10-K 1 d50235_10k.txt ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended December 31, 2001. OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________ to ________. Commission File number 0-24023 TEJAS BANCSHARES, INC. (Exact name of registrant as specified in its charter) Texas 75-1950688 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 905 South Fillmore, Suite 701, Amarillo, Texas 79101 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (806) 373-7900 Securities to be registered pursuant to Section 12(b) of the Act: None Title of each class Name of each exchange on which registered Not Applicable Not Applicable Securities registered pursuant to Section 12(g) of the Act: (Title of Class) Common Stock, $1.00 par value per share 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 filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Registration S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of registrant's voting stock held by nonaffiliates (which excludes the registrant's Board of Directors) as of March 1, 2002, was $77,571,237. This amount is based on the consideration offered by Wells Fargo & Company in connection with its pending acquisition of the registrant as more fully described in this Annual Report on Form 10-K. There is no established public trading market for the registrant's voting stock and there exists no other accurate method to determine its current market price. On March 1, 2002, the Company had 13,038,437 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: NONE PART I ITEM 1. BUSINESS. General Tejas Bancshares, Inc. Tejas Bancshares, Inc. (the "Company"), was incorporated in Texas on June 22, 1983. On December 31, 1983, the Company became a bank holding company, as defined in the Bank Holding Company Act of 1956, as amended (the "BHC Act"), by acquiring all issued and outstanding capital stock of Fritch State Bank, a Texas banking association. During 1997, Fritch State Bank relocated its main office to Amarillo, Texas, and converted its charter from a Texas banking association to a national banking association under the title "The First National Bank of Amarillo" (the "Bank"). Effective April 1999, the Company established a new middle tier holding company named Tejas Force, Inc. ("Force"). Force has no significant operations. In April 2001, the Company became a financial holding company under the BHC Act allowing it to affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or are complementary thereto. The Company owns all issued and outstanding capital stock of Force which, in turn, owns all issued and outstanding capital stock of the Bank. As of December 31, 2001, the Company had, on a consolidated basis, total assets of approxi mately $356,773,000; total deposits of approximately $299,854,000; total loans of approximately 310,589,000 (net of unearned discount and allowance for loan losses); and total stockholders' equity of approximately $55,128,000. The Company currently does not, as an entity, engage in separate business activities of a material nature apart from its activities for the Bank. The Company's primary activities are to assist in the management and coordination of the Bank's financial resources and to provide capital, business development, long-range planning, and public relations services for the Bank. The Bank operates under the day-to-day management of its own officers, and the Bank's Board of Directors formulates its own policies for banking and business matters. As noted above, the Company elected to become a financial holding company pursuant to the BHC Act which permits it to engage in activities which are "financial in nature." "Financial in nature" activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Board of Governors of the Federal Reserve System (the "Federal Reserve") determines from time to time to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. A bank holding company that is not also a financial holding company is limited to engaging in banking and such other activities as determined by the Federal Reserve to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Company currently conducts only those activities that are permissible of a bank holding company. 1 The Company's primary source of revenue is dividends from the Bank. Any future dividend payments by the Bank will be determined by the Bank based on its financial condition, and any dividends may be declared and paid only in compliance with applicable law and regulatory guidelines. As a bank holding company, the Company is subject to supervision and examination by the Federal Reserve in accordance with the requirements in the BHC Act and the rules and regulations promulgated thereunder by the Federal Reserve. The First National Bank of Amarillo The Bank is a national banking association with its main office in Amarillo, Texas. The Bank opened for business on April 10, 1965, as a Texas banking association and converted to a national banking association effective June 30, 1997. As a national banking association, the Bank is subject to regulation by the Comptroller of the Currency (the "Comptroller") in accordance with the requirements in the National Bank Act and the rules and regulations promulgated thereunder by the Comptroller. As of December 31, 2001, the Bank had total assets of approximately $356,631,000; total deposits of approximately $300,481,000; total loans of approximately $310,589,000 (net of unearned discount and allowance for loan losses); and total stockholders' equity of approximately $54,360,000. The Bank provides a full range of banking services to business, industry, public and governmental organizations, and individuals in Amarillo, Dalhart, and Fritch, Texas. The Bank serves its customers with a variety of commercial banking services. For businesses, the Bank offers checking facilities, certificates of deposit, short-term loans for working capital purposes, term loans for fixed assets and expansion needs, and other commercial loans for its business customers. When the borrowing needs of a customer exceed the Bank's lending limit, the Bank participates with other banks and, in certain cases, with William H. Attebury, a director of the Company, in making the loan. Similarly, the Bank provides other services for its customers through its correspondent and other relationships with other financial institutions. In addition, since mid-1999, the Bank has offered trust services. The individual services provided by the Bank include checking accounts, savings accounts, certificates of deposit, Money Market Deposit accounts, NOW accounts, IRA and qualified retirement plans, safe deposit facilities, and personal loan programs, including home improvement loans, mortgage loans, and installment loans for the purchase of automobiles and other consumer goods. The Bank also provides cashier's checks, travelers' checks, money orders, wire transfers, and bank-by-mail services. Pending Acquisition by Wells Fargo & Company On December 13, 2001, the Company entered into an agreement with Wells Fargo & Company ("WFC") providing for the merger of the Company with a subsidiary of WFC. If the merger is completed, WFC will exchange a total of $82,501,292 in value of its common stock for all outstanding shares of the Company's common stock and the Company will become a subsidiary of WFC. It is anticipated that the Bank will thereafter be merged into a banking subsidiary of WFC. A formula will determine the number of WFC shares each shareholder of the Company will receive in the merger. That number will not be known until the merger is completed. However, each 2 outstanding share of the Company's common stock will be exchanged for a fractional share of WFC common stock having a value between $6.05 and $6.22. The actual per share value will depend on the extent to which currently outstanding options to buy the Company's common stock are exercised before the merger. The per share value will decrease with each option exercised. For example, if no options are exercised, the per share value will be $6.22. If all outstanding options are exercised, the per share value will be $6.05. The Company does not expect a significant number of options to be exercised before the merger, however, it cannot guarantee this. The Company expects the exchange of WFC share for the Company's shares to be generally tax free to its shareholders for U.S. federal income tax purposes except for cash received instead of fractional WFC shares. If the merger is completed, the Company's shareholders will own less than 0.1% of the outstanding common stock of WFC. The Company's shareholders will vote on the merger at a special meeting of the shareholders to be held on April 18, 2002. The holders of at least two-thirds of the outstanding shares of the Company's common stock must approve the merger. No vote of WFC's stockholders is required to approve the merger. The merger is also subject to receipt of regulatory approval from the Federal Reserve. An application for the approval was filed in January 2002 and was approved on March 20, 2002. At the meeting, the Company's shareholders will also vote on proposals to approve payments to two officers of the Company and/or the Bank, to the extent the payments could constitute "excess parachute payments" under Section 280G of the Internal Revenue Code. These payments are separate and will not affect what a Company's shareholder will receive in the merger. It is presently anticipated that the merger will be completed during the second quarter of 2002, although there can be no assurance that this timetable will be met. Competition The banking business in the Bank's trade area, which includes Amarillo, Dalhart, and Fritch, and surrounding areas of the Texas Panhandle, has become increasingly competitive over the past several years, and the level of competition facing the Company and the Bank may increase further. The Company and the Bank experience competition in both lending and attracting funds from other banks and non-financial institutions in their market area. Non-bank competitors for deposits and deposit-type accounts include savings and loan associations, credit unions, securities firms, money market funds, life insurance companies, and the mutual funds industry. The Bank encounters competition for loans from other banks, savings and loan associations, finance companies, insurance companies, small loan and credit card companies, credit unions, pension trusts, and securities firms. Recent legislation, court decisions, and administrative actions have expanded the business activities in which banks and non-bank financial institutions may engage. When others engage in these activities, the level of competition experienced by the Company and the Bank increases. Some competitors are not subject to the same degree of regulation and supervision as the Company and the Bank. 3 Many banks and other financial institutions with which the Company and the Bank compete have capital resources and legal loan limits substantially above those maintained by the Company and the Bank. These institutions may also perform certain functions for their customers, including securities brokerage and international banking services, which the Company and the Bank presently do not offer directly. The Company considers its principal competition in the commercial banking business to be the other full-service banks in its primary market areas. The Company's products and services in its target market are most similar to those of area banks and, to some extent, savings associations. The Bank seeks to provide a high level of personalized banking service to professionals and owner-operated businesses, emphasizing quick and flexible responses to customer demands. The Bank relies heavily on its officers, directors, and existing shareholders to solicit and refer potential customers. Trust Department In connection with its personalized banking services to professionals and owner-operated businesses, the Bank formed a full-service Trust Department in mid-1999. The Trust Department provides the following services: Trust Administration. Consults with its customers regarding various trust options that fit their needs. As trustee, the Bank will, among other things, administer trusts per their terms, invest trust assets, keep records, make tax and fiduciary decisions, distribute income and/or principal to beneficiaries. Investment Management. Designs and implements an investment portfolio using multiple assets, styles and managers to meet its customers' personal risk tolerance, return needs, and time horizon. Custodial Services. As custodian, holds customers' assets in safekeeping and executes trade settlements. Financial and Tax Planning. Uses its expertise and extensive experience in addressing financial and tax planning issues. Estate Administration. Supervises the settlement of estates per the terms of its customers' wills as well as help in resolving in any unexpected issues. It may also act as agent for any designated executor and assist him or her with the estate settlement. Farm and Ranch Asset Management. Handles all matters to properly manage farm and ranch assets, including, among others, property leasing, property insurance, crop insurance, income collection and bill paying. Oil and Gas Asset Management. Handles all matters to manage oil and gas assets including, among others, leasing, production and income collection, operating expenses and tax reporting. Employee Benefits. Manages investments for 401(k) plans, pension and profit sharing plans, IRAs, and individual securities. 4 Agency/Consultant Agreement with Wells Fargo Bank Texas, N.A. During the first quarter of 2002, the Bank entered into an Agency/Consultant Agreement with Wells Fargo Bank Texas, N.A., pursuant to which Wells Fargo Bank Texas, N.A. has agreed to provide certain services and advice to the Bank's Trust Department when acting in a fiduciary or non-fiduciary capacity. Lending Activities One of the Bank's main objectives is to seek attractive lending opportunities in its service area. Accordingly, in addition to offering a broad range of deposit services and products typically available from most banks and savings associations, the Bank offers a full range of retail and commercial credit services designed to meet the borrowing needs of small and medium-sized businesses and customers in the Bank's service area. These products include commercial loans (such as lines of credit, term loans, refinancing, etc.), personal lines of credit, direct-installment customer loans, residential mortgage loans, construction loans, and letters of credit. Substantially all of the Bank's loans are made to borrowers in the Bank's service area, which includes the Texas Panhandle. The Bank has, however, made a small number of loans outside its service area and in surrounding states. This practice is generally limited to borrowers (both individuals and businesses) who have either specific ties to the Bank's service area or businesses in the Bank's service area. The Bank conducts its lending activities pursuant to the loan policy adopted by its Board of Directors. See Item 1. "BUSINESS - - Loan Policies and Underwriting Practices" for a discussion of the Bank's loan policy. Substantially all loans in the Bank's portfolio have been originated by the Bank. A few loans in the Bank's portfolio, however, were purchased from a competing bank. These purchased loans had been originated by members of the Bank's lending staff during their prior tenure at the competing bank and were seasoned loans of known customers. These purchased loans conform with the Bank's underwriting standards. This practice was unique to the Bank's reorganization during the latter half of 1997. The Bank may, from time to time, purchase loans from other banks and participations from correspondent banks, which loans will conform to the Bank's underwriting standards. The Bank has no foreign loans or highly leveraged transaction loans in its portfolio. Loan Portfolio For purposes of this discussion, the Bank's loans are divided into four categories: commercial loans, agricultural loans, real estate loans, and loans to individuals, each discussed below. Commercial Loans. The Bank's commercial loans are diversified to meet most business needs. The commercial loans offered by the Bank include (i) commercial real estate loans (as discussed herein), (ii) short-term working capital and other commercial loans, and (iii) construction loans (discussed herein). Credit analysis of a commercial loan application involves a review of many related factors including collateral, type of loan, loan maturity, terms and conditions, and various loan-to-value ratios related to the Bank's loan policy. The Bank requires commercial borrowers to submit financial statements at least annually. Any exceptions to this requirement are extremely rare. In addition, the Bank requires appraisals or evaluations for loans secured by real estate. These appraisals or evaluations are obtained before the funds are advanced. The Bank also requires personal guarantees on all non-individual/consumer loans, except when cash collateral or financial strength of the borrower mitigates this requirement. The total number of loans in the Bank's portfolio without personal guarantees at December 31, 2001, is insignificant compared to the 5 overall value of its loan portfolio. Terms are granted commensurate with the useful life of the collateral offered. Agricultural Loans. Agricultural loans include loans to cattle feeding operations, cattle producers, farmers and ranchers, and other agriculture-related borrowers. These loans are subject to the credit analysis, financial statement, and collateral requirements mentioned above under commercial loans. Real Estate Loans. Real estate loans are divided into three categories: residential mortgage lending, construction loans, and commercial real estate loans, each discussed in greater detail below. Residential Mortgage Loans. The Bank's continued commitment to provide residential mortgage loans led to the decision to start a full scale Mortgage Department during the first quarter of 2000. This decision was made based on the following factors: (i) the commitment to be more competitive in this line of business, (ii) a strong real estate market, and (iii) low interest rates. Residential loan originations are generated by the Bank's Mortgage Department with referrals coming from the Bank's lending staff, marketing efforts, present customers, walk-in customers, and referrals from real estate agents, mortgage brokers, and builders. The Bank focuses its lending efforts primarily on the origination of loans secured by first mortgages on owner-occupied, one-to- four family residences. Substantially all of the Bank's one-to-four family residential mortgage originations are secured by properties in and around Amarillo. The outstanding principal amount of loans secured by properties outside the Bank's service area is not significant compared to the value of the Bank's entire loan portfolio. The Bank does not purchase residential mortgage loans but may sell loans it originates on the secondary market. Residential mortgage products include Conventional and Jumbo loan products. The terms vary from fixed-rate to variable-rate loans with amortization up to 30 years. The Bank requires loans secured by first mortgages on real estate to have loan-to-value ratios within limits as specified by the secondary market. The Bank's Mortgage Department also originates home equity loans. The terms of these loans are very specific as mandated by federal and state law. The Bank's Mortgage Department currently operates under a Retail Broker Origination Program with Wells Fargo Home Mortgage, Inc., pursuant to which the Bank provides mortgage products to its customers as a broker originator on behalf of Wells Fargo. Under this program, the Bank continues to originate mortgage loans and then sells these loans to Wells Fargo Home Mortgage, Inc. The Bank entered into this arrangement with Wells Fargo Home Mortgage, Inc. during the first quarter of 2002. Construction Loans. Construction loans consist of one-to-four family and commercial. The Bank's emphasis in construction loans is directed toward properties that will either be sold or have a specific repayment source at completion. The Bank may finance construction loans for projects built on speculation, but these typically have substantial secondary sources of repayment. The Bank's construction loans are secured by property located primarily in its service area and typically have variable interest rates during the construction period. Construction loans to individuals are generally made in connection with permanent financing on the property. In determining whether to originate real estate construction loans, the Bank considers such factors as the borrower's financial condition and debt service coverage. 6 Commercial Real Estate Loans. Commercial real estate loans provide permanent financing for commercial and retail structures, office buildings, warehouses, churches, and multiple-family buildings. Commercial real estate lending entails a thorough analysis of the borrower's financial condition and/or the tenant's financial condition, debt service coverage, and current and projected economic conditions. Commercial real estate loans are made at both fixed and adjustable interest rates, generally for terms up to 15 years. Loans to Individuals. Loans to individuals include personal and consumer loans, which may be secured or unsecured depending on the credit quality and purpose of the loan. The Bank requires loan applications and/or personal financial statements from its borrowers on loans that it originates. Loan officers complete a debt-to-income analysis that must meet established standards of the Bank's lending policy. Consumer loan terms vary according to the type and value of collateral, length of contract, and creditworthiness of the borrower. The Bank's underwriting standards for consumer loans include an application, a determination of the applicant's payment history on other debts, with greatest weight being given to payment history with the Bank, and an assessment of the borrower's ability to meet existing obligations and payments on the proposed plan. Although the applicant's creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed amount of the loan. See Item 1. "BUSINESS -- Loan Policies and Underwriting Practices." Additional information regarding the various components of the Bank's loan portfolio is provided in Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Loan Portfolio." Risk Elements The risk elements in the Company's loan portfolio are similar to those in other comparable commercial banks. Risk elements related to specific loan categories are as follows: Commercial Loans. Commercial loans include a variety of loans to commercial entities, including loans to finance accounts receivable, inventories, and other business activities. Risk of nonperformance on these loans includes the risk that the borrower's cash flow will be insufficient to service the debt and the risk that collateral will not be sufficient to offset any loss. Certain loans to qualified borrowers may be unsecured. Agricultural Loans. Agricultural loans, in addition to risks similar to other commercial loans as described above, may be susceptible to commodity market risk and weather. Real Estate Loans. Real estate loans represent the Bank's greatest concentration of loans, approximately 45 percent of the portfolio at December 31, 2001. However, the amount of risk associated with these loans is mitigated in part because of the type of loans involved. Most of the Bank's real estate loans are collateralized by properties in and around Amarillo. However, the Bank does have some real estate loans that would be considered to be outside of the trade territory, most of which are commercial real estate properties that are occupied by tenants with substantial financial capacity. Real estate properties are particularly sensitive to general economic conditions and experience devaluation when economic factors decline. Accordingly, an increase in interest rates or a softening of the real estate market may reduce demand for this product. Management also pursues an aggressive policy of reappraisal on any real estate loan that becomes troubled, and potential exposures are recognized and reserved for as soon as they are identified. 7 Installment Loans. Risk of nonperformance on these loans includes the risk that the borrower's cash flow will be insufficient to service the debt and the risk that the collateral will be insufficient to offset any loss. Currently, the economy in the Bank's service area appears stable. Management is, however, cognizant of the nationwide increase in the personal bankruptcy rate and believes this trend may have an adverse effect on the Bank's net charge-offs. Most of the Bank's loans to individuals are collateralized, which management believes will limit its exposure in this area if current bankruptcy trends continue. Loan Policies and Underwriting Practices General. The Bank's credit officers strive to accommodate all credit needs of creditworthy borrowers. Attempts are made, within the parameters of the Bank's loan policy, as discussed below, to make and structure loans designed to generate future business for the Bank. The Bank operates within the parameters of its loan policy and underwriting standards. These policies and standards, however, may not apply to all potential borrowers or circumstances, and, accordingly, deviations from the loan policy or underwriting standards, related to either collateralization requirements and/or loan-to-value ratio guidelines, are made only in extreme situations. These deviations, which are infrequent and involve loans representing an insignificant amount relative to the value of the Bank's overall loan portfolio, are addressed individually during the underwriting process. Although the Bank does not formally track these deviations from policy as a whole (except for real estate loans), known deviations are addressed herein. The following summarizes the Bank's loan policy and underwriting practices. Loan Policy. The Bank maintains a comprehensive loan policy that establishes guidelines for all categories of lending. It represents a reference guide and training tool outlining Bank Management's position relative to lending activities. It is written to provide guidelines to be consistently applied by the Bank's loan officers without destroying the innovative and creative approaches necessary to cope with changing markets. The Bank's Loan Committee administers its loan policy in accordance with directives from the Bank's Board of Directors. The Loan Committee is comprised of Senior Credit Officers. The Committee reviews policy and procedures at least annually, or more frequently as needed, and submits recommendations to the Bank's Chief Executive Officer for review and approval. Ultimate approval of the loan policy rests with the Bank's Board of Directors. The Bank's primary lending area includes customers residing in the Panhandle of Texas and, to a lesser extent, in portions of the neighboring states of Oklahoma, Kansas, Colorado, and New Mexico. Other principles of the Bank's loan policy are described below: o The Bank will not engage in non-recourse lending unless the loan is specifically approved in advance by the Loan Committee or the Chief Executive Officer. Non-recourse lending is defined as a loan with no personal liability of the principal of a borrowing entity when the collateral is the only source of repayment. Although the Bank prefers to obtain guarantees of payment from each principal of a closely held corporation, this is not considered non-recourse lending if there is an additional source of repayment other than the collateral. 8 o If an applicant or a loan application reflects a potential credit weakness, adequate additional support, such as co-signers or enforceable guarantees, is sought. However, these are seldom considered the primary source of repayment and are, therefore, not heavily relied on by the Bank. o Credit officers are responsible for ascertaining the real market value of any collateral taken on a loan. Appraisal reports or comparable sales reports are used as guidelines only, not as an absolute measure of market value. o The Bank satisfies itself as to the repayment source of the borrower, whether it is cash flow or liquidation of collateral associated with a normal business cycle (e.g., sale of crops or cattle, or inventory turnover). Supervision and Regulation Banking is a complex, highly regulated industry. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of monetary policy. In furtherance of those goals, Congress has created several largely autonomous regulatory agencies and enacted much legislation that governs banks, bank holding companies, and the banking industry. Descriptions of and references to the statutes and regulations below are brief summaries and do not purport to be complete. The descriptions are qualified in their entirety by reference to the specific statutes and regulations discussed. The Company As a bank holding company under the BHC Act, the Company is registered with and is subject to regulation by the Federal Reserve. Among other things, applicable statutes and regulations require the Company to file annual and other reports with and furnish information to the Federal Reserve, which may make inspections of the Company. The BHC Act provides that a bank holding company must obtain the prior approval of the Federal Reserve to acquire more than 5 percent of the voting stock or substantially all the assets of any bank or bank holding company. In addition, the BHC Act restricts the Bank's extension of credit to the Company. The BHC Act also provides that, with certain exceptions, a bank holding company may not (i) engage in any activities other than those of banking or managing or controlling banks and other authorized subsidiaries or (ii) own or control more than 5 percent of the voting shares of any company that is not a bank, including any foreign company. A bank holding company is permitted, however, to acquire shares of any company, the activities of which the Federal Reserve, after due notice and opportunity for hearing, has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. The Federal Reserve's regulations state specific activities that are permissible under that exception. The Company does not currently have any agreements or commitments to engage in any nonbanking activities. In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the Federal Reserve considers whether any such activity by an affiliate of the holding company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh any possible adverse effects such as undue consideration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve has cease-and-desist powers over parent 9 holding companies and nonbanking subsidiaries if their actions constitute a serious threat to the safety, soundness, or stability of a subsidiary bank. Federal regulatory agencies also have authority to regulate debt obligations (other than commercial paper) issued by bank holding companies. That authority includes the power to impose interest ceilings and reserve requirements on the debt obligations. A bank holding company and its subsidiaries are also prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property, or furnishing of services. A bank holding company may also acquire shares of a company which furnishes or performs services for a bank holding company and acquire shares of the kinds and in the amounts eligible for investment by national banking associations. Federal banking law allows a bank holding company to acquire or establish banks in any state of the United States. In addition, Texas banking laws permit a bank holding company which owns stock of a bank outside Texas (an "Out-of-State Bank Holding Company") to acquire a bank or a bank holding company in Texas. Such acquisition may occur only if the Texas bank to be directly or indirectly controlled by the Out-of-State Bank Holding Company has existed and continuously operated as a bank for at least five years. In any event, however, a bank holding company may not own or control banks in Texas whose deposits would exceed 20 percent of the total deposits of all federally insured deposits in Texas. On April 16, 2001, the Company became a financial holding company under the BHC Act. As a bank holding company that has elected also to become a financial holding company pursuant to the BHC Act, the Company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. "Financial in nature" activities include securities underwriting, dealing and market making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve determines from time to time to be so closely related to banking or managing or controlling banks as to be proper incident thereto. No Federal Reserve approval is required for the Company to acquire a company (other than a bank holding company, bank or savings association) engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. To date, the Company has not engaged in any of the expanded activities permitted of a financial holding company. The Bank The Bank is subject to various requirements and restrictions under federal and state laws, and to regulation, supervision, and regular examination by the Comptroller. The Bank is subject to the Comptroller's power to enforce compliance with applicable banking statutes and regulations. These requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans and the interest charged thereon, and restrictions relating to investments and other activities of the Bank. Impact of the Gramm-Leach-Bliley Act. Federal banking regulators, as required under the Gramm-Leach-Bliley Act (the "GLB Act"), have adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. The rules require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to nonaffiliated third parties. 10 The privacy provisions of the GLB Act affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. Dividends. The Bank may generally pay dividends on its stock as long as their payment complies with applicable law and regulations. A national bank may not pay dividends from its stated capital. Additionally, if losses have been sustained at any time by a national bank equal to or exceeding its undivided profits then on hand, it can pay no dividend, and all dividends must be paid out of net profits then on hand, after deducting expenses, including losses and provisions for loan losses. The payment of dividends out of net profits of a national bank is further limited by a provision of the National Bank Act that prohibits it from declaring a dividend on its shares of its stock until 10 percent of its net profits are transferred to the surplus each time dividends are declared, unless the transfer would increase the bank's surplus to an amount greater than its capital. In addition, the prior approval of the Comptroller is required if the total of all dividends declared by a national bank in any calendar year exceeds the total of its net profits for that year combined with its net profits for the two preceding years, less any required transfers to surplus or to funds to retire any preferred stock. Additionally, under 12 U.S. C. ss. 1818, the Comptroller has the right to prohibit the payment of dividends by a national bank if the payment is deemed to be an unsafe and unsound banking practice. Transactions with Affiliates. The Federal Reserve Act prohibits the Bank from engaging in specified transactions (including, for example, loans) with certain affiliates unless the terms and conditions of the transactions are substantially the same or at least as favorable to the Bank as those prevailing at the time for comparable transactions with or involving other non-affiliated entities. In the absence of comparable transactions, any transaction between a bank and its affiliates must be on terms and under circumstances, including credit standards, that in good faith would be offered or would apply to non-affiliated companies. In addition, certain transactions, referred to as "covered transactions," between the Bank and its affiliates may not exceed 10 percent of the Bank's capital and surplus per affiliate and an aggregate of 20 percent of its capital and surplus for covered transactions with all affiliates. Certain transactions with affiliates, such as loans, also must be secured by collateral of specific types and amounts. Finally, the Bank may not purchase low-quality assets from an affiliate. The Company is an affiliate of the Bank. Loans to Insiders. Federal law also constrains the types and amounts of loans that any bank may make to its executive officers, directors, and principal shareholders. Among other things, the loans must be approved by the Bank's Board of Directors in advance and must be on terms and conditions as favorable to the Bank as those available to unrelated persons. Regulation of Lending Activities. Loans made by the Bank are also subject to numerous federal and state laws and regulations, including truth-in-lending statutes, the Federal Consumer Credit Protection Act, the Texas Consumer Credit Code, the Texas Consumer Protection Code, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act, and adjustable rate mortgage disclosure requirements. Remedies to the borrower and penalties to the Bank are provided for the Bank's failure to comply with these laws and regulations, whose scope and requirements have expanded significantly in recent years. Branch Banking. Pursuant to the Texas Finance Code, all Texas banks may branch statewide. Accordingly, a bank located anywhere in Texas may, subject to regulatory approval, establish branch facilities near any of the Bank's facilities and within its market areas. In addition, out-of-state banks may branch into Texas, and Texas banks may branch into other states. If other 11 banks establish branch facilities near the Bank or any of its facilities, it is uncertain whether these facilities would have a materially adverse effect on the Bank's business. Governmental Monetary Policies. The commercial banking business is affected not only by general economic conditions but also by the monetary policies of the Federal Reserve. Changes in the discount rate on member bank borrowings, control of borrowings, control of borrowings at the "discount window," open market operations, the imposition of and changes in reserve requirements against member banks, deposits and assets of foreign branches, the imposition of and changes in reserve requirements against certain borrowings by banks and their affiliates, and the limits on interest rates which member banks may pay on time and savings deposits are some of the instruments of monetary policy available to the Federal Reserve. Those policies influence significantly the overall growth of bank loans, investments, deposits, and interest rates charged on loans or paid on time and savings deposits. Any future monetary policies and their effect on the Bank's business and earnings, therefore, cannot be predicted accurately. Capital Adequacy. In 1983, Congress enacted the International Lending Supervision Act, which, among other things, directed the Comptroller to establish minimum levels of capital for national banks and to require national banks to achieve and maintain adequate capital. Pursuant to this authority, the Comptroller has promulgated capital-adequacy regulations to which all national banks, such as the Bank, are subject. The Comptroller's capital-adequacy regulations are based upon a risk-based capital determination, whereby a bank's capital adequacy is determined in light of the risk, both on- and off- balance sheet, in the bank's assets. Different categories of assets are assigned risk weightings and, based thereon, are counted at a percentage (from 0 to 100 percent) of their book value. The regulations divide capital between Tier 1 capital, or core capital, and Tier 2 capital, or supplemental capital. Tier I capital consists primarily of common stock, noncumulative perpetual preferred stock, related surplus, and minority interests in consolidated subsidiaries. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of varying percentages of the allowance for loan and lease losses, all other types of preferred stock not included in Tier 1 capital, hybrid capital instruments, and term-subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The Tier 1 component must comprise at least 50 percent of qualifying total capital. Every national bank must maintain a certain ratio of Tier 1 capital to risk-weighted assets (a "Core Capital Ratio") and a ratio of Tier 1 plus Tier 2 capital to risk-weighted assets (a "Risk-Based Capital Ratio"). All banks must achieve and maintain a minimum Core Capital Ratio of at least 4 percent and a minimum Risk-Based Capital Ratio of 8 percent. As of December 31, 2001, the Bank's Core Capital Ratio was 17.34 percent, and its Risk- Based Capital Ratio was 18.59 percent. In addition, national banks generally must achieve and maintain a Leverage Ratio of at least 4 percent. The leverage ratio is measured as the ratio of Tier 1 capital to adjusted quarterly average assets. As of December 31, 2001, the Bank's Leverage Ratio was 15.29 percent. FIRREA. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA"), enacted in 1989, includes various provisions that affect or may affect the Bank. Among other things, FIRREA generally permits bank holding companies to acquire healthy thrifts and failed or failing 12 thrifts. FIRREA also removed certain cross-marketing prohibitions previously applicable to thrift and bank subsidiaries of a common holding company. Furthermore, a multi-bank holding company may now be required to indemnify the federal deposit insurance fund against losses it incurs for the company's affiliated banks, which in effect makes a bank holding company's equity investments in healthy bank subsidiaries available to the Federal Deposit Insurance Company (the "FDIC") to assist the company's failing or failed bank subsidiaries. In addition, pursuant to FIRREA, any depository institution that has been chartered less than two years, has undergone a change in control within the last two years, is not in compliance with the minimum capital requirements of its primary federal banking regulator, or is otherwise in a troubled condition must notify its primary federal banking regulator of the proposed addition of any person to the board of directors or the employment of any person as a senior executive officer of the institution at least 30 days before the addition or employment becomes effective. During this 30-day period, the applicable federal banking regulatory agency may disapprove of the addition or employment of the director or officer. The Bank is not presently subject to those requirements. FIRREA also expands and increases civil and criminal penalties available to the appropriate regulatory agency against certain "institution-affiliated parties" primarily including (i) management, employees, and agents of a financial institution, as well as (ii) independent contractors such as attorneys and accountants and others who participate in the financial institution's affairs and who caused or are likely to cause more than minimum financial loss to or a significant adverse effect on the institution, by knowingly or recklessly violating a law or regulation, breaching a fiduciary duty, or engaging in unsafe or unsound practices. These practices can include an institution's failure to timely file required reports or to submit accurate reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue cease-and-desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications, or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, or take other action the ordering agency determines to be appropriate. As a result, the Comptroller now has greater enforcement power than it has had since deregulation of the banking industry in 1978. The FDIC Improvement Act. The FDIC Improvement Act of 1991 ("FDICIA") makes many reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions, and improvement of accounting standards. This statute also limits deposit insurance coverage, implements changes in consumer protection laws, and calls for least-cost resolution and prompt regulatory action for troubled institutions. FDICIA requires every national bank with total assets over $500,000,000 to have an annual independent audit of its financial statements by a certified public accountant to verify that the financial statements are presented in accordance with generally accepted accounting principles and comply with other disclosure requirements prescribed by the Comptroller. FDICIA also places certain restrictions on activities of banks depending on their level of capital. FDICIA divides banks into five different categories, depending on their level of capital. Under regulations adopted by the Comptroller, a bank is "well capitalized" if it has a total Risk-Based Capital Ratio of 10 percent or more, a Core Capital Ratio of 6 percent or more, and a Leverage Ratio of 5 percent or more, and the bank is not subject to an order or capital directive to meet and maintain a certain capital level. A bank is "adequately capitalized" if it has a total Risk- 13 Based Capital Ratio of 8 percent or more, a Core Capital Ratio of 4 percent or more, and a Leverage Ratio of 4 percent or more (unless it receives the highest composite rating at its most recent examination and is not experiencing or anticipating significant growth, in which instance it must maintain a Leverage Ratio of 3 percent or more). A bank is "undercapitalized" if it has a total Risk- Based Capital Ratio of less than 8 percent, a Core Capital Ratio of less than 4 percent, or a Leverage Ratio of less than 4 percent. A bank is "significantly undercapitalized" if it has a Risk-Based Capital Ratio of less than 6 percent, a Core Capital Ratio of less than 3 percent, and a Leverage Ratio of less than 3 percent. A bank is "critically undercapitalized" if it has a Leverage Ratio of 2 percent or less. In addition, the Comptroller may downgrade a bank's classification (but not to "critically undercapitalized") based on other considerations even if the Bank meets the capital guidelines. According to these guidelines, the Bank was classified as "well capitalized" as of December 31, 2001. In addition, if a national bank is undercapitalized, it must submit a capital restoration plan to the Comptroller. Pursuant to FDICIA, an undercapitalized national bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the Comptroller's acceptance of a capital restoration plan for the bank. Furthermore, if a national bank is undercapitalized, the Comptroller may take certain actions to correct its capital position; if a bank is significantly undercapitalized or critically undercapitalized, the Comptroller would be required to take one or more prompt corrective actions. These actions would require among other things: (i) sales of new securities to bolster capital, (ii) improvements in management, (iii) limits on interest rates paid, (iv) prohibitions on transactions with affiliates, (v) termination of certain risky activities, and (vi) restrictions on compensation paid to executive officers. If a national bank is critically undercapitalized, FDICIA requires it to be placed into conservatorship or receivership within 90 days, unless the Comptroller and the FDIC concur that other action would better achieve the FDICIA's purposes for prompt corrective action. A bank's capital classification affects the frequency of its examinations, impacts its ability to engage in certain activities, and affects the deposit insurance premiums it pays. Under FDICIA, the Comptroller must conduct a full-scope, on-site examination of every national bank at least once every 12 months. An exception to this rule is made, however, for national banks (i) with assets of less than $100,000,000, (ii) categorized as "well capitalized," (iii) found to be well managed with an outstanding composite rating, and (iv) not subject to a change in control during the last 12 months; these banks will be examined by the Comptroller once every 18 months. Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. "Well-capitalized" banks are permitted to accept brokered deposits, but all banks that are not well capitalized cannot accept those deposits. The FDIC may, on a case-by-case basis, permit banks that are adequately capitalized to accept brokered deposits if it determines that the deposits would not constitute an unsafe or unsound practice for the bank. In addition, under FDICIA, the FDIC can assess insurance premiums on a bank's deposits at a variable rate depending on the probability that the deposit insurance fund will incur a loss for the bank. (Under prior law, the deposit insurance assessment was a flat rate, regardless of the likelihood of loss.) In this regard, the FDIC has issued regulations for a transitional risk-based deposit assessment that determines the deposit insurance assessment rates on the basis of the bank's capital classification and supervisory evaluations. Each of these categories has three subcategories, 14 resulting in nine assessment risk classifications. The three subcategories about capital are "well capitalized," "adequately capitalized," and "less than adequately capitalized" (includes "undercapitalized," "significantly undercapitalized," and "critically undercapitalized" banks). The three subcategories for supervisory concerns are "healthy," "supervisory concern," and "substantial supervisory concern." A bank is deemed "healthy" if it is financially sound with only a few minor weaknesses. A bank is deemed subject to "supervisory concern" if it has weaknesses that, if not corrected, could result in significant deterioration of the bank and increased risk to the Bank Insurance Fund. A bank is deemed subject to "substantial supervisory concern" if it poses a substantial probability of loss to the Bank Insurance Fund of the FDIC (the "BIF"). The federal banking agencies have established guidelines which prescribe standards for depository institutions relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and management compensation. The agencies may require an institution which fails to meet these standards to submit a compliance plan. The agencies are also currently proposing standards for asset quality and earnings. The Company cannot predict what effect these guidelines will have on the Bank. Deposit Insurance. The Bank's deposits are insured up to $100,000 per insured account by the BIF. As an institution whose deposits are insured by BIF, the Bank paid deposit insurance premiums to the BIF of approximately $50,600 for the year ended December 31, 2001. The Bank's deposit insurance assessments may increase depending upon the risk category and subcategory, if any, to which the Bank is assigned by the FDIC. Any increase in insurance assessments could have an adverse effect on the Bank's earnings. Future Legislation. Various legislation, including proposals to substantially change the financial institution regulatory system, is from time to time introduced in Congress. Legislation of this type may change banking statutes and the operating environment of the Company and the Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any of this potential legislation will be enacted, and if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company or the Bank. THE FOREGOING SUMMARIZES SOME OF THE RELEVANT LAWS, RULES, AND REGULATIONS GOVERNING NATIONAL BANKS AND BANK HOLDING COMPANIES, BUT DOES NOT PURPORT TO BE A COMPLETE SUMMARY OF ALL APPLICABLE LAWS, RULES, AND REGULATIONS GOVERNING BANKS AND BANK HOLDING COMPANIES. Environmental Factors To date, the Company has not been required to perform any investigations or clean-up activities, nor has it been subject to any environmental claims. There can be no assurance, however, that this will remain the case in the future. In the ordinary course of its business, the Company from time to time forecloses on properties securing loans. There is a risk that the Company could be required to investigate and clean up hazardous or toxic substances or chemical releases at those properties after their acquisition and could be held liable to a governmental entity or to third parties for property damage, personal injury, and investigation and clean-up costs in connection with the contamination. The costs of investigation, remediation, or removal of those substances may be 15 substantial, and the presence of the substances, or the failure to properly remediate the property, may adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances also may be liable for the costs of removal or remediation of the substances at the disposal or treatment facility, whether or not the person owns or operates the facility. In addition, the owner or former owners of a contaminated site may be subject to common-law claims by third parties based on damages and costs resulting from environmental contamination of the property. In its business, the Company may acquire properties through foreclosure, and hazardous or toxic waste could be found on them. The Company could then be held responsible for cleaning up or removing the waste, and the cost could exceed the value of the properties. Employees The Company is a bank holding company and primarily conducts its operations through its subsidiary, the Bank. The Company has no paid employees. Certain Bank employees and directors conduct the Company's business but are not specifically compensated as Company employees. As of December 31, 2001, the Bank had 102 full-time and 16 part-time employees. Employees receive benefits, such as life and health insurance plans. The Bank's employees are not represented by any collective bargaining group. The Bank considers its relations with its employees to be good. ITEM 2. PROPERTIES. The Company's executive and administrative offices are located at 905 South Fillmore, Amarillo, Texas. The Company has executed two leases with an unaffiliated third party for this location, one for approximately 5,600 square feet on the seventh floor, which is used for the Company's and the Bank's executive and administrative offices, and one for approximately 2,100 square feet on the ground floor, which is used for retail banking transactions. These leases expire in June 2004 and provide for rent escalations tied to either increases in the lessor's operating expenses or fluctuations in the consumer price index in the relevant geographic market. The term of these leases may be renewed through June 2012. In addition to the main office, the Bank maintains five full-service branch offices in Amarillo (three branches), Dalhart, and Fritch, Texas. Amarillo, Texas As described above, the Bank's main retail office is located on the first floor of a seven-story office complex at 905 South Fillmore in downtown Amarillo. The Bank leases approximately 7,700 square feet of office space from an unaffiliated third party. This location offers a walk-in lobby but has no drive-through lanes. On February 2, 1998, and February 17, 1998, the Bank opened two de novo, full-service branches in commercial areas of Amarillo. One branch is near the intersection of U.S. Interstate 40 and Washington Street and is highly visible to passing traffic. The other branch is near the intersection of 34th Avenue and Bell Street, also a highly visible location. The Bank constructed and owns each branch building and leases the ground space from unaffiliated third parties. The leases expire in February 2010 and August 2027. Each stand-alone branch facility is approximately 2,500 square feet and has five drive-through lanes and one walk-up automated teller machine. 16 On December 4, 1999, the Bank opened another de novo, full-service branch on 45th Street near Coulter in a temporary facility. The branch moved into its completed facility located at 45th and Coulter on January 28, 2001. The Bank owns this facility. Dalhart, Texas On October 15, 1997, the Bank opened a de novo, full-service branch at 1723 Tennessee in Dalhart. This branch, which offers four drive-through lanes and one drive-up automated teller machine, is located in a strip shopping center in the business district and is surrounded by other commercial businesses. This facility, which occupies approximately 5,500 square feet, is leased from an unaffiliated third party. The initial term of the lease will expire in October 2002 but may be renewed through October 2012. Fritch, Texas The Fritch branch of the Bank is located downtown at 102 West Broadway (Highway 136). It consists of a one-story brick building (approximately 3,230 square feet) with three drive-through lanes and one drive-up automated teller machine; it is owned by the Bank. ITEM 3. LEGAL PROCEEDINGS. The Company and the Bank are sometimes involved in various legal proceedings in the normal course of their business. None of these matters, either singularly or in the aggregate, would have, in the management's opinion, a material adverse effect upon the financial statements of the Company or the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Market Information, Holders, and Dividends. There is no established public trading market for the Company's Common Stock, and, as the Transfer Agent and Registrar for the Company's Common Stock, the Bank believes the Common Stock is seldom traded and is not necessarily aware of the price for which it is bought or sold. Management of the Company does not anticipate that there will be an active public trading market for the Company's Common Stock. None of the Company's shares of Common Stock (i) is subject to outstanding options or warrants to purchase nor are any securities convertible into the Company's Common Stock, except for options to purchase 587,750 shares of Common Stock which were outstanding at December 31, 2001, to key employees of the Bank under the Company's 1998 Incentive Stock Plan, or (ii) is being or proposed to be publicly offered by the Company. During the third quarter ended September 30, 2001, the Company acquired 373,997 shares of its Common Stock from Donald E. Powell, the former Chairman, President and Chief Executive Officer of the Company, at a price of $6.00 per share. The acquired shares, which represented Mr. Powell's entire equity interest in the Company, were then retired. The per share price was established by the board of directors after consideration of a fairness opinion received from SAMCO Capital Markets, the Company's independent financial advisor. As of March 1, 2002, there were approximately 1,200 owners of record of the Company's 13,038,437 shares of the Common Stock outstanding. The Company paid no cash dividends on its Common Stock in 1999, 2000 or 2001. The Company intends to retain all earnings to finance its operations and does not expect to pay cash dividends in the foreseeable future. Any decision by the Board of Directors to declare dividends in the future will depend on the Company's earnings, capital requirements, financial condition, and other relevant factors. The Company's ability to pay dividends is also restricted by Texas law. Generally, Texas law prohibits corporations from paying dividends if, after giving effect to the distribution, the corporation would be insolvent, or the distribution exceeds the surplus of the corporation. The Company is also subject to the dividend restrictions applicable to national banks because its principal source of income is the dividends the Bank pays to the Company. Under the National Bank Act, dividends may be paid only out of retained earnings as defined in the statute. The Comptroller's approval is required if the dividends for any year exceed the net profits, as defined, for that year plus the retained net profits for the preceding two years. In addition, unless a national bank's capital surplus equals or exceeds the stated capital for its common stock, no dividends may be declared unless the bank makes transfers from retained earnings to capital surplus. See "Supervision and Regulation" under Item 1 of this Annual Report on Form 10-K. Recent Sales of Unregistered Securities. Directors of the Company and the Bank did not receive compensation to serve in the those capacities before November 1, 1998, and directors of the Company, who are also directors of the Bank, will receive no cash compensations for serving as 18 directors of the Company. In lieu of cash compensation for meeting fees for the non-employee members of the Board of Directors of the Bank, the Board of Directors for the Company and the Bank adopted The First National Bank of Amarillo Directors' Stock Compensation Plan ( the "Plan"). Effective November 1, 1998, and for the period ending December 31, 2001, the Company delivered to its Directors certificates representing a total of 75,400 shares of the Common Stock (the "Shares"). Each Director endorsed the certificates in blank and returned them to the Company to be held for future delivery in accordance with the Plan. The absence of a Director from any regularly scheduled meeting during the 14 months preceding December 31, 1999, or the 12 months preceding either December 31, 2000, or 2001, reduced the number of Shares delivered to him or her by a number calculated by multiplying the number of absences by 100 Shares and subtracting that number from the Shares otherwise deliverable to the Director for the applicable period. If a Director was terminated as a Director at any time before December 31, 2001, for any reason, including retirement, permanent disability, or death, or if a "corporate transaction" occurred in which the Bank and/or the Company is not the surviving entity, the Director or his or her designated beneficiary of his or her estate was entitled only to that number of Shares not already delivered to him or her under the Plan calculated by multiplying the number of meetings the Director attended by 100 during the then-current period. A total of 53,750 shares of Common Stock were issued to the Directors under the Plan. These shares were not registered under the Securities Act of 1933, as amended (the "Act"), pursuant to an exemption afforded by Section 4(2) of the Act (exempts transactions by an issuer not involving any public offering). No additional shares will be issued by the Company pursuant to the Plan for periods subsequent to December 31, 2001. After December 31, 2001, Directors of the Company and the Bank will be paid $600 per meeting and advisory directors will be paid $300 per meeting. ITEM 6. SELECTED FINANCIAL DATA. The following table gives consolidated selected financial data about the results of operations and financial condition of the Company for the periods and at the dates indicated. Amounts are in thousands, except for weighted average shares outstanding and per-share data. These data are qualified by, and should be read in conjunction with, the separate financial statements, reports, and other financial information elsewhere in this document. Certain consolidated financial data as of and for 2001, 2000, and 1999 are based on and derived from audited financial statements elsewhere in this document. Share data have been adjusted to reflect the 77.4372-for-1 stock dividend on July 2, 1997. 19

December 31, --------------------------------------------------------------------------------- (dollars, in thousands, except per share data) 2001 2000 1999 1998 1997 ~~1996~~ Summary of Operations Interest income $ 24,914 $ 26,839 $ 19,357 $ 14,922 $ 4,020 ~~$ 1,146~~ Interest expense 7,867 9,680 6,002 4,706 1,260 ~~515~~ Net interest income 17,047 17,159 13,355 10,216 2,760 ~~631~~ Provision for loan losses (850) 3,150 1,320 975 2,700 97 Noninterest income 3,364 2,657 1,846 1,149 162 ~~118~~ Noninterest expense 10,735 9,385 7,681 6,344 2,242 ~~606~~ Earnings (loss) before income taxes 10,526 7,281 6,199 4,046 (2,021) 46 Income taxes (benefit) 3,583 2,505 2,107 742 (39) 7 Net earnings (loss) 6,943 4,776 4,093 3,304 (1,981) 39 Per Share Data Net earnings (loss) - Basic 0.52 0.36 0.31 0.25 (0.41) ~~0.20~~ Book value at end of period 4.23 3.75 3.38 3.07 2.84 ~~2.91~~ Average common shares outstanding 13,281,727 13,415,184 13,406,764 13,344,130 4,824,792 ~~712,035~~ Balance Sheet Data (End of Period) Total assets 356,773 369,334 299,041 247,288 144,741 ~~18,212~~ Investment securities 7,137 5,071 6,723 7,303 5,085 ~~10,303~~ Loans outstanding 316,284 329,795 262,247 183,551 117,102 ~~1,464~~ Allowance for loan losses (5,695) (4,990) (4,525) (3,625) (2,748) ~~(45)~~ Total deposits 299,854 283,848 251,968 205,139 106,255 ~~16,067~~ Stockholders' equity 55,128 50,259 45,361 41,164 37,853 ~~2,068~~ Selected Performance Ratios Return on average assets 1.96% 1.45% 1.53% 1.65% (3.57)% ~~0.21%~~ Return on average equity 13.03% 9.90% 9.45% 8.37% (15.13)% ~~1.90%~~ Net interest margin 5.15% 5.67% 5.47% 5.59% 5.43% ~~3.70%~~ Asset Quality Ratios Nonperforming loans to gross loans 0.0602% 0.0006% 0.00% 0.00% 40.7800% Nonperforming assets to ~~stockholders'~~ equity 30.3809% 0.0038% 0.00% 0.00% 30.3800% Net charge-offs (recoveries) to ~~average~~equity ~~loans~~(0.48)% 0.91% 0.20% 0.06% 0.00% ~~4.30%~~ Allowance to end-of-period loans 1.80% 1.51% 1.73% 1.94% 2.29% ~~3.07%~~ Allowance to end-of-period nonperforming loans 11109.45% 2626.10% N/A N/A N/A ~~64.53%~~ Liquidity and Capital Ratios (End of ~~Period) (End of~~ period) Loans (net) to deposits 103.58% 114.43% 102.28% 89.48% 110.21% ~~9.11%~~ Equity to assets 15.45% 13.61% 15.17% 16.65% 26.15% ~~11.36%~~

The Bank's growth in loans and deposits since 1997 is primarily attributable the relocation of its main office from Fritch to Amarillo, a more economically vibrant market. Deposit and loan growth since 1997 can be attributable to the Bank's management team, which has emphasized growth from the Bank's existing client base, capitalized on opportunities in its target market (e.g., customers of competing financial institutions), and delivered personalized banking services to its customers. In addition, the Bank's loan growth is attributable to its aggressive commercial lending program and its entry into agricultural and real estate lending and strong emphasis on the commercial loan market. Growth in total assets since 1997 is primarily attributable to the increase in the Bank's loan portfolio, which was supported by a significant capital infusion after the Company's stock offering in 1997. 20 The increase in 2001 and 2000 interest income as compared to 1999 was attributable primarily to the larger loan portfolio, and the increase in non-interest income was accompanied by increases in interest and non-interest expenses. A negative provision for loan losses of $850,000 was made in 2001. A provision for loan losses was necessary in 2000 to maintain an adequate allowance for loan losses after net charge-offs of $2,685,093. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Provision and Allowance for Loan Losses" for additional information about the provision for loan losses. Forward-Looking Statements The Company makes certain forward-looking statements in this Annual Report on Form 10-K that are based upon its current expectations and projections about current events. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of invoking these safe harbor provisions. You can identify these statements from the Company's use of the words "estimate," "project," "believe," "intend," "anticipate," "expect," and similar expressions. These forward-looking statements include: o statements of the Bank's goals, intentions, and expectations; o statements regarding the Bank's business plans and growth strategies; o statements regarding the asset quality of the Bank's loan and investment portfolios; and o estimates of the Bank's risks and future costs and benefits. These forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors which could affect the actual outcome of future events: o fluctuations in market rates of interest and loan and deposit pricing, which could negatively affect our net interest margin, asset valuations, and expense expectations; o adverse changes in the economy of the Texas Panhandle, which might affect the Company's business prospects and could cause credit-related losses and expenses; o the extent of continuing client demand for the high level of personalized service that is the key element of the Bank's banking approach; o adverse developments in the Bank's loan and investment portfolios; o difficulties in identifying attractive acquisition opportunities and strategic partners that will complement the Bank's banking approach; o competitive factors in the banking industry, such as the trend towards consolidation in the Bank's market; o changes in banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks like the Company; and 21 o the occurrence of acts of terrorism, such as the acts of September 11, 2001, or acts of war. Because of these and other uncertainties, the Company's actual future results may be materially different from the results indicated by these forward-looking statements. In addition, the Company's past results of operations do not necessarily indicate the Company's future results. These uncertainties and others are discussed in the sections of this Annual Report on Form 10-K named "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company's consolidated balance sheets, and statements of earnings. This section should be read in conjunction with the Company's consolidated financial statements and accompanying notes and other detailed financial information included herein. General The Company is a one-bank holding company that commenced operations on December 31, 1983. The Bank originally began operations as Fritch State Bank on April 10, 1965. Ownership of the Bank is the Company's major activity. Activities of the Company are limited and are stated in Note 16 to the Consolidated Financial Statements included with this Annual Report on Form 10-K. Accordingly, unless specifically noted herein, the Company's activities as described in this Management's Discussion and Analysis of Financial Condition and Results of Operations are virtually indistinguishable from those of the Bank. Composition of the management team of the Company and the Bank changed significantly in 1997, and the new management team significantly changed the geographic, product, and service focus of the Bank. Prior management generally limited loans to selected commercial and consumer installment loans, which comprised less than 10 percent of average assets. Limited real estate lending was performed, and agricultural loans were made only on a exception basis. During 1997, however, the new management team changed the lending philosophy of the Bank to a more traditional commercial banking activity. Accordingly, average loans during 2001, 2000, and 1999 represented approximately 90 percent, 89 percent, and 79 percent, respectively, of average total assets. The new management team's philosophy in growing the loan portfolio was to hire experienced loan officers primarily from one large competing financial institution in the Amarillo market, and for those loan officers to aggressively grow the Bank's lending customers' base. Although management aggressively sought new customers, it was, and continues to be, selective in deciding which customers to pursue to operate in a safe and sound manner in accordance with the Bank's loan policy. Thus management believes that the Bank's loan portfolio growth has been achieved without relaxing credit underwriting policies. The Bank's loan policy, including underwriting standards, is discussed at length in Item 1. "BUSINESS--Loan Policies and Underwriting Practices" to this Annual Report on Form 10-K. 22 Deposit growth during 2001, 2000, and 1999 and was primarily fueled by the additional customers gained through the process mentioned above and by the Bank's ability to attract deposits because of the reputation of its management team and the name recognition of "The First National Bank of Amarillo" in its market. The Bank does not offer above-market rates on its deposits and has no "brokered" deposits. For the Years Ended December 31, 2001, 2000, and 1999 Results of Operations The Company experienced net earnings of $6,942,484, $4,776,278, and $4,092,725 for the years ended December 31, 2001, 2000, and 1999, respectively. Earnings for 2001, 2000, and 1999, were significantly influenced by activity in the allowance for loan losses, as discussed below. The return on average assets for 2001, 2000, and 1999 was 1.96 percent, 1.45 percent, and 1.53 percent, respectively, and return on average equity was 13.03 percent, 9.90 percent, and 9.45 percent, respectively. The improvement in return on average equity in 2001 was primarily caused by the negative provision for loan losses of $850,000. Net interest income was slightly lower while non-interest income and expense were higher. The improvement in return on average equity in 2000 and 1999 is primarily attributable to higher net interest income and non-interest income, offset with a higher provision for loan losses and higher non-interest expense. The provision for loan losses in 2001 was a negative $850,000 in comparison to the 2000 and 1999 provisions of $3,150,000 and $1,320,000, respectively. During 2001, the negative provision to the allowance for loan losses was partially made as a result of recovering a $2,500,000 loan charged off in 2000. During 2000, additional provisions were made to the allowance for loan losses. These provisions included an amount related to a potential problem loan that resulted in a charge off of $2,500,000 in late 2000. In addition, management believed that the allowance for loan losses should grow as loans grow. Accordingly, management made a subjective determination of the allowance based on banking experience and knowledge, and comparison to peers. Management expects that appropriate, additional provisions will be made as the loan portfolio grows. Net Interest Income The largest component of operating income is net interest income, which is the difference between the income earned on assets and interest paid on deposits. Net interest income is determined by the rates earned on the Company's interest-earning assets and the rates paid on its interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of its interest- earning assets and interest-bearing liabilities. During the years ended December 31, 2001, 2000, and 1999, net interest income was $17,046,579, $17,159,438, and $13,354,688, respectively. The decrease in net interest income during 2001 of $112,859 (0.66 percent) is primarily a result of a lower net interest margin caused by the rapid decrease in interest rates during 2001. Average interest-earning assets increased $28,007,411 (9.25 percent) in 2001. The increase in net interest income for 2000 and 1999 was primarily due to an increase in average interest-earning assets of $58,769,886 (24.09 percent) and $61,241,992 (33.51 percent), respectively. Average interest-bearing liabilities increased by 23 $15,333,778, $44,724,880 and $45,224,747 for the years ended December 31, 2001, 2000, and 1999, respectively. The following table gives the average consolidated balance sheets of the Company and its subsidiaries for the past three years along with an analysis of net interest earnings for each major category of interest-earning assets and interest-bearing liabilities, the average yield or rate paid on each category, and net yield on interest-earning assets:

2001 2000 ~~1999~~ ------------------------------------------ --------------------------------------- Average Average Average Average Balance (1) Interest Rate Balance (1) Interest Rate ------------ --------~~----~~ ----- ------------ --------~~----~~ ----- ASSETS INTEREST-EARNING ASSETS Interest bearing due from ~~banks~~ $ 1733,~~714~~561 $ 1,~~015~~330 53.7396% $ --17,714 $ --1,015 --5.73% banks Loans(1) Commercial and agricultural ~~154~~143,~~264~~251,~~576~~026 1310,~~791~~311,~~527~~571 87.9420% ~~109~~154,~~270~~264,~~174~~576 913,~~074~~791,~~421~~527 8.3094% Real estate - mortgage ~~110~~143,~~431~~533,~~755~~436 911,~~803~~330,~~785~~621 87.8889% 84110,~~128~~431,~~116~~755 79,~~036~~803,~~885~~785 8.3688% Installment loans to ~~individuals 29~~34,~~283~~385,~~882~~007 2,~~713~~794,~~897~~762 98.2713% 1629,~~859~~283,~~324~~882 12,~~521~~713,~~743~~897 9.0327% ------------- ------------- ----- ------------- ------------- ----- individuals Total loans ~~293~~321,~~980~~169,~~213~~469 2624,~~309~~436,~~209~~954 87.9561% ~~210~~293,~~257~~980,~~614~~213 1726,~~633~~309,~~049~~209 8.3995% Securities taxable 6,~~360~~840,~~979~~663 ~~386~~368,~~403~~703 65.0739% 6,~~965~~360,~~267~~979 386,~~961~~403 56.5607% Federal funds sold and other interest-earning assets 2,~~403~~725,~~239~~863 ~~143~~106,~~264~~673 53.9691% 262,~~769~~403,~~378~~239 1143,~~336,396~~264 45.9996% ------------- ------------- ----- ------------- ------------- ----- Total interest-earning ~~assets~~330,769,556 24,913,660 7.53% 302,762,145 26,839,891 8.87% ~~243,992,259~~assets ~~19,356,406 7.93%~~ NONINTEREST- EARNING ASSETS Cash and due from banks 18,946,672 21,247,049 ~~18,887,166~~ Other assets 11,~~610~~278,~~526~~019 711,~~738~~610,~~859~~526 Less: allowance for loan losses (56,~~425~~038,~~352~~945) (35,~~976~~425,~~627~~352) ------------- ------------- Total $~~330~~ 354,~~194~~955,~~368~~302 $~~266~~ 330,~~641~~194,~~657~~368 ============= ============= INTEREST-BEARING LIABILITIES Interest-bearing demand $ 3739,~~146~~544,~~257~~937 $ ~~753~~330,~~450~~495 20.0384% $ 3337,~~806~~146,~~890~~257 $ ~~588~~753,~~101~~450 12.7403% Money market deposits 5355,~~616~~909,~~124~~530 21,~~027~~274,~~058~~209 32.7828% 4953,~~920~~616,~~045~~124 12,~~623~~027,~~188~~058 3.2578% Other savings deposits 6,694,150 64,909 0.97% 6,033,928 137,843 2.28% 5Time deposits 97,~~131~~805,~~727~~218 ~~107~~5,~~743~~199,322 25.1032% ~~Time deposits~~ 98,132,763 5,860,408 5.97% 74Federal funds purchased 5,~~547~~910,~~967~~630 3265,~~676,515~~802 4.9350% ~~Federal funds purchased~~ 8,627,596 587,935 6.81% ~~108~~Other borrowings 17,~~219~~709,041 6732,~~171~~344 54.7014% ~~Other borrowings~~ 4,683,060 313,759 6.70% -- -- -- -------~~-----~~ ------------- ----- ------------- ------------- ----- Total interest-bearing liabilities ~~208~~223,~~239~~573,~~728~~506 97,~~680~~867,~~453~~081 43.6552% ~~163~~208,~~514~~239,~~848~~728 69,~~001~~680,~~718~~453 34.6765% NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits 75,383,072 71,397,857 58Other 2,~~400~~712,~~657~~858 ~~Other~~ 2,331,977 ~~1,394,128~~ Stockholders' equity 53,285,866 48,224,806 ~~43,332,024~~ ------------- ------------- Total $~~330~~ 354,~~194~~955,~~368~~302 $~~266~~ 330,~~641~~194,~~657~~368 ============= ============= Net interest income $ 17,~~159~~046,~~438~~579 $ 1317,~~354~~159,~~688~~438 ============= ============= Net yield on earning assets 5.6715% 5.4767% ===== ===== ~~1998~~1999 ---------------------------------------- Average Average Balance (1) Interest Rate ------------ --------~~----~~ ----- ASSETS INTEREST-EARNING ASSETS Interest bearing due from ~~banks~~ $ -- $ -- -- banks Loans(1) Commercial and agricultural 87109,~~548~~270,~~987~~174 79,~~587~~074,~~292~~421 8.6730% Real estate - mortgage 5184,~~373~~128,~~294~~116 47,~~385~~036,~~126~~885 8.5436% Installment loans to ~~individuals 14~~16,~~517~~859,~~960~~324 1,~~338~~521,~~075~~743 9.2203% ------------- ------------- ----- individuals Total loans ~~153~~210,~~440~~257,~~241~~614 1317,~~310~~633,~~493~~049 8.6739% Securities taxable 56,~~822~~965,~~355~~267 ~~351~~386,~~933~~961 65.0456% Federal funds sold and other interest-earning assets 2326,~~487~~769,~~671~~378 1,~~259~~336,~~919~~396 54.3699% ------------- ------------- ----- Total interest-earning ~~assets 182~~243,~~750~~992,~~267~~259 1419,~~922~~356,~~345~~406 87.1793% assets NONINTEREST- EARNING ASSETS Cash and due from banks 1518,~~562~~887,~~646~~166 Other assets 57,~~154~~738,~~451~~859 Less: allowance for loan losses (3,~~161~~976,~~808~~627) ------------- Total $~~200~~ 266,~~305~~641,~~556~~657 ============= INTEREST-BEARING LIABILITIES Interest-bearing demand $ 2633,~~914~~806,~~760~~890 $ ~~607~~588,~~289~~101 21.2674% Money market deposits 2949,~~615~~920,~~881~~045 ~~957~~1,~~149~~623,188 3.2325% Other savings deposits 35,~~590~~131,~~907~~727 91107,~~491~~743 2.5510% Time deposits 5874,~~168~~547,~~553~~967 3,~~050~~676,~~488~~515 54.2493% Federal funds purchased --108,219 --6,171 --5.70% Other borrowings -- -- -- ------------- ------------- ----- Total interest-bearing liabilities ~~118~~163,~~290~~514,~~101~~848 46,~~706~~001,~~417~~718 3.9867% NONINTEREST-BEARING LIABILITIES AND STOCKHOLDERS' EQUITY Demand deposits 4158,~~673~~400,~~022~~657 Other ~~860~~1,~~854~~394,128 Stockholders' equity 3943,~~481~~332,~~579~~024 ------------- Total $~~200~~ 266,~~305~~641,~~556~~657 ============= Net interest income $ 1013,~~215~~354,~~928~~688 ============= Net yield on earning assets 5.5947% =====

--------------- (1) For purposes of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. 24 The following table summarizes interest earned and paid resulting from changes in volume and in rates:

~~2000~~2001 Compared to ~~1999~~2000 ~~1999~~2000 Compared to ~~1998~~1999 --------------------- --------------------- Volume Rate Net Volume Rate Net INTEREST EARNED ON Interest bearing due from banks $ ~~1,015~~700 $ --(385) $ 315 $ 1,015 $ -- $ --1,015 ~~$ --~~ Loans Commercial and agriculture (933,185) (2,546,771) (3,479,956) 3,977,754 739,352 4,717,106 1Real Estate - mortgage 2,~~815~~700,~~169~~939 (~~328~~1,~~040~~174,103) 1,~~487~~526,~~129~~836 ~~Real Estate - mortgage~~ 2,313,010 453,890 2,766,900 ~~2,741,485 (89,726) 2,651,759~~ Installment loans to individuals 438,670 (357,805) 80,865 1,150,401 41,753 1,192,154 ~~211,841 (28,173) 183,668~~ ----------- ----------- ----------- ----------- ----------- ----------- Total 2,206,424 (4,078,679) (1,872,255) 7,441,166 1,234,994 8,676,160 4Securities Taxable 27,~~768,495~~822 (~~445~~45,~~939~~522) 4(17,~~322,556~~700) ~~Securities Taxable~~ (35,081) 34,523 (558) ~~65,126 (30,098) 35,028~~ Nontaxable -- -- -- ~~-- -- --~~ Federal funds sold and other interest-earning assets 17,376 (53,967) (36,591) (1,411,034) 217,902 (1,193,132) ~~167,879 (91,402) 76,477~~ ----------- ----------- ----------- ----------- ----------- ----------- Total interest-earning assets 2.252,322 (4,178,553) (1,926,231) 5,996,066 1,487,419 7,483,485 ~~5,001,500 (567,439) 4,434,061~~ INTEREST PAID ON Deposits Interest-bearing demand 45,822 (468,777) (422,955) 61,689 103,660 165,349 ~~136~~Money market deposits 83,~~709~~358 (~~155~~836,~~897~~207) (19752,~~188~~849) ~~Money market deposits~~ 126,296 277,574 403,870 ~~660,170 5,869 666,039~~ Other savings deposits 13,696 (86,630) (72,934) 20,054 10,046 30,100 34Time deposits (19,~~359~~497) (18641,~~107~~589) 16(661,~~252~~086) ~~Time deposits~~ 1,310,335 873,558 2,183,893 ~~816~~Federal funds purchased (154,~~730~~876) (~~190~~167,~~703~~257) ~~626~~(322,~~027~~133) ~~Federal funds purchased~~ 580,326 1,438 581,764 ~~6,171~~Other --borrowings 6579,~~171~~087 ~~Other~~(160,502) ~~borrowings~~418,585 313,759 -- 313,759 -- -- -- -----~~------~~ ----------- ----------- ----------- ----------- ----------- Total interest-bearing liabilities 547,590 (2,360,962) (1,813,372) 2,412,459 1,266,276 3,678,735 ~~1,654,139 (358,838) 1,295,301~~ ----------- ----------- ----------- ----------- ----------- ----------- Net interest income $ 31,~~583~~704,~~607~~733 $ ~~221~~(1,~~143~~817,592) $ 3(112,~~804,750~~859) $ 3,~~347~~583,~~361~~607 $~~(208~~ 221,~~601)~~143 $ 3,~~138~~804,~~760~~750 =========== =========== =========== =========== =========== ===========

The change in interest due to volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. Other Operating Income and Expense Other Operating Income. Other operating income for 2001 and 2000 increased by $706,384 (26.6 percent) and $811,454 (44.0 percent), respectively, because of increased activity on deposit accounts. Other Operating Expenses. During 2001 and 2000, other operating expenses increased by $1,349,289 (14.4 percent) and $1,703,991 (22.2 percent), respectively. The increase in operating expenses was primarily attributable to the Company's overall growth. Salaries and benefits accounted for approximately $1,042,000 and $752,000, respectively, of the increase in operating expenses, and increases in other costs to conduct banking operations (which accounted for approximately $308,000 and $952,000, respectively, of the increase in operating expenses). Securities Portfolio The Company's objective in its management of the investment portfolio is to maintain high quality, relatively liquid investments with competitive returns. During 2001, the weighted average yield on taxable securities was 5.39 percent as compared to 6.07 percent during 2000 and 5.56 percent during 1999. The Company primarily invests in U.S. Treasury securities, other U.S. government agency obligations, and mortgage-backed securities. 25 The carrying values of the major classifications of securities were as follows:

Available for Sale ------------------ 2001 2000 1999 ~~1998~~ ---- ---- ---- U.S. Treasury and other U.S. government agencies and corporations $3,448,897 $1,837,861 $4,017,304 ~~$4,090,764~~ Mortgage-backed securities 913,360 1,213,153 1,490,168 ~~1,993,793~~Other ~~States~~securities ~~and political subdivisions -- --~~ 2,~~810~~775,175 ~~Other securities~~ 2,019,775 1,215,675 ~~1,215,675~~ ---------- ---------- ---------- Total $7,137,432 $5,070,789 $6,723,147 ~~$7,303,042~~ ========== ========== ==========

For 2001, 2000 and 1999 other securities consist primarily of Federal Home Loan Bank and Federal Reserve Bank stock. The following table shows the stated maturities of securities at December 31, 2001, and the weighted average yields of such securities (calculated on the basis of the cost and effective yield weighted for the scheduled maturity of each security). Mortgage-backed securities are reported at their estimated average life.

Maturing After One Maturing After Five Year But Within ~~Five~~ But Within Ten Years Maturing --------------- ----- --------------- Maturing Within One Year ~~Years~~Five Years Over Ten Years --------------- ----- ----- -------------- Amount Yield Amount Yield Amount Yield Amount Yield AVAILABLE-FOR-SALE U. S. Treasury and other U. S. government agencies and corporations $1,~~524~~024,~~189~~437 64.2343% $~~202~~2,~~125~~424,460 65.7703% $~~149~~ 29,~~238~~890 78.3991% $1 883,~~175,462~~470 6.3026% ~~State and political subdivisions -- 0.00% -- 0.00% -- 0.00% -- 0.00%~~ Other securities (1) -- 0.00% -- 0.00% -- 0.00% $2,~~019,~~775,175 63.1096% ---------- ----- -------- -- ---- -------- -- ---- ---------- ----- Total $1,~~524~~024,~~189~~437 64.2343% $~~202~~2,~~125~~424,460 65.7703% $~~149~~ 29,~~238~~890 78.3991% $3,~~195~~658,~~237~~645 64.1752% ========== ========== ========== ==========

(1) These securities do not have maturity dates and are included in over ten years column. Loan Portfolio During 2001, total loans increased by $13,510,865 from $329,795,016 at December 31, 2000, to $316,284,151 at December 31, 2001. At December 31, 2001, 2000, and 1999, net loans accounted for 87.1 percent, 87.9 percent, and 86.2 percent, respectively, of total assets. The growth in the loan portfolio during 1999 through 2001 was primarily attributable to the previously discussed change of ownership of the Company and the Bank, the change in management after the Acquisition, and, as a result of the management change, the Bank's renewed emphasis on lending and its recognition of the importance of loans in its overall asset mix. Prior management of the Bank generally limited loans to selected commercial and consumer installment loans, which portfolio of loans comprised less than 10 percent of total average assets. The Bank conducted limited real estate lending, due primarily to the stagnant economy in the Bank's primary market, and agricultural loans were made only on an exceptional basis. During 1997, however, the Bank relocated to the larger and more economically viable Amarillo market, and new management changed the Bank's lending philosophy to more closely resemble a traditional commercial banking business. To accomplish its goal of growing the Bank's loan portfolio, management hired nine experienced loan officers in 1997, primarily from one competing financial institution in Amarillo. These loan officers were successful in generating new business from existing customers of the Bank as well as new customer relationships for the Bank. As a result, at December 31, 2001, 2000, and 1999, loans represented approximately 91 percent, 89 percent, and 79 percent, respectively, of total average 26 assets. Although taking an aggressive posture in growing the loan portfolio, management was careful to build a portfolio consistent with the underwriting parameters in the Bank's loan policy. Accordingly, management believes that the significant growth in the Bank's loan portfolio during the last four years has been achieved without relaxing credit underwriting policies. The general growth in the loan portfolio, as discussed above, also resulted in a significant change in the portfolio mix. The loan portfolio in 1996 consisted primarily of commercial loans (representing approximately 36 percent of total loans) and installment loans (representing approximately 53 percent of total loans). With the change in philosophy as described above, agribusiness and real estate lending activity increased from 0 percent and 11 percent of the loan portfolio, respectively, at December 31, 1996, to approximately 13 percent and 29 percent of total loans, respectively, at December 31, 1997, approximately 27 percent and 35 percent of total loans, respectively, at December 31, 1998, approximately 15 percent and 40 percent of total loans, respectively, at December 31, 1999, approximately 17 percent and 42 percent of total loans, respectively, at December 31, 2000, and approximately 19 percent and 45 percent of total loans, respectively, at December 31, 2001. The amounts of loans outstanding at the indicated dates are shown in the following table according to type of loans:

December 31 ---------------------------------------------------------------------------------~~---------~~ 2001 2000 1999 1998 1997 ~~1996~~ ------------ ------------ ------------ ------------ --------------------------------- Commercial $ 83,568,460 $106,098,467 $ 94,893,661 $ 65,560,035 $ 45,901,834 $Agricultural ~~553~~58,~~641~~986,997 ~~Agricultural~~ 57,310,086 39,454,848 50,051,845 15,381,803 -- Real Estate Commercial 99,120,292 102,823,605 80,150,036 39,643,202 16,282,655 ~~54,321~~ 1-4 Single family 41,843,228 36,380,261 25,750,839 20,542,212 18,069,332 ~~114,156~~ Loans to individual 27,065,424 23,692,144 20,432,316 11,407,138 24,359,581 ~~822,872~~ Student loans 5,702,136 3,502,551 1,606,681 104,302 -- -- ------------ ------------ ------------ ------------ ------------ Total $316,286,537 $329,807,114 $262,288,381 $187,308,734 $119,995,205 ~~$1,544,990~~ ============ ============ ============ ============ ============

27 The following table shows the maturity analysis of loans outstanding as of December 31, 2001, net of unearned discount. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates:

Maturing After Maturing One Year But Within Within Five Maturing After One Year Years Five Years ------------ ------------ ------------ Total loans Individuals $ 12,~~230~~708,~~699~~288 $14 18,~~088~~834,~~387~~284 $ ~~863~~1,~~512~~222,602 Commercial 6155,~~540~~317,~~697~~440 3324,~~627~~897,~~479~~594 113,~~431~~353,~~393~~426 Real Estate 3330,~~889~~169,~~761~~232 3337,~~409~~323,~~275~~779 7173,~~904~~470,~~829~~509 Agricultural 5356,~~617~~811,~~080~~847 2,~~323~~155,~~864~~950 ~~868~~19,~~040~~200 ------------ ------------ ------------ Total $~~161~~155,~~278~~006,~~237~~807 $ 83,~~449~~211,~~005~~607 $85 78,~~067~~065,~~774~~737 ============ ============ ============ Loans maturing with: Predetermined interest rates $ 2696,~~108~~826,~~474~~057 $40 43,~~394~~982,~~614~~700 $51 38,~~902~~414,~~430~~389 Floating or adjustable rates ~~135~~58,~~169~~180,~~763~~750 4339,~~054~~228,~~391~~907 3339,~~165~~651,~~344~~348 ------------ ------------ ------------ Total $~~161~~155,~~278~~006,~~237~~807 $ 83,~~449~~211,~~005~~607 $85 78,~~067~~065,~~774~~737 ============ ============ ============

The Bank has no specific policies regarding "rollover" of short-term loans in its portfolio. Although some loans are expected to be renewed at maturity, the Bank evaluates each maturing loan on a case-by- case basis to determine whether it should be renewed or whether the borrower should be requested to pay off the loan at maturity. The Bank cannot reasonably estimate the dollar amount of loans maturing during 2002 which may ultimately be renewed. Provision and Allowance for Loan Losses The following table summarizes the Bank's loan loss experience for the last five years ended December 31: 28

2001 2000 1999 1998 1997 ~~1996~~ ---- ---- ---- ---- ---- BALANCE OF ALLOWANCE FOR LOAN LOSSES AT THE BEGINNING OF YEAR $ 4,989,585 $ 4,524,678 $ 3,625,435 $ 2,748,418 $ 45,200 ~~$ 22,574~~ CHARGE-OFFS Commercial 1,125,099 180,242 565,704 101,981 -- ~~3,826~~ Real estate construction --13,152 -- -- -- -- Real estate mortgage 529 -- 56,303 -- -- --Installment ~~Individual~~19,704 2,523,717 39,504 12,238 5,144 -- Agricultural -- -- -- -- -- All Other 77,163 -- -- -- -- ~~79,001~~ ----------- ----------- ----------- ----------- ----------- Total Loan Charge-offs $ 1,235,647 2,703,959 661,511 114,219 5,144 ~~82,827~~ ----------- ----------- ----------- ----------- ----------- RECOVERIES Commercial 102,421 4,338 223,906 13,500 7,906 ~~396~~ Real estate construction -- -- -- -- -- Real estate mortgage 9,480 8,690 6,759 -- -- --Installment ~~Individual~~2,578,811 5,838 10,089 2,736 456 ~~8,054~~ Agricultural -- -- -- -- -- All Other --100,610 -- -- -- -- ----------- ----------- ----------- ----------- ----------- Total Loan Recoveries 2,791,322 18,866 240,754 16,236 8,362 ~~8,450~~ ----------- ----------- ----------- ----------- ----------- NET RECOVERIES (CHARGE-OFFS) 1,555,675 (2,685,093) (420,757) (97,983) 3,218 ~~(74,377)~~ ADDITIONS CHARGED TO OPERATIONS (850,000) 3,150,000 1,320,000 975,000 2,700,000 ~~97,003~~ ----------- ----------- ----------- ----------- ----------- BALANCE AT END OF YEARS $ 5,695,260 $ 4,989,585 $ 4,524,678 $ 3,625,435 $ 2,748,418 ~~$ 45,200~~ =========== =========== =========== =========== =========== RATIO OF NET CHARGE-OFFS DURING THE PERIOD TO AVERAGE LOANS- OUTSTANDING DURING THE PERIOD (0.48%) 0.91% 0.20% 0.06% 0.00% ~~4.30%~~ =========== =========== =========== =========== ===========

Risk elements include accruing loans past due 90 days or more, nonaccrual loans, and loans which have been restructured to provide a reduction or deferral of interest or principal for reasons related to the debtor's financial difficulties, potential problem loans, and loan concentrations. The bank had no nonaccrual loans at the years ended December 31, 1997 to 2001. The following table summarizes the Bank's past due loans for the years ended December 31:

2001 2000 1999 1998 1997 ~~1996~~ ---- ---- ---- ---- ---- ACCRUING LOANS WHICH ARE PAST DUE 90 DAYS OR MORE Commercial $ -- $ -- $ -- $ -- $ -- Real Estate Construction -- -- -- -- -- Real Estate Mortgage 51,265 -- -- 14,952 -- ~~63,864~~ Individual -- -- -- -- ~~6,178~~-- Agricultural -- 190,000 -- -- -- -- ------~~---~~ --------- --------- --------- --------- Total $ 51,265 $190,000 $ -- $ 14,952 $ -- ~~$ 70,042~~ ========= ========= ========= ========= =========

At December 31, 2001, the Bank had no foreign loans outstanding and no loan concentrations, except for those indicated in the first table under "Loan Portfolio," exceeding 10 percent of total loans. Management believes all material restructured loans have been identified based upon the Bank's loan data system and management's awareness of the loan files and customer contacts. The Company has developed policies and procedures for evaluating the overall quality of its loan portfolio and the timely identification of potential problem loans. Management's judgment as to the 29 adequacy of the allowance is based upon a number of assumptions about future events which it believes are reasonable, but which may not be valid. Thus, there can be no assurance that future charge offs will not exceed the allowance for loan losses or that additional increases in the allowance for loan losses will not be required. Activity in the allowance for loan losses for 2001, 2000, and 1999, had a significant impact on earnings. Additions to the allowance for loan losses, recorded as the provision for loan losses on the Company's consolidated statements of earnings, are made periodically to maintain the allowance at an appropriate level based on management's analysis of the potential risk in the loan portfolio. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, historical loan loss experience, the amount of loan losses actually charged off or recovered during a given period, and current and anticipated economic conditions. The Company believes that it is conservative in the identification and charge off of problems, and, in certain instances, the Company has received recoveries on loans that were previously charged off. At December 31, 2001, 2000, and 1999, allowances for loan losses were $5,695,260, $4,989,585, and $4,524,678, respectively, which represented 1.80 percent, 1.51 percent, and 1.73 percent of outstanding loans at those respective dates. This compares to peer group percentages of the allowance for loan losses to outstanding loans of 1.32 percent, 1.35 percent, and 1.27 percent, for 2001, 2000, and 1999, respectively. During 2001, 2000, and 1999, the Company recorded provisions for loan losses of $(850,000), $3,150,000, and $1,320,000, respectively. During 2001 net recoveries were $1,555,675, while during 2000 net charge offs were $2,685,093. The charge offs in 2000 included a $2,500,000 charge off that was fully recovered during 2001. Determination of the Company's amount of the provision for loan losses for 2001, 2000, and 1999 was unique. Prior management of the Company generally limited its lending activity to commercial and consumer installment loans, and the loan portfolio constituted less than 10 percent of average total assets of the Bank. Because of significant growth in the loan portfolio during 1997, new management believed that the allowance for loan losses should grow also. Determining an appropriate level of allowance for loan loss and provision for loan loss was unique because, with management's decision to offer a broader range of loan products and to deploy more of the Bank's assets in loans, the Company had no historical loss history to benchmark against. Accordingly, management made a subjective determination of the proper level of allowance based on collective banking experiences, knowledge of the market and conditions, comparison to peers, and an intentional effort to be conservative during this growth phase. Management believes that appropriate underwriting practices were adhered to in the origination of new loans and, although the Company had no significant impaired, potential problem, or nonperforming loans at December 31, 2001, management recognized that losses are often inherent in the lending process. Accordingly, management believes that loan losses should be provided for as the loan portfolio grows, even if specific problem loans are not yet identified. Determination of an appropriate allowance is subjective and may be adjusted in the near term because of changes in economic conditions or review by regulatory examiners. Management expects that appropriate, additional future provisions will be made as the loan portfolio grows. The risk elements in the Company's loan portfolio are similar to those in the loan portfolios of other comparable commercial banks in the Bank's lending area and are discussed in detail under the caption "GENERAL--Lending Activities--Risk Elements." Management made a subjective determination of the proper level of the allowance for loan losses by considering each risk element and 30 drawing from collective banking experiences and knowledge of the Company's market, by evaluating overall economic conditions, by comparing its loan portfolio to those of peer banks, and by intentionally trying to be conservative during the Bank's significant growth phase. Management thus determined that allowances at December 31, 2001, of $5,695,260 (representing 1.80 percent of outstanding loans) and at December 31, 2000, of $4,989,585 (representing 1.51 percent of outstanding loans) were appropriate. The allowance for loan losses is not specifically allocated among the various categories of loans in the portfolio, as management cannot predict the amount of charge-offs by loan category. At December 31, 2001, 2000, or 1999, there were no significant impaired loans or loans delinquent over 90 days. Accrual of interest is discontinued on loans when management believes, after considering economic and business conditions and collection efforts, that a borrower's financial condition is such that the collection of interest is doubtful. A delinquent loan is generally placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid is reversed and deducted from earnings as a reduction of reported interest income. No additional interest is accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. Management's policy is to charge off loans when it determines that the outstanding principal on the loan is uncollectible. Loans charged off do not necessarily mean that a loan has absolutely no recovery or salvage value; rather, when management decides to charge off a loan, management has determined that it is no longer practical or desirable to defer charging off the loan even though partial recovery may eventually be effected. Potential Problem Loans. A potential problem loan is one in which management has serious doubts about the borrower's future performance under the loan contract. These loans are current as to principal and interest, and, accordingly, they are not included in nonperforming assets categories. At December 31, 2001, the Company had no material loans considered by management to be potential problem loans. The level of potential problem loans is one factor to be used in determining the adequacy of the allowance for loan losses. Deposits and Other Interest-Bearing Liabilities Deposits. Average total deposits were $275,336,907, $266,326,929, and $221,807,286 during 2001, 2000, and 1999, respectively. Average interest-bearing deposits were $199,953,835, as compared to $194,929,072 in 2000, and $163,406,629 in 1999. The average daily amount of deposits and rates paid are summarized for the periods indicated in the following table. 31

Year Ended Year Ended Year Ended December 31, ~~2000~~2001 December 31, ~~1999~~2000 December 31, ~~1998~~1999 ----------------- ----------------- ----------------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- DEPOSITS Noninterest-bearing demand $ 7175,~~397~~383,~~857~~072 0.00% $ 5871,~~400~~397,~~657~~857 0.00% $ 4158,~~673~~400,~~022~~657 0.00% Interest-bearing demand 39,544,937 0.84% 37,146,257 2.03% 33,806,890 1.74% 26Money market deposits 55,~~914~~909,~~760~~530 2.2628% ~~Money market deposits~~ 53,616,124 3.78% 49,920,045 3.25% ~~29,615,881 3.23%~~ Other savings deposits 6,694,150 0.97% 6,033,928 2.28% 5,131,727 2.10% 3Time deposits 97,~~590~~805,~~907~~218 25.5532% ~~Time deposits~~ 98,132,763 5.97% 74,547,967 4.93% ~~58,168,553 5.24%~~ ------------ ------------ ------------ Total $275,336,907 $266,326,929 $221,807,286 ~~$159,963,123~~ ============ ============ ============

Maturities of time certificates of deposits of $100,000 or more outstanding as of December 31, 2001, are summarized as follows: 3 months or less $21,661,859 Over 3 months through 6 months 13,263,494 Over 6 months through 12 months 30,869,412 Over 12 months 2,707,213 ----------- $68,501,978 There were no deposits by foreign depositors at December 31, 2001, 2000, or 1999. Significant Financial Ratios The following table shows consolidated operating and capital ratios for 2001, 2000, and 1999. 2001 2000 1999 ---- ---- ---- Return on average assets 1.96% 1.45% 1.53% Return on average equity 13.03% 9.90% 9.45% Average equity to average asset ratio 15.01% 14.60% 16.25% Dividend payout ratio to net earnings 0.00% 0.00% 0.00% Borrowed Funds At December 31, 2001, the Company had no federal funds purchased and borrowings from the Federal Home Loan Bank. The maximum amount of federal funds purchased and borrowings from the Federal Home Loan Bank outstanding at any month-end was $30,000,000 and $30,000,000, respectively. During 2001, the average amounts outstanding and related weighted average interest rates were approximately $5,911,000 and $17,709,000, and 4.50% and 4.14%, respectively. During 2000, the average amounts outstanding and related weighted average interest rates were approximately $8,628,000 and $4,683,000, and 6.81 percent and 6.70 percent, respectively. The Company had no borrowed funds at December 31, 1999. Capital The cornerstone of the Company's capital structure is its common stock, which represents 100 percent of total capitalization at December 31, 2001. The Company's equity base was strengthened significantly during 1997 through the issuance of common stock in an intrastate offering to bona fide 32 Texas residents on August 31, 1997. The Company raised approximately $40 million in new capital in this offering. The cash raised from the stock offering was used primarily to increase the Bank's capital base to support its physical expansion and significant growth in its loan portfolio. Additional information regarding growth of the Bank's loan portfolio is provided under the caption "Loan Portfolio" in Item 7. "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." Dependence on this additional capital to support the significant loan growth was partially offset by the significant increase in the deposit base at the Bank during 2001, 2000, 1999, 1998, and late 1997, which provided an additional source of funding loan growth. From December 31, 2000, to December 31, 2001, average total deposits at the Bank increased by $9,009,978, from $266,326,929 to $275,366,907, an increase of approximately 3.40 percent. From December 31, 1999, through December 31, 2000, average total deposits at the Bank increased by $44,519,643 from $221,807,286 to $266,326,929, or an increase of approximately 20 percent. Additional information regarding the growth in the deposit base is provided under the caption "Deposits and Other Interest-Bearing Liabilities" in Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The combination of the Bank's increased deposit base coupled with the additional capital from the stock offering has been used to support the significant loan growth at the Bank following the Acquisition. The Company and the Bank are subject to various regulatory capital requirements of 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 Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (shown in the table below) of Total and Tier I Capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I Capital to average assets (as defined). Management believes, as of December 31, 2001, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2001, the most recent notification from the Bank's regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier 2 leveraged ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company and the Bank exceeded their regulatory capital ratios, as shown in the following table. 33 ANALYSIS OF CAPITAL

~~ANALYSIS OF CAPITAL~~ To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, ~~2000~~2001 Total Capital (to Risk-Weighted Assets): Tejas Bancshares, Inc. ~~$54~~59,~~409~~023,~~560~~689 1618.4784% ~~$26~~25,~~431~~065,~~081~~000 8.00% N/A The Bank 5358,~~580~~253,~~277~~443 1618.2259% 2625,~~423~~065,~~496~~000 8.00% ~~$33~~31,~~029~~331,~~370~~000 10.00% Tier I Capital (to Risk-Weighted Assets): Tejas Bancshares, Inc. ~~$50~~55,~~259~~085,~~474~~321 1517.2158% ~~$13~~12,~~215~~533,~~540~~000 4.00% N/A The Bank 4954,~~431~~316,~~347~~784 1417.9734% 1312,~~211~~533,~~748~~000 4.00% 1918,~~817~~799,~~622~~000 6.00% Tier I Capital (to Average Assets): Tejas Bancshares, Inc. ~~$50~~55,~~259~~085,~~474~~321 15.2251% ~~$13~~14,~~207~~206,~~775~~000 4.00% N/A The Bank 4954,~~431~~316,~~347~~784 1415.9729% 1314,206,~~774~~000 4.00% 1617,~~508~~758,~~467~~000 5.00%

The Company currently has no material commitments for capital expenditures and no present intention to pay dividends on its common stock. Given the Company's strong capital ratios shown in the preceding table, management believes the Company's capital structure is adequate to support continued growth of the Company and the Bank in the near future. Liquidity Management Liquidity management involves monitoring the Company's sources and uses of funds in order to meet its day-to-day cash flow requirements while maximizing profits. Liquidity represents the ability of a Company to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management is made more complicated because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to the same degree of control. The Company has maintained a level of liquidity that is adequate to provide the necessary cash requirements. The Company's uses federal funds and borrowings from the Federal Home Loan Bank as its primary source of liquidity. Average federal funds sold were $2,725,863 and $2,403,239 during 2001 and 2000, respectively. Average federal funds purchased were $5,910,630 and $8,627,596 during 2001 and 2000, respectively. The Company has $45,000,000 in federal funds purchased lines available from correspondent banks of which none was used as of December 31, 2001. There were no borrowings from the Federal Home Loan Bank as of December 31, 2001. The average borrowings from the Federal Home Loan Bank were $17,709,041 during 2001. Management has also lined out potential purchasers of loans as a tool to maintain liquidity. The Company has numerous loan participations with other parties, primarily financial institutions. Loan participations are a common commercial banking arrangements whereby the Company sells, on a nonrecourse basis, a portion of a loan to another party or parties. These arrangements spread the risk between or among the parties and provide liquidity to the Company while reducing risk. Although no formal agreements or commitments exist, management believes that additional loan participations could readily be sold for liquidity purposes, if necessary. Management regularly reviews the liquidity position of the Company and has implemented internal policies which establish guidelines for sources of asset-based liquidity. Management believes that the continued growth in the deposit base will enable the Company to meet its long-term liquidity needs. 34 Interest-Rate Risk Sensitivity The largest component of the Company's net earnings is derived from the spread between yields on interest-earning assets and the cost of interest-bearing liabilities. In a changing interest-rate environment, this spread can widen or narrow depending on the relative repricing and maturities of interest-earning assets and interest-bearing liabilities. The Company's general policy is to reasonably match the rate sensitivity of its assets and liabilities to prudently manage interest-rate risk. To accomplish this, the Company monitors its interest-rate sensitivity, or risk, and matches more closely the cash flows and effective maturities or repricings of its interest-sensitive assets and liabilities. Interest-rate sensitivity is a function of the repricing characteristics of the Company's portfolio of assets and liabilities. These repricing characteristics are the time frames at which interest-earning assets and interest-bearing liabilities are subject to changes in interest rates either at repricing, replacement, or maturity. Sensitivity is measured as the difference between the volume of assets and liabilities in the Company's current portfolio that are subject to repricing in future time periods. The difference at any given time is called the interest sensitivity "gap" and is usually calculated separately for various segments of time and on a cumulative basis. Any excess of assets or liabilities results in an interest sensitivity gap. A positive gap denotes net asset sensitivity, and a negative gap represents net liability sensitivity. An institution has a negative gap if the amount of interest-bearing liabilities maturing or repricing in a specified time period exceeds the amount of interest-earning assets maturing or repricing in the same period. If more interest-earning assets than interest-bearing liabilities mature or reprice in a specified period, then the institution has a positive gap. Accordingly, in a rising interest-rate environment in an institution with a negative gap, the cost of its rate-sensitive liabilities would theoretically rise faster than the yield on its rate-sensitive assets, thereby diminishing future net interest income. In a falling interest- rate environment, a negative gap would indicate that the cost of rate-sensitive liabilities would decline faster than the yield on rate-sensitive assets and improve net interest income. For an institution with a positive gap, the reverse would be expected. The Company has sought to increase the sensitivity of its assets to changing interest rates by emphasizing shorter term and/or adjustable rate loans. The Company also originates fixed-rate mortgage loans, which are generally sold in the secondary market. The Company manages the maturity and repricing characteristics of its liabilities and has sought to keep the interest sensitivity of its liabilities short by emphasizing shorter term deposits. The following table presents rate-sensitive assets and rate-sensitive liabilities as of December 31, 2001, which mature or reprice in the time periods shown. Except for the effects of prepayments, the table presents principal cash flows from payments, maturity, or repricing. This table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain categories of assets and liabilities is subject to competitive and other pressures beyond the Company's control. As a result, certain assets and liabilities indicated as maturing or otherwise repricing within a stated period may, in fact, mature or reprice at different times and at different volumes. 35 December 31, 2001

~~December 31, 2000~~ Assets Subject to Interest Rate ~~-------------------------------~~ 3 Months 3 Months 1 Year 3 Years 5 Years ~~Over~~ Adjustment or Less to 1 Year to 3 Years to 5 Years to 15 Years ~~15 Years~~ ---------- --~~----------~~ ------------- ------------ ------------ ------------ ~~------------~~ Interest Bearing Due From FHLB $ 2711,~~331~~762 $ -- $ -- $ -- $ -- ~~$ --~~ Loans Combined - fixed rate projected payments, floating rate by repricing interval ~~207~~185,~~083~~915,~~469~~663 2742,~~111~~084,~~577~~889 1813,~~638~~991,~~385~~988 2429,~~826~~627,~~079~~000 3933,~~271~~032,~~053~~682 ~~12,864,453~~ Investments Combined - fixed rate by maturity, floating rate by repricing interval, and projected ~~payments 447~~437,~~305~~597 21,~~318~~544,~~718~~674 ~~202~~792,~~125~~981 ~~-- 37~~1,~~691~~523,906 229,~~064,950~~890 payments Federal Funds Sold 14,~~730~~430,000 -- -- -- -- -- --~~----------~~ ------------- ------------ ------------ ------------ ~~------------~~ Total $~~209~~190,~~288~~795,~~105~~022 ~~$ 29~~43,~~430~~629,~~295~~563 ~~$ 18~~14,~~840~~784,~~510~~969 ~~$ 24~~31,~~826~~150,~~079~~906 ~~$ 39~~33,~~308~~062,~~744~~572 ~~$ 14,929,403~~ ============ ============= ============ ============ ============ ~~============~~ Cumulative ~~209~~190,~~288~~795,~~105~~022 ~~238~~234,~~718~~424,~~400~~585 ~~257~~249,~~558~~209,~~910~~554 ~~282~~280,~~384~~360,~~989~~460 ~~321~~313,~~693~~423,~~733~~032 ~~336,623,136~~ Liabilities Subject to Interest Rate Adjustment NOW Accounts 3940,~~700~~972,~~927~~536 ~~-- -- -- -- --~~ Money Market Accounts 4748,~~799~~441,~~487~~473 ~~-- -- -- -- --~~ Savings Accounts 6,~~149~~866,~~438~~662 ~~-- -- -- -- --~~ Fed Funds and Other Borrowing ~~33,000,000~~ -- ~~-- -- -- --~~ CDs Greater than $100,000 2521,~~256~~661,~~043~~859 3244,~~383~~132,~~508~~906 32,~~784~~707,213 -- -- -- CDs Less than $100,000 1418,~~732~~208,~~978~~657 2219,~~621~~609,~~998~~637 5270,~~070,893~~447 -- -- -- ----------~~---~~ ------------ ------------ ------------ ------------ Total $~~166~~136,~~638~~151,~~873~~187 ~~$ 55~~63,~~005~~742,~~506~~543 ~~$ 8~~2,~~855~~977,~~066~~660 $ -- $ -- ~~$ --~~ ============ ============= ============ ============ ============ ~~============~~ Cumulative ~~166~~136,~~638~~151,~~873~~187 ~~221~~199,~~644~~893,~~379~~730 ~~230~~202,~~499~~871,~~445~~390 ~~230~~202,~~499~~871,~~445~~390 ~~230~~202,~~499~~871,~~445~~390 ~~230,499,445~~ Net Position of Assets (Liabilities) 4254,~~649~~643,~~232~~835 (2520,~~575~~112,~~211~~980) 911,~~985~~807,~~444~~309 2431,~~826~~150,~~079~~906 3933,~~308~~062,~~744~~572 ~~14,929,403 ------------ ------------- ------------ ------------ ------------ ------------~~ Cumulative Gap $ 4254,~~649~~643,~~232~~835 ~~$ 17~~34,~~074~~530,~~021~~855 ~~$ 27~~46,~~059~~338,~~465~~164 ~~$ 51~~77,~~885~~489,~~544~~070 ~~$ 91~~110,~~194~~551,~~288~~642 ~~$106,123,691~~ Rate Sensitive Assets as % of Rate Sensitive Liabilities (Cumulative) ~~125~~140.5913% ~~107~~117.7027% ~~111.74%~~ 122.5184% ~~139~~138.5620% ~~146~~154.0449% Assets Subject to Interest Rate ~~-------------------------------~~Over Adjustment 15 Years Total ------------ ------------ Interest Bearing Due From FHLB $-- 2711,~~331~~762 Loans Combined - fixed rate projected payments, floating rate by repricing interval ~~329~~11,~~795~~631,~~016~~929 316,284,151 Investments Combined - fixed rate by maturity, floating rate by repricing interval, and projected ~~payments~~2,808,385 57,~~070~~137,~~789~~433 payments Federal Funds Sold 14,~~730~~430,000 ------------ ------------ Total ~~$336~~14,~~623~~440,~~136~~314 327,863,346 ============ ============ Cumulative 327,863,346 Liabilities Subject to Interest Rate Adjustment NOW Accounts 3940,~~700~~972,~~927~~536 Money Market Accounts 4748,~~799~~441,~~487~~473 Savings Accounts 6,~~149~~866,~~438~~662 Fed Funds and Other Borrowing ~~33,000,000~~-- CDs Greater than $100,000 61-- 68,~~423~~501,~~764~~978 CDs Less than $100,000 4238,~~425~~088,~~829~~741 ------------ ------------ Total ~~$230~~-- 202,~~499~~871,~~445~~390 ============ ============ Cumulative 202,871,390 Net Position of Assets (Liabilities) 14,440,314 Cumulative Gap 124,991,956 Rate Sensitive Assets as % of Rate Sensitive Liabilities (Cumulative) 161.61%

As shown by the table, at December 31, 2001, the maturities of the Company's interest-bearing assets extend over 15 years, while its interest-bearing liabilities generally mature in less than one year. Also, the Company's interest-bearing assets significantly exceed its interest-bearing liabilities (a positive gap). Accordingly, a rising interest-rate environment would positively affect the Company's net interest margin, and a falling interest-rate environment would negatively affect the Company's net interest margin. A static gap report consists of an inventory of the dollar amounts of assets and liabilities that could mature or reprice in a particular period. It does not consider the probability that potential maturities or repricings of interest-sensitive accounts will occur, or to what extent. Accordingly, although the table indicates the Company's gap position at a particular time, those measurements are not intended to and do not forecast the effect of changes in market interest rates on the Company's gap position and may differ from actual results after December 31, 2001. Impact of Inflation Unlike most industrial companies, the assets and liabilities of financial institutions such as the Company and the Bank are primarily monetary. Therefore, interest rates have a more significant effect on the Company's performance than do the changes in the general rate of inflation and changes 36 in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. New Accounting Standards On January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of the new standard did not have a material impact on the Company's financial statements. In June 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations and Statement No. 142, Goodwill and other Intangible Assets. The Company will adopt the new standards beginning with its 2002 fiscal year, the year in which adoption is first required. Management has evaluated the impact of adopting these new standards and believes they will not have a material impact. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Please refer to "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Interest-Rate Risk Sensitivity". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Please refer to the financial statements, the report thereon and the notes thereto commencing at page F-1 of this Form 10-K, which financial statements, report, notes, and data are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 37 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. General The following table sets forth certain information concerning the directors and executive officers of the Company. Each executive officer of the Company is elected annually and serves at the discretion of the Company's Board of Directors. Directors of the Company hold office for a term of one year or until their successors are duly elected and qualified.

~~ASSETS~~Name ~~2000~~Age ~~1999~~Position ~~----~~with ~~----~~Company ~~Cash and due from banks $ 25,527,124 $ 20,711,268 Federal funds sold 1,730,000 4,350,000~~ ----~~---------~~ ---~~----------~~ ~~Cash and cash equivalents 27,257,124 25,061,268~~ ------------- --------~~-----~~ ~~Securities~~William ~~available-for-sale~~H. ~~5,070,789~~Attebury ~~6,723,147~~73 ~~Loans~~Director ~~329,795,016~~Jack ~~262,247,493~~W. ~~Less~~Hall ~~allowance~~50 ~~for~~Chief ~~loan~~Financial ~~losses (4,989,585) (4,524,678) ------------- ------------- Loans, net 324,805,431 257,722,815 ------------- ------------- Bank premises~~ and ~~equipment~~Accounting ~~Land~~Officer ~~560,189~~Wales ~~560,189~~H. ~~Buildings 3~~Madden,~~724,847~~ ~~1,863,462~~Jr. ~~Furniture,~~74 ~~fixtures~~Director ~~and~~Jay ~~equipment~~O'Brien ~~2,414,206~~57 ~~1,598,630~~Director ~~Construction~~John inF. ~~process~~Stradley ~~21,500~~59 ~~1,357,288~~President ~~------------- ------------- Total, at cost 6,720,742 5,379,569 Less accumulated depreciation~~ and ~~amortization~~Chief ~~1,667,708~~Executive 1,026,243 ------------- ------------- Bank premises and equipment, net 5,053,034 4,353,326 ------------- ------------- Accrued interest receivable 4,287,606 3,234,949 Federal income tax receivable 1,083,476 -- Deferred tax asset, net 1,447,121 1,719,300 Other assets 329,184 226,591 ------------- ------------- Total assets $ 369,333,765 $ 299,041,396 ============= =============Officer

None of the directors of the Company holds other directorships in a company or has been nominated to become a director in a company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or subject to the requirements of Section 15(d) of the Exchange Act, or any company registered as an investment company under the Investment Company Act of 1940. Experience The following are brief descriptions of the directors and executive officers of the Company, the positions they hold, and their principal occupations and business experience during the past five years. Unless otherwise indicated, the principal occupation listed for a person has been his occupation for at least the past five years. William H. Attebury. Mr. Attebury was formerly a director with Boatmen's First National Bank of Amarillo and served in that capacity from 1975 until February 1997 when he resigned. He has served as a director of the Company and the Bank since June 25, 1997. Mr. Attebury is a private investor. Jack W. Hall. Mr. Hall was formerly a senior vice-president with NationsBank in Dallas. He worked for NationsBank and its predecessor banks, Boatmen's First National Bank of Amarillo and The First National Bank of Amarillo, for 21 years. He has served as chief financial officer of the Company since February 1, 1998. Wales H. Madden, Jr. Mr. Madden was formerly a director with Boatmen's First National Bank of Amarillo and served in that capacity from 1961 until February 1997 when he resigned. He has served as a director of the Company and the Bank since June 25, 1997. Mr. Madden is an attorney and a private investor. Jay O'Brien. Mr. O'Brien was formerly a director with Boatmen's First National Bank of Amarillo from 1993 until February 1997 when he resigned. He has served as a director of the Company and the Bank since June 25, 1997. Mr. O'Brien is a cattleman. 38 John F. Stradley. Mr Stradley was formerly an executive vice-president with Boatmen's First National Bank of Amarillo. He worked for Boatmen's First National Bank of Amarillo and its predecessor bank, The First National Bank of Amarillo, for 31 years. He has served as a director of the Bank since February 26, 1998, and as the Company's and the Bank's president and chief executive officer since April 18, 2001. There are no family relationships among any of the executive officers or directors of the Company or the Bank. Meetings and Committees of the Board of Directors The Board of Directors of the Company held 18 meetings, of which 14 were combined meetings with the Board of Directors of the Bank, in 2001. During 2001, each of the Company's directors attended at least 75 percent of the total number of meetings of the Board of Directors. The Board of Directors of the Company currently does not have any committees. However, the Company may establish one or more committees during 2002. These committees, if formed, may include an executive committee, a nominating committee, an audit committee, a loan committee, and a compensation committee. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires the Company's officers, directors, and persons who own more than 10 percent of a registered class of the Company's equity securities and certain other affiliated persons to file reports of ownership and changes in ownership with the SEC. Officers, directors, and greater than 10 percent shareholders are required by SEC regulations to furnish the Company copies of all Section 16(a) forms they file. Based solely on review of the copies of those forms, or written representations that no other forms were required, the Company believes that during the fiscal year ended December 31, 2001, all Section 16(a) filing requirements applicable to its officers, directors, and greater than 10 percent beneficial owners were satisfied. ITEM 11. EXECUTIVE COMPENSATION. Compensation of Executive Officers The following table states the compensation paid by the Company and the Bank for the last three fiscal years to the Chief Executive Officer of the Company and the Bank. Except for Mr. John F. Stradley, no executive officers of the Company or the Bank received compensation above $100,000 during the last three fiscal years. 39

~~LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999~~ ---- ------------------------------------------------------------------------------------------------------------------------------- ~~LIABILITIES~~Summary ~~Deposits~~Compensation ~~Demand~~Table ----------------------------------------------------------------------------------------------------------------------------------- ~~noninterest~~All ~~bearing~~other $Name ~~86,348,482~~and $Principal ~~70,029,027 Demand~~ Compen- ~~interest~~Position ~~bearing~~Annual ~~87,500,414~~Compensation ~~89,490,720~~Long ~~Time~~Term ~~and~~Compensation ~~savings~~sation ~~109,999,031~~($) ~~92,447,906~~ ------------- ---------------------------------------------------------------------------------------------------------------------- ~~Total~~Awards ~~deposits~~Payout ~~283,847,927 251,967,653 Federal funds purchased 17,000,000~~ ----------------------------------------------------------------------------------------------------------------------------------- Other ~~borrowings~~Annual ~~16,000,000~~Restricted Securities Compen-- ~~Accrued~~Stock ~~interest~~Underlying ~~payable~~LTIP ~~1,510,927~~sation ~~879,291~~Award(s) ~~Federal~~Options/ ~~income~~Payout ~~taxes~~($) ~~payable~~Year --Salary ~~206,181~~($) ~~Other~~Bonus ~~liabilities~~($) ~~715,437~~($) ~~627,507~~($) SARs (#) ------------- ------------- ~~Total liabilities 319,074,291 253,680,632~~ ------------- -------------------------------------------------------------------------------------------- ~~STOCKHOLDERS'~~Donald ~~EQUITY~~E. ~~Common~~Powell ~~stock~~2001 0 $143,763 0 N/A N/A N/A $1346 ~~par~~(2) ~~value~~Chairman 20of the Board,~~000~~ 2000 0 $100,000 ~~shares~~0 ~~authorized,~~N/A 13N/A N/A $887 (2) President,~~415,267~~ and ~~13,418,017~~Chief ~~issued~~1999 in0 ~~2000~~0 ~~and~~0 ~~1999,~~N/A ~~respectively~~N/A ~~13,415,267~~N/A ~~13,418,017~~$682 ~~Paid-in~~(2) ~~capital~~Executive ~~26,515,193~~Officer ~~26,532,993~~(1) ~~Retained~~John ~~earnings~~F. 10Stradley 2001 $97,~~519~~300 $100,~~458~~000 5$8,~~743,180~~400 ~~Accumulated~~N/A ~~other~~N/A ~~comprehensive~~N/A ~~income~~N/A ~~(loss)~~President 6and Chief 2000 $28,~~356~~000 (0 $6,~~426)~~000 ~~Deferred~~N/A ~~directors'~~N/A ~~compensation~~N/A ~~(196,800)~~N/A Executive Officer (~~327,000~~1) 1999 0 0 N/A N/A N/A N/A ------------- ------------- ~~Total stockholders' equity 50,259,474 45,360,764~~ ------------- -------------------------------------------------------------------------------------------- ~~TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 369,333,765 $ 299,041,396 ============= =============~~-----------------------------------------------------------------------------------------------------------------------------------

(1) On April 18, 2001, the board of directors of each of the Company and the Bank appointed Mr. Stradley to serve as president and chief executive officer of both organizations. Mr. Powell, who formerly held those positions, continued to serve as chairman of the board. The board of directors took this action upon learning that Mr. Powell received initial indication from the Bush Administration that President Bush intended to nominate Mr. Powell to serve as Chairman of the FDIC. Mr. Powell later resigned from his position as chairman of the board of the Company and the Bank following his confirmation by the Senate. (2) Membership dues for the Amarillo Club paid by the Company during 1999, 2000, and 2001. Change of Control Agreements Jack W. Hall, Chief Financial Officer of the Company and the Bank. Pursuant to the terms of a change in control agreement, Jack W. Hall, Chief Financial Officer of the Company and the Bank, will receive, upon completion of a change in control transaction ( such as completion of the merger with WFC), a change in control payment in cash equal to 2.99 times his average annual compensation, less the value attributable to the acceleration of his stock options payable by the Bank within five business days following the effective date of the change in control. Payment of this amount pursuant to Mr. Hall's change in control agreement is contingent upon completion of the merger, but is not contingent on receipt of separate shareholder approval as described below or the continued employment or termination of Mr. Hall subsequent to completion of the merger. In addition to his change in control agreement, Mr. Hall and the Bank have entered into a supplemental change in control agreement, as amended, providing for the cash payment to Mr. Hall, only if approved by the shareholders of the Company, equal to the difference between three times his compensation (including any bonus) and the amount of cash received by Mr. Hall pursuant to the terms of the change in control agreement. No payment under the supplemental change in control agreement will be made to Mr. Hall unless approved by the shareholders of the Company. 40 Stock Option Plan On May 19, 1998, the Company's shareholders adopted the Tejas Bancshares, Inc., 1998 Incentive Stock Plant (the "Option Plan"). The total number of shares of Common Stock as to which awards may be granted pursuant to the Plan is 1,333,333. Under the Option Plan, the Company may grant both incentive stock options ("incentive stock options") intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and options which are not qualified as incentive stock options ("nonqualified stock options"). Incentive stock options must be granted at an exercise price equal to or greater than the fair market value of the Company's Common Stock on the date of grant and the term may not exceed ten years. The exercise price of nonqualified stock options granted under the Option Plan will be determined by a committee of the Company's Board of Directors on the date of grant. The exercise price of incentive stock options granted to holders of more than 10 percent of the Common Stock must be at least 110 percent of the fair market value of the Common Stock on the date of grant, and the term of such incentive stock options may not exceed five years. Additionally under the Option Plan, the Company may grant (i) nonqualified stock options to officers, directors, and employees of the Company and the Bank in lieu of annual retainers, fees, or compensation, (ii) stock appreciation rights, (iii) restricted shares, (iv) dividend equivalent rights, (v) stock awards, (vi) and other stock-based awards which are related to or serve a similar function to the foregoing; however, the Company does not anticipate granting these types of awards. The Option Plan became effective as of January 28, 1998, and will terminate on January 27, 2008, unless earlier terminated by the Board. Termination of the Option Plan will not affect awards made before termination, but awards will not be made after termination. The Board, or a committee designated by the Board from among its members (the "Committee"), is responsible for administration of the Option Plan. The Committee periodically makes determinations with respect to the participation of all employees, officers, directors, and consultants of the Company and the Bank in the Option Plan, and any such person is eligible (collectively, the "Participants") in the Option Plan and, except as otherwise required by law or the Option Plan, the grant terms of awards, including vesting schedules, retirement and termination rights, payment alternatives such as cash, stock, contingent award or other means of payment consistent with the purposes of the Option Plan, and such other terms and conditions as the Committee deems appropriate which shall be contained in the award agreement with respect to a Participant. The Committee has the authority to interpret and construe the provisions of the Option Plan and any award agreement and make determinations pursuant to any plan provision or award agreement which shall be final and binding on all persons. The Committee also has the authority at any time to provide for the conditions and circumstances under which awards shall be forfeited. The Committee has the authority to accelerate the vesting of any award and the time at which any award becomes exercisable. The aggregate number of shares of Common Stock as to which awards may be granted to participants, the number of share thereof covered by each outstanding award, and the price per share thereof in each such award, shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a subdivision or consolidation of shares or other capital adjustment, or the payment of a stock dividend or other increase or decrease in such shares, effected without receipt of consideration by the Company, or other change in corporate or capital structure. 41 If a change of control of the Company occurs, all awards granted under the Option Plan immediately vest, become exercisable in full, regardless of whether all conditions of exercise relating to length of service have been satisfied. For the year ended December 31, 2001, Mr. Stradley neither was granted nor exercised any awards under the Option Plan and he had no outstanding awards as of December 31, 2001. Compensation Committee Interlocks and Insider Participation No interlocking relationships exist between the Company's Board of Directors or officers responsible for compensation decisions and the board of directors or compensation committee of any company, nor has any such interlocking relationship existed in the past. Compensation of Directors Directors of the Company and the Bank did not receive compensation to serve in those capacities before November 1, 1998, and directors of the Company, who are also directors of the Bank, will receive no cash compensation for serving as directors of the Company. In lieu of cash compensation for meeting fees for the non-employee members of the Board of Directors of the Bank, the Board of Directors for the Company and the Bank adopted The First National Bank of Amarillo Directors' Stock Compensation Plan (the "Plan"). Effective November 1, 1998, and for the period ending December 31, 2001, the Company delivered to the Directors three certificates representing a total of 3,800 shares of Common Stock (the "Shares") of the Company. Each Director endorsed the certificates in blank and returned them to the Company to be held for future delivery in accordance with the Plan. The absence of a Director from any regularly scheduled meeting during the 14 months preceding December 31, 1999, or the 12 months preceding either December 31, 2000, or 2001, reduced the number of Shares delivered to him or her by a number calculated by multiplying the number of absences by 100 Shares and subtracting that number from the Shares otherwise deliverable to the Director for the applicable period. If a Director was terminated as a Director at any time before December 31, 2001, for any reason, including retirement, permanent disability, or death, or if a "corporate transaction" occurs in which the Bank and/or the Company is not the surviving entity, the Director or his or her designated beneficiary of his or her estate was entitled only to that number of Shares not already delivered to him or her under the Plan calculated by multiplying the number of meetings the Director attended by 100 during the then-current period. A total of 53,750 shares of Common Stock were delivered to the Directors under the Plan. The Plan is no longer in effect. Directors currently receive cash compensation for their services as Directors. Total Shareholder Return Comparison Performance Graph There is no established public trading market for the Company's voting stock and there exists no other accurate method to determine its market price. As a result, there is no effective method to construct a meaningful performance graph. 42 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table states information as of January 15, 2002, regarding the number of shares of Common Stock beneficially owned by all directors and executive officers of the Company. Beneficial ownership includes any shares held in the name of the spouse, minor children, or other relatives of the holder living in that person's home, as well as any shares held in the name of another person under an arrangement whereby the holder can vest title in himself at once or in the future. Except as otherwise indicated, the persons or entities listed below have sole voting and investment power for all shares of the Common Stock they beneficially own. Percentage of ownership is based on 13,037,787 shares of Common Stock issued and outstanding as of January 15, 2002. --------------------------------------------------------------------- Common Stock Percent of Name Beneficially Owned(1) Outstanding(2) Common Stock --------------------------------------------------------------------- William H. Attebury 306,615(3) 2.35% --------------------------------------------------------------------- Wales H. Madden, Jr 72,551(4) * --------------------------------------------------------------------- Jay O'Brien 155,210(5) 1.19% --------------------------------------------------------------------- John F. Stradley 32,801 * --------------------------------------------------------------------- Jack W. Hall 22,500(6) * --------------------------------------------------------------------- All executive officers and directors as a group (five persons): 589,677(6) 4.52% --------------------------------------------------------------------- (1) Unless otherwise noted, the indicated owner has sole voting power and sole investment power. (2) Shares issuable to an individual or group under stock options exercisable within 60 days of January 15, 2002, are considered outstanding for the purpose of calculating the percentage of total shares of common stock owned by such individual or group. Such shares are not considered outstanding for the purpose of calculating the percentage of total outstanding shares of common stock owned by any other individual group. (3) Includes 151,508 shares owned by the Attebury Family Partnership of which Mr. Attebury is the president of the managing partner and for which he exercises voting and investment authority, and an aggregate of 46,056 shares held by Mr. Attebury as custodian for eight of his grandchildren and for which Mr. Attebury exercises voting and investment authority. (4) Includes 3,334 shares held in the Wales H. Madden IV Trust of which Mr. Madden serves as trustee, 3,334 shares held in the S. Hamilton Madden Trust of which Mr. Madden serves as trustee, and 65,883 shares owned by Gore Creek Capital, Ltd., of which Mr. Madden is a limited partner and exercises shared voting and investment authority for those shares. (5) Includes 7,267 shares held in the Jay O'Brien Pension Trust; does not include 15,153 shares owned by Mr. O'Brien's spouse as separate property for which he disclaims beneficial ownership. (6) Includes 22,500 shares issuable upon the exercise of outstanding options, which options are (a) currently exercisable for 5,850 shares, (b) will be exercisable for 1,350 shares within 60 days of the date hereof, and (c) will be exercisable for the remaining 15,300 shares if the merger with WFC is approved by the Company's shareholders. 43 * Owns less than 1 percent. Principal Holders of Common Stock To the best of the Company's knowledge, no shareholder beneficially owns 5 percent or more of the outstanding shares of the Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Indebtedness of Management Certain officers, directors, and principal shareholders of the Company and the Bank, and their affiliates, have deposit accounts and other transactions with the Bank, including loans in the ordinary course of business. All loans or other extensions of credit made by the Bank to officers, directors, and principal shareholders of the Company and the Bank and to affiliates of those persons were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with independent third parties and did not involve more than the normal risk taken by the lender or present other unfavorable features. The extensions of credit by the Bank to those persons did not, and do not currently, involve more than the normal risk of collectibility or present other unfavorable features. At December 31, 2001, the outstanding principal amount of indebtedness to the Bank owed by directors and executive officers of the Company and their affiliates, who were indebted to the Bank on that date, totaled $2,984,538 (excluding participations), which represented approximately 5.4 percent of the Bank's equity capital accounts. The Bank expects to continue to enter into transactions in the ordinary course of business on similar terms with officers, directors, and principal shareholders of the Company, the Bank, and their affiliates. In addition to those lending relationships, some directors of the Company, and some of their associates, have had transactions with the Bank in the ordinary course of business, including the following: William H. Attebury. Mr. Attebury had a re-advancing operating note with the Bank in the amount of $500,000. The highest outstanding balance on this note during 2001 was $500,000. The loan is closed. Bison Development Company, which is wholly-owned by Mr. Attebury, has a re-advancing agricultural note with the Bank in the amount of $500,000. The highest outstanding balance on this note during 2001 was $500,000. There was no outstanding balance on this note as of January 1, 2002. Alpha Three Cattle Company, owned by Mr. Attebury (25 percent) and his sons Edward A. Attebury (25 percent) and W. A. Attebury (50 percent), has a re-advancing agricultural note with the Bank in the amount of $6,000,000. The highest outstanding balance on this note during 2001 was $5,920,000. The outstanding balance of the note as of January 1, 2002, was $4,501,135.63. Mr. Attebury participates, from time to time, with the Bank in making loans to customers of the Bank when a customer desires funds above the Bank's lending limit. Mr. Attebury does so on the same terms and conditions as the Bank, and the Bank does not secure any of the indebtedness owing to him under these arrangements. Mr. Attebury pays the Bank 0.5 percent of the amount of the loans for its servicing of the loans in which he participates. 44 Wales H. Madden, Jr. An affiliated interest of Mr. Madden has a note with the Bank for working capital. The highest outstanding balance on this note during 2001 was $525,400. The outstanding balance of this note as of January 1, 2002, was $503,401. Jay O'Brien. An affiliated interest of Mr. O'Brien has a line of credit in the amount of $2,500,000 with the Bank for working capital. The highest outstanding balance on this line of credit during 2001 was $548,000. The outstanding balance of the line of credit as of January 1, 2002, was $1.00. Another affiliate of Mr. O'Brien has a line of credit in the amount of $2,000,000. This line of credit was not used during 2001. Another affiliate of Mr. O'Brien has a line of credit in the amount of $2,000,000. The highest outstanding balance on this line of credit during 2001 was $957,160. There was no outstanding balance on this line of credit as of January 1, 2002. Mr. O'Brien has a line of credit for $500,000. The highest outstanding balance on this line of credit during 2001 was $23,500. There no outstanding balance on this line of credit January 1, 2002. All of the foregoing transactions were on substantially the same terms, including interest rates and collateral to the extent applicable, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectibility or present other unfavorable features. Additional transactions may take place with the Bank in the ordinary course of business. 45 PART IV. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (A) DOCUMENTS FILED AS A PART OF THIS REPORT (1) Exhibit Number Description ------ ----------- 3.1 Restated Articles of Incorporation of Tejas Bancshares, Inc.* 3.2 Amended and Restated Bylaws of Tejas Bancshares, Inc.* 10.1 Tejas Bancshares, Inc., 1998 Incentive Stock Plan ** 21.1 Subsidiaries of Tejas Bancshares, Inc.*** ------------- * Incorporated by reference from the Company's Registration Statement on Form 10 dated April 10, 1998. ** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. *** Incorporated by reference from the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (2) Financial Statements Page Independent Auditor's Report F-3 Audited Financial Statements Consolidated Balance Sheets F-4 Consolidated Statements of Earnings F-6 Consolidated Statements of Stockholders' Equity F-7 Consolidated Statements of Cash Flows F-8 Summary of Significant Accounting Policies F-9 Notes to Consolidated Financial Statements F-14 (B) REPORTS ON FORM 8-K Current Report on Form 8-K dated December 13, 2001. 46 TEJAS BANCSHARES, INC. SIGNATURES Pursuant to Section 13 or 15(d) of the Securities Act of 1934, Tejas Bancshares, Inc., has caused this report to be signed on its behalf by the undersigned, hereunto duly authorized on March 28, 2002. TEJAS BANCSHARES, INC. By /s/ John F. Stradley ---------------------------------- John F. Stradley President and Chief Executive Officer Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Tejas Bancshares, Inc., and in the capacities and on the date indicated.

~~2000~~Signature ~~1999~~Title ~~1998~~Date ~~----~~/s/ ~~----~~John ~~----~~F. ~~INTEREST~~Stradley ~~INCOME~~Principal ~~Interest~~Executive ~~and~~Officer ~~fees on loans $26,309,209 $17,633,049 $13,310,493 Interest and dividends on investment securities 387,418 386,961 351,933 Interest on federal funds sold 143,264 1,336,396 1,259,919~~ ----------- ----------- ----------- ~~Total~~John ~~interest~~F. ~~income~~Stradley ~~26,839,891~~March 1928,~~356,406~~ ~~14,922,345~~2002 ~~-----------~~/s/ ~~-----------~~Jack ~~-----------~~W. ~~INTEREST~~Hall ~~EXPENSE~~Principal ~~Interest~~Financial onOfficer ~~deposits 8,778,759 6,001,718 4,706,417 Interest on other borrowings 901,694~~ -- -- ----------- ----------- -----~~------~~ ~~Total~~and ~~interest~~Principal ~~expense~~Accounting ~~9,680,453~~March 628,~~001,718~~ ~~4,706,417~~2002 ~~-----------~~Jack ~~-----------~~W. ~~-----------~~Hall ~~Net~~Officer ~~interest~~/s/ ~~income~~William ~~17,159,438~~H. ~~13,354,688~~Attebury ~~10,215,928~~Director ~~PROVISION~~March ~~FOR LOAN LOSSES 3~~28,~~150,000~~ ~~1,320,000~~2002 ~~975,000~~ ----------- ----------- ----------- ~~Net~~William ~~interest~~H. ~~income~~Attebury ~~after~~/s/ ~~provision~~Wales ~~for~~H. ~~loan losses 14~~Madden,~~009,438~~ ~~12,034,688~~Jr. ~~9,240,928~~Director ~~-----------~~March ~~----------- ----------- OTHER OPERATING INCOME Service charges 1~~28,~~779,183~~ ~~1,281,951~~2002 ~~714,912 Other 878,348 564,126 434,465~~ ----------- ----------- ----------- ~~Total~~Wales ~~other~~H. ~~operating income 2~~Madden,~~657,531~~ ~~1,846,077~~Jr. ~~1,149,377~~/s/Jay ~~-----------~~O'Brien ~~-----------~~Director ~~-----------~~March ~~OTHER OPERATING EXPENSES Salaries and employee benefits 4~~28,~~594,091~~ ~~3,842,432~~2002 2,960,405 Depreciation and amortization 663,031 433,962 310,416 Advertising 398,429 347,215 381,132 Occupancy expense 460,016 429,827 361,323 Federal Deposit Insurance Corporation premiums, net 49,636 22,762 25,883 Professional fees 189,969 159,450 188,722 Supplies, stationery and office expenses 511,157 356,693 628,913 Taxes other than on income and salaries 348,188 171,002 187,488 Data processing 910,865 859,077 431,025 Postage 189,550 176,357 122,732 Other 1,070,470 882,634 745,964 ----------- ----------- ----------- ~~Total~~Jay other operating expenses 9,385,402 7,681,411 6,344,003 ----------- ----------- ----------- Earnings before income taxes 7,281,567 6,199,354 4,046,302 INCOME TAXES 2,505,289 2,106,629 741,999 ----------- ----------- ----------- NET EARNINGS $ 4,776,278 $ 4,092,725 $ 3,304,303 =========== =========== =========== NET EARNINGS PER SHARE - Basic $ 0.36 $ 0.31 $ 0.25 =========== =========== =========== NET EARNINGS PER SHARE - Diluted $ 0.35 $ 0.30 $ 0.24 =========== =========== ===========O'Brien

47 TEJAS BANCSHARES, INC. AND SUBSIDIARIES Amarillo, Texas CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 F-1 INDEX TO FINANCIAL STATEMENTS PAGE INDEPENDENT AUDITOR'S REPORT............................................ F-3 FINANCIAL STATEMENTS Consolidated Balance Sheets........................................... F-4 Consolidated Statements of Earnings................................... F-6 Consolidated Statements of Stockholders' Equity....................... F-7 Consolidated Statements of Cash Flows................................. F-8 Summary of Significant Accounting Policies............................ F-9 Notes to Consolidated Financial Statements............................ F-14 F-2 Independent Auditor's Report The Board of Directors Tejas Bancshares, Inc. Amarillo, Texas We have audited the accompanying consolidated balance sheets of Tejas Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tejas Bancshares, Inc. and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. Clifton Gunderson LLP Amarillo, Texas January 30, 2002 F-3 TEJAS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000 ASSETS

~~Accumulated~~2001 ~~other~~2000 ~~Common Paid~~-~~in Retained comprehensive stock capital earnings income (loss)~~ ---~~---------~~ ----~~--------~~ ~~------------~~Cash ~~------------~~and ~~Balance~~due atfrom ~~December~~banks ~~31, 1997~~ $ 1324,~~333~~931,~~334~~786 $ 2625,~~137~~527,~~427~~124 $Federal ~~(1,653,848)~~funds $sold 364,~~329 COMPREHENSIVE INCOME Net earnings -- -- 3~~430,~~304,303~~000 ~~-- Other comprehensive income~~1, ~~net of tax: Change in unrealized gain (loss) on available-for-sale securities~~730, ~~net of deferred tax of $(6,017) -- -- -- (11,681) TOTAL COMPREHENSIVE INCOME Directors' stock compensation plan (64,600 shares) 64,600 323,~~000 -- -- ~~Amortization of directors' stock compensation plan~~ -- -- -- -- -~~-----------~~ ------------ -~~-----------~~ ~~------------~~Cash ~~Balance~~and atcash ~~December~~equivalents 3129, ~~1998 13~~361,~~397,934~~786 2627,~~460~~257,~~427~~124 ~~1,650,455 24,648 COMPREHENSIVE INCOME Net earnings~~ -- -- ~~4,092,725~~ -- ~~Other comprehensive income, net of tax: Change in unrealized gain (loss) on available~~-~~for~~-~~sale securities, net of deferred tax of $(16,007)~~ -- -- -- ~~(31,074) TOTAL COMPREHENSIVE INCOME Exercise of stock options 9,283 18,566~~ -- -- ~~Directors' stock compensation plan (10,800 shares) 10,800 54,000~~ -- -- ~~Amortization of directors' stock compensation plan~~ -- -- -- --Securities available-for-~~----------~~sale ~~------------ ------------ ------------ Balance at December 31~~7, ~~1999 13~~137,~~418,017~~432 ~~26,532,993~~ 5,~~743~~070,~~180~~789 ~~(6,426)~~Loans ~~COMPREHENSIVE INCOME Net earnings -- -- 4~~316,~~776~~284,~~278~~151 ~~-- Other comprehensive income~~329,795,016 ~~net~~Less ofallowance ~~tax:~~for ~~Change~~loan inlosses ~~unrealized gain~~ (~~loss~~5,695,260) ~~on available-for-sale securities~~(4, ~~net of reclassification adjustment and deferred tax of $6~~989,~~584~~585) -- -- -- ~~12,782~~ -------~~-----~~ ------------ -~~-----------~~ ~~------------~~Loans, ~~TOTAL~~net ~~COMPREHENSIVE INCOME Exercise of stock options 1~~310,~~350 2~~588,~~700~~891 ~~-- -- Cancellation of directors' shares (4~~324,~~100 shares) (4~~805,~~100)~~431 ~~(20,500)~~ -- -- ~~Amortization of directors' stock compensation plan~~ -- -- -- -- -~~-----------~~ ------------ -~~-----------~~ ~~------------~~Bank ~~Balance~~premises atand ~~December~~equipment 31Land 560,189 ~~2000 $ 13~~560,~~415,267~~189 $Buildings 263,~~515~~867,~~193~~427 ~~$ 10~~3,~~519~~724,~~458~~847 ~~$ 6~~Furniture,~~356~~ ~~============~~fixtures ~~============~~and ~~============~~equipment ~~============ Deferred directors' compensation Total ------------ ------------ Balance at December 31~~2, ~~1997 $ -- $ 37~~268,~~853,242~~571 ~~COMPREHENSIVE INCOME Net earnings -- 3~~2,~~304~~414,~~303~~206 ~~Other~~Construction ~~comprehensive income, net of tax: Change~~ in ~~unrealized~~process ~~gain (loss) on available~~-~~for~~-~~sale~~ ~~securities~~21,500 ~~net of deferred tax of $(6,017)~~ -- ~~(11,681)~~ ------------ ~~TOTAL COMPREHENSIVE INCOME 3,292,622~~ ------------ ~~Directors' stock compensation plan (64,600 shares) (387,600)~~ -- ~~Amortization of directors' stock compensation plan 18~~Total,~~600~~ ~~18,600 ------------ ------------ Balance~~ at ~~December~~cost 316, ~~1998 (369~~696,~~000)~~187 416,~~164~~720,~~464~~742 ~~COMPREHENSIVE~~Less ~~INCOME~~accumulated ~~Net~~depreciation ~~earnings~~and --amortization 42,~~092~~146,~~725~~919 ~~Other comprehensive income~~1, ~~net of tax: Change in unrealized gain (loss) on available-for-sale securities~~667,708 ~~net of deferred tax of $(16,007)~~ -- ~~(31,074)~~ ------------ ~~TOTAL COMPREHENSIVE INCOME 4,061,651~~ ------------ ~~Exercise of stock options~~ -- ~~27,849~~Bank ~~Directors'~~premises ~~stock~~and ~~compensation plan (10~~equipment,~~800~~ ~~shares)~~net ~~(64~~4,~~800) -- Amortization of directors' stock compensation plan 106~~549,~~800~~268 ~~106~~5,~~800~~053,034 ------------- ------------- ~~Balance~~Accrued atinterest ~~December~~receivable 312, ~~1999 (327~~735,~~000)~~748 ~~45,360,764 COMPREHENSIVE INCOME Net earnings --~~ 4,~~776~~287,~~278~~606 ~~Other~~Federal ~~comprehensive~~ income, ~~net of~~ tax: ~~Change~~receivable in367,452 ~~unrealized gain (loss) on available-for-sale securities~~1,083,476 ~~net~~Deferred ~~of reclassification adjustment and deferred~~ tax ~~of -- 12~~asset,~~782~~ ~~------------~~net ~~------------ TOTAL COMPREHENSIVE INCOME 4~~1,~~789~~777,~~060~~632 ~~------------ Exercise of stock options -- 4~~1,~~050 Cancellation of directors' shares (4~~447,~~100~~121 ~~shares)~~Other ~~24,600~~assets ~~-- Amortization of directors' stock compensation plan 105~~254,~~600~~618 ~~105~~329,~~600~~184 ------------- ------------- ~~Balance~~TOTAL atASSETS ~~December 31, 2000~~ $ ~~(196~~356,~~800)~~772,827 $ 50369,~~259~~333,~~474~~765 ============= =============

F-4 TEJAS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) December 31, 2001 and 2000 LIABILITIES AND STOCKHOLDERS' EQUITY

2001 2000 ~~1999 1998~~ ---- ---- ~~----~~LIABILITIES ~~CASH~~Deposits ~~FLOWS~~Demand ~~FROM~~- ~~OPERATING~~noninterest ~~ACTIVITIES~~bearing ~~Net earnings~~ $ 496,~~776~~982,~~278~~466 $ 486,~~092~~348,~~725~~482 $Demand 3,304,303 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 663,031 433,962 310,416 Deferred income taxes 265,595 (403,280) (969,287) Amortization of deferred directors' compensation 105,600 106,800 18,600 Provision for loan losses 3,150,000 1,320,000 975,000 Change in: Accrued interest receivable (1,052,657) (885,866) (1,188,135) Federal income tax receivable (1,083,476) -- ~~-- Other assets (102,593) (67,202) (80,681) Accrued~~ interest ~~payable~~bearing ~~631~~89,~~636 194~~414,~~829~~009 ~~461~~87,~~786 Federal income taxes payable (206~~500,~~181)~~414 ~~139,187~~Time ~~(257,715)~~and ~~Other~~savings ~~liabilities 87~~113,~~930 394~~457,~~682~~381 ~~148~~109,~~023 Other (12~~999,~~216)~~031 ~~19,835 6,870~~ ------------ -~~-----------~~ ------------- ~~Net~~Total ~~cash~~deposits ~~provided by operating activities 7~~299,~~222~~853,~~947~~856 5283,~~345~~847,~~672~~927 ~~2,729,180~~Federal ~~------------~~funds ~~------------~~purchased --~~----------~~ ~~CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and pay-downs on securities available-for-sale 5~~17,~~631~~000,~~219~~000 ~~2,723,119~~Other ~~2,816,304~~borrowings ~~Purchases of securities available~~-~~for~~-~~sale~~ (316,~~947~~000,~~279)~~000 ~~(2,210,140)~~Accrued ~~(5,059,010)~~interest ~~Change~~payable ~~in loans to customers (70~~980,~~232,616)~~826 ~~(75~~1,~~491~~510,~~891)~~927 ~~(67,423,660)~~Other ~~Expenditures~~liabilities ~~for bank premises and equipment (1~~809,~~362,739)~~891 (2715,~~275,055)~~437 ~~(1,960,393)~~ ------------ -~~-----------~~ ------------- ~~Net~~Total ~~cash~~liabilities ~~used by investing activities (69~~301,~~911~~644,~~415)~~573 ~~(77~~319,~~253~~074,~~967)~~291 ~~(71,626,759)~~ ------------ -~~-----------~~ ------------- ~~CASH~~STOCKHOLDERS' ~~FLOWS~~EQUITY ~~FROM~~Common ~~FINANCING~~stock, ~~ACTIVITIES~~$1 ~~Net~~par ~~increase~~value in20,000,000 ~~deposits~~shares 31authorized,~~880,274~~ 4613,~~828~~037,~~539~~787 98and 13,~~884~~415,~~456~~267 ~~Net~~issued ~~increase~~ in ~~federal~~2001 ~~funds~~and ~~purchased~~2000, 17respectively 13,~~000~~037,~~000~~787 --13,415,267 Paid--in ~~Net~~capital ~~increase~~25,718,803 in26,515,193 ~~other~~Retained ~~borrowings~~earnings 16,~~000~~328,~~000~~731 --10,519,458 --Accumulated ~~Proceeds~~other ~~from~~comprehensive ~~exercise~~income ~~of stock options 4~~42,~~050~~933 276,~~849~~356 --Deferred ~~------------~~directors' ~~------------~~compensation --~~----------~~ ~~Net cash provided by financing activities 64~~(196,~~884,324~~800) ~~46,856,388 98,884,456~~ ------------ -~~-----------~~ ------------- ~~Net~~Total ~~increase~~stockholders' ~~(decrease)~~equity ~~in cash and cash equivalents 2~~55,~~195~~128,~~856~~254 ~~(25,051,907) 29,986,877 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,061,268~~ 50,~~113~~259,~~175~~474 ~~20,126,298~~ ------------ -~~-----------~~ ------------- ~~CASH~~TOTAL LIABILITIES AND ~~CASH~~STOCKHOLDERS' ~~EQUIVALENTS,~~EQUITY ~~END OF YEAR~~ $ 27356,~~257~~772,~~124~~827 $ 25369,~~061~~333,~~268~~765 ~~$ 50,113,175~~ ============ =~~===========~~ =============

~~Gross~~2001 ~~Gross~~2000 ~~Amortized~~1999 ~~unrealized~~---- ~~unrealized~~---- ~~Fair~~---- ~~cost~~INTEREST ~~gains~~INCOME ~~losses~~Interest ~~value~~and fees on loans $ 24,436,954 $ 26,309,209 $ 17,633,049 Interest and dividends on investment securities 370,033 387,418 386,961 Interest on federal funds sold 106,673 143,264 1,336,396 ------------ ------------ ------------ Total interest income 24,913,660 26,839,891 19,356,406 ------------ ~~Available~~-~~for~~-~~sale:~~---------- ~~Government~~------------ ~~agency~~INTEREST ~~securities~~EXPENSE $1Interest on deposits 6,~~833~~868,~~508~~935 $8,778,759 56,~~603~~001,718 $Interest on other borrowings 998,146 901,694 -- ------------ ------------ ------------ Total interest expense 7,867,081 9,680,453 6,001,718 ------------ ------------ ------------ Net interest income 17,046,579 17,159,438 13,354,688 PROVISION FOR LOAN LOSSES (1850,~~250~~000) $3,150,000 1,~~837~~320,~~861~~000 ~~Mortgage~~-~~backed~~----------- ~~securities~~------------ 1------------ Net interest income after provision for loan losses 17,~~207~~896,~~876~~579 814,~~147~~009,438 (12,034,688 ------------ ------------ ------------ OTHER OPERATING INCOME Service charges 2,~~870)~~078,730 1,~~213~~779,~~153~~183 1,281,951 Other ~~securities~~1,285,185 2878,~~019~~348 564,~~775~~126 ------------ ------------ ------------ Total other operating income 3,363,915 2,~~019~~657,~~775~~531 1,846,077 ------------ ------------ ------------ OTHER OPERATING EXPENSES Salaries and employee benefits 5,635,667 4,594,091 3,842,432 Depreciation and amortization 605,329 663,031 433,962 Advertising 364,813 398,429 347,215 Occupancy expense 571,181 460,016 429,827 Federal Deposit Insurance Corporation premiums 50,638 49,636 22,762 Professional fees 347,865 189,969 159,450 Supplies, stationery and office expenses 333,934 511,157 356,693 Taxes other than on income and salaries 394,914 348,188 171,002 Data processing 1,014,817 910,865 859,077 Postage 212,364 189,550 176,357 Other 1,203,169 1,070,470 882,634 ------------ ------------ ------------ Total ~~available~~other operating expenses 10,734,691 9,385,402 7,681,411 -~~for~~-~~sale~~---------- $5------------ ------------ Earnings before income taxes 10,~~061~~525,~~159~~803 7,281,567 6,199,354 INCOME TAXES 3,583,319 2,505,289 2,106,629 ------------ ------------ ------------ NET EARNINGS $13 6,~~750~~942,484 $( 4,~~120)~~776,278 $5 4,~~070~~092,~~789~~725 ============ ============ ============ NET EARNINGS PER SHARE - Basic $ 0.52 $ 0.36 $ 0.31 ============ ============ ============ NET EARNINGS PER SHARE - Diluted $ 0.51 $ 0.35 $ 0.30 ============ ============ ============

These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. F-6 TEJAS BANCSHARES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years ended December 31, 2001, 2000 and 1999

~~Gross~~Accumulated ~~Gross~~other ~~Amortized~~Common ~~unrealized~~Paid-in ~~unrealized~~Retained ~~Fair~~comprehensive ~~cost~~stock ~~gains~~capital ~~losses~~earnings ~~value~~income (loss) ----- ------- -------- ------- ------ Balance at December 31, 1998 $ 13,397,934 $ 26,460,427 $ 1,650,455 $ 24,648 COMPREHENSIVE INCOME Net earnings -- -- ~~Available~~4,092,725 -~~for~~-~~sale~~ Other comprehensive income, net of tax: ~~U.S.~~Change ~~Treasury~~in unrealized gain (loss) on available-for-sale securities, net of deferred tax of $2(16,~~203,191~~007) $-- -- $-- (331,~~880~~074) ~~$2,199,311~~TOTAL ~~Government~~COMPREHENSIVE ~~agency~~INCOME ~~securities~~Exercise 1of stock options 9,~~826,368~~283 118,~~910~~566 -- -- Directors' stock compensation plan (10,~~285~~800 shares) 110,~~817~~800 54,~~993~~000 ~~Mortgage~~-~~backed~~- ~~securities~~-- 1Amortization of directors' stock compensation plan -- -- -- -- ------------ ------------ ------------ ------------ Balance at December 31,~~487~~ 1999 13,~~649~~418,017 826,~~503~~532,993 (5,~~984~~743,180 (6,426) 1COMPREHENSIVE INCOME Net earnings -- -- 4,~~490~~776,~~168~~278 -- Other comprehensive income, net of tax: Change in unrealized gain (loss) on available-for-sale securities, net of reclassification adjustment and deferred tax of $6,584 -- -- -- 12,782 TOTAL COMPREHENSIVE INCOME Exercise of stock options 1,~~215~~350 2,~~675~~700 -- -- 1Cancellation of directors' shares (4,~~215~~100 shares) (4,~~675~~100) (20,500) -- -- Amortization of directors' stock compensation plan -- -- -- -- ------------ ------------ ------------ ~~Total~~------------ Balance at December 31, 2000 13,415,267 26,515,193 10,519,458 6,356 COMPREHENSIVE INCOME Net earnings -- -- 6,942,484 -- Other comprehensive income, net of tax: Change in unrealized gain (loss) on available-for-sale securities, net of reclassification adjustment and net of deferred tax of $618,~~732~~842 -- -- -- 36,~~883~~577 ~~$10~~TOTAL COMPREHENSIVE INCOME Exercise of stock options 14,~~413~~067 $28,134 -- -- Cancellation of directors' shares (2017,~~149~~550 shares) (17,550) (87,750) -- -- Amortization of directors' stock compensation plan -- -- -- -- Purchase and retirement of 373,997 shares of stock (373,997) (736,774) (1,133,211) -- ------------ ------------ ------------ ------------ Balance at December 31, 2001 $6 13,~~723~~037,~~147~~787 $ 25,718,803 $ 16,328,731 $ 42,933 ============ ============ ============ ============ Deferred directors' compensation Total ------------ ----- Balance at December 31, 1998 $ (369,000) $ 41,164,464 COMPREHENSIVE INCOME Net earnings -- 4,092,725 Other comprehensive income, net of tax: Change in unrealized gain (loss) on available-for-sale securities, net of deferred tax of $(16,007) -- (31,074) ------------ TOTAL COMPREHENSIVE INCOME 4,061,651 ------------ Exercise of stock options -- 27,849 Directors' stock compensation plan (10,800 shares) (64,800) -- Amortization of directors' stock compensation plan 106,800 106,800 ------------ ------------ Balance at December 31, 1999 (327,000) 45,360,764 COMPREHENSIVE INCOME Net earnings -- 4,776,278 Other comprehensive income, net of tax: Change in unrealized gain (loss) on available-for-sale securities, net of reclassification adjustment and deferred tax of $6,584 -- 12,782 ------------ TOTAL COMPREHENSIVE INCOME 4,789,060 ------------ Exercise of stock options -- 4,050 Cancellation of directors' shares (4,100 shares) 24,600 -- Amortization of directors' stock compensation plan 105,600 105,600 ------------ ------------ Balance at December 31, 2000 (196,800) 50,259,474 COMPREHENSIVE INCOME Net earnings -- 6,942,484 Other comprehensive income, net of tax: Change in unrealized gain (loss) on available-for-sale securities, net of reclassification adjustment and net of deferred tax of $18,842 -- 36,577 ------------ TOTAL COMPREHENSIVE INCOME 6,979,061 ------------ Exercise of stock options -- 42,201 Cancellation of directors' shares (17,550 shares) 105,300 -- Amortization of directors' stock compensation plan 91,500 91,500 Purchase and retirement of 373,997 shares of stock -- (2,243,982) ------------ ------------ Balance at December 31, 2001 $ -- $ 55,128,254 ============ ============

~~Amortized~~2001 ~~Fair~~2000 ~~cost~~1999 ~~value~~---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 6,942,484 $ 4,776,278 $ 4,092,725 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 605,329 663,031 433,962 Deferred income taxes (349,353) 265,595 (403,280) Amortization of deferred directors' compensation 91,500 105,600 106,800 Provision for loan losses (850,000) 3,150,000 1,320,000 Change in: Accrued interest receivable 1,551,858 (1,052,657) (885,866) Federal income tax receivable 716,024 (1,083,476) -- Other assets 74,566 (102,593) (67,202) Accrued interest payable (530,101) 631,636 194,829 Federal income taxes payable -- (206,181) 139,187 Other liabilities 94,454 87,930 394,682 Other 10,235 (12,216) 19,835 ------------ ~~Available~~------------ ------------ Net cash provided by operating activities 8,356,996 7,222,947 5,345,672 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities and pay-downs on securities available-for-sale: ~~Due~~1,843,915 ~~one~~5,631,219 ~~year~~2,723,119 orPurchases ~~less~~of $2securities available-for-sale (3,~~761~~865,~~963~~374) $(3,947,279) (2,~~765~~210,~~865~~140) ~~Due~~Change ~~from~~in ~~one~~loans to ~~five~~customers ~~years~~15,066,540 ~~199~~(70,~~945~~232,616) ~~202~~(75,~~282~~491,891) ~~Due~~Expenditures ~~from~~for ~~five~~bank topremises ~~ten~~and ~~years~~equipment 36(101,563) (1,362,739) (2,275,055) 37------------ ------------ ------------ Net cash provided (used) by investing activities 12,~~691~~943,518 ~~Due~~(69,911,415) ~~after~~(77,253,967) ~~ten~~------------ ~~years~~------------ 43------------ CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 16,~~421~~005,929 4531,~~176~~880,274 ~~Other~~46,828,539 2Net increase (decrease) in federal funds purchased (17,~~019~~000,~~775~~000) 17,000,000 -- Net increase (decrease) in other borrowings (16,000,000) 16,000,000 -- Proceeds from exercise of stock options 42,201 4,050 27,849 Purchase of stock (2,~~019~~243,~~775~~982) -- -- ------------ ------------ ~~Total~~------------ ~~available~~Net cash provided (used) by financing activities (19,195,852) 64,884,324 46,856,388 -~~for~~-~~sale~~---------- $5------------ ------------ Net increase (decrease) in cash and cash equivalents 2,104,662 2,195,856 (25,051,907) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 27,257,124 25,061,~~159~~268 50,113,175 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $5 29,~~070~~361,~~789~~786 $ 27,257,124 $ 25,061,268 ============ ============ ============

These consolidated financial statements should be read only in connection with the accompanying summary of significant accounting policies and notes to consolidated financial statements. F-8 TEJAS BANCSHARES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000 and 1999 Nature of Operations Tejas Bancshares, Inc. (the Company) provides a variety of financial services to individuals and corporate customers in the community of Amarillo, Texas and the surrounding geographical area. The Company's primary deposit products are demand deposits and time and savings accounts. Its primary lending products are consumer, commercial, agriculture and real estate loans. The Company also provides trust services. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, which include The First National Bank of Amarillo (the Bank). All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with 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. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses. Comprehensive Income The Company follows the provisions of Financial Accounting Standard No. 130, Reporting Comprehensive Income. Under this standard, comprehensive income is reported for all periods. Comprehensive income includes both net income and other comprehensive income. Other comprehensive income includes the change in unrealized gains and losses on securities available-for-sale, net of tax. Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Trading securities are bought and held principally for the purpose of selling them in the near term. The Corporation had no securities classified as trading at December 31, 2001 or 2000. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. F-9 TEJAS BANCSHARES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000 and 1999 Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Loans The Company grants real estate, agriculture, commercial and consumer loans to customers in primarily the community of Amarillo, Texas, and the surrounding geographical area. Although the Company has a diversified loan portfolio, a substantial portion of its debtors' ability to honor their contracts is dependent upon the real estate and agribusiness sectors. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on real estate, agricultural and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual 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. Allowance for Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. F-10 TEJAS BANCSHARES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000 and 1999 Allowance for Loan Losses (Continued) A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for real estate, agricultural and commercial loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impair-ment disclosures. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation and amortization, which is computed using the straight-line method over the estimated useful lives of the assets. Advertising Costs The Company expenses advertising costs as incurred. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Off-Balance-Sheet Financial Instruments In the ordinary course of business, the Company has entered into off-balance-sheet financial instruments consisting primarily of commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. F-11 TEJAS BANCSHARES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000 and 1999 Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers due from banks and federal funds sold to be cash equivalents. Federal funds are generally sold for one-day periods. Net Earnings Per Share Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if the Company's stock options were exercised. Such dilutive potential common shares are calculated using the treasury stock method. Transfers of Financial Assets Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Stock Compensation Plans Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, whereby compen-sation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plan have no intrinsic value at the grant date, and under Opinion No. 25 no compensation cost is recognized for them. The Company has elected to continue with the accounting methodology in Opinion No. 25 and, as a result, has provided pro forma disclosures of net earnings and earnings per share and other disclosures, as if the fair value based method of accounting had been applied. New Accounting Standards On January 1, 2001, the Company adopted Financial Accounting Standards Board Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The adoption of the new standard did not have a material impact on the Company's financial statements. F-12 TEJAS BANCSHARES, INC. AND SUBSIDIARIES SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES December 31, 2001, 2000 and 1999 New Accounting Standards (Continued) In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets as of January 1, 2002. Application of the nonamortization provisions of the Statement will not have an effect on net income as the Company currently has no goodwill or other intangibles. This information is an integral part of the accompanying consolidated financial statements. F-13 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SECURITIES The amortized cost, gross unrealized gains, gross unrealized losses and fair value of available-for-sale securities by major security type at December 31, 2001, were as follows:

~~2000~~Gross ~~1999~~Gross ~~1998~~Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ~~Balance~~---------- atAvailable-for-sale: ~~beginning~~Government ofagency ~~year~~securities $ 43,~~524~~400,~~678~~041 $ 348,~~625,435~~856 $ 2-- $3,~~748~~448,~~418~~897 ~~Provision~~Mortgage-backed ~~charged~~securities to897,166 ~~expense 3~~17,~~150,000~~452 (1,~~320,000~~258) ~~975~~913,~~000~~360 ~~Loans~~Other ~~charged~~securities ~~off (~~2,~~703~~775,~~959)~~175 ~~(661,511)~~-- ~~(114,219)~~-- ~~Recoveries on loans previously charged off 18~~2,~~866 240~~775,~~754~~175 ~~16,236~~ ----------- ----------- ---------- ---------- ~~Balance~~Total atavailable-for-sale ~~end of year~~ $ 47,~~989~~072,~~585~~382 $ 466,~~524,678~~308 $ 3(1,~~625~~258) $7,~~435~~137,432 =========== =========== ========== ==========

Other securities consist of Federal Home Loan Bank and Federal Reserve Bank stock at December 31, 2001. The amortized cost, gross unrealized gains, gross unrealized losses and fair value of available-for-sale securities by major security type at December 31, 2000, were as follows:

~~Options~~Gross ~~Outstanding~~Gross ~~Options~~Amortized ~~Exercisable~~unrealized ~~---------------------------------------------------~~unrealized Fair cost gains losses value Available-for-~~----------------------------~~sale: ~~Weighted-average~~Government ~~Number~~agency ~~remaining~~securities ~~Weighted-average~~$1,833,508 ~~Number~~$ ~~Weighted~~5,603 $ (1,250) $1,837,861 Mortgage-~~average~~backed ~~outstanding~~securities ~~contractual~~1,207,876 ~~life~~8,147 ~~exercise~~(2,870) ~~price~~1,213,153 ~~exercisable~~Other ~~exercise~~securities ~~price~~2,019,775 -- --~~-------~~ 2,019,775 ----------~~------~~ ----------~~----~~ ----------- ---------- Total available-for---sale ~~418~~$5,~~167~~061,159 ~~7.14~~ $ ~~3.00 87~~13,~~167~~750 $ ~~3.00~~(4,120) ~~184~~$5,~~500~~070,789 ~~8.37~~========== ~~6.00~~========== ~~17,700~~========== ~~6.00~~==========

Other securities consist of Federal Home Loan Bank and Federal Reserve Bank stock at December 31, 2000. Maturities of investment securities classified as available-for-sale were as follows at December 31, 2001 (maturities of mortgage-backed securities have been presented based upon estimated cash flows, assuming no change in the current interest rate environment). 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. Amortized Fair cost value Available-for-sale: Due one year or less $1,954,836 $1,982,270 Due from one to five years 2,283,240 2,316,887 Due from five to ten years 27,925 29,890 Due after ten years 31,206 33,210 Other 2,775,175 2,775,175 ---------- ---------- Total available-for-sale $7,072,382 $7,137,432 ========== ========== F-14 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 1 - SECURITIES (CONTINUED) Investment securities with a carrying value of approximately $2,000,000 at both December 31, 2001 and 2000 were pledged to secure public deposits as required or permitted by law. NOTE 2 - LOANS The major classifications of loans are as follows: 2001 2000 ---- ---- Real estate - primarily commercial mortgage $ 138,316,025 $ 137,970,671 Agriculture 58,986,997 57,310,086 Commercial 83,568,460 106,098,467 Installment loans to individuals 27,065,424 23,692,144 Student loans 5,702,136 3,502,551 Unearned income (2,386) (12,098) ------------- ------------- 313,636,656 328,561,821 Loans held for sale 2,647,495 1,233,195 ------------- ------------- Total loans $ 316,284,151 $ 329,795,016 ============= ============= The changes in the allowance for loan losses were as follows:

2001 2000 1999 ~~1998~~ ---- ---- ---- ~~Balances~~Balance at beginning of ~~period~~year $ 134,~~180~~989,~~375~~585 $ 124,~~139~~524,~~003~~678 $ 103,~~550~~625,~~806~~435 ~~Balances~~Provision ~~related~~charged to ~~directors~~expense ~~elected~~(850,000) ~~during 1999 --~~ 3,~~100~~150,~~453~~000 ~~-- Advances 33~~1,~~771~~320,~~298~~000 ~~11,069,541~~Loans ~~11,679,984~~charged ~~Repayment~~off (261,~~146~~235,~~375~~647) (132,~~128~~703,~~622~~959) (10661,~~091,787~~511) Recoveries on loans previously charged off 2,791,322 18,866 240,754 ------------ ------------ ------------ ~~Balances~~Balance at end of year $ 205,~~805~~695,~~298~~260 $ 134,~~180~~989,~~375~~585 $ 124,~~139~~524,~~003~~678 ============ ============ ============

At December 31, 2001 and 2000 there were no material amounts of impaired loans. NOTE 3 - DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more was approximately $68,500,000 and $61,359,000 at December 31, 2001 and 2000, respectively. The related interest expense on these deposits was approximately $2,909,000 and $3,580,000 for 2001 and 2000, respectively. Other interest-bearing deposits of $100,000 or more totaled approximately $89,279,000 and $81,032,000 at December 31, 2001 and 2000, respectively. At December 31, 2001, the scheduled maturities of all time deposits were substantially all within one year. F-15 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 4 - OTHER BORROWINGS At December 31, 2000, the Company had other borrowings of $16,000,000. Other borrowings consisted of advances from the Federal Home Loan Bank (FHLB) which were secured by stock in FHLB, deposits with FHLB and certain first mortgage loans. NOTE 5 - INCOME TAXES The following is a summary of the components of income tax expense: 2001 2000 1999 ---- ---- ---- Current - federal $ 3,932,672 $ 2,239,694 $ 2,509,909 Deferred (349,353) 265,595 (403,280) ----------- ----------- ----------- Total income tax expense $ 3,583,319 $ 2,505,289 $ 2,106,629 =========== =========== =========== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows: 2001 2000 ---- ---- Deferred tax assets: Allowance for loan losses $ 1,778,108 $ 1,302,205 Bank premises and equipment basis and depreciation differences 131,630 151,027 Allowance for investment security losses 21,711 24,685 Other 647 36,550 ----------- ----------- 1,932,096 1,514,467 Deferred tax liabilities: Available-for-sale securities (22,117) (3,274) Other (132,347) (64,072) ----------- ----------- Net deferred tax asset $ 1,777,632 $ 1,447,121 =========== =========== Management believes that it is more likely than not that the Company will realize the recorded deferred tax assets and, accordingly, no valuation allowance has been established. Total income taxes for the years ended December 31, 2001, 2000 and 1999 are allocated $3,583,319, $2,505,289, and $2,106,629, respectively, to income tax from operations and $18,842, $6,584 and $(16,007), respectively, as a component of other comprehensive income for the tax effect of unrealized gains (losses) on available-for-sale securities recognized for financial reporting purposes. F-16 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 5 - INCOME TAXES (CONTINUED) Total income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% in 2001, 2000 and 1999 to earnings before income taxes as a result of the following: 2001 2000 1999 ---- ---- ---- Computed "expected" tax expense $ 3,578,773 $ 2,475,733 $ 2,107,780 Other, net 4,546 29,556 (1,151) ----------- ----------- ----------- Total income tax expense $ 3,583,319 $ 2,505,289 $ 2,106,629 =========== =========== =========== NOTE 6 - STOCK OPTIONS AND STOCK COMPENSATION PLAN Stock Options On May 19, 1998, the Company's stockholders approved the Tejas Bancshares, Inc. 1998 Incentive Stock Plan (the Plan). The Plan's objectives are to attract, retain and provide incentive to employees, officers and directors and to increase overall stockholders' value. The number of shares reserved for issuance under the Plan is 1,333,333. The Plan provides for the grant of both incentive stock options and non-qualified stock options as well as the grant of restricted stock, stock appreciation rights, dividend equivalent rights, stock awards and other stock-based awards. The exercise price of the options granted approximated or exceeded the market value of the common stock at the date of grant. The options generally vest ratably over eight years from the date of grant and terminate 10 years from the date of grant. The following table summarizes the activity for the Plan: Weighted-average Shares exercise price ------ -------------- Outstanding at December 31, 1998 508,000 $3.03 Granted 186,500 5.90 Exercised (9,283) 3.00 Expired or canceled (76,900) 3.20 -------- ----- Outstanding at December 31, 1999 608,317 3.89 Granted 7,500 6.00 Exercised (1,350) 3.00 Expired or canceled (11,800) 3.76 -------- ----- Outstanding at December 31, 2000 602,667 3.92 Granted 15,800 6.00 Exercised (14,067) 3.00 Expired or canceled (16,650) 4.41 -------- ----- Outstanding at December 31, 2001 587,750 $3.98 ======== ===== F-17 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 6 - STOCK OPTIONS AND STOCK COMPENSATION PLAN (CONTINUED) Stock Options (continued) Weighted-average Shares exercise price ------ -------------- Exercisable at end of year December 31, 2001 162,375 $ 3.77 December 31, 2000 104,867 3.51 December 31, 1999 45,225 3.00 Available for grant at end of year December 31, 2001 720,883 December 31, 2000 720,033 December 31, 1999 715,733 The following table summarizes information about options outstanding under the Plan at December 31, 2001:

~~2000~~Options ~~1999~~Outstanding ~~1998~~Options Exercisable ----------------------------------- ---------------------~~-------------~~ ------------------------------- Weighted---average ~~Income~~Number ~~Shares~~remaining ~~Per~~Weighted-average ~~share~~Number ~~Income~~Weighted-average ~~Shares~~outstanding ~~Per~~contractual ~~share~~life ~~Income~~exercise ~~Shares~~price ~~Per~~exercisable ~~share~~exercise ~~numerator~~price ~~denominator amount numerator denominator amount numerator denominator amount~~ ----------- ----------- -----~~----~~ ---------- ----~~-------~~ --------- --~~--------~~ ----------- ---~~------~~ ~~Basic EPS $ 4~~395,~~776,278~~250 6.13~~,415,184~~ $ 03.3600 $4120,~~092,725~~675 ~~13,406,764~~ $~~0.31~~ $3~~,304,303 13,344,130 $0~~.2500 ~~Effect of dilutive stock options -- 209~~192,~~083~~500 ~~-- 214,159 -- 166,000 ----------- ---------- ----- ---------- ---------- ------ ---------- ---------- ------ Diluted EPS $ 4,776,278 13,624,267 $0~~7.3550 ~~$4,092,725 13,620,923 $ 0~~6.3000 $341,~~304,303~~700 ~~13,510,130 $ 0~~6.~~24 =========== ========== ===== ========== ========== ====== ========== ========== ======~~00

The Company applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for the Plan and recognizes no compensation costs in net earnings from the grant of options as options are granted at exercise prices equal to the current stock price. Had compensation cost been determined under the terms of SFAS 123, Accounting for Stock-Based Compensation, the Company's pro forma 2001, 2000 and 1999 net earnings and earnings per share would have been as follows: 2001 2000 1999 ---- ---- ---- Net earnings As reported $ 6,942,484 $ 4,776,278 $ 4,092,725 Pro forma 6,663,684 4,660,478 3,928,725 Earnings per share Basic As reported $ 0.52 $ 0.36 $ 0.31 Pro forma 0.50 0.35 0.29 Diluted As reported $ 0.51 $ 0.35 $ 0.30 Pro forma 0.50 0.35 0.29 F-18 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 6 - STOCK OPTIONS AND STOCK COMPENSATION PLAN (CONTINUED) In accordance with SFAS 123, the fair value of options at date of grant was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: 2001 2000 1999 ---- ---- ---- Risk-free interest rate 5.02% 6.03% 5.65% Expected life (years) 7.14 7.51 8.49 Expected volatility 32.00% 32.00% 32.00% Expected dividend yield -- -- -- In accordance with SFAS 123, the weighted average fair value of options granted during 2001, 2000 and 1999 was $3.12, $3.34 and $3.28, respectively. Directors' Stock Compensation Plan During October 1998, the Company's board of directors approved a nonemployee directors' compensation plan for the directors of the Bank. The Plan provides that directors will receive shares of common stock as compensation for serving. Restricted shares are issued to the directors and are released after the end of each year of service. Shares related to missed meetings or for termination are forfeited back to the Company. A committee of the board determined the fair value at the date of issue. At December 31, 1998, 64,000 shares were issued and outstanding. No shares were issued under the Plan during 2001 and 2000. During 1999, a total of 10,800 shares were issued under the Plan. During 2001 and 2000, 17,550 and 4,100 shares, respectively, were forfeited back to the Company for missed meetings. Amortization of compensation cost in 2001, 2000 and 1999 amounted to $91,500, $105,600 and $106,800, respectively. NOTE 7 - TRANSACTIONS WITH RELATED PARTIES The Company's directors and their associates, including companies and firms of which they are officers or in which they and/or their families have an ownership interest, are customers of the Company. The following is a summary of loan activity with these parties for the years ended December 31, 2001, 2000 and 1999:

To2001 be2000 ~~well~~1999 ~~capitalized under For capital prompt corrective Actual adequacy purposes action provisions~~ ----~~----------------~~ ----~~----------------~~ ----~~----------------~~ ~~Amount~~Balances ~~Ratio~~at ~~Amount~~beginning ~~Ratio Amount Ratio -------------------- -------------------- -------------------- As~~ of ~~December~~period ~~31, 2000 Total Capital (to Risk Weighted Assets): Tejas Bancshares, Inc.~~ $~~54,409,560~~ ~~16.47% $ 26~~20,~~431~~805,~~081~~298 ~~8.0% N/A The Bank 53,580,277 16.22% 26,423,496 8.0%~~ $ ~~33,029,370 10.0% Tier I Capital (to Risk Weighted Assets): Tejas Bancshares, Inc. $50,259,474 15.21% $~~ 13,~~215~~180,~~540~~375 ~~4.0% N/A The Bank 49,431,347 14.97% 13,211,748 4.0%~~ $ 1912,~~817~~139,~~622~~003 ~~6.0%~~Balances ~~Tier~~related ~~I Capital (~~to ~~Average~~directors ~~Assets):~~elected ~~Tejas~~during ~~Bancshares,~~1999 ~~Inc.~~-- ~~$50,259,474~~-- ~~15.22% $ 13~~3,~~207~~100,~~775~~453 ~~4.0%~~Advances ~~N/A The Bank 49~~19,~~431~~987,~~347~~437 ~~14.97% 13~~33,~~206~~771,~~774~~298 ~~4.0% $ 16~~11,~~508~~069,~~467~~541 ~~5.0%~~Repayment ~~As of December 31, 1999 Total Capital~~ (~~to Risk Weighted Assets): Tejas Bancshares~~26, ~~Inc. $48~~388,~~625,652~~883) ~~18.79% $ 20~~(26,~~706~~146,~~927~~375) ~~8.0% N/A The Bank 47~~(13,~~809~~128,~~951 18.47% 20,703,376 8.0% $ 25,879,220 10.0% Tier I Capital (to Risk Weighted Assets~~622): ~~Tejas~~------------ ~~Bancshares,~~------------ ~~Inc.~~------------ ~~$45,360,764~~Balances ~~17.52%~~at $end ~~10,353,463~~of ~~4.0%~~year ~~N/A The Bank 44,545,610 17.21% 10,351,688 4.0%~~ $ 1514,~~527~~403,~~532~~852 ~~6.0% Tier I Capital (to Average Assets): Tejas Bancshares, Inc.~~ $~~45,360,764~~ ~~17.01% $ 10~~20,~~665~~805,~~923~~298 ~~4.0% N/A The Bank 44,545,610 16.71% 10,665,103 4.0%~~ $ 13,~~332~~180,~~629~~375 ~~5.0%~~============ ============ ============

The Company also has deposit activities with related parties in the normal course of business which amounted to approximately $15,200,000, $14,000,000 and $12,400,000 at December 31, 2001, 2000 and 1999, respectively. F-19 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 7 - TRANSACTIONS WITH RELATED PARTIES (CONTINUED) During 2001, the Company acquired 373,997 shares of its common stock from Donald E. Powell, the Company's former President and Chief Executive Officer, at a price of $6.00 per share. The acquired shares were then retired. The per share price was established by the Board of Directors after consideration of a fairness opinion received from an independent financial advisor. NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash disbursed for interest for the years ended December 31, 2001, 2000 and 1999 was $8,397,182, $9,048,817, and $5,806,889, respectively. Cash disbursed for income taxes was $3,710,000, $3,426,000 and $2,286,000 for the years ended December 31, 2001, 2000 and 1999, respectively. During the year ended December 31, 2001, noncash investing activities included the recognition as a component of comprehensive income the net unrealized gain on available-for-sale securities of $36,577, net of deferred taxes of $18,842. During the year ended December 31, 2000, noncash investing activities included the recognition as a component of comprehensive income the net unrealized loss on available-for-sale securities of $12,782, net of deferred taxes of $6,584. During the year ended December 31, 1999, noncash investing activities included the recognition as a component of comprehensive income the net unrealized loss on available-for-sale securities of $(31,074), net of deferred taxes of $(16,007). Other noncash transactions during 1999 included the issuance of 10,800 shares of common stock under a directors' stock compensation plan. There were no shares of common stock issued under a directors' stock compensation plan during 2001 and 2000. During 2001 and 2000, shares cancelled were 17,550 and 4,100, respectively. NOTE 9 - LEASE COMMITMENTS The Company leases certain land, office space and equipment under noncancelable operating leases expiring in various years through 2027. Certain leases contain renewal options from five to ten years based on existing or escalated terms. Future minimum lease payments under these leases are as follows: 2002 $ 255,075 2003 218,216 2004 147,238 2005 73,050 2006 70,750 Later years 772,000 ---------- Total $1,536,329 ========== Total rental expense for the years ended December 31, 2001, 2000 and 1999 was approximately $300,000, $260,000 and $242,000, respectively. F-20 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 10 - COMMITMENTS AND CONTINGENCIES The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in 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 upon extension of credit is based on management's credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. The exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit is represented by the contractual amount. Unfunded loan commitments and letters of credit were approximately $112,000,000 and $9,000,000, respectively, at December 31, 2001 and $144,000,000 and $6,140,000, respectively, at December 31, 2000. Management does not anticipate any losses as a result of these transactions. NOTE 11 - EARNINGS PER SHARE The following is a reconciliation of the numerators and the denominators of the basic and diluted earnings per share computations for net income:

2001 2000 ~~1999 1998~~ ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 4,776,278 $ 4,092,725 $ 3,304,303 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Equity in undistributed (income) of Bank (4,872,955) (4,199,673) (3,447,625) Amortization of deferred directors' compensation 105,600 106,800 18,600 Change in current tax receivable 29,756 (12,459) (73,832) Other 6,732 (42,636) 28,021 ----------- ----------- ----------- ~~Net cash provided (used) by operating activities 45,411 (55,243) (170,533)~~ ----------- ----------- ----------- ~~CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiary~~ -- ~~(6,000)~~ -- ------~~-----~~ ~~-----------~~Income ~~-----------~~Shares ~~Net~~Per ~~cash~~share ~~used~~Income byShares ~~investing~~Per ~~activities~~share --numerator ~~(6,000)~~denominator --amount ~~-----------~~numerator ~~-----------~~denominator ~~-----------~~amount ~~CASH~~Basic ~~FLOWS~~EPS ~~FROM~~$ ~~FINANCING~~6,942,484 ~~ACTIVITIES~~13,281,727 ~~Proceeds~~$0.52 ~~from~~$4,776,278 ~~exercise~~13,415,184 $0.36 Effect of dilutive stock options ~~4,050~~-- 27211,~~849~~424 -- 209,083 ----------- ----------- ---------- ---------- ~~Net~~Diluted ~~cash~~EPS ~~provided~~$ by6,942,484 ~~financing~~13,493,151 ~~activities~~$0.51 $4,~~050~~776,278 2713,~~849~~624,267 $0.35 =========== ========== ========== ========== 1999 -- ----------- ----------- ----------------- ~~Increase~~Income ~~(decrease)~~Shares inPer ~~cash~~share ~~49,461~~numerator ~~(33,394)~~denominator ~~(170~~amount Basic EPS $4,~~533)~~092,725 ~~CASH~~13,406,764 ~~BEGINNING~~$0.31 OFEffect ~~YEAR~~of ~~680,227~~dilutive ~~713,621~~stock ~~884,154~~options --~~---------~~ 214,159 ----------- ----------- ~~CASH,~~Diluted ~~END~~EPS ~~OF YEAR~~ $ ~~729~~4,~~688~~092,725 ~~$ 680~~13,~~227~~620,923 $0.30 ~~713,621~~ =========== ==========~~= ===========~~

NOTE 12 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments, the results of applying such methods and assumptions to the financial instruments and limitations inherent in fair value estimates: Commitments to Extend Credit Generally, the Company enters into commitments to extend credit at adjustable interest terms. Accordingly, the commitment amount is a reasonable estimate of fair value. F-21 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 12 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Securities For securities, excluding restricted equity securities, fair value is equal to the quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities or bid quotations received from securities dealers. The carrying value of restricted equity securities approximates fair values. Securities available-for-sale had a carrying value and fair value of approximately $7,137,000 and $5,071,000 at December 31, 2001 and 2000, respectively. Loans Fair values of loans are estimated by discounting the future cash flows through the estimated maturity using the current rates at which similar loans would be made to borrowers with similar credit ratings. Fair value of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices. The carrying value of loans, net of the allowance for loan losses, was $310,588,891 and $324,805,431 at December 31, 2001 and 2000, respectively. The fair value of loans at those dates was approximately the same as carrying value. Deposits The fair value of demand deposits, both interest and noninterest bearing, and savings accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated using the rates currently offered for deposits of similar remaining maturities. At December 31, 2001 and 2000, the carrying value of deposits was $299,853,856 and $283,847,927. The fair value of deposits at those dates was approximately the same as carrying value. Federal Funds Purchased and Other Borrowings The fair values of federal funds purchased and advances from the Federal Home Loan Bank are equal to the carrying values as such liabilities are deemed to be short-term borrowings. Other The carrying amounts of cash and short-term instruments and accrued interest approximate fair value. F-22 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 12 - DISCLOSURE ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. NOTE 13 - RETIREMENT PLAN Effective January 1, 1999, the Company adopted a 401(k) Plan whereby substantially all employees participate in the Plan. Employees may contribute up to 15 percent of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions equal to 50 percent of the first 6 percent of an employee's compensation contributed to the Plan. Matching contributions vest to the employee equally over a five-year period. For the years ended December 31, 2001, 2000 and 1999 expense attributable to the Plan amounted to $266,000, $116,000 and $63,000, respectively. NOTE 14 - REGULATORY MATTERS The Company (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by 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 Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier I capital to average assets (as defined). Management believes, as of December 31, 2001 that the Company and Bank meet all capital adequacy requirements to which they are subject. F-23 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 14 - REGULATORY MATTERS (CONTINUED) As of December 31, 2001, the most recent notification from the Bank's regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Company's and Bank's actual capital amounts and ratios are presented in the following table:

There are certain regulatory guidelines on the amount of dividends that can be paid by the Bank to the Company. These guidelines do not currently have a significant effect on the amount of dividends paid by the Bank. The Bank is also required to maintain certain daily reserve balances on hand in accordance with requirements of the Board of Governors of the Federal Reserve System. For the years ended December 31, 2001 and 2000, the Bank maintained average cash and due from bank balances of approximately $3,630,000 and $3,448,000, respectively, in order to satisfy such requirements. F-24 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 15 - MERGER On December 13, 2001, the Company entered into an agreement with Wells Fargo & Company (Wells Fargo) for the merger of the Company with a Wells Fargo subsidiary. If the merger is completed, Wells Fargo will exchange a total of $82,501,292 in value of its common stock for all outstanding shares of the Company's common stock. The merger is subject to regulatory and shareholder approval. In addition, if the merger is completed, various employees of the Company will receive special bonuses having an aggregate value of approximately $1 million and certain change in control payments will be made to certain officers of the Company. NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION The condensed balance sheets, statements of earnings and cash flows for Tejas Bancshares, Inc. (parent only) follow: Condensed Balance Sheets 2001 2000 ---- ---- Assets Cash on deposit with Bank $ 627,050 $ 729,688 Investment in Bank 54,365,716 49,437,347 Current tax receivable 135,488 56,535 Deferred tax benefit -- 35,904 ----------- ----------- TOTAL ASSETS $55,128,254 $50,259,474 =========== =========== STOCKHOLDERS' EQUITY $55,128,254 $50,259,474 =========== =========== Condensed Statements of Earnings 2001 2000 1999 ---- ---- ---- DIVIDENDS FROM BANK $ 2,244,000 $ -- $ -- EXPENSES Other (193,309) (96,677) (106,948) EQUITY IN UNDISTRIBUTED INCOME OF BANK 4,891,793 4,872,955 4,199,673 ----------- ----------- ----------- NET EARNINGS $ 6,942,484 $ 4,776,278 $ 4,092,725 =========== =========== =========== F-25 TEJAS BANCSHARES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 NOTE 16 - PARENT COMPANY FINANCIAL INFORMATION (CONTINUED) Condensed Statements of Cash Flows

This information is an integral part of the accompanying consolidated financial statements. F-26

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