securities available for sale		120		—		120		NM
Gain on sale of mortgage loans		354		293		61			20.82
Other		136		109		27			24.77

Total noninterest income	$	927	$	781	$	146			18.69	%


NM		Not meaningful.

Noninterest Income. Noninterest income increased primarily due to gains on sale of securities and mortgage loans. Gains on sale of securities are not stable sources of income and there is no assurance that the Company will generate such gains in the future. Our origination, sale and resulting gains on one-to-four family residential loans in the secondary market is dependent upon relative customer demand, which is affected by current and anticipated market interest rates.

Service charges decreased as a result of lower NSF charges and other deposit fees driven by new regulations related to overdraft protection programs, partially offset by higher ATM fees. Other noninterest income increased due to higher fees from sales of investment and insurance products and an increase in the cash surrender value of the BOLI investment.

Summary of Noninterest Expense.


	Three Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Noninterest expense:
Compensation and benefits	$	1,446	$	1,209	$	237			19.60	%
Occupancy costs		278		297		(19	)		(6.40	)
Equipment expense		63		53		10			18.87
Data processing expense		118		131		(13	)		(9.92	)
ATM expense		98		96		2			2.08
Professional and outside services		216		157		59			37.58
Stationery and supplies		16		30		(14	)		(46.67	)
Marketing		36		46		(10	)		(21.74	)
FDIC insurance assessments		30		92		(62	)		(67.39	)
Operations from OREO		47		1		46		NM
Other		233		221		12			5.43

Total noninterest expense	$	2,581	$	2,333	$	248			10.63	%


NM		Not meaningful.

Noninterest Expense. Noninterest expense increased due primarily to an increase in compensation and benefits, professional and outside services, costs from operations from OREO, partially offset by lower FDIC insurance assessments.

Compensation and benefits increased due to higher salary levels, an additional commercial loan officer and additional personnel associated with the startup of mortgage warehouse lending. Occupancy costs decreased primarily as a result of lower real estate taxes and depreciation expense. Professional and outside services reflect costs associated with the Company’s public filing requirements with the SEC and outside consultant fees incurred for general corporate purposes. FDIC insurance assessments decreased due to a lower insurance assessment rate. Operations from OREO increased due to various holding costs related to other real estate owned. Other noninterest expense increased due primarily to higher legal expenses related to loan matters and various other company expenses.

Income Tax Expense. We recorded income tax expense of $80,000 for the three months ended September 30, 2011, compared to income tax expense of $151,000 for the same period in 2010. Our effective tax rate was 19.4% for the three months ended September 30, 2011, compared to 37.9% for the three months ended September 30, 2010. The decrease in the effective tax rate was primarily attributable to certain factors, including permanent differences related to tax exempt income consisting of interest on municipal obligations and BOLI income.

Comparison of Operating Results for the Nine Months Ended September 30, 2011 and 2010

General. We recorded net income of $767,000 for the nine months ended September 30, 2011, compared to net income of $205,000 for the same period last year. Net interest income increased by $911,000 to $7.0 million for the nine months ended September 30, 2011 from $6.0 million for the nine months ended September 30, 2010, noninterest income increased by $554,000 and our provision for loan losses decreased by $585,000, which was partially offset by higher noninterest expense of $1.4 million and income tax expense of $116,000.

Summary of Net Interest Income


	Nine Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Interest income:
Interest and fees on loans	$	7,856	$	7,244	$	612			8.45	%
Securities — taxable		279		251		28			11.16
Securities — nontaxable		131		48		83			172.92
Other interest — earning assets		77		139		(62	)		(44.60	)

Total interest income		8,343		7,682		661			8.60


Interest expense:
Savings deposits		60		65		(5	)		(7.69	)
Money market		117		213		(96	)		(45.07	)
Demand deposit account		79		103		(24	)		(23.30	)
Certificates of deposit		792		910		(118	)		(12.97	)

Total deposits		1,048		1,291		(243	)		(18.82	)
Borrowings		337		344		(7	)		(2.03	)

Total interest expense		1,385		1,635		(250	)		(15.29	)


Net interest income	$	6,958	$	6,047	$	911			15.07	%

Summary of Average Yields, Average Rates and Average Balances.

Average Yields and Rates


	Nine Months Ended September 30,						Increase
	2011			2010			(decrease)

Loans		5.33	%		5.69	%		(0.36	)%
Securities — taxable		1.88	%		2.75	%		(0.87	)
Securities — nontaxable		3.59	%		3.78	%		(0.19	)
Other interest — earning assets		0.50	%		0.54	%		(0.04	)

Total interest-earning assets		4.60	%		4.70	%		(0.10	)

Savings deposits		0.24	%		0.26	%		(0.02	)
Money market		0.37	%		0.79	%		(0.42	)
Demand deposit account		0.18	%		0.26	%		(0.08	)
Certificates of deposit		1.58	%		2.02	%		(0.44	)

Total deposits		0.70	%		0.95	%		(0.25	)
Borrowings		2.88	%		2.16	%		0.72

Total interest-bearing liabilities		0.86	%		1.08	%		(0.22	)

Net interest rate spread		3.74	%		3.62	%		0.12
Net interest margin		3.84	%		3.70	%		0.14	%

Average Balances


	Nine Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Loans	$	196,585	$	169,689	$	26,896			15.85	%
Securities — taxable		19,810		12,153		7,657			63.01
Securities — nontaxable		4,865		1,691		3,174			187.70
Other interest — earning assets		20,539		34,184		(13,645	)		(39.92	)


Total interest-earning assets		241,799		217,717		24,082			11.06


Savings deposits		33,591		33,679		(88	)		(0.26	)
Money market		41,744		35,730		6,014			16.83
Demand deposit account		57,174		52,017		5,157			9.91
Certificates of deposit		66,911		59,950		6,961			11.61

Total deposits		199,420		181,376		18,044			9.95
Borrowings		15,583		21,190		(5,607	)		(26.46	)


Total interest-bearing liabilities		215,003		202,566		12,437			6.14


Net interest-earning assets	$	26,796	$	15,151	$	11,645			76.86	%

Interest income on nontaxable securities increased primarily from an increase in our average balance, which more than offset the decrease in the average yield of our nontaxable securities. The decline in the average yield on our nontaxable securities portfolio resulted from lower market interest rates.

During the nine months ended September 30, 2011, we utilized deposits to a higher degree and relied less on overnight and short-term advances to fund loans.

Provision for Loan Losses. We recorded a provision for loan losses of $720,000 for the nine months ended September 30, 2011, compared to $1.3 million for the same period in 2010. The decrease was primarily attributable to a specific allowance of $604,000 on a commercial real estate loan established in the first quarter of 2010.

Summary of Noninterest Income.


	Nine Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Noninterest income:
Service charges	$	951	$	1,138	$	(187	)		(16.43	)%
Gain on sale of securities available for sale		322		128		194			151.56
Gain on sale of mortgage loans		883		471		412			87.47
Other		349		214		135			63.08

Total noninterest income	$	2,505	$	1,951	$	554			28.40	%

Noninterest Income. Noninterest income increased primarily due to gains on sale of mortgage loans and securities. Our origination, sale and resulting gains on one-to-four family residential loans in the secondary market is dependent upon relative customer demand, which is affected by current and anticipated market interest rates. Gains on sale of securities are not stable sources of income and there is no assurance that the Company will generate such gains in the future.

Summary of Noninterest Expense.


	Nine Months Ended September 30,				Increase
(Dollars in thousands)	2011		2010		(Decrease)			% Change

Noninterest expense:
Compensation and benefits	$	4,049	$	3,231	$	818			25.32	%
Occupancy costs		804		858		(54	)		(6.29	)
Equipment expense		194		164		30			18.29
Data processing expense		356		419		(63	)		(15.04	)
ATM expense		286		282		4			1.42
Professional and outside services		739		465		274			58.92
Stationery and supplies		82		89		(7	)		(7.87	)
Marketing		124		109		15			13.76
FDIC insurance assessments		200		226		(26	)		(11.50	)
Operations from OREO		178		1		177		NM
Other		736		532		204			38.35

Total noninterest expense	$	7,748	$	6,376	$	1,372			21.52	%


NM		Not meaningful.

Noninterest Expense. Noninterest expense increased due primarily to an increase in compensation and benefits, professional and outside services, operations from OREO and other noninterest expense.

Compensation and benefits increased due to reversal of a bonus accrual in the 2010 period, higher salary levels and mortgage commission expenses, an additional commercial loan officer and additional personnel associated with the startup of the mortgage warehouse business, partially offset by a higher level of deferred loan origination costs. Occupancy costs decreased as a result of primarily lower maintenance costs, real estate taxes and depreciation expense. Equipment expense increased due to higher maintenance costs. Data processing decreased primarily as a result of lower costs following a contract renegotiation. Professional and outside services reflect costs associated with the Company’s public filing requirements with the SEC and outside consultant fees incurred for general corporate purposes. FDIC insurance assessments decreased as a result of a lower insurance assessment rate, partially offset by a higher level of deposits. Operations from OREO increased due primarily to real estate taxes incurred on one commercial real estate property and various other holding costs related to other real estate owned. Other noninterest expense increased due primarily to higher legal expenses related to loan matters, travel costs, charitable contributions and various other company expenses.

Income Tax Expense. We recorded income tax expense of $228,000 for the nine months ended September 30, 2011, compared to income tax expense of $112,000 for the same period in 2010. Our effective tax rate was 22.9% for the nine months ended September 30, 2011, compared to 35.3% for the nine months ended September 30, 2010. The decrease in the effective tax rate was primarily attributable to certain factors, including permanent differences related to tax exempt income consisting of interest on municipal obligations and BOLI income.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments have not been made for tax-exempt securities. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	For the Three Months Ended September 30,
	2011							2010
	Average							Average
	Outstanding							Outstanding
	Balance		Interest		Yield/Rate⁽¹⁾			Balance		Interest		Yield/Rate⁽¹⁾

Interest-earning assets:
Loans, net		199,556		2,667		5.35	%		172,201		2,481		5.76	%
Taxable investment securities		20,973		80		1.53	%		11,893		61		2.05	%
Nontaxable investment securities		6,807		61		3.58	%		2,089		19		3.64	%
Total other interest-earning assets		16,569		22		0.53	%		30,273		46		0.61	%
FHLB of Dallas stock		955		1		0.42	%		951		—		0.00	%

Total interest-earning assets		244,860		2,831		4.62	%		217,407		2,607		4.80	%
Non-interest-earning assets		17,162							10,109

Total assets		262,022							227,516


Interest-bearing liabilities:
Savings deposits		34,338		18		0.21	%		34,005		22		0.26	%
Money market		42,792		32		0.30	%		38,005		64		0.67	%
Demand deposit accounts		55,695		22		0.16	%		50,829		30		0.24	%
Certificates of deposit		71,421		272		1.52	%		62,253		294		1.89	%

Total deposits		204,246		344		0.67	%		185,092		410		0.89	%
Borrowings		14,802		112		3.03	%		15,985		113		2.83	%
Other liabilities		—		—					—		—

Total interest-bearing liabilities		219,048		456		0.83	%		201,077		523		1.04	%
Non-interest-bearing liabilities		10,332							9,102

Total liabilities		229,380							210,179
Equity		32,642							17,337

Total liabilities and equity		262,022							227,516


Net interest income				2,375							2,084

Net interest rate spread ⁽²⁾						3.79	%						3.76	%

Net interest-earning assets ⁽³⁾		25,812							16,330

Net interest margin ⁽⁴⁾						3.88	%						3.83	%

Average interest-earning assets to interest-bearing liabilities						111.78	%						108.12	%


(1)		Yields and rates for the three months ended September 30, 2011 and 2010 are annualized.

(2)		Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)		Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)		Net interest margin represents net interest income divided by average total interest-earning assets.


	For the Nine Months Ended September 30,
	2011							2010
	Average							Average
	Outstanding							Outstanding
	Balance		Interest		Yield/Rate⁽¹⁾			Balance		Interest		Yield/Rate⁽¹⁾

Interest-earning assets:
Loans, net		196,585		7,856		5.33	%		169,689		7,244		5.69	%
Taxable investment securities		19,810		279		1.88	%		12,153		251		2.75	%
Nontaxable investment securities		4,865		131		3.59	%		1,691		48		3.78	%
Total other interest-earning assets		19,585		74		0.50	%		32,951		134		0.54	%
FHLB of Dallas stock		954		3		0.42	%		1,233		5		0.54	%

Total interest-earning assets		241,799		8,343		4.60	%		217,717		7,682		4.70	%
Non-interest-earning assets		15,290							9,874

Total assets		257,089							227,591


Interest-bearing liabilities:
Savings deposits		33,591		60		0.24	%		33,679		65		0.26	%
Money market		41,744		117		0.37	%		35,730		213		0.79	%
Demand deposit accounts		57,174		79		0.18	%		52,017		103		0.26	%
Certificates of deposit		66,911		792		1.58	%		59,950		910		2.02	%

Total deposits		199,420		1,048		0.70	%		181,376		1,291		0.95	%
Borrowings		15,583		337		2.88	%		21,190		344		2.16	%
Other liabilities		—		—					—		—

Total interest-bearing liabilities		215,003		1,385		0.86	%		202,566		1,635		1.08	%
Non-interest-bearing liabilities		9,558							7,781

Total liabilities		224,561							210,347
Equity		32,528							17,244

Total liabilities and equity		257,089							227,591


Net interest income				6,958							6,047

Net interest rate spread ⁽²⁾						3.74	%						3.62	%

Net interest-earning assets ⁽³⁾		26,796							15,151

Net interest margin ⁽⁴⁾						3.84	%						3.70	%

Average interest-earning assets to interest-bearing liabilities						112.46	%						107.48	%


(1)		Yields and rates for the nine months ended September 30, 2011 and 2010 are annualized.

(2)		Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3)		Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)		Net interest margin represents net interest income divided by average total interest-earning assets.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan sales and repayments, advances from the Federal Home Loan Bank of Dallas, and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. For the nine months ended September 30, 2011, our liquidity ratio averaged 16.6%. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2011.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (i) expected loan demand; (ii) expected deposit flows; (iii) yields available on interest-earning deposits and securities; and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are affected by our operating, financing, lending and investing activities during any given period. At September 30, 2011, cash and cash equivalents totaled $6.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $27.8 million at September 30, 2011.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our consolidated financial statements.

At September 30, 2011, we had $21.0 million in loan commitments outstanding, including $16.5 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2011 totaled $42.0 million, or 20.0% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including loan sales and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2012. We believe, however, that based on past experience, a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activity is originating loans. During the nine months ended September 30, 2011 and 2010 we originated $98.9 million and $64.8 million of loans, including unfunded commitments, respectively. We purchased $31.6 million and $8.2 million of securities during the nine months ended September 30, 2011 and 2010, respectively.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We had a net increase in total deposits of $21.3 million and $25.6 million for the nine months ended September 30, 2011 and 2010, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. Borrowings decreased by $2.0 million and $6,000 for the nine months ended September 30, 2011 and 2010, respectively.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Dallas, which provides an additional source of funds. Federal Home Loan Bank advances decreased $2.0 million to $14.0 million at September 30, 2011. At September 30, 2011, we had remaining credit available under the FHLB of Dallas program of $106.9 million.

SharePlus Federal Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2011, SharePlus Federal Bank exceeded all regulatory capital requirements. SharePlus Federal Bank is considered “well capitalized” under regulatory guidelines. See Note 8 — Regulatory Capital of the notes to the consolidated financial statements.

Nonperforming Assets

Nonperforming Loans. At September 30, 2011, our nonaccrual loans totaled $926,000. The non-accrual loans consisted of nine single-family residential loans totaling $468,000 with $117,000 in specific allowances, four commercial business loans totaling $319,000 with $119,000 in specific allowances and four home equity loans totaling $139,000 with $37,000 in specific allowances. Two of the home equity loans totaling $68,000 were brought current in October, 2011. Three of the commercial business loans totaling $119,000 and four of the single-family residential loans totaling $85,000 were charged-off subsequent to September 30, 2011.

For the nine months ended September 30, 2011, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $33,000. Interest income recognized on such loans for the nine months ended September 30, 2011 was $18,000.

At September 30, 2011, we had a total of 13 loans that were not currently classified as nonaccrual, 90 days past due or troubled debt restructurings, but where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that could result in disclosure as nonaccrual, 90 days past due or troubled debt restructurings. All of these loans are being monitored on our Watch List at September 30, 2011. Two of these loans are automobile loans, with an aggregate loan balance of $7,000, and were made to individuals who have declared personal bankruptcy. Ten of these loans, with an aggregate balance of $1.2 million, are collateralized by one- to four-family residential mortgages of borrowers who have, on occasion, been late with scheduled payments. One of these loans is a commercial real estate loan totaling $1.9 million which has been impacted by slower than projected leasing activity and rental rates below projections at the time of origination. This property is now 77% leased. This loan is current and continues to maintain significant interest and tax reserves at the Bank.

Troubled Debt Restructurings. Troubled debt restructurings include loans for which either a portion of interest or principal has been forgiven, or for loans modified at interest rates or on terms materially less favorable than current market rates. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At September 30, 2011, we had $6.1 million of troubled debt restructurings (not included in nonaccrual loans) related to 14 consumer loans totaling $106,000, five residential loans totaling $715,000 and three commercial real estate loans totaling $5.3 million. The $5.3 million in commercial real estate loans were modified during the first quarter of 2011, and included significant principal repayments from the borrowers, as well as interest rate reductions on each loan. The borrowers continued to make interest payments throughout the modification process. Management believes these modifications will allow for continued performance and additional time to market the properties, and recent appraisals on the properties indicate that the loans are adequately collateralized. Of this $6.1 million in troubled debt restructurings (not included in nonaccrual loans), one loan totaling $1,000 was past due between 30-89 days.

Other Real Estate Owned. At September 30, 2011, we had $2.2 million in other real estate owned, consisting of commercial real estate, with a carrying value of $2.0 million and one single-family dwelling of $158,000.

Classification of Assets. Assets that do not expose us to risk sufficient to warrant classification, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention. As of September 30, 2011, we had $1.9 million of assets designated as special mention with specific allowance of $0.

When we classify assets as either substandard or doubtful, we allocate a portion of the related general loss allowances to such assets as we deem prudent. The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the balance sheet date. When we classify a problem asset as doubtful, we charge the asset off. For other classified assets, we provide a specific allowance for that portion of the asset that is considered uncollectible. Our determination as to the classification of our assets and the amount of our loss allowances are subject to review by our primary federal regulator, the Office of the Comptroller of the Currency, which can require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of our review of our assets at September 30, 2011, substandard assets consisted of loans of $8.1 million with specific allowance of $273,000 and other real estate owned of $2.2 million. There were no doubtful or loss assets at September 30, 2011.

As of September 30, 2011, our largest substandard asset was a $2.0 million commercial real estate loan collateralized by 119 acres of raw land located in Celina, Texas. The loan was originated in February 2008 to a developer who purchased the property for residential development. The land was appraised at $4.4 million in early 2008 with a loan to cost value of 67% at the time the loan was originated. The land was re-appraised in April 2010 for $2.6 million, and at that date no sales had occurred due to the general market downturn. The loan was originally structured on a five-year term, with interest payable quarterly and a minimum 5% principal reduction, from sales or investor contribution, due at the end of each of years 3 and 4. This loan was modified in March of 2011, and the borrower reduced the principal by $105,000. Terms were further modified to allow for continued performance and additional time to market the property. Following the loan modification, management also identified this loan as a troubled debt restructuring.

Allowance for Loan Losses

Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Specific Allowances for Identified Problem Loans. We establish a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not evaluated for impairment to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, adjusted for qualitative factors that could impact the allowance for loan losses. These qualitative factors may include changes in lending policies and procedures, existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current real estate environment.

In addition, as an integral part of their examination process, the Office of the Comptroller of the Currency will periodically review our allowance for loan losses. Such agency may require that we recognize additions to the allowance based on their judgments of information available to them at the time of their examination.

The allowance for loan losses decreased $404,000, or 18.9%, to $1.7 million at September 30, 2011 from $2.1 million at December 31, 2010. In addition, the allowance for loan losses to total loans receivable, including loans held for sale, decreased to 0.8% at September 30, 2011 as compared to 1.1% at December 31, 2010. The allowance for loan losses as a percentage of nonperforming loans decreased to 24.7% at September 30, 2011 from 39.2% at December 31, 2010. The decline was attributable primarily to the partial charge-off of a loan secured by undeveloped land, which was foreclosed in February 2011 and a partial charge-off of a loan secured by a retail center that was foreclosed in July 2011. Substandard loans decreased to $8.1 million at September 30, 2011 from $12.1 million at December 31, 2010. Nonperforming loans, including troubled debt restructurings not included in nonaccrual loans, increased to $7.0 million at September 30, 2011 from $5.4 million at December 31, 2010 resulting from an increase in troubled debt restructurings of $5.1 million, primarily related to three commercial real estate loans deemed to be adequately collateralized, and a $3.5 million decrease in nonaccrual loans. Nonperforming loans are evaluated to determine impairment.

Impaired loans with specific valuation allowances were $450,000 at September 30, 2011, and the related specific valuation allowance for loan losses was $273,000. Impaired loans without specific valuation allowances were $7.3 million at September 30, 2011.

To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at September 30, 2011 and December 31, 2010.

Appraisals are performed by a rotating list of independent, certified appraisers to obtain fair values on non-homogenous loans secured by real estate. The appraisals are generally obtained when market conditions change, annually for criticized loans, and at the time a loan becomes impaired.

We periodically evaluate the carrying value of loans and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations.

There were no changes in our nonaccrual or charge-off policies during the nine months ended September 30, 2011 or 2010. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans, including troubled debt restructurings, that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments. As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. For additional information, see Note 7 — Financial Instruments with Off-Balance Sheet Risk of the notes to the consolidated financial statements.

Contractual Obligations. In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Impact of Inflation and Changing Prices

Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

Not applicable, as the Registrant is a smaller reporting company.

Item 4. Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of September 30, 2011. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Senior Vice President and Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended September 30, 2011, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II — Other Information


Item 1.		Legal Proceedings

The Company is subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s financial condition or results of operations.


Item 1A.		Risk Factors

Not applicable, as the Registrant is a smaller reporting company.


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

None.


Item 3.		Defaults Upon Senior Securities

None.


Item 4.		[Reserved]


Item 5.		Other Information

None.


Item 6.		Exhibits


	3.1	Articles of Incorporation of SP Bancorp Inc. (1)

	3.2	Bylaws of SP Bancorp, Inc. (1)

	4.0	Form of Common Stock Certificate of SP Bancorp, Inc. (1)

	10.1	2010 Incentive Compensation Plan (1)

	10.2	2008 Nonqualified Deferred Compensation Plan (1)

	10.3	Phantom Stock Plan (1)

	31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101. INS		XBRL Instance Document

101. SCH		XBRL Taxonomy Extension Schema Document

101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF		XBRL Taxonomy Extension Definition Linkbase Document

101. LAB		XBRL Taxonomy Extension Label LInkbase Document

101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document


(1)		Incorporated by reference into this document from the Exhibits filed with the Securities Exchange Commission in the Registration Statement on Form S-1, and any amendments thereto, Registration No. 333-167967.

SIGNATURES

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


	SP BANCORP, INC.
Date: November 14, 2011		/s/ Jeffrey Weaver
		Jeffrey Weaver
		President and Chief Executive Officer

Date: November 14, 2011		/s/ Suzanne C. Salls
		Suzanne C. Salls
		Senior Vice President and Chief Financial Officer