UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB


 |X|   ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                  For the fiscal year ended: December 31, 2003

                                       OR

 | |   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

                         Commission File No.: 000-49637

                            HERITAGE BANCSHARES, INC.
                 (Name of Small Business Issuer in its charter)


                Delaware                                  75-2963969
       (State or other jurisdiction                    (I.R.S. Employer
    of incorporation or organization)               Identification Number)
          102 West High Street

             Terrell, Texas
          (Address of Principal                             75160
           Executive Offices)                             (Zip Code)


        Issuer's telephone number, including area code: (972) 563 - 2657

                  Securities registered under Section 12(b) of
                               the Exchange Act:

                                 Not Applicable

                  Securities registered under Section 12(g) of
                               the Exchange Act:

                    Common Stock (par value $0.01 per share)
                                (Title of Class)

Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 |_|

Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. |X|

Issuer's revenues for its most recent fiscal year:  $4.5 million

As of March 22, 2004, the aggregate value of the 376,307 shares of Common Stock
of the Registrant issued and outstanding on such date, which excludes 96,941
shares held by all directors and executive officers of the Registrant as a
group, was approximately $9.69 million. This figure is based on the last known
trade price of $25.75 per share of the Registrant's Common Stock on March 22,
2004.

Number of shares of Common Stock outstanding as of March 22, 2004: 473,248

Transitional Small Business Disclosure Format:  Yes |_|    No |X|


                    Documents Incorporated by Reference: None

<PAGE>

Recent Developments

      On January 14, 2004, Heritage Bancshares, Inc. signed a definitive
Agreement and Plan of Merger (the "Merger Agreement") with HGroup Acquisition
Co., a Delaware corporation ("HGroup"). Pursuant to the Merger Agreement and
subject to the satisfaction of certain conditions set forth in the Merger
Agreement, HGroup will acquire Heritage Bancshares effective as of the filing of
the Certificate of Merger with the Secretary of State of Delaware, by merging
HGroup with and into Heritage Bancshares, with Heritage Bancshares surviving and
continuing to exist as a registered savings and loan holding company (the
"Merger"). The Merger Agreement provides that HGroup's Certificate of
Incorporation and bylaws will be the Certificate of Incorporation and bylaws of
the surviving corporation except that the Certificate of Incorporation shall be
amended to provide for the name of the corporation to be Heritage Bancshares,
Inc. The Merger Agreement conditions the closing of the Merger upon the approval
of the transaction by Heritage Bancshares stockholders, the receipt of
regulatory approvals and other customary closing conditions. A special meeting
of the Heritage Bancshares stockholders has been scheduled for April 29, 2004.

      The Merger Agreement provides that at the effective time of the Merger,
each share of Heritage Bancshares common stock will be converted into the right
to receive cash in the amount of approximately $26.25. The total consideration
could be reduced by the amount by which $200,230 exceeds the sum of certain
combined balances in the employee stock ownership plan and the amount of
aggregated deferred gains from the sale of real estate owned by TFS Investment
Corporation, a subsidiary of Heritage Bancshares. While this adjustment could be
as high as $0.42 per share, it is believed that the balances and the gains will
be sufficient to offset this amount.

      In connection with the Merger Agreement, the directors and executive
officers of Heritage Bancshares entered into Stockholder Agreements with HGroup
(the "Stockholder Agreements"). Pursuant to the terms and subject to the
conditions of the Stockholder Agreements, these individuals, who have the right
to vote approximately 20% of Heritage Bancshares common stock, have agreed to
vote their shares in favor of approving the Merger Agreement, the Merger and the
other transactions contemplated by the Merger Agreement and the Merger.

                                     PART I.

Item 1.     Description of Business

General

      Heritage Bancshares, Inc. (the "Company") is a Delaware corporation and
the sole stockholder of Heritage Bank, SSB ("Heritage Bank" or the "Bank").
Heritage Savings Bank, SSB converted to the stock form of organization in
February 2002 and changed its name to Heritage Bank, SSB effective May 17, 2002.
The business of the Company consists primarily of the business of the Bank. At
December 31, 2003, the Company had total consolidated assets of $51.9 million,
total consolidated deposits of $39.5 million, and total consolidated
stockholders' equity of $7.6 million.

      Founded in 1922 as Terrell Building and Loan and subsequently Terrell
Federal Savings and Loan Association, Heritage Bank is a community and customer
oriented stock savings bank organized under the laws of the State of Texas.
Heritage Bank conducts business out of its main office in Terrell, Texas. The
Bank's deposits are insured by the Savings Association Insurance Fund ("SAIF")
of the


                                       1
<PAGE>

Federal Deposit Insurance Corporation ("FDIC") to the maximum extent permitted
by law. References herein to the Company refer to the consolidated operations of
the Company and the Bank unless otherwise noted.

      Heritage Bank's business consists principally of attracting deposits from
the general public and using those funds to originate loans secured by one- to
four-family residential properties. Heritage Bank also originates a significant
volume of construction and commercial real estate loans. One- to four-family
residential loans amounted to $12.1 million at December 31, 2003, representing
29.0% of the total gross loan portfolio. Construction loans at the same date
amounted to $15.1 million, or 36.1% of the total gross loan portfolio, while
commercial real estate loans amounted to $8.6 million or 20.5% of the total
gross loan portfolio. Heritage Bank's profitability depends primarily on its net
interest income, which is the difference between the income the Bank receives on
loans and other assets and the cost of funds, which consists of the interest
paid on deposits and borrowings.

      The Bank currently exceeds all applicable minimum regulatory capital
requirements. At December 31, 2003, the Bank had Tier 1, total risk-based and
leverage capital ratios of 15.5%, 16.6% and 11.9%, respectively, as compared to
the minimum requirements of 4.0%, 8.0%, and 4.0%, respectively.

      The Company, as a registered savings and loan holding company, is subject
to examination and regulation by the Office of Thrift Supervision ("OTS") and
the Texas Savings and Loan Department (the "Department"), and is subject to
various reporting and other requirements of the Securities and Exchange
Commission ("Commission"). The Bank is also subject to examination and
comprehensive regulation by the Department, which is the Bank's chartering
authority, and by the FDIC, as the administrator of the SAIF. The Bank is
subject to certain reserve requirements established by the Federal Reserve Board
and is a member of the Federal Home Loan Bank ("FHLB") of Dallas, which is one
of the 12 regional banks comprising the FHLB System.

Lending Activities

      General. At December 31, 2003, the net loan portfolio (gross loans, net of
the allowance for loan losses and deferred loan fees) of Heritage Bank totaled
$41.5 million, representing approximately 80.0% of total assets at that date.
The principal lending activities of Heritage Bank are the origination of one- to
four-family (which are also known as single-family) residential loans and
construction loans (primarily related to non-speculative, pre-sold, one-to
four-family residences). At December 31, 2003, single-family residential and
construction loans amounted to $27.3 million or 65.1% of the total gross loan
portfolio (including unfunded amounts). In addition, Heritage Bank originates
commercial real estate, consumer and multi-family loans. On an increasing basis,
Heritage Bank offers commercial business loans.

      The types of loans that Heritage Bank may originate are subject to federal
and state laws and regulations. Interest rates charged on loans are affected
principally by the demand for such loans and the supply of money available for
lending purposes and the rates offered by its competitors. These factors are, in
turn, affected by general and economic conditions, the monetary policy of the
federal government, including the Federal Reserve Board, legislative and tax
policies, and governmental budgetary matters.

      Under Texas law, a savings bank is generally required to maintain lending
limits applicable to Federal savings banks. Under these rules, an institution
generally may not make loans to one borrower and related entities in an amount
which exceeds 15% of its unimpaired capital and surplus, although loans in an
amount equal to an additional 10% of unimpaired capital and surplus may be made
to a borrower if the loans are fully secured by readily marketable securities.
In certain cases an institution may make


                                       2
<PAGE>

loans to one borrower in an amount not to exceed the lesser of 30% of unimpaired
capital and surplus or $30,000,000, provided these loans are to develop domestic
residential housing units that meet specific criteria. At December 31, 2003,
Heritage Bank's regulatory limit on loans-to-one borrower was $997,000. Its five
largest loans or groups of loans-to-one borrower, including related entities,
were:

      o     $865,106 - three loans on developed residential lots and a single
            family dwelling to a developer of homes under the USDA rural housing
            program.

      o     $788,551 - Loans on developed residential lots and interim
            construction funds for single family dwellings to a developer of
            homes with prices under $140,000.

      o     $772,647 - Loans on several one-to-four family dwellings held for
            rental by a real estate investor.

      o     $700,000 - A guidance line of credit to a builder of affordable
            homes (sales prices under $120,000) for the construction of single
            family dwellings.

      o     $700,000 - A guidance line of credit to another builder of
            affordable homes (sales prices under $120,000) for the construction
            of single family dwellings.

      All of these loans or groups of loans were performing in accordance with
their terms at December 31, 2003.

      Loan Portfolio Composition. The following table sets forth the composition
of Heritage Bank's loan portfolio by type of loan at the dates indicated.

<TABLE>
<CAPTION>
                                                                      December 31,
                                             -------------------------------------------------------------------
                                                            2003                                   2002
                                             -----------------------------      --------------------------------
                                                Amount           Percent           Amount               Percent
                                             -------------    ------------      ------------         -----------
                                                                       (In Thousands)
<S>                                            <C>                <C>            <C>                    <C>
Real estate loans:
  One-to four-family ......................    $ 12,145            29.0%         $  11,947               31.1%
  Multi-family ............................         428             1.0                152                 0.4
  Commercial ..............................       8,579            20.5              5,210                13.5
  Construction ............................      15,146            36.1             17,089                44.4
Commercial Business .......................       3,087             7.4              1,690                 4.4
Consumer loans:
  Loans secured by deposits ...............         541             1.3                465                 1.3
  Other ...................................       2,023             4.7              1,902                 4.9
                                               --------           -----          ---------               -----
    Total loans receivable (1) ............      41,949           100.0%            38,455               100.0%
                                                                                 =========               =====

Less:

Allowance for loan losses .................        (448)                              (416)
Deferred fees .............................
Loans in process ..........................         (47)                                --
                                               --------                          ---------
  Loans receivable, net ...................    $ 41,454                          $  37,990
                                               ========                          =========
</TABLE>

---------------

(1)   Substantially all of Heritage Bank's loans are collateralized with real
      estate, automobiles, deposits or other assets.


      Origination of Loans. The lending activities of Heritage Bank are subject
to the written underwriting standards and loan origination procedures
established by the Board of Directors and management. Loan originations are
obtained through a variety of sources, including referrals from real estate
brokers, builders and existing customers. Written loan applications are taken by
loan officers. The loan officers also supervise the procurement of credit
reports, appraisals and other documentation


                                       3
<PAGE>

involved with a loan. Property valuations are performed by independent outside
appraisers approved by the Board of Directors of Heritage Bank.

      Under the real estate lending policy of Heritage Bank, a title certificate
signed by an approved attorney licensed by the State of Texas or a title policy
issued by a reputable title insurance company that satisfies secondary market
requirements is received prior to closing. Heritage Bank also requires hazard
insurance and flood insurance where the security property is located in a flood
hazard area as designated by the Department of Housing and Urban Development.
Heritage Bank does not require borrowers to advance funds to an escrow account
for the payment of real estate taxes or hazard insurance premiums.

      Heritage Bank's loan approval process is intended to assess the borrower's
ability to repay the loan, the viability of the loan and the adequacy of the
value of the property that will secure the loan. Heritage Bank's credit policy
assigns aggregate lending limits to officers of Heritage Bank depending on
whether the loan is secured or unsecured. Under the policy, loan authorities are
as follows:

<TABLE>
<CAPTION>
      ---------------------------------------------------------------------------------------------------
                                                                                            Unsecured/
      Approving Authority                                                      Secured      Overdrafts
      ---------------------------------------------------------------------------------------------------
<S>                                                                          <C>            <C>
      Bank lending limit - combined liabilities to one borrower........      $  700,000           N/A
      Majority vote of the Board of Directors..........................      $  700,000     $ 700,000
      Director's Loan Committee........................................      $  700,000     $ 700,000
      Officer's Loan Committee.........................................      $  250,000     $  50,000
      President........................................................      $  100,000     $  25,000
      Executive Vice President, Chief Lending Officer..................      $  100,000     $  25,000
      Executive Vice President, Chief Financial Officer................               0     $   5,000
      Vice Presidents and Assistant Vice Presidents....................      $   25,000     $   5,000
      Operations Officers..............................................               0     $   5,000
      ---------------------------------------------------------------------------------------------------
</TABLE>

      Loans over $700,000 are approved by the entire Board of Directors. The
Director's Loan committee consists of two outside directors and the Bank
President. The Officer's Loan Committee consists of the Bank President, the
Chief Lending Officer, the Chief Financial Officer, and one other loan officer.

      Heritage Bank also purchases participations in single-family and
commercial real estate loans, subject to the same underwriting standards that
govern loans generated by Heritage Bank. By engaging in loan participations,
Heritage Bank is able to take lending opportunities that otherwise would not be
available to it, because of its size. Heritage Bank enters into agreements with
the institutions that originate these purchased loans generally on a
non-recourse basis, that is, Heritage Bank will bear the risk of default
pro-rata with other lenders holding participations in the loan, including the
originating institution. At December 31, 2003, there were no classified loan
participations.


                                       4
<PAGE>

      The following table shows total loans originated, sold and repaid during
the periods indicated.

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                     ---------------------------------
                                                                         2003                 2002
                                                                     ------------         ------------
                                                                               (In Thousands)
<S>                                                                   <C>                   <C>
       Loan originations:
         Real estate loans:
           One- to four-family..................................      $   4,555             $   3,742
           Multi-family.........................................            160                   313
           Commercial...........................................          4,494                 2,492
           Construction.........................................         33,501                27,178
         Commercial business....................................          3,924                 1,136
         Consumer loans:
           Loans secured by deposits............................            246                   256
           Other................................................          1,796                 1,969
                                                                       --------             ---------
           Total loans originated...............................         48,676                37,086
                                                                       --------             ---------
       Loan participations purchased:
         One- to four-family....................................          4,660                   936
         Commercial loans, real estate secured..................             --                 1,110
       Sales and loan principal reductions:
         Loans sold(1)..........................................             --                    --
         Loan participations sold..............................              45                   591
         Loan principal reductions..............................         49,797                32,128
                                                                       --------             --------
           Total loans sold and principal reductions............         49,842                32,719
                                                                       --------             --------
       Increase (decrease) due to other items, net(2)...........             --                   (92)
                                                                       --------             --------
       Net increase in loan portfolio...........................      $  $3,494             $   6,321
                                                                       ========             ========
</TABLE>

----------
(1)   Loans sold consist of one- to four-family real estate.

(2)   Other items consist of loans in process, deferred fee, unearned interest,
      charge-offs, and allowance for loan losses.

      Although federal laws and regulations permit savings institutions to
originate and purchase loans secured by real estate located throughout the
United States, Heritage Bank concentrates its lending activity to its primary
market area of Kaufman County, Texas. Heritage Bank will also consider loan
applications from the adjacent counties of Dallas, Ellis, Henderson, Hunt,
Rockwall and Van Zandt.

      Subject to its loans-to-one borrower limitation, under Texas law Heritage
Bank is permitted to invest without limitation in residential mortgage loans and
Heritage Bank may invest up to 40% of its assets in non-real estate secured
commercial loans.

      Maturity of Loan Portfolio. The following table presents certain
information at December 31, 2003, regarding the dollar amount of loans maturing
in Heritage Bank's portfolio based on their contractual terms to maturity or
scheduled amortization, but does not include potential prepayments. Demand
loans, loans having no stated schedule of repayments and stated maturity, and
overdrafts are reported as becoming due within one year. Loan balances do not
include undisbursed loan proceeds, net deferred loan origination costs and
allowance for loan losses.

<TABLE>
<CAPTION>
                                                         Commercial                      Total
                                          Real Estate     Business       Consumer        Loans
                                          -----------    ----------      --------      ---------
                                                               (In Thousands)
<S>                                         <C>            <C>           <C>           <C>
Amounts due in:
  One year or less......................    $  19,953      $  1,581      $   535       $  22,069
  More than one year to five years......        8,191         1,233        1,697          11,121
  More than five years..................        8,154           273          332           8,759
                                             --------       -------       ------        --------
    Total amount due....................    $  36,298      $  3,087      $ 2,564       $  41,949
                                             ========       =======       ======        ========
</TABLE>

                                       5
<PAGE>

      The following table sets forth the dollar amount of all loans, before net
items, due after December 31, 2004, which have fixed interest rates or which
have floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                      Floating or
                                                  Fixed-Rate        Adjustable-Rates                Total
                                                 ------------    --------------------           ------------
                                                                      (In Thousands)
<S>                                                <C>                 <C>                        <C>
         Real estate loans:
           One- to four-family.................    $   9,385           $    437                   $  9,822
           Multi-family........................          280                 --                        280
           Commercial..........................        4,706                 --                      4,706
           Construction........................        1,151                 --                      1,151
         Commercial business...................        1,874                 --                      1,874
         Consumer loans:
           Loans secured by deposits...........          224                 --                        224
           Other...............................        1,824                 --                      1,823
                                                    --------            -------                    -------
              Total loans......................    $  19,444           $    437                   $ 19,880
                                                    ========            =======                    =======
</TABLE>

      Scheduled contractual maturities of loans do not necessarily reflect the
actual expected term of the loan portfolio. The average life of mortgage loans
is substantially less than their average contractual terms because of
prepayments. The average life of mortgage loans tends to increase when current
mortgage loan rates are higher than rates on existing mortgage loans and,
conversely, decrease when rates on current mortgage loans are lower than
existing mortgage loan rates (due to refinancing of adjustable-rate and
fixed-rate loans at lower rates). Under the latter circumstance, the weighted
average yield on loans decreases as higher yielding loans are repaid or
refinanced at lower rates.

      One- to Four-Family Residential Real Estate Loans. One of the primary
lending activities of Heritage Bank is the origination of loans secured by
single-family residences. At December 31, 2003, $12.1 million or 29.0% of the
total gross loan portfolio, before net items, consisted of one- to four-family
residential loans.

      The loan-to-value ratio, maturity and other provisions of the loans made
by Heritage Bank generally have reflected the policy of making less than the
maximum loan permissible under applicable regulations, in accordance with sound
lending practices, market conditions and underwriting standards established by
Heritage Bank. Heritage Bank's present lending policies on one- to four-family
residential mortgage loans generally limit the maximum loan-to-value ratio to
80% of the lesser of the appraised value or purchase price of the property up to
$500,000. If Heritage Bank originates a residential mortgage loan with a
loan-to-value ratio in excess of 80%, Heritage Bank typically requires the
borrower to obtain private mortgage insurance. Residential mortgage loans are
amortized on a monthly basis with principal and interest due each month. The
loans do include "due-on-sale" clauses.

      Heritage Bank's residential mortgage loans have either fixed rates of
interest or interest rates that adjust periodically during the term of the loan.
The maximum maturity for residential mortgage loans is 30 years. These loans are
fully amortizing with monthly loan payments sufficient to repay the total amount
of the loan with interest by the end of the loan term. Heritage Bank's
residential mortgage loans generally are originated under terms, conditions and
documentation which permit them to be sold to U.S. Government-sponsored
agencies, such as the Federal Home Loan Mortgage Corporation, and other
investors in the secondary market for mortgages. It is Heritage Bank's current
policy to sell all newly originated fixed rate mortgage loans with a maturity
greater than five years to the secondary market. At December 31, 2003, Heritage
Bank did not have any loans held for sale. Additionally, at December 31, 2003,
$9.7 million, or 80.0% of Heritage Bank's one- to four-family residential
mortgage loans were seasoned fixed-rate loans.


                                       6
<PAGE>

      The adjustable-rate single-family residential mortgage loans currently
offered by Heritage Bank have interest rates that adjust each year in accordance
with a designated index, plus a stipulated margin. Heritage Bank's
adjustable-rate single-family residential real estate loans generally have a cap
of 2% on any increase or decrease in the interest rate at any adjustment date,
and include a specified cap on the maximum interest rate over the life of the
loan, which cap generally is 6% above the initial rate. There also is a floor of
2% below the initial rate. These loans generally are underwritten based on the
initial rate. Heritage Bank's adjustable-rate loans require that any payment
adjustment resulting from a change in the interest rate of an adjustable-rate
loan be sufficient to result in full amortization of the loan by the end of the
loan term and, thus, do not permit any of the increased payment to be added to
the principal amount of the loan, or so-called negative amortization. At
December 31, 2003, $2.4 million or 20.0% of Heritage Bank's one- to four-family
residential mortgage loans were adjustable-rate loans.

      Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
increase, the loan payment by the borrower increases to the extent permitted by
the terms of the loan, thereby increasing the potential for default. Moreover,
as with fixed-rate loans, as interest rates increase, the marketability of the
underlying collateral property may be adversely affected by higher interest
rates. Heritage Bank believes that these risks, which have not had a material
adverse effect on Heritage Bank to date, generally are less than the risks
associated with holding fixed-rate loans in an increasing interest rate
environment.

      Commercial Real Estate Loans. Heritage Bank's commercial real estate loan
portfolio primarily consists of loans secured by owner occupied small business,
office buildings, small warehouses, production facilities, retail stores and
restaurants located within Heritage Bank's market area. Commercial real estate
loans amounted to $8.6 million or 20.5% of the total gross loan portfolio at
December 31, 2003, of which $4.7 million or 54.7% were fixed-rate loans and $3.9
million or 45.3% were adjustable-rate loans. In comparison, at December 31,
2002, approximately $5.2 million or 13.5% of the gross loan portfolio consisted
of commercial real estate loans. This increase reflects the Bank's expanded
marketing efforts with respect to growth stimulation in the commercial real
estate loan portfolio. Heritage Bank's commercial real estate loans typically
have a loan-to-value ratio of 80% or less and generally have higher interest
rates than single-family residential mortgage loans. The maximum term of
Heritage Bank's commercial real estate loans is 15 years.

      Commercial real estate lending is generally considered to involve a higher
degree of risk than one- to four-family residential lending. Such lending
typically involves large loan balances concentrated in a single borrower or
groups of related borrowers for rental or business properties. In addition, the
payment experience on loans secured by income-producing properties is typically
dependent on the success of the operation of the related project and thus is
typically affected by adverse conditions in the real estate market and in the
economy. Heritage Bank generally attempts to mitigate the risks associated with
its commercial real estate lending by, among other things, lending primarily in
its market area and using low loan-to-value ratios in the underwriting process.

      Construction Loans. At December 31, 2003, Heritage Bank had approximately
$15.1 million, or 36.0% of the total gross loan portfolio, in construction
loans, of which $3.2 million or 21.2% were fixed-rate loans and $11.9 million or
78.8% were adjustable-rate loans. In comparison, at December 31, 2002,
approximately $17.1 million, or 44.4% of the total loan portfolio, were
construction loans. The decline in construction loans from 2002 to 2003 is
attributable to the Bank's expanded marketing efforts with respect to growth
stimulation in commercial real estate loans together with increased competition
for construction lending in the Bank's local market area. The construction loans
of Heritage Bank are


                                       7
<PAGE>

comprised largely of loans made to builders to construct individual pre-sold
homes based upon the commitment for a third party to do the permanent loan. The
maximum loan-to-value ratio is 85% of the real estate as it will be improved.
Interest-only payments are required during the construction period, which is
typically nine to 12 months.

      Construction lending is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate
because of the uncertainties of construction, including the possibility of costs
exceeding the initial estimates and the need to obtain a tenant or purchaser if
the property will not be owner-occupied. Heritage Bank generally attempts to
mitigate the risks associated with construction lending by, among other things,
lending in its market area, using conservative underwriting guidelines, and
monitoring the construction process. Heritage Bank also generally requires
personal guarantees of builders and buyers of homes.

      Multi-family Residential Loans. At December 31, 2003, $428,000 or 1.0% of
total loans receivable were multi-family (over four units) residential loans.
The multi-family residential mortgage loans are underwritten on substantially
the same basis as its commercial real estate loans. Loans secured by
multi-family real estate are underwritten based on the income producing
potential of the property and the financial strength of the borrower. The net
operating income, which is the income derived from the operation of the property
less all operating expenses, must be sufficient to cover the payments related to
the outstanding debt. Heritage Bank generally requires personal guarantees from
borrowers in addition to the security property as collateral for such loans.
Heritage Bank generally requires an assignment of rents or leases in order to be
assured that the cash flow from the project will be used to repay the debt.
Appraisals on properties securing multi-family and commercial real estate loans
are performed by independent state licensed fee appraisers approved by the board
of directors.

      Heritage Bank generally maintains a tax and insurance escrow account for
loans secured by multi-family real estate. In order to monitor the adequacy of
cash flows on income-producing properties, the borrower is requested or required
to provide periodic financial information. Loans secured by multi-family real
estate properties are generally larger and involve a greater degree of credit
risk than one- to four-family residential mortgage loans. Such loans typically
involve large balances to single borrowers or groups of related borrowers.

      Because payments on loans secured by multi-family real estate properties
are often dependent on the successful operation or management of the properties,
repayment of such loans may be subject to adverse conditions in the real estate
market or the economy. If the cash flow from the project is reduced, or if
leases are not obtained or renewed, the borrower's ability to repay the loan may
be impaired.

      Other Lending. Heritage Bank also has a relatively small but increasing
amount of consumer and commercial business loans. At December 31, 2003, these
loans amounted to $2.6 million and $3.1 million, respectively, or 6.1% and 7.4%
of the total loan portfolio.

      Consumer loans generally involve greater risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or that are
secured by rapidly depreciable assets, such as automobiles. In these cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
therefore are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and


                                       8
<PAGE>

insolvency laws, may limit the amount which can be recovered on such loan.
Approximately $541,000 or 21.1% of the consumer loans are secured by deposits.

      Loan Origination and Other Fees. In addition to interest earned on loans,
Heritage Bank receives loan origination fees or "points" for originating loans.
Loan points are a percentage of the principal amount of the mortgage loan and
are charged to the borrower in connection with the origination of the loan.

Asset Quality

      General. Heritage Bank mails delinquent notices and makes telephone calls
to borrowers when a borrower fails to make a required payment within 16 days of
the date due. Collection letters are sent when the account is more than 30 days
past due. If these efforts fail to result in the loan being reinstated, Heritage
Bank will initiate the necessary legal actions. This may include recommendations
for extension, repossession, or the initiation of other legal proceedings. In
most cases, deficiencies are cured promptly. While Heritage Bank generally
prefers to work with borrowers to resolve these problems, Heritage Bank will
institute foreclosure or other collection proceedings when necessary to minimize
any potential loss.

      Loans are placed on non-accrual status when management believes the
probability of collection of interest is insufficient to warrant further
accrual, based upon significant deterioration in the financial condition of the
borrower, where repayment in full of interest and principal is not expected, or
where the loan is 90 days past due, unless well secured and in the process of
collection. When a loan is placed on non-accrual status, previously accrued but
unpaid interest is deducted from interest income.

      Real estate and other assets acquired by Heritage Bank as a result of
foreclosure or by deed-in-lieu of foreclosure are classified as real estate
owned until sold. Heritage Bank had $1.02 million or 2.0% of total assets in
real estate owned at December 31, 2003. At December 31, 2003 other real estate
owned consisted of eight residential properties. The Company has valued these
properties at the lower of their cost of acquisition or fair value less
estimated costs to sell.

      Delinquent Loans. The following table sets forth information concerning
delinquent loans at December 31, 2003, in dollar amounts and as a percentage of
Heritage Bank's total gross loan portfolio. The amounts presented represent the
total outstanding principal balances of the related loans, rather than the
actual payment amounts which are past due.

<TABLE>
<CAPTION>
                                                                     December 31, 2003
                                     ---------------------------------------------------------------------------------
                                               30-59                      60-89                      90 or More
                                           Days Overdue                Days Overdue                 Days Overdue
                                     -------------------------  ---------------------------   ------------------------
                                                     Percent                     Percent                     Percent
                                                    of Total                    of Total                    of Total
                                                      Gross                       Gross                       Gross
                                       Amount         Loans        Amount         Loans         Amount        Loans
                                     ----------    -----------  -----------    ------------   ----------    ----------
                                                                   (Dollars in Thousands)
<S>                                    <C>              <C>       <C>             <C>          <C>             <C>
Real estate loans:
  One- to four-family..............    $  312           0.7%      $   173         0.4%         $   754         1.8%
  Construction.....................       262           0.6           258         0.6              121         0.3
Commercial business loans                 271           0.6
Consumer loans:
  Loans secured by deposits........        --            --            --          --               --          --
  Other............................        67           0.2            24         0.1              111         0.3
                                        -----        ------         -----     -------            -----    --------
  Total loans......................    $  912           2.2%      $   455         1.1%         $   986         2.4%
                                        =====      ========         =====     =======            =====    ========
</TABLE>


                                       9
<PAGE>

      Nonperforming Assets. The following table presents information with
respect to Heritage Bank's nonperforming assets at the dates indicated.

<TABLE>
<CAPTION>
                                                                    At December 31,
                                                            ----------------------------
                                                              2003                2002
                                                            --------            --------
                                                                 (Dollars in Thousands)
<S>                                                       <C>                  <C>
      Nonaccruing loans:
      Real estate loans:
          One- to four-family...........................  $      754           $     301
          Construction..................................         121                  --
        Consumer loans:
          Loans secured by deposits.....................          --                  --
          Other.........................................         111                  --
                                                            --------            --------
            Total nonaccruing loans.....................         986                 301
                                                            --------            --------
      Real estate owned.................................       1,021                 602
                                                            --------            --------
            Total nonperforming assets(1)...............       2,007                 903
      Troubled debt restructurings......................          --                  --
                                                            --------            --------
      Troubled debt restructurings and total
        nonperforming assets............................  $    2,007           $     903
                                                            ========            ========
      Total nonperforming loans and troubled debt
        restructurings as a percentage of total
        gross loans.....................................         4.8%                2.4%
      Total nonperforming assets and
        troubled debt restructurings as a
        percentage of total assets......................         3.9%                1.9%
</TABLE>

(1)   Nonperforming assets consist of nonperforming loans, impaired loans, other
      repossessed assets and other real estate.

      The net increase in nonperforming assets and troubled debt restructurings
of $1.1 million was primarily due to the addition of other real estate owned in
the amount of $419,000 together with a $574,000 increase in non-accruing real
estate loans and a $111,000 increase in non-accruing consumer loans. The
increase in non-accruing real estate loans is due to a large number of borrowers
being 90 days or more past due. Management believes these loans are adequately
secured by real estate or, in the alternative, has adequately allocated specific
reserves against any loan where the net realizable value of the collateral has
been deemed insufficient to satisfy the related debt. Non-accruing consumer
loans increased by $111,000, as the Bank's consumer loan portfolio has grown.
All of these loans are collateralized, and management believes these loans are
adequately secured or, in the alternative, has adequately allocated specific
reserves against any loan where the net realizable value of the collateral has
been deemed insufficient to satisfy the related debt.

      If the $986,000 of non-accruing loans of Heritage Bank had been current in
accordance with their terms during the year ended December 31, 2003, the gross
income on such loans would have been approximately $87,000. No significant
interest income was actually collected by Heritage Bank on such loans in the
year ended December 31, 2003.

      Classified Assets. Federal regulations require that each insured savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of insured institutions, federal examiners have authority to
identify problem assets and, if appropriate, classify them. There are three
classifications for problem assets: "substandard," "doubtful" and "loss."
Substandard assets have one or more defined weaknesses and are characterized by
the distinct possibility that the insured institution will


                                       10
<PAGE>

sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a higher
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan losses. If an
asset or portion thereof is classified loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge-off such amount. General loss
allowances established to cover possible losses related to assets classified
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses do not
qualify as regulatory capital. Federal examiners may disagree with an insured
institution's classifications and amounts reserved.

      Heritage Bank's total classified assets at December 31, 2003 (excluding
loss assets specifically reserved for) amounted to $610,000, all of which were
classified as substandard. Of the total $610,000 classified assets, $114,000
were nonperforming loans as of December 31, 2003. The remaining $496,000 related
to potential problem loans due to various circumstances such as prior history
with the customer. The six largest classified assets at December 31, 2003
aggregate $566,000 or 92.8% of total classified assets and consisted of:

      o     One loan to a bankrupt individual in the amount of $200,334 on a
            primary single family residence. At December 31, 2003, the borrower
            was current on post-petition payments in the Chapter 13 bankruptcy
            case. The loan is secured by real estate and has PMI coverage.

      o     Three non-performing loans to a residential builder totaling
            $113,585. The Bank subsequently foreclosed on these loans in
            February, 2004.

      o     One loan to an individual in the amount of $124,199. The borrower
            was performing, but was one payment delinquent. The loan is secured
            by the borrower's primary residence with a 66% loan-to-value ratio.

      o     One loan to an individual in the amount of $65,134. The borrower was
            performing, but was two payments delinquent. The loan is secured by
            the borrower's primary residence with a 51% loan-to-value ratio.

      o     One loan to an individual in the amount of $34,847. The borrower was
            performing, but was one payment delinquent. The loan is secured by
            the borrower's primary residence with a 58% loan-to-value ratio.

      o     One loan to an individual in the amount of $27,762. The borrower was
            performing, but was one payment delinquent. The loan is secured by
            the borrower's primary residence with a 39% loan-to-value ratio.

      Reserve Policy and Methodology. Heritage Bank maintains an allowance for
credit losses to absorb losses inherent in the loan portfolio. The allowance is
based on ongoing, monthly assessments of the probable estimated losses inherent
in the loan portfolio.

     Heritage  Bank's  methodology  for  assessing  the  appropriateness  of the
allowance  consists of several key elements,  which include a general  allowance
and specific allowances for identified problem loans. In addition, the allowance
incorporates the results of measuring impaired loans as provided in Statement of
Financial  Accounting  Standards ("SFAS") No. 114,  "Accounting by Creditors for
Impairment of a Loan" and SFAS No. 118, "Accounting by


                                       11
<PAGE>

Creditors for Impairment of a Loan-Income Recognition and Disclosures." These
accounting standards prescribe the measurement methods, income recognition and
disclosures related to impaired loans.

      The general allowance is calculated by applying loss factors to
outstanding loans based on the internal risk evaluation of the loan portfolio.
Changes in risk evaluations of both performing and nonperforming loans affect
the amount of the general allowance. Loss factors are based both on the
historical loss experience as well as on significant factors that include
portfolio mix, trends in loans past due, trends in loan losses, economic
conditions, portfolio management and expected growth. These factors, in
management's judgment, affect the collectibility of the loan portfolio as of
each evaluation date.

      The appropriateness of the allowance is reviewed and established by
management based upon its evaluation of then-existing economic and business
conditions affecting Heritage Bank's key lending areas. To the extent that these
conditions are evidenced by a specifically identifiable credit or portfolio
segment as of an evaluation date, management's estimate of the effect of such
condition may be reflected as a specific allowance applicable to the credit or
portfolio segment. Individual loans that are impaired, have specified inherent
weaknesses, or have special characteristics or trends that warrant management's
attention are specifically evaluated. Construction loans and one- to four-family
mortgage loans are evaluated as separate portfolio segments. Where any of these
conditions is not evidenced by a specifically identifiable credit or portfolio
segment as of the evaluation date, management's evaluation of the loss related
to this condition is reflected in the unallocated allowance. The evaluation of
the inherent loss with respect to these conditions is subject to a higher degree
of uncertainty because they are not identified with specific problem credits or
portfolio segments.

      Management also evaluates the adequacy of the allowance for loan losses
based on a review of individual loans, historical loan loss experience, the
value and adequacy of collateral, and economic conditions in Heritage Bank's
market area. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans that may be susceptible to significant change. For
all specifically reviewed loans for which it is probable that Heritage Bank will
be unable to collect all amounts due according to the terms of the loan
agreement, Heritage Bank determines impairment by computing a fair value either
based on discounted cash flows using the loan's initial interest rate or the
fair value of the collateral if the loan is collateral dependent.

      Because the allowance for loan losses is based on estimates of losses
inherent in the loan portfolio, actual losses can vary significantly from the
estimated amounts. Heritage Bank's methodology as described permits adjustments
to any loss factor used in the computation of the general allowance in the event
that, in management's judgment, significant factors which affect the
collectibility of the portfolio as of the evaluation date are not reflected in
the loss factors. By assessing the estimated losses inherent in the loan
portfolio on a monthly basis, Heritage Bank is able to adjust specific and
inherent loss estimates based upon any more recent information that has become
available. In addition, management's determination as to the amount of the
allowance for loan losses is subject to review by the Department and the FDIC,
which may require the establishment of additional general or specific allowances
based upon their judgment of the information available to them at the time of
their examination of Heritage Bank.

      Heritage Bank may also use ratio analysis as a supplemental tool for
evaluating the reasonableness of the loan loss reserves. This analysis may be
used to identify divergent trends (compared to the institution's peer group and
its own historical practices) in such things as the


                                       12
<PAGE>

relationship of the reserves to classified and non-classified loans, to past due
and non-accrual loans, to total loans and to historical gross and net
charge-offs. Ratio analysis is regarded as a supplemental checking system and is
not used by itself as a basis for determining the adequacy of loss reserves.

      As a further cross-check on the adequacy of the loan loss reserves,
Heritage Bank will compare its reserves against the following guidelines:

      o     50 percent of the portfolio that is classified doubtful.

      o     15 percent of the portfolio that is classified substandard.

      o     10 percent of the portfolio that is classified watch. (Watch loans
            are loans that do not have specified inherent weaknesses, but rather
            special characteristics or trends that warrant management's
            attention.)

      o     For the portions of the portfolio that have not been classified
            (including those loans designated special mention), estimated credit
            losses over the upcoming twelve months given facts and circumstances
            as of the evaluation date, based on the institution's average annual
            rate of net charge-offs experienced over the previous two or three
            years on similar loans, adjusted for current conditions and trends.

Heritage Bank uses the amount derived from these calculations as a
cross-reference, but not as a basis for the setting of the reserves.

      The following table sets forth information concerning the allocation of
Heritage Bank's allowance for loan losses by loan categories at the dates
indicated.

<TABLE>
<CAPTION>
                                                                 December 31,
                                         -----------------------------------------------------------
                                                     2003                          2002
                                         ---------------------------    ----------------------------
                                                         Percent of                      Percent of
                                                       Loans in Each                    Loans in Each
                                                         Category to                     Category to
                                                         Total Gross                     Total Gross
                                             Amount         Loans           Amount          Loans
                                         ------------   ------------    ------------   -------------
                                                            (Dollars in Thousands)
<S>                                         <C>              <C>         <C>                <C>
Real estate loans:
  One- to four-family...................    $    46          29.0%       $    117           31.1%
   Multi-family.........................          3           1.0        $     --            0.4
  Commercial............................         69          20.5              39           13.5
  Construction..........................        266          36.1             216           44.4
Commercial business.....................         33           7.4              22            4.4
Consumer loans:
  Loans secured by deposits.............         --           1.3              --             --
  Other.................................         31           4.7              22            6.2
                                             ------        ------         -------         ------
    Total...............................    $   448        100.0%             416         100.0%
                                             ======        ======         =======         ======
</TABLE>

Consumer loans involve more risk than mortgage loans because consumer loans are
often either unsecured or secured by assets that depreciate in value. Heritage
Bank's consumer loans totaled $2.6 million and equaled 6.1% of the total gross
loan portfolio at December 31, 2003, compared to 6.2% at December 31, 2002. Of
the total $2.6 million of consumer loans at December 31, 2003, $541,000 were
secured by deposits.


                                       13
<PAGE>

      The following table sets forth an analysis of Heritage Bank's allowance
for loan losses during the periods indicated.

                                                      Year Ended December 31,
                                                    --------------------------
                                                       2003             2002
                                                    ---------        ---------
                                                      (Dollars in Thousands)

      Total loans outstanding...............         $41,949         $ 38,455
      Average loans outstanding, gross......          41,570           36,104
      Balance at beginning of period........            416               320
      Charge-offs:
      Real estate loans:
           Construction and development.....           (166)             (54)
           Residential 1-4 family...........             --               (6)
                                                      -----           ------
                                                      (166)              (60)
      Consumer Loans:
        Other...............................           (19)               (4)
                                                      -----           ------
            Total charge-offs...............          (185)              (64)
                                                      -----           ------
      Recoveries:
      Consumer loans:
        Loans secured by deposits...........             --                --
        Other...............................             --                --
                                                      -----           -------
            Total recoveries................             --                --
                                                      -----           -------
      Net charge-offs.......................          (185)              (64)
                                                      -----           ------
      Provision for loan losses.............            217               160
                                                      -----           -------
      Balance at end of period..............         $  448          $    416
                                                      =====           =======
      Allowance for loan losses as a
        percent of total gross loans
        outstanding.........................            1.1%              1.1%
                                                      =====           =======
      Allowance for loan losses as a
        percent of total non-performing
        loans...............................           45.4%            138.2%
                                                      =====           =======
      Ratio of net charge-offs to
        average loans outstanding...........            .45%              0.2%
                                                      =====           =======

Investment Securities

      Heritage Bank has authority to invest in various types of securities,
including mortgage-backed securities, United States Treasury obligations,
securities of various federal agencies and of state and municipal governments,
certificates of deposit at federally-insured banks and savings institutions,
certain bankers' acceptances and federal funds. Heritage Bank's investment
strategy is established by the Asset/Liability Committee which presently
consists of the entire Board of Directors. The Asset/Liability Committee meets
on a quarterly basis and the strategy established by the committee is
implemented by Heritage Bank's President and its Chief Financial Officer. Any
material deviations from the investment strategy requires approval by the
Asset/Liability Committee.


                                       14
<PAGE>

      The following table sets forth information relating to the amortized costs
and fair value of Heritage Bank's investment securities (all of which were
classified as available for sale) at the dates indicated.

<TABLE>
<CAPTION>
                                                                    December 31,
                                        -------------------------------------------------------------------
                                                       2003                               2002
                                        --------------------------------    -------------------------------
                                        Amortized Cost      Fair Value      Amortized Cost      Fair Value
                                        --------------     -------------    --------------    -------------
                                                                   (In Thousands)
<S>                                          <C>               <C>              <C>              <C>
    Available for sale:
      U.S. Government Agency
    obligations........................      $   --            $    --          $ 1,100          $ 1,100
      Mortgage-backed Securities.......         542                551              803              821
                                             ------            -------          -------          -------
        Total available for sale.......      $  542            $   551          $ 1,903          $ 1,921
                                              =====            =======          =======          =======
</TABLE>

      The following table sets forth the amount of Heritage Bank's securities
which mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 2003. The amounts reflect
fair value of Heritage Bank's securities at December 31, 2003.

<TABLE>
<CAPTION>
                                                                      Contractually Maturing
                                ---------------------------------------------------------------------------------------------------
                                           Weighted                Weighted               Weighted               Weighted
                                1 Year      Average                 Average     5-10       Average    Over 10    Average
                                or Less      Yield    1-5 Years      Yield      Years       Yield      Years      Yield      Total
                                -------    --------   ---------    --------   --------   ---------    --------   --------   -------
                                                                     (In Thousands)
<S>                              <C>          <C>       <C>           <C>      <C>           <C>       <C>         <C>       <C>
U.S. Government Agency
  obligations................    $  --        --%       $              --%     $  --          --%      $  --        --%      $  --
  Mortgage-backed securities.      535        4.3           8         8.7          5         8.6           3       8.6         551
                                 -----                  -----                  -----                    ----                 -----
    Total securities
available
      for sale...............    $ 535                  $   8                  $   5                   $   3                 $  551
                                 =====                  =====                  =====                   =====                 ======
</TABLE>

      Mortgage-backed securities represent a participation interest in a pool of
one- to four-family or multi-family mortgages. The mortgage originators use
intermediaries (generally U.S. Government agencies and government-sponsored
enterprises) to pool and repackage the participation interests in the form of
securities, with investors receiving the principal and interest payments on the
mortgages. Such U.S. Government agencies and government-sponsored enterprises
guarantee the payment of principal and interest to investors.

      Mortgage-backed securities are typically issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security approximates the life of the underlying
mortgages.

      The mortgage-backed securities of Heritage Bank consist of Government
National Mortgage Association securities, Federal Home Loan Mortgage Corporation
securities and Federal National Mortgage Association securities. The Government
National Mortgage Association is a government agency within the Department of
Housing and Urban Development which is intended to help finance
government-assisted housing programs. Government National Mortgage Association
securities are


                                       15
<PAGE>

backed by loans insured by the Federal Housing Administration, or guaranteed by
the Veterans Administration, and the timely payment of principal and interest on
Government National Mortgage Association securities are guaranteed by the
Government National Mortgage Association and backed by the full faith and credit
of the U.S. Government. The Federal Home Loan Mortgage Corporation is a private
corporation chartered by the U.S. Government. The Federal Home Loan Mortgage
Corporation issues participation certificates backed principally by conventional
mortgage loans. The Federal Home Loan Mortgage Corporation guarantees the timely
payment of interest and the ultimate return of principal on participation
certificates. The Federal National Mortgage Association is a private corporation
chartered by the U.S. Congress with a mandate to establish a secondary market
for mortgage loans. The Federal National Mortgage Association guarantees the
timely payment of principal and interest on Federal National Mortgage
Association securities. Neither the Federal Home Loan Mortgage Corporation nor
the Federal National Mortgage Association securities are backed by the full
faith and credit of the United States.

      Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of Heritage Bank.

Sources of Funds

      General. Deposits are the primary source of Heritage Bank's funds for
lending and other investment purposes. In addition to deposits, principal and
interest payments on loans and mortgage-backed securities are a source of funds.
Loan repayments are a relatively stable source of funds, while deposit inflows
and outflows are significantly influenced by general interest rates and money
market conditions. Borrowings may also be used on a short-term basis to
compensate for reductions in the availability of funds from other sources and on
a longer-term basis for general business purposes.

      Deposits. Deposits are attracted by Heritage Bank principally from within
its primary market area. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.

      Heritage Bank obtains deposits primarily from residents of Texas. Heritage
Bank currently does, from time to time, solicit deposits from outside Texas but
does not pay fees to brokers to solicit funds for deposit. At December 31, 2003,
Heritage Bank had $3.9 million in brokered deposits.

      Interest rates paid, maturity terms, service fees and withdrawal penalties
are established on a periodic basis. Management determines the rates and terms
based on rates paid by competitors, the need for funds or liquidity, growth
goals and federal and state regulations. Heritage Bank attempts to control the
flow of deposits by pricing its accounts to remain generally competitive with
other financial institutions in its market area.

      Heritage Bank is currently focused on serving its depositor base with more
bank-like products including checking accounts, negotiable order of withdrawal
accounts, debit cards, credit cards, ATM services and cashier's checks.
Management is particularly focusing its attention on increasing the number of
demand deposit accounts.

      The following table shows the distribution of and certain other
information relating to Heritage Bank's deposits by type as of the dates
indicated.


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                             December 31,
                                             ----------------------------------------------
                                                     2003                    2002
                                             ----------------------  ----------------------
                                                         Percent of               Percent of
                                              Amount      Deposits     Amount      Deposits
                                             ---------    ---------  ----------   ---------
                                                        (Dollars in Thousands)
<S>                                           <C>           <C>       <C>            <C>
Transaction accounts:
  Demand deposits.........................    $ 4,899        12.4%     $ 3,381         9.9%
 Money market.............................      3,991        10.1        2,518         7.4
  Savings deposits........................      1,521         3.9        1,589         4.7
                                              -------      ------     --------      ------
    Total short term accounts.............     10,411        26.4        7,488        22.0
                                              -------      ------     --------      ------
Certificate accounts:
   1.0% - 1.99%...........................     12,458        31.5        5,122        15.0
   2.0% - 2.99%...........................      6,318        16.0       10,775        31.6
  3.0% - 3.99%............................      5,660        14.3        2,884         8.4
  4.0% - 4.99%............................      3,234         8.2        2,350         6.9
  5.0% - 5.99%............................        730         1.8        2,447         7.1
  6.0% - 6.99%............................        721         1.8        3,068         9.0
                                               ------      ------      -------      ------
    Total certificate accounts............     29,121        73.6       26,646        78.0
                                              -------      ------     --------      ------
      Total deposits......................    $39,532       100.0%    $ 34,134       100.0%
                                              =======      ======     ========      ======
</TABLE>

      The following table sets forth the savings activities of Heritage Bank
during the periods indicated.

                                                   Year Ended December 31,
                                                 --------------------------
                                                    2003            2002
                                                 ---------        --------
                                                        (In Thousands)

Total deposits at beginning of period.......      $  1,589        $  1,837
   Net (withdrawals)........................          (72)           (264)
Interest credited...........................             4              16
                                                   -------        --------
  Total deposits at end of period...........      $  1,521        $  1,589
                                                  ========        ========

      The following table shows the interest rate and maturity information for
Heritage Bank's certificates of deposit at December 31, 2003.

<TABLE>
<CAPTION>
                                                         Maturity Date
                     -----------------------------------------------------------------------------------------
 Interest Rate       One Year or Less       Over 1-2 Years      Over 2-3 Years      Over 3 Years         Total
----------------     ----------------       --------------      --------------      ------------         -----
                                                          (In Thousands)

<S>                     <C>                   <C>                <C>                <C>              <C>
1.0% - 1.99%            $   10,869            $   1,288          $     301          $     --         $  12,458
2.0% - 2.99%                 2,193                2,251              1,765               109             6,318
3.0% - 3.99%                   864                  897              1,154             2,745             5,660
4.0% - 4.99%                   699                  123                 99             2,313             3,234
5.0% - 5.99%                   560                   30                 81                59               730
6.0% - 6.99%                   721                   --                 --                --               721
                         ---------             --------           --------           -------          --------
  Total                 $   15,906            $   4,589          $   3,400          $  5,226         $  29,121
                         =========             ========           ========           =======          ========
</TABLE>

      As of December 31, 2003, the aggregate amount of outstanding time
certificates of deposit at Heritage Bank in amounts greater than or equal to
$100,000, was approximately $4.7 million. The following table presents the
maturity of these time certificates of deposit at such dates.


                                       17
<PAGE>

                                                         December 31, 2002
                                                       ---------------------
                                                           (In Thousands)

3 months or less.......................................     $   1,484
Over 3 months through 12 months........................         2,018
Over 1 year through 3 years............................           507
Over 3 years...........................................           732
                                                             --------
                                                            $   4,741

Borrowings. Heritage Bank may obtain advances from the Federal Home Loan Bank of
Dallas upon the security of the common stock it owns in that bank and certain of
its residential mortgage loans and mortgage-backed and other investment
securities, provided certain standards related to creditworthiness have been
met. These advances are made pursuant to several credit programs, each of which
has its own interest rate and range of maturities. Federal Home Loan Bank
advances are generally available to meet seasonal and other withdrawals of
deposit accounts and to permit increased lending.

      The following table shows certain information regarding the short-term
borrowings of Heritage Bank at or for the dates indicated:

<TABLE>
<CAPTION>
                                                     At or for the Year Ended December 31,
                                                     -------------------------------------
                                                           2003                 2002
                                                     ----------------       ---------------
                                                              (Dollars In Thousands)
<S>                                                     <C>                 <C>
      FHLB open line of credit:
        Average balance outstanding................     $   4,267           $  3,513
        Maximum amount outstanding at any
          month-end during the period...............        5,400               5,400
        Balance outstanding at end of period........    $   4,112           $   5,400
        Average interest rate during the period.....         3.7%                 4.0%
        Weighted average interest rate at end of
          period....................................         3.6%                 4.7%
</TABLE>

      At December 31, 2003, Heritage Bank had $4.1 million of Federal Home Loan
Bank advances secured by mortgage loans aggregating $10.6 million. The residual
of the borrowings were secured by certain real estate and small business loans
in conjunction with a blanket loan security agreement between Heritage Bank and
the Federal Home Loan Bank. Of the total Federal Home Loan Bank borrowings at
December 31, 2003, $3.75 million contractually mature in 2004 and $362,000
contractually mature in 2005. If these advances mature or are called in a rising
interest rate environment, Heritage Bank may be required to replace these
advances with higher rate advances.

Subsidiaries

      At December 31, 2003, the Company's wholly-owned subsidiary, Heritage Bank
had one subsidiary, TFS Investment Corporation. TFS Investment Corporation was
established in 1995 for the purpose of constructing single-family residences for
resale. At December 31, 2003, TFS Investment Corporation had 17 lots for resale
with a cost basis of $34,000. Additionally, at December 31, 2003, TFS Investment
Corporation held undeveloped land with a cost basis of $205,000.


                                       18
<PAGE>

Total Employees

      Heritage Bank had 24 full-time employees and four part-time employees at
December 31, 2003. None of these employees are represented by a collective
bargaining agent, and Heritage Bank believes that it enjoys good relations with
its personnel.

Competition

      Heritage Bank faces significant competition both in attracting deposits
and in making loans. Heritage Bank's profitability and any expansion into other
markets depends upon Heritage Bank's continued ability to compete successfully.
Its most direct competition for deposits has come historically from commercial
banks, credit unions and other savings institutions located in its primary
market area, including many large financial institutions which have greater
financial and marketing resources available to them. In addition, Heritage Bank
faces significant competition for investors' funds from short-term money market
securities, mutual funds and other corporate and government securities. Heritage
Bank does not rely upon any individual group or entity for a material portion of
its deposits. The ability of Heritage Bank to attract and retain deposits
depends on its ability to generally provide a rate of return, liquidity and risk
comparable to that offered by competing investment opportunities.

      Heritage Bank's competition for real estate loans comes principally from
mortgage banking companies, commercial banks, other savings institutions and
credit unions. Heritage Bank competes for loan originations primarily through
the interest rates and loan fees it charges, and the efficiency and quality of
services it provides borrowers. Factors which affect competition include general
and local economic conditions, current interest rate levels and volatility in
the mortgage markets. Competition may increase as a result of the continuing
reduction of restrictions on the interstate operations of financial institutions
and the anticipated slowing of refinancing activity.

Regulation

      The following discussion of certain laws and regulations which are
applicable to Heritage and Heritage Bank, as well as descriptions of laws and
regulations contained elsewhere herein, summarizes the aspects of such laws and
regulations which are deemed to be material to Heritage Bancshares, Inc., and
Heritage Bank. However, the summary does not purport to be complete and is
qualified in its entirety by reference to applicable laws and regulations.

   Heritage Bancshares, Inc.

      Holding Company Acquisitions. Heritage is a savings and loan holding
company within the meaning of the Home Owners' Loan Act, as amended (the "HOLA")
and has registered with the OTS. Federal law generally prohibits a company,
without prior OTS approval, from acquiring the ownership or control of any
savings bank electing to be subject to its provisions. Under the HOLA, Heritage
is subject to periodic examination by the OTS and is required to file periodic
reports of its operations and such additional information as the OTS may
require. Because Heritage Bank is chartered under Texas law, Heritage is also
subject to registration with, and regulation by, the Texas Savings and Loan
Commissioner ("Commissioner") under the Texas Savings Bank Act.

      Activities and Other Limitations. A savings and loan holding company is a
legal entity separate and distinct from its subsidiary bank. Normally, the major
source of a holding company's revenue is dividends a holding company receives
from its subsidiary bank. The right of a savings and loan holding company to
participate as a stockholder in any distribution of assets of its subsidiary
bank upon its liquidation or reorganization or otherwise is subject to the prior
claims of creditors of such


                                       19
<PAGE>

subsidiary bank. The subsidiary bank is subject to claims by creditors for
long-term and short-term debt obligations, including deposit liabilities.

      The HOLA also prohibits a savings and loan holding company, with certain
exceptions, from acquiring more than 5% of the voting shares of any company that
is not a savings association and from engaging in any business other than those
permissible for a financial holding company under the Bank Holding Company Act
of 1956, as amended (the "BHCA"). Financial holding companies may engage in a
broad range of financially related activities, including insurance and
securities activities, and activities that are financial in nature or incidental
to such financial activities. The BHCA lists certain activities that are
considered financial in nature and permits the Federal Reserve Board to expand
that list to include other activities that are complementary to the activities
on the preapproved list. The preapproved activities include (1) securities
underwriting, dealing and market making, (2) insurance underwriting, (3)
merchant banking, and (4) insurance company portfolio investments.

      In addition to activities permitted for financial holding companies,
Heritage as a savings and loan holding company, is also permitted to (1) furnish
or perform management services for Heritage Bank, (2) conduct an insurance
agency and escrow business, (3) hold, manage or liquidate assets owned or
acquired from Heritage Bank, (4) hold or manage properties used or occupied by
Heritage Bank, (5) act as a trustee under a deed of trust and (6) engage in any
activity permissible for a multiple savings and loan holding company as of March
5, 1987 (including various real estate management and development activities).
In addition, a savings and loan holding company may engage in activities that
the Federal Reserve Board permits for bank holding companies. These activities
include operating a mortgage company, finance company, credit card company,
factoring company, trust company or savings association; performing certain data
processing operations; providing limited securities brokerage services; acting
as an investment or financial advisor; acting as an insurance agent for certain
types of credit-related insurance; leasing personal property on a full-payout,
non-operating basis; providing tax planning and preparation services; operating
a collection agency; and providing certain courier services.

      Heritage Bank

      General. Heritage Bank is a Texas-chartered savings bank, the deposit
accounts of which are insured by the SAIF of the FDIC. As a SAIF insured,
Texas-chartered savings bank, the Heritage Bank is subject to the examination,
supervision, reporting and enforcement requirements of the Department, as the
chartering authority for Texas savings banks, and the FDIC, as administrator of
the SAIF, and to the statutes and regulations administered by the Department and
the FDIC governing such matters as capital standards, mergers, establishment of
branch offices, subsidiary investments and activities and general investment
authority. Heritage Bank is required to file reports with the Department and the
FDIC concerning its activities and financial condition and will be required to
obtain regulatory approvals prior to entering into certain transactions,
including mergers with, or acquisitions of, other financial institutions.

      The Department and the FDIC have extensive enforcement authority over
Texas-chartered savings banks, such as Heritage Bank. This enforcement authority
includes, among other things, the ability to issue cease-and-desist or removal
orders, to assess civil money penalties and to initiate injunctive actions. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe and unsound practices.

      The Department has established a schedule for the assessment of
"supervisory fees" upon all Texas savings banks to fund the operations of the
Department. These supervisory fees are computed on


                                       20
<PAGE>

the basis of each savings bank's total assets (including consolidated
subsidiaries) and are payable at the end of each calendar quarter. A schedule of
fees has also been established for certain filings made by Texas savings banks
with the Department. The Department also assesses fees for examinations
conducted by the Department's staff, based upon the number of hours spent by the
staff performing the examination. During the year ended December 31, 2003,
Heritage Bank incurred approximately $5,200 in supervisory fees and expenses.

      Insurance of Accounts. The deposits of Heritage Bank are insured to the
maximum extent permitted by the SAIF, which is administered by the FDIC. As
insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC. The FDIC also has the authority to
initiate enforcement actions against Heritage Bank.

      SAIF insured institutions are assigned to one of three capital groups
which are based solely on the level of an institution's capital--"well
capitalized," "adequately capitalized," and "undercapitalized." These capital
levels are defined in the same manner as under the prompt corrective action
system discussed below. These three groups are then divided into three subgroups
which reflect varying levels of supervisory concern, from those banks which are
considered to be healthy to those which are considered to be of substantial
supervisory concern. The matrix so created results in nine assessment risk
classifications, with rates ranging from zero for well capitalized, healthy
institutions to .27% for undercapitalized institutions with substantial
supervisory concerns. The insurance premium for Heritage Bank for 2003 was
approximately $5,825. The SAIF is required by law to maintain a reserve ratio of
1.25% of insured deposits.

      The FDIC may terminate the deposit insurance of any insured depository
institution, including Heritage Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is not aware of any existing circumstances which would
result in termination of Heritage Bank's deposit insurance.

      Capital Requirements. The FDIC has promulgated regulations and adopted a
statement of policy regarding the capital adequacy of state-chartered banks
which, like Heritage Bank, are not members of the Federal Reserve System. The
FDIC's capital regulations establish a minimum 3.0% Tier 1 leverage capital
requirement for the most highly-rated state-chartered, non-member banks, with an
additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier 1 leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, highest-rated banks are those that the FDIC determines are
not anticipating or experiencing significant growth and have well diversified
risk, including no undue interest rate risk exposure, excellent asset quality,
high liquidity, good earnings and, in general, which are considered a strong
banking organization, rated composite 1 under the Uniform Financial Institutions
Rating System. Leverage or core capital is defined as the sum of common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, and minority interests in consolidated
subsidiaries, minus all intangible assets other than certain qualifying
supervisory goodwill, and certain purchased mortgage servicing rights and
purchased credit and relationships.


                                       21
<PAGE>

      The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital which is defined as Tier 1 capital and
supplementary (Tier 2 capital) to risk weighted assets of 8%. In determining the
amount of risk-weighted assets, all assets, plus certain off balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item.

      The components of Tier 1 capital are equivalent to those discussed above
under the 3% leverage standard. The components of supplementary (Tier 2) capital
include certain perpetual preferred stock, certain mandatory convertible
securities, certain subordinated debt and intermediate preferred stock and
general allowances for loan and lease losses. Allowance for loan and lease
losses includable in supplementary capital is limited to a maximum of 1.25% of
risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital. At December 31, 2003,
Heritage Bank met each of its capital requirements.

      A bank which has less than the minimum leverage capital requirement must,
within 60 days of the date as of which it fails to comply with such requirement,
submit to its FDIC regional director for review and approval a reasonable plan
describing the means and timing by which the bank shall achieve its minimum
leverage capital requirement. A bank which fails to file such plan with the FDIC
is deemed to be operating in an unsafe and unsound manner and could subject the
bank to a cease-and-desist order from the FDIC. The FDIC's regulation also
provides that any insured depository institution with a ratio of Tier 1 capital
to total assets that is less than 2.0% is deemed to be operating in an unsafe or
unsound condition pursuant to Section 8(a) of the Federal Deposit Insurance Act
("FDIA") and is subject to potential termination of deposit insurance. However,
such an institution will not be subject to an enforcement proceeding thereunder
solely on account of its capital ratios if it has entered into and is in
compliance with a written agreement with the FDIC to increase its Tier 1
leverage capital ratio to such level as the FDIC deems appropriate and to take
such other action as may be necessary for the institution to be operated in a
safe and sound manner. The FDIC capital regulation also provides, among other
things, for the issuance by the FDIC or its designee(s) of a capital directive,
which is a final order issued to a bank that fails to maintain minimum capital
to restore its capital to the minimum leverage capital requirement within a
specified time period. Such directive is enforceable in the same manner as a
final cease-and-desist order.


                                       22
<PAGE>

      At December 31, 2003, Heritage Bank exceeded all of its regulatory capital
requirements, with Tier 1, total risk-based and leverage capital ratios of
15.5%, 16.6% and 11.9%, respectively. The following table sets forth Heritage
Bank's compliance with the above-described capital requirements as of December
31, 2003.

<TABLE>
<CAPTION>
                                                                                   Total
                                                                  Tier 1         Risk-Based         Leverage
                                                                Capital(1)        Capital            Capital
                                                              ------------------------------------------------
                                                                              (Dollars in Thousands)

<S>                                                              <C>               <C>              <C>
Capital under generally accepted accounting principles:          $  6,420          $  6,420         $  6,420
                                                                  =======           =======          =======

Regulatory capital                                                  6,175             6,623            6,175
Minimum required regulatory capital(2)                              1,594             3,187            2,070
                                                                  -------           -------          -------
Excess regulatory capital                                           4,581             3,436            4,175
                                                                  =======           =======          =======

Regulatory capital as a percentage                                   15.5%             16.6%            11.9%
Minimum capital required as a percentage(2)                           4.0%              8.0%             4.0%
Regulatory capital as a percentage in excess of requirements         11.5%              8.6%             7.9%
</TABLE>

----------------

(1)   Does not reflect the 4.0% requirement to be met in order for an
      institution to be "adequately capitalized." See "- Prompt Corrective
      Action."

(2)   Tier 1 capital and total risk-based capital are computed as a percentage
      of adjusted risk-weighted assets of $39.8 million. Leverage capital is
      computed as a percentage of average total assets of $51.8 million.

      Under the Texas Savings Bank Act, Heritage Bank must maintain minimum
capital as prescribed by the Commissioner in an amount not less than the
regulatory capital required for national banks. A national bank must maintain
Tier 1 capital in an amount equal to at least 3.0% of adjusted total assets, and
at least 8.0% of risk-based capital. The Department may establish higher
minimums based upon Heritage Bank's history, management or earnings prospects.

      Restrictions on Transactions With Affiliates. Transactions between a
savings bank, such as Heritage Bank, and its "affiliates" are subject to
quantitative and qualitative restrictions under Sections 23A and 23B of the
Federal Reserve Act, FDIC regulations and Regulation W as promulgated by the
Board of Governors of the Federal Reserve System as if Heritage Bank were a
member of the Federal Reserve System. Heritage is an affiliate of Heritage Bank
as defined in the Federal Reserve Act and FDIC Regulations.

      Section 23A applies to certain "covered transactions" between an affiliate
and a savings bank. In general, the extent to which a savings bank or its
subsidiaries may engage in such "covered transactions" with affiliates is
limited to an amount equal to 10% of the institution's capital and surplus, in
the case of covered transactions with any one affiliate, and to an amount equal
to 20% of such capital and surplus, in the case of covered transactions with all
affiliates. A "covered transaction" is defined to include a loan or extension of
credit to an affiliate; a purchase of investment securities issued by an
affiliate; a purchase of assets from an affiliate, with certain exceptions; the
acceptance of securities issued by an affiliate as collateral for a loan or
extension of credit to any party; or the issuance of a guarantee, acceptance or
letter of credit on behalf of an affiliate. Section 23B applies to "covered
transactions" as well as to the sale of securities or assets to an affiliate,
the payment of money or the furnishing of services to an affiliate and
transactions in which an affiliate acts as an agent or broker or receives a fee
for its services to the savings


                                       23
<PAGE>

association. These transactions may be engaged in only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings bank or its subsidiary, as those prevailing at the time for comparable
transactions with nonaffiliated companies.

      In addition, Sections 22(h) and (g) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22(h), loans to a director, an executive officer and
to a greater than 10% stockholder of a bank, and certain affiliated interests of
either, may not exceed, together with all other outstanding loans to such person
and affiliated interests, the bank's loans to one borrower limit (generally
equal to 15% of the institution's unimpaired capital and surplus). Section 22(h)
also requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons and also requires prior board approval for certain
loans. In addition, the aggregate amount of extensions of credit by a bank to
all insiders cannot exceed the institution's unimpaired capital and surplus.
Furthermore, Section 22(g) places additional restrictions on loans to executive
officers.

      Liquidity. Heritage Bank must maintain investments in liquid assets equal
to at least 10% of its average daily deposits for the most recently completed
calendar quarter. Liquid assets for these purposes include cash, balances in a
Federal Reserve Bank or Federal Home Loan Bank, and readily marketable
investments, including unencumbered federal government sponsored enterprises
securities.

      Dividends. Under the Texas Savings Bank Act, dividends may be declared
when out of current and retained income.

      Prompt Corrective Action. Under the "Prompt Corrective Action" provisions
of the FDIA, the federal banking agencies have established five capital
categories ("well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized" and "critically undercapitalized"). The prompt
corrective action provisions of the FDIA, and the regulations promulgated
thereunder, require certain mandatory actions and authorize other discretionary
actions to be taken by the appropriate federal banking agency with respect to
institutions in the three undercapitalized categories, with the nature and
extent of such action dependent primarily on the category in which the
institution is placed.

      The severity of the actions authorized or required to be taken by the FDIC
increases as an institution's capital position deteriorates. Under the prompt
corrective action provisions, the FDIC is required to monitor closely and to
restrict asset growth, acquisitions, branching and new lines of business of an
undercapitalized bank. The FDIA also prohibits dividends and other capital
distributions if, following such distribution, a bank would be undercapitalized
and requires an undercapitalized bank to submit to the FDIC a capital
restoration plan.

      At December 31, 2003, Heritage Bank was deemed a "well capitalized"
institution for purposes of the above regulations and as such is not subject to
the above mentioned restrictions.

      Safety and Soundness Guidelines. The FDIC and the other federal banking
agencies have established guidelines for safety and soundness, addressing
operational and managerial standards, as well as compensation matters for
insured financial institutions. Institutions failing to meet these standards are
required to submit compliance plans to their appropriate federal regulators. The
FDIC and the other agencies have also established guidelines regarding asset
quality and earnings standards for insured institutions. Heritage Bank believes
that it is in compliance with these guidelines and standards.


                                       24
<PAGE>

      Community Reinvestment Act and the Fair Lending Laws. Heritage Bank has a
responsibility under the Community Reinvestment Act of 1977 and related
regulations of the FDIC to help meet the credit needs of their communities,
including low- and moderate-income neighborhoods. In addition, the Equal Credit
Opportunity Act and the Fair Housing Act (together, the "Fair Lending Laws")
prohibit lenders from discriminating in their lending practices on the basis of
characteristics specified in those statutes. An institution's failure to comply
with the provisions of the Community Reinvestment Act could, at a minimum,
result in regulatory restrictions on its activities. Failure to comply with the
Fair Lending Laws could result in enforcement actions by the FDIC, as well as
the Department of Justice.

      Qualified Thrift Lender Test. As a Texas-chartered savings bank, Heritage
Bank is required to comply with the qualified thrift lender or QTL test pursuant
to Section 92.204 of the Texas Finance Code. Additionally, for Heritage to
register as a savings and loan holding company, Heritage Bank is required to
meet the QTL test under OTS regulations. Heritage Bank can comply with the QTL
test either by qualifying as a domestic building and loan association as defined
in the Internal Revenue Code of 1986, as amended (the "Code"), or by meeting the
second prong of the QTL test set forth in the HOLA, as described below.

      Under the "domestic building and loan" test, Heritage Bank must meet a
supervisory test, a business operations test, and an asset composition test
which requires that 60% of total assets must consist of cash, United States
obligations, share loans, and loans secured by residential real estate. Heritage
Bank meets the definition of a "domestic building and loan association" under
this test.

      Currently, the prong of the QTL test that is not based on the Internal
Revenue Code requires that 65% of Heritage Bank's "portfolio assets" (as
defined) consist of certain housing and consumer-related assets on a monthly
average basis in nine out of every 12 months. Assets that qualify without limit
for inclusion as part of the 65% requirement include:

   o  loans made to purchase, refinance, construct, improve or repair domestic
      residential housing;

   o  home equity loans;

   o  most mortgage-backed securities;

   o  stock issued by the Federal Home Loan Bank of Dallas; and

   o  direct or indirect obligations of the FDIC.

      In addition, the following assets, among others, may be included in
meeting the test subject to an overall limit of 20% of Heritage Bank's portfolio
assets: 50% of residential mortgage loans originated and sold within 90 days of
origination; 100% of consumer loans; and stock issued by the FHLMC or the FNMA.
Portfolio assets consist of total assets minus the sum of (1) goodwill and other
intangible assets, (2) property used by the savings institution to conduct its
business, and (3) liquid assets up to 20% of the institution's total assets. At
December 31, 2003, the qualified thrift investments of Heritage Bank were
approximately 102% of its portfolio assets.

      Federal Home Loan Bank System. Heritage Bank is a member of the Federal
Home Loan Bank of Dallas, which is one of 12 regional Federal Home Loan Banks
that administers the home financing credit function of savings institutions.
Each Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the Federal Home Loan Bank System. It
makes loans to members (i.e.,


                                       25
<PAGE>

advances) in accordance with policies and procedures established by the Board of
Directors of the Federal Home Loan Bank. At December 31, 2003, Heritage Bank had
$4.1 million of Federal Home Loan Bank advances. See Note 10 to Consolidated
Financial Statements.

      As a member, Heritage Bank is required to purchase and maintain stock in
the Federal Home Loan Bank of Dallas in an amount equal to at least 1% of its
aggregate unpaid residential mortgage loans or similar obligations at the
beginning of each year. At December 31, 2003, Heritage Bank had $493,000 in
Federal Home Loan Bank stock, of which $268,000 was the minimum required for
compliance with this requirement.

      The Federal Home Loan Banks are required to provide funds for the
resolution of troubled savings institutions and to contribute to affordable
housing programs through direct loans or interest subsidies on advances targeted
for community investment and low- and moderate-income housing projects. These
contributions have adversely affected the level of Federal Home Loan Bank
dividends paid in the past and could do so in the future. These contributions
also could have an adverse effect on the value of Federal Home Loan Bank stock
in the future. The dividend yield on Heritage Bank's Federal Home Loan Bank
stock was 2.25% in 2003 and 2.7% in 2002.

      Federal Reserve System. The Federal Reserve Board requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. No reserve
is required to be maintained on the first $6.6 million of transaction accounts,
reserves of 3% were required to be maintained for amounts up to $45.4 million of
net transaction accounts, and a reserve of $1.2 million plus 10% against net
transaction accounts above this amount. The above dollar amounts and percentages
are subject to periodic adjustment by the Federal Reserve Board. Because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets and constrain
its ability to lend.

      Other Matters. Additional legislative and administrative actions affecting
the banking industry may be considered by the United States Congress, the state
legislatures, and various regulatory agencies, including those referred to
above. It cannot be predicted with certainty whether such legislative or
administrative action will be enacted or to the extent to which the banking
industry in general or Heritage and Heritage Bank in particular would be
affected.


                                       26
<PAGE>

Item 2.     Description of Property.

      The following table sets forth certain information with respect to the
Bank's offices at December 31, 2003.

<TABLE>
<CAPTION>
                                                                      Net Book             Amount of
                                                                      Value of            Deposits at
Description/Address                               Leased/Owned        Property         December 31, 2003
-------------------                               ------------        ---------        -----------------
                                                                            (In Thousands)

<C>                                                   <C>                <C>                  <C>
102 West High Street                                  Owned              $241                 $39,432
Terrell, Texas  75160

3101 Joe Ramsey Boulevard, Suite 104                  Leased              $0                   $100
Greenville, Texas  75401

210 West Nash Street                                  Leased              $1                    $0
Terrell, Texas  75160
</TABLE>

      Additionally, the Company owns a parcel of land located in Terrell, Texas
with a cost basis of $1.037 million which is held for future development.


Item 3.     Legal Proceedings.

         There are no material legal proceedings to which the Company is a party
or to which any of their property is subject.


Item 4.     Submission of Matters to a Vote of Security Holders.

         Not applicable.


                                       27
<PAGE>

                                     PART II

Item 5.     Market for Common Equity and Related Stockholder Matters.

      The common stock of Heritage Bancshares, Inc. is listed for quotation on
the OTC Bulletin Board under the symbol "HRGB.OB." The following table shows the
high and low bid prices for Heritage's common stock for each fiscal quarter of
the Company's fiscal years ended 2003 and 2002 following the Company's
completion of its initial stock offering in February 2002. The high and low bid
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

                                              High                Low
                                          -----------         -----------
Year ended December 31, 2003
     First quarter                        $   14.25           $  12.25
     Second quarter                           14.44              13.00
     Third quarter                            13.70              12.85
     Fourth quarter                           13.97              12.90

Year ended December 31, 2002
     First quarter                        $   11.85           $  11.05
     Second quarter                           12.80              11.68
     Third quarter                            12.65              12.00
     Fourth quarter                           12.75              10.00


      As of March 25, 2004, there were 168 stockholders of record and 473,248
shares of common stock outstanding.

Dividend Policy

      Heritage has never declared or paid cash dividends on its common stock and
does not anticipate paying cash dividends in the foreseeable future. Heritage
presently expects that it will retain all future earnings, if any, for use in
its business.


Equity Compensation Plan Information

       The following table summarizes as of December 31, 2003, certain
information about equity awards to our employees, officers, directors and other
persons under our equity compensation plans.
<TABLE>
<CAPTION>

                                                             (a)                         (b)                         (c)
                                                             ---                         ---                         ---
                                                                                                             Number of securities
                                                                                                           remaining available for
                                                  Number of securities to be        Weighted-average    future issuance under equity
                                                   issued upon exercise of        exercise price of           compensation plans
                                                     outstanding options,        outstanding options,       (excluding securities
                                                     warrants and rights          warrants and rights       reflected in column (a))
                                                  --------------------------     ---------------------   ---------------------------

<S>                                                                              <C>                              <C>
Plan category
Equity compensation plans approved by
security holders                                             --                  $        --                      68,804
Equity compensation plans not approved by
security holders                                             --                  $        --                          --
Total                                                        --                  $        --                      68,804
</TABLE>

Item 6.     Management's Discussion and Analysis or Plan of Operation

      General

      On July 25, 2001, the Board of Directors of Heritage Savings Bank, SSB
(the "Savings Bank") adopted a Plan of Conversion, subject to necessary
approvals, to convert from a Texas chartered mutual savings bank to a Texas
chartered stock savings bank with the concurrent issuance of its capital stock
to a holding company. In September 2001, Heritage Bancshares, Inc. ("Heritage"
or the "Company") was incorporated.


                                       28
<PAGE>

      Heritage completed its stock offering in February 2002. Heritage sold
491,468 shares of common stock with net proceeds of approximately $4.5 million.
Heritage became the holding company for the Savings Bank on February 22, 2002.
Because Heritage had no results of operations prior to February 2002, all the
following financial information and related discussion presented prior to
February 2002 is for the Savings Bank and its subsidiary on a consolidated
basis.

      The Savings Bank changed its name to Heritage Bank, SSB ("Heritage Bank")
effective May 17, 2002.

"Safe Harbor" Statement

      In addition to historical information, forward-looking statements are
contained herein that are subject to risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that could cause future results to vary from current
expectations, include, but are not limited to, the impact of economic conditions
(both generally and more specifically in the markets in which the Company
operates), the impact of competition for the Company's customers from other
providers of financial services, the impact of government legislation and
regulation (which changes from time to time and over which the Company has no
control), and other risks detailed in this Annual Report on Form 10-KSB and in
the Company's other Securities and Exchange Commission filings. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
reflect management's analysis only as of the date hereof. The Company undertakes
no obligation to publicly revise these forward-looking statements, to reflect
events or circumstances that arise after the date hereof. Readers should
carefully review the risk factors described in other documents the Company files
from time to time with the Securities and Exchange Commission.

Exposure to Changes in Interest Rates

      The ability to maintain net interest income depends upon earning a higher
yield on assets than the rates paid on deposits and borrowings and sustaining
this positive interest rate spread during fluctuations in prevailing interest
rates. Interest rate sensitivity is a measure of the difference between amounts
of interest-earning assets and interest-bearing liabilities which either reprice
or mature within a given period of time. The difference, or the interest rate
repricing "gap," provides an indication of how an institution's interest rate
spread will be affected by changes in interest rates. A gap is considered
positive when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities, and is considered negative when the amount
of interest-rate sensitive liabilities exceeds the amount of interest-rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap within shorter maturities would adversely affect net interest
income, while a positive gap within shorter maturities would result in an
increase in net interest income. During a period of falling interest rates, a
negative gap within shorter maturities would result in an increase in net
interest income while a positive gap within shorter maturities would have the
opposite effect. As of December 31, 2003, the amount of the Company's
interest-earning assets which were estimated to mature or reprice within one
year exceeded the Company's interest-bearing liabilities with the same
characteristics by $7.583 million or 14.6% of the Company's total assets.


                                       29
<PAGE>

      Quantitative Analysis. The following table summarizes the anticipated
maturities or repricing of the Company's interest-earning assets and
interest-bearing liabilities as of December 31, 2003, based on the information
and assumptions set forth in the notes to the table.

<TABLE>
<CAPTION>
                                                                               More Than
                                       Within      Three to      More Than    Three Years
                                        Three       Twelve      One Year to     to Five      Over Five
                                       Months       Months      Three Years      Years         Years       Total
                                     -----------  -----------  -------------  ------------  -----------  ----------
                                                                 (Dollars In Thousands)

<S>     <C>                          <C>          <C>            <C>          <C>           <C>          <C>
Interest-earning assets:
  Loans (1) ..................       $  17,759    $   4,198      $  4,974     $    5,885    $   9,086    $ 41,902
  Investment securities(2)....             348          180             3             --           20         551
  Other(3)....................           5,433           --           335             --          189       5,957
                                     ---------    ---------      --------     ----------    ---------    --------
    Total interest-earning
      assets..................          23,540        4,378         5,312          5,885        9,295      48,410
                                     ---------    ---------      --------     ----------    ---------    --------

Interest-bearing liabilities:
  Certificates of deposit.....           7,162        8,744         7,990          1,576        3,649      29,121
  Other deposits(4)...........             170          509         1,159            971        3,971       6,780
  Borrowings..................              --        3,750           362             --           --       4,112
                                     ---------    ---------      --------     ----------    ---------    --------
    Total interest-bearing
      Liabilities.............           7,332       13,003         9,511          2,547        7,620      40,013
                                     ---------    ---------      --------     ----------    ---------    --------

Excess (deficiency) of
  interest-earning assets
  over interest-bearing
  liabilities.................          16,208      (8,625)        (4,199)         3,338        1,675       8,397
                                     ---------    ---------      --------     ----------    ---------    --------

Cumulative excess (deficiency)
  of interest-earning assets
  over interest-bearing
  liabilities.............           $  16,208    $   7,583      $  3,384     $    6,722    $   8,397    $  8,397
                                     =========    =========      ========     ==========    =========    ========

Cumulative excess (deficiency)
  of interest-earning assets
  over interest-bearing
  liabilities as a percentage
  of total assets.............            31.2%        14.6%          6.5%          13.0%       16.2%        16.2%
                                     =========    =========      ========     ==========    =========    ========
</TABLE>

----------

(1)   Fixed-rate loans are included in the periods in which they are scheduled
      to be repaid, based on scheduled amortization, adjusted to take into
      account estimated prepayments. Adjustable-rate loans are included in the
      periods in which interest rates are next scheduled to reset, adjusted to
      take into account estimated prepayments.

(2)   Reflects repricing, contractual maturity or anticipated call date.

(3)   Includes interest-bearing demand deposits and other interest-bearing
      deposits.

(4)   Adjusted to reflect a 10% annual decay rate on other deposits.


                                       30
<PAGE>

      Although interest rate sensitivity gap is a useful measurement and
contributes toward effective asset and liability management, it is difficult to
predict the effect of changing interest rates based solely on that measure. As a
result, management also regularly reviews interest rate risk by forecasting the
impact of alternative interest rate environments on net interest income and net
portfolio value ("NPV"), which is defined as the net present value of the
Company's existing assets, liabilities and off-balance sheet instruments, and
evaluating these impacts against the maximum potential changes in net interest
income and NPV. The following table presents the Company's NPV as of December
31, 2003.

<TABLE>
<CAPTION>
                                           Net Portfolio Value
--------------------------------------------------------------------------------------------------------
                                                                         As a Percentage of PV of Assets
    Change in                                                            -------------------------------
Interest Rates in
   Basis Points
  (Rate Shock in
    Rates)(1)         $ Amount           $ Change         % Change           NPV Ratio         Change
------------------   ----------         ----------       ----------          ---------        ---------
                                              (Dollars In Thousands)

<S>                     <C>               <C>              <C>                 <C>             <C>
       +300             $5,575            $(617)           (10.0)%             11.8%           (0.1)%
       +200              5,747             (445)            (7.2)              12.0              0.1
       +100              5,969             (223)            (3.6)              12.1              0.2
        --               6,192                --               --              11.9               --
       -100              6,397               205              3.3              11.6            (0.3)
       -200              6,426               234              3.8              11.3            (0.6)
       -300              6,372               180              2.9              11.1            (0.8)
</TABLE>

----------

(1)   Assumes an instantaneous uniform change in interest rates at all
      maturities.

      Qualitative Analysis. The ability to maintain a positive "spread" between
the interest earned on assets and the interest paid on deposits and borrowings
can be adversely affected when market rates of interest change. The Company's
actions with respect to interest rate risk and its asset/liability gap
management are taken under the guidance of the Asset/Liability Committee, which
presently consists of all members of the Company board. This committee meets
quarterly, or as frequently as necessary, to review the current composition of
assets and liabilities in light of the prevailing interest rate environment. The
Company's strategies to reduce the exposure of earnings to changes in interest
rates and manage the mismatch between asset and liability maturities are
described below.

         The Company attempts to reduce its potential exposure to interest rate
risk by:

      (1)   originating adjustable-rate loans;

      (2)   originating commercial business loans with maturities of five years
            or less;

      (3)   maintaining a portion of its investments and mortgage-backed
            securities with maturities or estimate average lives of less than
            five years;

      (4)   managing its deposits to establish stable deposit relationships;

      (5)   extending the terms of its Federal Home Loan Bank advances; and

      (6)   selling newly originated fixed rate residential mortgage loans with
            terms to maturity over five years.


                                       31
<PAGE>

Comparison of Financial Condition at December 31, 2003 and December 31, 2002

      Total assets increased approximately $4.3 million or 9.0% to $51.9 million
at December 31, 2003 compared to $47.6 million at December 31, 2002. This
increase in total assets was primarily due to an increase in cash and cash
equivalents of approximately $669,000 or 15.09% to $5.1 million at December 31,
2003 compared to $4.4 million at December 31, 2002, together with an increase in
net loans of approximately $3.5 million partially offset by decreases (due to
maturities) of $169,000 and $1.4 million in interest bearing deposits in other
banks and securities available for sale, respectively. The increase in cash and
cash equivalents was provided by deposit growth of approximately $5.4 million
partially offset by repayments of Federal Home Loan Bank advances of $1.3
million and volume demand within the loan portfolio. Loans, net allowance for
loan losses, increased $3.5 million or 9.1% to $41.5 million at December 31,
2003, as a result of increased loan demand, primarily with respect to commercial
real estate loans, commercial loans, and consumer loans. Commercial real estate
loans increased $3.4 million or 64.7% to $8.6 million at December 31, 2003
compared to $5.2 million at December 31, 2002. Commercial loans increased $1.4
million or 82.7% to $3.1 million at December 31, 2003 compared to $1.7 million
at December 31, 2002. Consumer loans increased $197,000 or 8.3% to $2.6 million
at December 31, 2003 compared to $2.4 million at December 31, 2002. This loan
growth was primarily attributable to increased marketing efforts within the
Company's lending area together with the additions of experienced lending
officers during 2002. The allowance for loan losses as a percentage of total
loans remained relatively consistent at 1.1% due to additional provisions of
$217,000 during 2003 together with net charge-offs of $185,000. The change in
loan mix due to the increase in commercial real estate, commercial and consumer
loans did not adversely affect the allowance for loan losses due to relatively
low and stable historical losses within these loan categories. Additionally,
construction loans, which represent 36.1% of Heritage Bank's gross loan
portfolio at December 31, 2003 are primarily for non-speculative, pre-sold,
one-to-four-family residences.

      Deposits increased $5.4 million or 15.8% to $39.5 million at December 31,
2003 compared to $34.1 million at December 31, 2002. The increases were spread
throughout Heritage Bank's deposit base, as demand accounts, money market
accounts and certificates of deposit increased $1.5 million, $1.5 million, and
$2.5 million or 44.9%, 58.5%, and 9.3%, respectively from 2002 to 2003. The
increase in deposit accounts is attributable to increased marketing efforts by
the Company together with accounts added which related to new loan customers.

      Total equity capital decreased approximately $353,000 or 4.5% to $7.6
million at December 31, 2003 compared to $7.9 million at December 31, 2002. The
decrease was primarily attributable to a consolidated net loss of $378,000 for
the year ended December 31, 2003. Total equity capital amounted to 14.6% of
total assets at December 31, 2003 compared to 16.6% at December 31, 2002.


                                       32
<PAGE>

      Average Balances, Net Interest Income and Yields Earned and Rates Paid.
The following tables present for the periods indicated the total dollar amount
of interest income from average interest-earning assets and the resultant
yields, as well as the total dollar amount of interest expense on average
interest-bearing liabilities and the resultant rates, and the net interest
margin. The tables do not reflect any effect of income taxes. All average
balances are based on average monthly balances during the periods. Heritage Bank
does not believe that the monthly averages differ significantly from what the
daily averages would be.

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                           -------------------------------    ------------------------------------
                                  At December 31, 2003                  2003                                2002
                                 ----------------------    -------------------------------    ------------------------------------
                                                                                  Average
                                                            Average                Yield/      Average                 Average
                                   Balance   Yield/Rate     Balance   Interest    Rate(1)      Balance     Interest  Yield/Rate(1)
                                   -------   ----------     -------   --------    -------      -------     --------  -------------

                                                                     (Dollars In Thousands)
<S>                                <C>          <C>        <C>        <C>            <C>      <C>          <C>           <C>
Interest-earning assets:
  Loans(2)..................       $41,902      7.76%      $ 41,570   $ 3,251        7.82%    $ 36,104     $ 2,957       8.19%
  Investment securities.....           551      9.78          1,126        54        4.80        2,261         109       4.82
  Interest-bearing deposits
at other banks(3)...........         5,957      1.58          5,984        94        1.57        4,473         109       2.44
                                   -------     -----       --------   -------     -------     --------     -------     ------
    Total interest-earning
assets......................        48,410      7.02         48,680     3,399        6.98       42,838       3,175       7.41
                                               -----                  -------     -------                  -------     ------
Non-interest-earning assets.         3,457                    2,287                              1,748
                                    ------                 --------                           --------
    Total assets............       $51,867                 $ 50,967                           $ 44,586
                                    ======                  =======                            =======

Interest-bearing
liabilities:
  Deposits:
    Demand..................       $ 1,268      0.24       $  1,222   $     3        0.25     $  1,162     $     6       0.52
    Money market............         3,991      0.55          3,049        22        0.72        2,582          25       0.97
    Savings.................         1,521      0.26          1,617         4        0.25        1,731          16       0.92
    Certificates of Deposit.        29,121      3.04         29,938       885        2.96       25,053         949       3.79
  Advances from Federal
Home Loan Bank..............         4,112      3.87          4,283       159        3.71        3,513         142       4.04
                                   -------     -----       --------   -------     -------     --------     -------     ------
  Total interest-bearing
liabilities.................        40,013      2.68         40,109     1,073        2.68       34,041       1,138       3.34
                                               -----                  -------     -------                  -------     ------
  Non-interest-bearing
liabilities.................         4,290                    4,664                              3,299
                                   -------                 --------                           --------
    Total liabilities.......        44,303                   44,773                             37,340
  Total equity capital(4)...         7,564                    6,194                              7,246
                                   -------                 --------                           --------
    Total liabilities and
equity capital..............       $51,867                 $ 50,967                           $ 44,586
                                   =======                 ========                           ========
  Net interest-earning
assets......................       $ 8,397                 $  8,571                           $  6,303
                                   =======                 ========                           ========
  Net interest income;
   interest rate spread(5)..                    4.34%                 $ 2,326        4.31%                 $ 2,037       4.07%
                                               =====                  =======     =======                   ======     ======
  Net interest margin(6)....                                                         4.78%                               4.76%
                                                                                  =======                              ======
  Interest-earning assets to
    interest-bearing
liabilities.................                                 121.37%                             117.3%
                                                           ========                           ========
</TABLE>

----------
(1)   Yields and rates have been annualized where appropriate.

(2)   Includes loans held for sale.

(3)   Includes interest-bearing demand deposits and other interest bearing
      deposits.

(4)   Includes retained earnings and accumulated other comprehensive income
      (loss).

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

(6)   Net interest margin is net interest income divided by average
      interest-earning assets.


                                       33
<PAGE>

      Rate/Volume Analysis. The following table describes the extent to which
changes in interest rates and changes in volume of interest-related assets and
liabilities have affected the Company's interest income and interest expense
during the periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior year rate), (ii)
changes in rate (change in rate multiplied by current year volume), and (iii)
total change in rate and volume. The combined effect of changes in both rate and
volume has been allocated proportionately to the change due to rate and the
change due to volume. In calculating this table, out of period items and
adjustments have been excluded.

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                 -----------------------------------------------
                                                                  2003 vs. 2002
                                                 -----------------------------------------------

                                                           Increase
                                                          (Decrease)
                                                            Due To                    Total
                                                   ------------------------          Increase
                                                      Rate          Volume          (Decrease)
                                                   ---------       --------         ---------
                                                                 (In Thousands)

<S>                                                  <C>             <C>             <C>
Interest-earning assets:
  Loans.....................................         $(154)          $ 448           $ 294
  Investment securities.....................            (0)             55            (55)
  Interest-bearing deposits at other banks..           (52)             37            (15)
                                                     -----           -----           -----
    Total interest-earning assets...........          (206)            430             224
                                                     -----           -----           -----

Interest-bearing liabilities:
  Deposits:
    Demand..................................            (3)              0             (3)
    Money market............................            (8)              5             (3)
    Savings.................................           (11)            (1)            (12)
    Certificates of Deposit.................          (249)            185            (64)
  Advances from Federal Home Loan Bank......           (14)             31              17
                                                     -----           -----           -----
    Total interest-bearing liabilities......          (285)            220             (65)
                                                     -----           -----           -----
  Increase (decrease) in net interest income         $  79           $ 210           $ 289
                                                     =====           =====           =====
</TABLE>

Comparison of Results of Operations for the Years Ended December 31, 2003 and
2002.

      General. Net loss and net income during the years ended December 31, 2003
and 2002 amounted to approximately $378,000 and $122,000, respectively. The
decrease in net income of $500,000 from 2002 to 2003 was primarily attributable
to a significant increase in noninterest expense and a less significant increase
in the provision for loan loss, partially offset by increases in net interest
income and noninterest income. These and other significant fluctuations in the
Company's results of operations are discussed on the following pages.

      Net Interest Income. Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on
interest-earning assets and the rates paid on interest-bearing liabilities) and
the relative amounts of interest-earning assets and interest-bearing
liabilities. Net interest income increased $290,000 or 14.2% to $2.3 million for
the year ended December 31, 2003 compared to $2.0 million for the year ended
December 31, 2002. This increase was primarily due to an increase in the average
interest rate spread to 4.31% for the year ended December 31, 2003 compared to
4.07% for the year ended December 31, 2002. For the same time periods, the
Company's net interest margin increased from 4.76% to 4.78%.

      Interest Income. Interest income increased $224,000 or 7.1% to $3.4
million for the year ended December 31, 2003 compared to $3.2 million for the
year ended December 31, 2002. This increase was primarily attributable to an
increase in the average balance on loans receivable and interest bearing
deposits in other banks partially offset by a decrease in the average balances
of investment securities and by a decrease in the yield on all interest earning
assets. The average balance of loans receivable increased from $36.1 million for
the year ended December 31, 2002 to $41.6 million for the year ended December
31, 2003, an increase of $5.5 million, or 15.1%. The increase was attributable
to aggressive but sound marketing strategies within the Company's lending area
together with an increase in experienced lending


                                       34
<PAGE>

personnel during the latter part of 2002. The average balances of investment
securities decreased $1.1 million or 50.2%, while interest bearing deposits at
other banks increased $1.5 million or 33.8% in 2003 compared to 2002. The
decreases in investment securities is primarily attributable to management's
philosophy to use maturities of such investments to fund higher yield loan
growth rather than replenish such investments. The increase in interest bearing
deposits in other banks is primarily attributable to excess funds made available
by an increase in deposits. The average yield on earning assets decreased from
7.4% in 2002 to 7.0% in 2003, as interest rates continued their declining trend.

      Interest Expense. Interest expense decreased $66,000 or 5.8% to $1.07
million for the year ended December 31, 2003 compared to $1.1 million for the
year ended December 31, 2002. While average balances of interest bearing
deposits and advances from the Federal Home Loan Bank increased $6.1 million or
17.8% from $34.0 million at December 31, 2002 to $40.1 million at December 31,
2003, the average yield decreased from 3.34% to 2.68% over the same period. The
most substantial rate declines were in savings accounts and certificates of
deposit. The yield on savings accounts declined from 0.92% at December 31, 2002
to 0.25% at December 31, 2003, while the yield on certificates of deposits
(representing 72.8% of total interest bearing liabilities at December 31, 2003)
declined from 3.79% to 2.96% over the similar period. Such rate declines are
consistent with economic trends and competition within the Bank's market area.

      Comparison of the Total Allowance and Related Provision for Loan Losses.
At December 31, 2003, the allowance for loan losses was $448,000, or 1.1% of the
total loan portfolio, compared to $416,000, or 1.1% at December 31, 2002.

      Heritage Bank experienced an overall increase in funded loans net of
allowance for loan losses, from December 31, 2002 to December 31, 2003 of $3.5
million. Changes in funded loan mix were as follows: One-to-four family real
estate loans increased from $11.9 million to $12.1 million, and commercial real
estate loans increased from $5.2 million to $8.6 million, construction loans
decreased from $17.0 million to $15.1 million and commercial loans increased
from $1.7 million to $3.1 million. Management reviewed the impact on the change
in loan mix in determining the adequacy of the allowance for loan losses, and
has made adjustments to maintain the allowance at a level equivalent to or
higher than our peers. Sixty-seven percent of the Bank's construction loans are
non-speculative, pre-sold or individually owned one-to-four family residences.
Additionally, consumer loans increased from $2.4 million to $2.6 million.
Heritage continually monitors the effects of the general economy and real estate
market on the Bank's loan portfolio.

      Heritage Bank's non-performing loans and troubled debt restructurings as a
percent of total gross loans increased from 2.4% at December 31, 2002 to 4.8% at
December 31, 2003. Net charge-offs for the year were $185,000 compared to
$64,000 for the year ended December 31, 2002. Of the $185,000 net charge-offs
incurred in 2003, $173,000 was related to fair value adjustments with respect to
foreclosures on three construction loans and subsequent transfers to other real
estate.

      During the year 2002, management enhanced the methodology through which
the adequacy of the allowance for loan losses is calculated and has done so on a
consistent basis since this date. Beginning in August 2002, management began
calculating specific reserves for each classified loan by deducting estimated
selling costs from the fair market value of the collateral securing each
classified loan. Additionally, general allocations were made for the remainder
of the portfolio (non-classified and performing loans) using percentages derived
in consultation with our auditors and comparable to or greater than those used
by our peers.

      Heritage Bank's ratio of net charge-offs to average loans outstanding was
..45% for the year ended December 31, 2003 compared to .18% for the year ended
December 31, 2002.

      For the years ended December 31, 2003 and 2002, the provision for losses
on loans amounted to $217,000 and $160,000, respectively. The increase in the
provision for the year ended December 31, 2003 compared to the same period in
2002 was based on internal methodologies and assumptions relative to continued
overall loan growth. While the Company cannot assure that future charge-offs
and/or


                                       35
<PAGE>

additional provisions will not be necessary, the Company believes that, as of
December 31, 2003, its allowance for loan losses was adequate.

      Noninterest Income. Noninterest income increased $762,000 from $348,000
for the year ended December 31, 2002 to $1.1 million for the year ended December
31, 2003. Fee income and service charges increased $337,000 from 2002 to 2003
primarily as a result of yield spread premiums and origination fees generated on
brokered loans. Such income amounted to $3,000 in 2002 compared to $306,000 in
2003. The increase is attributable to volume and market awareness, as the
Company's two loan production offices were opened for the full year ended
December 31, 2003 versus approximately three months during 2002. Gain on sales
of real estate increased $458,000 from 2002 to 2003 primarily as a result of
sales of residential lots by Heritage's subsidiary. The majority of income
recognized on residential lot sales for the year ended December 31, 2003 were
the result of two separate transactions with the same developer which aggregated
$662,000.

      Noninterest Expense. Noninterest expense increased $1.7 million or 84.8%
to $3.7 million for the year ended December 31, 2003 compared to $2.0 million
for the same period in 2002. This increase was primarily due to an increase of
$831,000 or 84.2% in compensation and benefits, a $93,000 increase in occupancy
expense, and a $784,000 increase in other miscellaneous expense. Compensation
expense increased due to the accrual of $408,000 related to estimated payments
to be made under certain change of control agreements executed by Heritage
and its key officers and to the addition of three experienced lending officers
during the latter part of 2002, as well as overall staff additions. The increase
in occupancy expense was due to the expansion of facilities, including the
addition of two loan production offices in August and September 2002. The
increase in other miscellaneous expense was primarily due to a $325,000 increase
in legal and professional fees, a $285,000 increase in other real estate
expenses and a $58,000 increase in advertising expense. The increase in legal
and professional fees was primarily attributable to costs associated with the
Company's continued defense of certain outstanding litigation which has been
resolved, while the increase in other real estate expenses is attributable to an
increase in the number of properties and write-downs of such properties of
approximately $186,000, and the increase in advertising expense was due to
marketing efforts employed by the Company to stimulate loan growth together with
the addition of two loan production offices. Also included in miscellaneous
expense is the accrual of fees associated with the potential sale of Heritage in
the amount of $125,000.

      Income Tax Benefit. During 2003, the Company recognized $172,000 of income
tax benefit which represents the effective tax rate multiplied by pretax loss,
net of certain excludable items. During the year ended December 31, 2002, the
Company recognized $63,000 of income tax expense representing the effective tax
rate multiplied by pretax earnings.

Liquidity and Capital Resources

      The State of Texas regulations require Heritage Bank to maintain liquidity
in an amount not less than 10% of an amount equal to its average daily deposits
for the most recently completed calendar quarter in cash and readily marketable
investments. For the quarter ended December 31, 2003 Heritage Bank's liquidity
was $6.6 million with a liquidity ratio of 15.9%. Heritage Bank met the
requirement in the prior three quarters.

      At December 31, 2003, the Company had outstanding commitments to extend
credit in regard primarily to undisbursed construction loan proceeds of $5.3
million. In addition, as of December 31, 2003, the total amount of certificates
of deposit which were scheduled to mature in the following 12 months was $15.9
million. The Company believes that it has adequate resources to fund all of its
commitments and that it can adjust the rate on certificates of deposit to retain
deposits in changing interest rate environments. If the Company requires funds
beyond its internal funding capabilities, advances from the Federal Home Loan
Bank of Dallas in the amount of $7.0 million are available at December 31, 2003
as an additional source of funds. Additionally, the Company had lines of credit
available from two unrelated commercial banks in the aggregate amount of $8.0
million.

Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations

      The Company's future contractual cash payments, by year are as follows:

<TABLE>
<CAPTION>
                                         Less than        1-3          3-5          Over
                                          One Year       Years        Years       5 Years       Total
                                          --------       -----        -----       -------       -----
                                                        (In Thousands)
<S>                                        <C>          <C>          <C>          <C>          <C>
      Certificates and other time
           deposits .................      $15,906      $ 7,989      $ 5,226      $  --        $29,121
      Advances from Federal Home Loan
           Bank .....................        3,750          362         --           --          4,112

      ESOP obligation ...............           32           72           82          144          330

           Total ....................      $19,688      $ 8,423      $ 5,308      $ 1,441      $33,563
                                           =======      =======      =======      =======      =======
</TABLE>


      The amount reflected above for advances from Federal Home Loan Bank
represents the Company's contractual obligation. The amount reflected above for
the ESOP obligation represents anticipated annual payments to fund the ESOP.
Refer to Notes 11 and 16 in the Consolidated Financial Statements for further
information.

      The Company's potential obligations associated with commitments to extend
credit at December 31, 2003 are summarized below. Since these potential
obligations may expire unused or not fully used, the amounts shown do not
necessarily reflect the actual future cash funding requirements.

<TABLE>
<CAPTION>
                                         Less than        1-3          3-5         Over
                                          One Year       Years        Years       5 Years       Total
                                          --------       -----        -----       -------       -----

                                                                  (In Thousands)

<S>                                         <C>          <C>          <C>          <C>          <C>
Commitments to extend credit .              $5,183       $   17       $   48       $   48       $5,296
                                            ======       ======       ======       ======       ======
</TABLE>

      See Note 15 to the Consolidated Financial Statements for additional
discussion of financial instruments with off-balance sheet risk, including a
discussion of the nature, business purpose and significance of off-balance sheet
arrangements.





                                       36
<PAGE>

      Heritage Bank is required to maintain regulatory capital sufficient to
meet Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios of
at least 4.0%, 4.0% and 8.0%, respectively. At December 31, 2003, Heritage Bank
exceeded each of its capital requirements with ratios of 11.9%, 15.5% and 16.6%,
respectively.

Impact of Inflation and Changing Prices

      The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles, which
generally require the measurement of financial position and operating results in
terms of historical dollars, without considering changes in relative purchasing
power over time due to inflation. Unlike most industrial companies, virtually
all of the Company's assets and liabilities are monetary in nature. As a result,
interest rates generally have a more significant impact on the Company's
performance than does the effect of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services, since such prices are affected by inflation to a larger extent than
interest rates.

Recent Accounting Standards

      In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting
for Stock-Based Compensation-Transition and Disclosure." FAS 148 amends FASB
Statement No. 123, "Accounting for Stock-Based Compensation" through provision
of alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. Additionally,
it requires more prominent disclosure about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The provisions of FAS 148 are generally effective for fiscal years beginning
after December 15, 2003.

      In April 2003, the FASB issued Statement No. 149 (FAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under FAS Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of FAS 149 are generally effective for contracts
entered into or modified after June 30, 2003.

      In May 2003, the FASB issued Statement No. 150 (FAS 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which such instruments were previously
classified as equity. The provisions of FAS 150 became generally effective June
1, 2003.

      The Company's policy is to adopt recently issued accounting pronouncements
as of their required effective date. With respect to adoption of FAS 149 and FAS
150 during 2003, there was no significant impact on the Company's consolidated
financial statements. With respect to the planned adoption of FAS 148 during
2004, the Company does not believe that the effects of adoption will have a
material impact on its consolidated financial statements.


                                       37
<PAGE>

Item 7.     Financial Statements.


             Table of Contents to Consolidated Financial Statements


<TABLE>
<CAPTION>
                                                                                                            Page
                                                                                                            ----
<S>                                                                                                           <C>
Independent Auditors' Report of Payne Falkner Smith & Jones, P. C.............................................39

Consolidated Balance Sheet as of December 31, 2003 and 2002...................................................40

Consolidated Statement of Operations for the Years Ended December 31, 2003 and 2002...........................41

Consolidated Statement of Changes in Stockholders' Equity for the Years Ended
     December 31, 2003 and 2002...............................................................................42

Consolidated Statement of Cash Flows for the Years Ended December 31, 2003
     and 2002.................................................................................................43

Notes to Consolidated Financial Statements....................................................................44
</TABLE>


                                       38
<PAGE>

                          Independent Auditors' Report



The Board of Directors
Heritage Bancshares, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheet of Heritage
Bancshares, Inc. and Subsidiary (Company) as of December 31, 2003 and 2002 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the years then ended. 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 Heritage Bancshares,
Inc. and Subsidiary as of December 31, 2003 and 2002, the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.


Dallas, Texas

March 15, 2004


                                       39
<PAGE>

                      HERITAGE BANCSHARES, INC. AND SUMMARY

                           Consolidated Balance Sheet

                           December 31, 2003 and 2002

                                 (In Thousands)


                                                        2003         2002
                                                      --------    --------
     ASSETS

Cash and due from banks                               $  4,581    $  3,872
Federal funds sold                                         560         600
                                                      --------    --------
     Total cash and cash equivalents                     5,141       4,472
Interest bearing deposits in other banks                   624         793
Securities available for sale                              551       1,921
Loans, net                                              41,454      37,990
Accrued interest receivable                                214         240
Bank premises and equipment, net                         1,629         693
Other assets                                             2,254       1,491
                                                      --------    --------

     Total assets                                     $ 51,867    $ 47,600
                                                      ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                              $ 39,532    $ 34,134
Advances from Federal Home Loan Bank                     4,112       5,400
Other liabilities                                          659         149
                                                      --------    --------
     Total liabilities                                  44,303      39,683

Commitments and contingencies                               --          --

Stockholders' equity:
    Preferred stock, $.01 par value, 200,000 shares
     authorized, no shares issued or outstanding            --          --
    Common stock, $.01 par value, 1,800,000 shares
     authorized, 491,468 shares issued and 473,248
     shares outstanding                                      5           5
    Additional paid-in capital                           4,471       4,471
    Retained earnings                                    3,639       4,017
    Unearned ESOP shares                                  (330)       (361)
    Accumulated other comprehensive
     income, net of tax                                  6          12
                                                      --------    --------
                                                         7,791       8,144
    Treasury stock at cost                               (227)       (227)
                                                      --------    --------
     Total stockholders' equity                          7,564       7,917
                                                      --------    --------

     Total liabilities and stockholders' equity       $ 51,867    $ 47,600
                                                      ========    ========


          See accompanying notes to consolidated financial statements.

                                       40
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                      Consolidated Statement of Operations

                 For the Years Ended December 31, 2003 and 2002

                                 (In Thousands)


                                                            2003      2002
                                                          -------    ------
    Interest income:
         Loans                                            $ 3,251    $2,957
         Investment securities                                 54       109
         Other                                                 94       109
                                                          -------    ------

                 Total interest income                      3,399     3,175
                                                          -------    ------

    Interest expense:
         Deposits                                             914       977
         Advances from Federal Home Loan Bank                 158       161
                                                          -------    ------

                  Total interest expense                    1,072     1,138
                                                          -------    ------

    Net interest income                                     2,327     2,037

    Provision for loan losses                                 217       160
                                                          -------    ------

    Net interest income after provision for loan losses     2,110     1,877
                                                          -------    ------

    Noninterest income:
         Fee income and service charges                       428        91
         Net gain on redemption of interest bearing
             deposits in other banks                           --         6
         Net gain on sales of real estate                     640       182
         Other                                                 42        69
                                                          -------    ------

                  Total noninterest income                  1,110       348
                                                          -------    ------

    Noninterest expense:
         Compensation and benefits                          1,818       987
         Occupancy                                            401       308
         Data processing                                      146       124
         Other                                              1,405       621
                                                          -------    ------

                  Total noninterest expense                 3,770     2,040
                                                          -------    ------

    (Loss) income before income taxes                        (550)      185

    Income tax (benefit) expense                             (172)       63
                                                          -------    ------

    Net (loss) income                                     $  (378)   $  122
                                                          =======    ======

    (Loss) earnings per share - basic and diluted           (0.80)     0.29
                                                          =======    ======


          See accompanying notes to consolidated financial statements.

                                       41
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

            Consolidated Statement of Changes in Stockholders' Equity

                 For the Years Ended December 31, 2003 and 2002

                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                                                 Accumulated
                                                                                                    Other
                                                          Additional                            Comprehensive
                                     Preferred   Common    Paid-in    Retained     Unearned         Income
                                       Stock      Stock     Capital   Earnings   ESOP Shares        (Loss)
                                     ---------   -------   --------   --------   -----------     ------------
<S>                                   <C>        <C>       <C>         <C>        <C>              <C>
Balance January 1, 2002               $     --   $    --   $     --    $ 3,895    $      --        $      36

Comprehensive income:
    Net income                              --        --         --        122           --               --
    Unrealized losses arising during
        the period (net of tax)             --        --         --         --           --              (24)

          Total comprehensive income

    Sale of common stock                    --         5      4,471         --         (393)              --
    Repayment of ESOP note payable          --        --         --         --           32               --
    Purchase of treasury stock              --        --         --         --           --               --

                                      --------   -------   --------   --------    ---------        ---------
Balance December 31, 2002                   --         5      4,471      4,017         (361)              12

Comprehensive loss:
    Net loss                                --        --         --       (378)          --               --
    Unrealized losses arising during
        the period (net of tax)             --        --         --         --           --               (6)


          Total comprehensive loss


    Repayment of ESOP note payable          --        --         --         --           31               --

                                      --------   -------   --------   --------    ---------        ---------
Balance December 31, 2003                  $ -       $ 5    $ 4,471    $ 3,639       $ (330)        $      6
                                      ========   =======   ========   ========    =========        =========

<CAPTION>
                                             Comprehensive
                                                Income             Treasury
                                                (Loss)               Stock             Total
                                             ------------          --------          --------
<S>                                            <C>                 <C>                 <C>
Balance January 1, 2002                                            $     --            $3,931

Comprehensive income:
    Net income                                 $      122                --               122
    Unrealized losses arising during
        the period (net of tax)                       (24)               --               (24)
                                              -----------
          Total comprehensive income           $       98
                                               ==========

    Sale of common stock                                                 --             4,083
    Repayment of ESOP note payable                                       --                32
    Purchase of treasury stock                                         (227)             (227)
                                                                   ---------         ---------
Balance December 31, 2002                                              (227)            7,917

Comprehensive loss:
    Net loss                                       $ (378)               --              (378)
    Unrealized losses arising during
        the period (net of tax)                        (6)               --                (6)
                                             -------------
          Total comprehensive loss                 $ (384)
                                              ============

    Repayment of ESOP note payable                                       --                31

                                                                   ---------         ---------
Balance December 31, 2003                                          $   (227)         $  7,564
                                                                   =========         =========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       42
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                      Consolidated Statement of Cash Flows

                 For the Years Ended December 31, 2003 and 2002

                                 (In Thousands)

<TABLE>
<CAPTION>
                                                                        2003        2002
                                                                      ---------   -------
<S>                                                                   <C>         <C>
Cash flows from operating activities:
     Net (loss) income                                                $   (378)   $   122
        Adjustments to reconcile net (loss) income to
           net cash provided by operating activities:
              Depreciation                                                 156        126
              Provision for loan losses                                    217        160
              Deferred tax (benefit) expense                              (172)        63
              Write-downs of other real estate                             186         --
              Net gain on sales of real estate                            (640)      (182)
              Other gains                                                   --         (6)
              Decrease in accrued interest and other assets                559        208
              Increase in accrued interest and other liabilities           513         71
                                                                      ---------   -------

                 Net cash provided by operating activities                 441        562
                                                                      ---------   -------

Cash flows from investing activities:
     Net sales, calls and paydowns of securities available for sale     13,358      1,566
     Purchases of securities available for sale                        (11,997)    (1,600)
     Decrease in interest bearing deposits in other banks                  169        364
     Net loans originated                                               (4,808)    (7,083)
     Proceeds from sales of other real estate                            1,115         --
     Improvements to other real estate                                    (658)        --
     Net additions of property and equipment                            (1,092)      (215)
                                                                      ---------   -------

                 Net cash used by investing activities                  (3,913)    (6,968)
                                                                      ---------   -------

Cash flows from financing activities:
     Net increase in demand, money market and savings accounts           2,923      1,167
     Net proceeds from certificates of deposits                          2,475        285
     Net (decrease) increase in Advances from
     Federal Home Loan Bank                                             (1,288)     3,460
     Net proceeds from sale of common stock                                 --      4,476
     Purchase of treasury stock                                             --       (227)
     Net decrease (increase) in unearned ESOP shares                        31       (361)
                                                                      ---------   -------

                 Net cash provided by financing activities               4,141      8,800
                                                                      ---------   -------

Net increase in cash and cash equivalents                                  669      2,394

Cash and cash equivalents at beginning of year                           4,472      2,078
                                                                      ---------   -------

Cash and cash equivalents at end of year                              $  5,141    $ 4,472
                                                                      =========   =======
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       43
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2003 and 2002


1.    Summary of Significant Accounting Policies

The accounting and reporting policies of Heritage Bancshares, Inc. and
Subsidiary (together referred to as the Company) conform to generally accepted
accounting principles and to practices generally followed within the Banking
industry. The following is a description of the more significant of these
policies.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of
Heritage Bancshares, Inc. (Heritage) and its wholly-owned subsidiary, Heritage
Bank, SSB (Bank) and the Bank's wholly-owned subsidiary, TFS Investment
Corporation (TFS).

The Bank was established in 1922 as Terrell Federal Building and Loan
Association, and in the 1930's changed its name to Terrell Federal Savings and
Loan Association. In October 1999, Terrell Federal Savings and Loan Association
converted from a federally chartered savings and loan to a state chartered
mutual savings bank and changed its name to Heritage Savings Bank, SSB. The Bank
went through a more recent name change to Heritage Bank, SSB effective May 2002.
The Bank's primary source of revenue is interest on loans and mortgage-backed
and related securities. The Bank is subject to competition from other financial
institutions. The Bank is also subject to the regulations of certain federal and
state agencies and undergoes periodic examinations by those regulatory
authorities.

In July 2001, the Board of Directors of the Bank adopted a Plan of Conversion,
subject to regulatory approval and approval by the members of the Bank, to
convert from a state chartered mutual savings bank to a state chartered stock
savings bank with the concurrent issuance of its capital stock to a holding
company. In September 2001, the holding company, Heritage Bancshares, Inc. was
formed. The conversion was to be accomplished through the amendment of the
Bank's state charter and the sale of Heritage's common stock in an amount equal
to the consolidated pro forma market value of Heritage after giving effect to
the conversion.

In January 2002, the Bank engaged in an offering of Heritage's stock with
priority given first to the Bank's eligible account holders, then to Heritage's'
Employee Stock Ownership Plan (formed in February 2002), then to other members
of the Bank. In February 2002, the offering was concluded with 491,468 shares
sold, proceeds received of approximately $4,915,000 and costs incurred of
approximately $439,000.

With the consummation of the conversion, Heritage became the holding company
of the Bank. Heritage had no results of operations prior to February 2002.
Accordingly, all financial information presented prior to February 2002, will
include only the Bank and its wholly owned subsidiary, TFS.


                                       44
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

Use of Estimates

The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues for the period. Actual results could differ
significantly 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 and
valuation of other real estate owned. While management uses available
information to recognize losses on loans and other real estate owned, future
provisions may be necessary based on changes in local economic conditions. In
addition, banking regulators, as an integral part of their examination process,
periodically review the Company's allowance for loan and other real estate
losses. They may require the Company to record additional provisions for losses
based on their judgment about information available to them at the time of their
examination.

A significant portion of the Company's loans are secured by real estate and
related assets located in local markets. Accordingly, the ultimate
collectibility of this portion of the Company's loan portfolio is susceptible to
changes in local market conditions.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand, federal funds sold, and funds
due from banks. For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments with original maturities of three
months or less to be cash equivalents.

Investment Securities

Trading Securities

Securities that are held for short-term resale are classified as trading account
securities and recorded at their fair values. Realized and unrealized gains and
losses on trading account securities are included in other income.



                                       45
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

Securities Held to Maturity

Government, Federal agency, and corporate debt securities that management has
the positive intent and ability to hold to maturity are reported at cost,
adjusted for amortization of premiums and accretion of discounts that are
recognized in interest income using the interest method over the period to
maturity. Mortgage-backed securities represent participating interests in pools
of long-term first mortgage loans originated and serviced by issuers of the
securities. Mortgage-backed securities are carried at unpaid principal balances,
adjusted for unamortized premiums and unearned discounts. Premiums and discounts
are amortized using the interest method over the remaining period to contractual
maturity, adjusted for anticipated prepayments.

Securities Available for Sale

Available for sale securities consist of investment securities not classified as
trading securities nor as held to maturity securities. Unrealized holding gains
and losses, net of tax, on available for sale securities are included in other
comprehensive income. Realized gains (losses) on available for sale securities
are included in other income (expense) and, when applicable, are reported as a
reclassification adjustment, net of tax, in other comprehensive income. Gains
and losses on the sale of available for sale securities are determined using the
specific identification method. The amortization of premiums and the accretion
of discounts are recognized in interest income using the interest method over
the period to maturity.

Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.

Loans Held for Sale

Loans originated 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 and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold for the
future or until maturity or pay-off are reported at their outstanding principal
balance adjusted for any charge-offs, the allowance for loan losses, and any
deferred fees or costs on originated loans and unamortized premiums or discounts
on purchased loans.

Impaired loans are accounted for at the net present value of expected future
cash flows, discounted at the loan's effective interest rate, the observable
market price of the loan or at the fair value of the collateral if the loan is
collateral dependent.


                                       46
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

The accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.

The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on the Company's past loan loss experience,
known and inherent risks in the portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral, and current economic conditions.

Fees and Costs Associated with Originating Loans

Loan origination fees, net of certain direct origination costs, are recognized
as an adjustment of the related loan yield using the interest method.

Bank Premises and Equipment

Bank premises, equipment and leasehold improvements are stated at cost, less
accumulated depreciation and amortization using the straight-line method. The
costs of leasehold improvements are amortized over the shorter of their
estimated useful lives of 3 to 10 years or the lease term. The costs of
buildings and furniture, fixtures and equipment are depreciated over their
estimated useful lives as follows:

          Building                                    30 years
          Furniture, fixtures and equipment           3-10 years

Other Real Estate Owned

Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at the lower of the Company's cost of acquisition or the
asset's fair market value that becomes the property's new basis. Costs relating
to development and improvement of property are capitalized, whereas costs
relating to holding property are expensed. The portion of interest costs
relating to development of real estate is capitalized subject to management's
evaluation of its recoverability.

Valuations are periodically performed by management, and a specific allowance
for losses is established, if necessary, by means of a charge to operations if
the carrying value of the property exceeds the fair value less estimated costs
to sell.


                                       47
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

Earnings Per Share

Earnings per share is computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," which requires
presentation of basic and fully diluted earnings per share (EPS) for entities
with complex capital structures. Basic EPS is based on net income divided by the
weighted-average number of shares outstanding during the period. Diluted EPS
includes the dilutive effect of stock options granted and convertible debentures
issued using the treasury stock method, and if-converted method, respectively.
The Company has no potentially dilutive warrants, options or debentures and,
therefore, there is no dilutive effect on EPS for all years presented.

Income Taxes

Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets and
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. Valuation allowances are established when necessary
to reduce deferred tax assets to the amount expected to be realized.

Financial Instruments

The Company has no derivative financial instruments at December 31, 2003 and
2002, respectively.

In the ordinary course of business the Company has entered into certain
off-balance sheet financial instruments consisting of commitments to extend
credit. Such financial instruments are recorded in the financial statements when
they are funded or related fees are incurred or received.

Treasury Stock

In July 2002 and November 2002, the Company repurchased an aggregate 16,000
shares and 2,220 shares, respectively, of its outstanding common stock at a
purchase price of approximately $199,000 and $28,000, respectively. The average
cost per share was $12.46. The Company has chosen to account for its acquisition
of treasury stock under the cost method.

Fair Values of Financial Instruments

The following methods and assumptions were used by the Company in estimating
fair values of financial instruments as disclosed herein:

Cash and short term instruments

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


                                       48
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

Available for sale securities

Fair values for securities excluding restricted equity securities, are based on
quoted market prices. The carrying values of restricted equity securities
approximate their fair value.

Loans

For variable-rate loans that reprice frequently and have no significant changes
in credit risk, fair values are based on carrying values. Fair values for
certain mortgage loans (for example, one-to-four family residential) and other
consumer loans are based on quoted market prices of similar loans sold in
conjunction with securitization transactions, adjusted for differences in loan
characteristics. Fair values for commercial real estate and commercial loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted cash flow
analyses or underlying collateral values, where applicable.

Deposits

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

Advances from Federal Home Loan Bank

Fair values for the Advances from Federal Home Loan Bank are based on rates
currently charged to enter into similar agreements taking into account the
remaining term of the agreements.

Accrued interest

The carrying amounts of accrued interest approximate their fair values.

Off-balance sheet instruments

Fair values for off-balance sheet lending commitments are based on fees
currently charged to enter into similar agreements taking into account the
remaining terms of the agreements and the counterparties' credit standings.

Reclassification

Certain amounts previously reported have been reclassified to conform to the
current format.


                                       49
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

2.    Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS No. 148 (SFAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS 148 amends SFAS
 No. 123, "Accounting for Stock-Based Compensation" through provision
of alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. Additionally,
it requires more prominent disclosure about the method of accounting for
stock-based compensation and the effect of the method used on reported results.
The provisions of SFAS 148 are generally effective for fiscal years beginning
after December 15, 2003.

In April 2003, the FASB issued SFAS No. 149 (SFAS 149), "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of SFAS 149 are generally effective for contracts
entered into or modified after June 30, 2003.

In May 2003, the FASB issued SFAS No. 150 (SFAS 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability, many of which such instruments were previously
classified as equity. The provisions of SFAS 150 became generally effective June
1, 2003.

The Company's policy is to adopt recently issued accounting pronouncements as of
their required effective date. With respect to adoption of SFAS 149 and SFAS 150
during 2003, there was no significant impact on the Company's consolidated
financial statements. With respect to planned adoption of SFAS 148 during 2004,
the Company does not believe that the effects of adoption will have a material
impact on its consolidated financial statements.

3.    Proposed Sale of Company Stock

Effective January 14, 2004, Heritage executed a definitive Agreement and Plan
of Merger (Merger Agreement) to sell 100% of its issued and outstanding common
stock to an unrelated investor, subject to the approval of Heritage's
stockholders. The Merger Agreement provides that at the effective time of the
Merger, each share of Heritage's common stock will be converted into the right
to receive cash in the amount of approximately $26.25. Additionally, the Merger
Agreement provides certain conditions that could reduce the stated price by as
much as $0.42 per share.


                                       50
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

4. Statement of Cash Flows

The Company has chosen to report on a net basis its cash receipts and cash
payments for time deposits accepted and repayments of those deposits, loans made
to members and principal collections on those loans and interest bearing
deposits in other financial institutions.

The Company uses the indirect method to present cash flows from operating
activities. Supplemental cash flow information at December 31, 2003 and 2002 is
presented as follows (in thousands):

                                                         2003       2002
                                                       -------    -------
      Cash transactions:
           Interest expense paid                       $ 1,082    $ 1,149
                                                       =======    =======

           Interest income received                    $ 3,425    $ 3,204
                                                       =======    =======

           Federal income taxes paid                   $    --    $    --
                                                       =======    =======

      Noncash transactions:
           Net unrealized depreciation on
                securities available for sale          $    (6)   $   (24)
                                                       =======    =======

           Net additions to other real estate owned    $ 1,127    $   602
                                                       =======    =======

5. Earnings Per Share

For 2002, earnings per share is based upon the weighted average shares
outstanding and results of operations after the conversion described in Note 1.
The computation of (loss) earnings per share for the years ended December 31,
2003 and 2002 is as follows (in thousands, except share amounts):

                                                       2003         2002
                                                     --------     --------

      Net (loss) income                              $   (378)    $    126
                                                     ========     ========
      Average common shares outstanding               473,248      414,501
                                                     ========     ========
      Basic and diluted (loss) earnings per share    $  (0.80)    $   0.30
                                                     ========     ========

The computation of earnings per share, assuming the offering of Heritage's
stock had been effective January 1, 2002 is as follows (in thousands, except
share amounts):

      Net income                                                  $    122
                                                                  ========
      Average common shares outstanding                            484,518
                                                                  ========
      Basic and diluted earnings per share                        $   0.25
                                                                  ========


                                       51
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

6. Debt and Equity Securities

Debt and equity securities have been classified in the consolidated balance
sheet according to management's intent. The carrying amount of securities and
their approximate fair values at December 31, 2003 and 2002 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                         Gross      Gross
                                           Amortized  Unrealized  Unrealized     Fair
                                             Cost        Gains      Losses       Value
                                             ----        -----      ------       -----
<S>                                         <C>         <C>         <C>         <C>
Securities Available for Sale

    December 31, 2003:
    Mortgage-backed securities              $  542      $    9      $   --      $  551
                                            ------      ------      ------      ------

                                            $  542      $    9      $   --      $  551
                                            ======      ======      ======      ======

    December 31, 2002:
    U.S. Government Agency obligations      $1,100      $   --      $   --      $1,100
    Mortgage-backed securities                 803          18          --         821
                                            ------      ------      ------      ------

                                            $1,903      $   18      $   --      $1,921
                                            ======      ======      ======      ======
</TABLE>

Proceeds from the sales of securities classified as available for sale were
approximately $2,000,000 for the year ended December 31, 2003. There were no
significant gross gains or gross losses realized on those sales during 2003.
There were no sales of securities for the year ended December 31, 2002.

Investment securities with recorded values of approximately $599,000 were
pledged as collateral for purposes required or permitted by law at December 31,
2002. There were no investment securities pledged at December 31, 2003.


                                       52
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

The amortized cost and estimated market value of debt and equity securities at
December 31, 2003 are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without prepayment penalties.

                                                      Amortized       Fair
                                                         Cost         Value
                                                         ----         -----

      Due in one year or less                            $  4         $  4
      Due from one year to five years                       3            3
      Due from five years to ten years                      1            1
      Due after ten years                                 534          543
                                                         ----         ----

                                                         $542         $551
                                                         ====         ====

There were no significant investment securities which were in an unrealized loss
position for periods of greater or less than twelve consecutive months at
December 31, 2003.

7. Loans and Allowance for Loan Losses

The composition of loans at December 31, 2003 and 2002 consisted of the
following (in thousands):

                                                    2003           2002
                                                  --------       --------

      Real estate:
                Residential 1- 4 family           $ 12,145       $ 11,947
                Multi-family                           428            152
                Commercial                           8,579          5,210
                Construction & development          15,146         17,089
                                                  --------       --------

                                                    36,298         34,398
                                                  --------       --------

      Commercial business                            3,087          1,690
                                                  --------       --------

      Consumer:
                Loans secured by deposits              541            465
                Other                                2,023          1,902
                                                  --------       --------

                                                     2,564          2,367
                                                  --------       --------

                                                    41,949         38,455

      Allowance for loan losses                       (448)          (416)
      Deferred fees                                    (47)           (49)
                                                  --------       --------

                                                  $ 41,454       $ 37,990
                                                  ========       ========


                                       53
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

A summary of the activity in the allowance for loan losses for the years ended
December 31, 2003 and 2002 is as follows (in thousands):

                                                        2003         2002
                                                       -----        -----

      Balance at beginning of year                     $ 416        $ 320
      Provision charged to operations                    217          160
      Loans charged-off                                 (185)         (64)
      Recoveries                                          --           --
                                                       -----        -----

      Balance at end of year                           $ 448        $ 416
                                                       =====        =====

The Company extends commercial and consumer credit loans primarily to borrowers
in the state of Texas. At December 31, 2003 and 2002, substantially all of the
Company's loans were collateralized with real estate, automobiles, deposits, and
other assets. Although the Company has a diversified loan portfolio, its
debtors' ability to honor their contracts is substantially dependent upon the
general economic conditions.

Impairment of loans having recorded investments of approximately $986,000 and
$301,000 at December 31, 2003 and 2002, respectively, has been recognized in
conformity with FAS 114 as amended by FAS 118. The average recorded investment
in impaired loans during 2003 and 2002 was approximately $644,000 and $440,000,
respectively. The total allowance for loan losses related to these loans was
approximately $43,000 and $17,000 at December 31, 2003 and 2002, respectively.
Interest income recognized on impaired loans for payments received in 2003 and
2002 was insignificant.

The Company is not committed to lend additional funds to debtors whose loans
have been modified.

8. Accrued Interest Receivable

Accrued interest receivable at December 31, 2003 and 2002 consisted of the
following (in thousands):

                                                            2003      2002
                                                            ----      ----

      Loans receivable                                      $211      $219
      Mortgage-backed and related securities                   3        21
                                                            ----      ----

                                                            $214      $240
                                                            ====      ====


                                       54
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

9.       Bank Premises and Equipment

Bank premises and equipment at December 31, 2003 and 2002 is summarized as
follows (in thousands):

                                                      2003          2002
                                                    -------       -------

      Land                                          $ 1,127       $    95
      Building                                          363           356
      Furniture fixtures and equipment                  673           627
                                                    -------       -------

                                                      2,163         1,078

      Less accumulated depreciation and
           amortization                                (534)         (385)
                                                    -------       -------

                                                    $ 1,629       $   693
                                                    =======       =======

10. Other Assets

Other assets at December 31, 2003 and 2002 consisted of the following (in
thousands):

                                                         2003        2002
                                                        ------      ------

      Other real estate owned, net                      $1,021      $  602
      Federal Home Loan Bank and other stock               543         533
      Lots held for residential development                239         234
      Net deferred tax asset                               184          38
      Prepaid expenses                                      99          54
      Federal income taxes receivable                       88          --
      Other                                                 80          30
                                                        ------      ------

                                                        $2,254      $1,491
                                                        ======      ======


                                       55
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

11. Advances From Federal Home Loan Bank

Advances from the Federal Home Loan Bank amounted to approximately $4,112,000
and $5,400,000 at December 31, 2003 and 2002, respectively. The borrowings are
collateralized by a security agreement, which requires the Company to maintain a
certain level of qualified first mortgage collateral in relation to the amount
of outstanding debt. The borrowings bear interest rates ranging from 3.26% to
6.99%.

At December 31, 2003, the scheduled repayments of principal due on outstanding
advances are as follows (in thousands):

                                               Amount       Average Rate
                                               ------       ------------

             2004                              $3,750          3.26%
             2005                                 362          6.99%
                                               ------          ----

                                               $4,112          3.59%
                                               ======          ====

12. Deposits

Deposits at December 31, 2003 and 2002 are summarized as follows (in thousands):

                            Weighted Average Rate at

                                          2003    2002       2003       2002
                                          ----    ----    -------    -------

      Demand accounts                     0.07%   0.15%   $ 4,899    $ 3,381
      Money market                        0.55%   1.00%     3,991      2,518
      Savings                             0.27%   0.25%     1,521      1,589
                                                          -------    -------

                                                           10,411      7,488
                                                          -------    -------

      Certificates of deposit:
             1.00% to 1.99%                                12,458      5,122
             2.00% to 2.99%                                 6,318     10,775
             3.00% to 3.99%                                 5,660      2,884
             4.00% to 4.99%                                 3,234      2,350
             5.00% to 5.99%                                   730      2,447
             6.00% to 6.99%                                   721      3,068
                                                          -------    -------

                                                           29,121     26,646
                                                          -------    -------

      Total deposits                                      $39,532    $34,134
                                                          =======    =======


                                       56
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

At December 31, 2003, scheduled maturities of certificates of deposit are as
follows (in thousands):

                                                 Amount  Average Rate
                                                 ------  ------------

            2004                                $15,906     2.14%
            2005                                  4,589     2.63%
            2006                                  3,400     2.85%
            2007                                  1,577     4.31%
            2008                                  3,649     3.76%
                                                -------     ----

                                                $29,121     2.50%
                                                =======     ====

Interest expense on deposits is summarized as follows (in thousands):

                                                     2003       2002
                                                     ----       ----

            Demand deposits                          $  3       $  6
            Money market                               22         25
            Savings                                     4         16
            Certificates of deposit                   885        930
                                                     ----       ----

                                                     $914       $977
                                                     ====       ====

13. Income Taxes

The (benefit) provision for income tax for the years ended December 31, 2003 and
2002 consisted of the following (in thousands):

                                                     2003       2002
                                                    -----      -----

            Income tax (benefit) expense:
            Current                                 $  --      $  --
            Deferred                                 (172)        63
                                                    -----      -----

            Income tax expense                      $(172)     $  63
                                                    =====      =====


                                       57
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

A reconciliation of the expected (benefit) provision based on the federal
statutory rate of 34% to the (benefit) provision for federal income taxes is as
follows (in thousands):

                                           2003       %        2002      %
                                          -----     -----     -----    -----

      Taxes based on statutory rate       $(187)    (34.0)    $  63     34.0
      Net non-deductible expenses             3       0.5        --       --
      Other                                  12       2.2        --       --
                                          -----     -----     -----    -----

                                          $(172)    (31.3)    $  63     34.0
                                          =====     =====     =====    =====

Deferred income taxes reflect the net tax effects of temporary differences
between the recorded amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.

Significant components of the Company's deferred tax assets and liabilities as
of December 31, 2003 and 2002 are as follows (in thousands):

                                                                   2003    2002
                                                                   ----    ----
      Deferred tax assets:
           Net operating loss carryforward                         $ 60    $  3
           Allowance for loan losses                                120     109
           Deferred loan fees, gains and accruals                   202      55
           Other                                                      5       6
                                                                   ----    ----

               Total deferred tax assets                            387     173
                                                                   ----    ----

      Deferred tax liabilities:
           FHLB stock dividends                                      41      37
           Bank premises & equipment                                 44      15
           Accrual to cash adjustment                                86      77
           Net unrealized gain on available for sale securities       3       6
                                                                   ----    ----

               Total deferred tax liabilities                       174     135
                                                                   ----    ----

               Net deferred tax asset                              $213    $ 38
                                                                   ====    ====

At December 31, 2003 and 2002,  the Company had net operating loss
carryforwards for federal income tax purposes of approximately $175,000 and
$8,000, respectively, that will expire beginning in 2019.

Included in other assets at December 31, 2003 and 2002, are net deferred tax
assets of approximately $213,000 and $38,000, respectively.


                                       58
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

14. Related Party Transactions

In the ordinary course of business, the Company has and expects to continue to
have transactions with its executive officers, directors and their affiliates.
In the opinion of management, such transactions are on the same terms as those
prevailing at the time for comparable transactions with unaffiliated persons.

The Company had no outstanding loans to related parties at December 31, 2003 and
2002.

15. Financial Instruments

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

The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of these instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance-sheet instruments. At December 31, 2003 and 2002, the
approximate amounts of these financial instruments were as follows (in
thousands):

                                                           2003      2002
                                                          ------    ------

      Financial instruments whose contract
         amounts represent credit risk:
            Commitments to extend variable rate credit    $4,608    $6,244
            Commitments to extend fixed rate credit          688       544
            Letters of credit                                 --        --
                                                          ------    ------

                                                          $5,296    $6,788
                                                          ======    ======

Commitments to extend fixed rate credit and the related interest rates are as
follows at December 31, 2003 (in thousands):

      6.00% to 6.99%                                                  $180
      7.00% to 7.99%                                                   361
      8.00% to 8.99%                                                   145
      9.00% to 9.99%                                                    --
      10.00% to 10.99%                                                   2
                                                                      ----

                                                                      $688
                                                                      ====


                                       59
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

Commitments to extend variable rate credit are at rates ranging from 4.00% to
8.00% as of December 31, 2003, and 4.25% to 8.25% at December 31, 2002.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount and type of collateral
obtained if deemed necessary by the Company upon extension of credit, varies and
is based on management's credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Company's policy for obtaining collateral and the nature of such
collateral is essentially the same as that involved in making commitments to
extend credit.

Although the maximum exposure to loss is the amount of such commitments,
management currently anticipates no material losses from such activities.


                                       60
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

The estimated fair values of the Company's financial instruments were as follows
at December 31, 2003 and 2002 (in thousands):

<TABLE>
<CAPTION>
                                                  2003                      2002
                                                  ----                      ----
                                         Carrying      Fair        Carrying      Fair
                                          Amount       Value        Amount       Value
                                         --------     -------      --------     -------
<S>                                      <C>          <C>          <C>          <C>
Financial assets:
      Cash and due from banks and
           federal funds sold            $ 5,141      $ 5,141      $ 4,472      $ 4,472
      Interest bearing deposits              624          652          793          728
      Equity securities                      543          543          533          533
      Securities available for sale          551          551        1,921        1,921
      Loans and loans held for sale       41,454       41,574       37,990       37,995
      Accrued interest receivable            214          214          240          240

Financial liabilities:
      Deposits                            39,532       39,850       34,134       34,230
      Accrued interest payable                19           19           29           29
      Other borrowings                     4,112        4,154        5,400        5,338

Off-balance sheet assets:
      Commitments to extend credit            --           --           --           --
      Standby letters of credit               --           --           --           --
</TABLE>


                                       61
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

16. Employee Benefits

The Company established an Employee Stock Ownership Plan (ESOP) for the benefit
of its employees. As part of the conversion, the ESOP purchased 39,317 shares of
common stock for approximately $393,000 with funds borrowed from Heritage. The
ESOP expense was approximately $66,000 and $54,000 for the years ended December
31, 2003 and 2002, respectively.

Shares purchased by the ESOP with the loan proceeds are allocated to ESOP
participants based on a pro rata basis as debt service payments are made to
Heritage on an annual basis. The loan is secured by the shares purchased with
the proceeds and will be repaid by the ESOP with funds from the Bank's
discretionary contributions to the ESOP and earnings on ESOP assets. Principal
payments are scheduled to occur over a ten-year period. At December 31, 2003 and
2002 the note payable associated with the ESOP was approximately $330,000 and
$361,000, respectively.

Effective October 30, 2003, the Company executed change of control agreements
with certain of its key officers, whereby, the key officers were granted the
right to receive their annual salaries for a period of two years should a change
of control (as defined) of the Company occur. The agreements also call for
certain additional compensatory payments should a change in control occur. The
change of control agreements have been amended but such amendments will become
effective only upon consummation of the merger discussed in Note 3.

As more fully discussed in Note 3, the Company executed a definitive Agreement
and Plan of Merger to sell 100% of its issued and outstanding common stock to an
unrelated investor. In conjunction with the proposed sale, the Company has
accrued a net compensatory liability related to the above change of control
agreements in the approximate amount of $408,000 at December 31, 2003.


                                       62
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

17. Other Noninterest Expense

The components of other noninterest expense are summarized as follows at
December 31, 2003 and 2002 (in thousands):

                                                        2003      2002
                                                       ------    ------

            Legal fees                                 $  391    $   66
            Provision for loss on other real estate       186        --
            Advertising and public relations              121        63
            Other real estate expenses                     99        --
            Filing fees                                    94        44
            Office expense                                 63        27
            Directors fees                                 58        52
            Consulting fees                                52       104
            Employee training                              27        36
            Other                                         314       229
                                                       ------    ------

                                                       $1,405    $  621
                                                       ======    ======

18. Commitments and Contingencies

The Company is involved in legal actions arising from normal business
activities. Management believes that these actions are without merit or that the
ultimate liability, if any, resulting from them will not materially affect the
consolidated financial position or results of operations of the Company.

19. Significant Group Concentrations of Credit Risk

Most of the Company's business activity is with customers located within Texas.
Such customers are normally also depositors of the Company.

The distribution of commitments to extend credit approximates the distribution
of loans outstanding. Commercial and standby letters of credit were granted
primarily to commercial borrowers.

The contractual amounts of credit related financial instruments such as
commitments to extend credit and letters of credit represent the amounts of
potential accounting loss should the contract be fully drawn upon, the customer
default, and the value of any existing collateral become worthless.


                                       63
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

At December 31, 2003, the Company has a concentration of funds on deposit in
excess of federally insured limits at two independent correspondent banks in the
following approximate amounts (in thousands):

                                                              Amount
                                                              ------

            Federal Home Loan Bank                            $3,912

            Southwest Bank of Texas                              460
                                                              ------

                                                              $4,372
                                                              ======

The nature of the Company's business requires that it maintain amounts due from
banks which, at times, may exceed federally insured limits.

20. Regulatory Matters

The Company is subject to various regulatory capital requirements administered
by its primary federal regulator, the Federal Deposit Insurance Corporation
(FDIC). Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by regulators
that if undertaken, could have a direct material affect on the Company and the
financial statements. Under the regulatory capital adequacy guidelines and the


                                       64
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines involving quantitative measures of the Bank's assets,
liabilities, and certain off balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification under the
prompt corrective action guidelines are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and tangible
capital to adjusted total assets (as defined). Management believes, as of
December 31, 2003 and 2002, that the Bank meets all capital adequacy
requirements to which it is subject.

As of December 31, 2003 and 2002, the Bank's capital ratios exceed those levels
necessary to be categorized 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 disclosed in the table below. There are no conditions or events since
December 31, 2003 that management believes have changed the Bank's category.


                                       65
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

A comparison of the Bank's actual capital amounts and ratios to required capital
amounts and ratios is presented in the following table (in thousands):

<TABLE>
<CAPTION>
                                                                                                              To Be Well
                                                                                                           Capitalized Under
                                                                     For Capital                           Prompt Corrective
Bank only:                         Actual                         Adequacy Purposes                        Action Provisions
----------                     --------------                --------------------------                ---------------------------
                               Amount   Ratio                Amount               Ratio                Amount                Ratio
                               ------   -----                ------               -----                ------                -----
<S>                            <C>      <C>                  <C>                   <C>                 <C>                   <C>
As of December 31, 2003:
  Total Risk-Based
     Capital (to Risk-                        (greater than         (greater than       (greater than         (greater than
     Weighted Assets)          $6,623   16.6%  or equal to)  $3,187  or equal to)  8.0%  or equal to)  $3,984  or equal to)  10.0%
  Tier I capital (to Risk-                    (greater than         (greater than       (greater than         (greater than
     Weighted Assets)          $6,175   15.5%  or equal to)  $1,594  or equal to)  4.0%  or equal to)  $2,390  or equal to)   6.0%
  Tier I capital (to Adjusted                 (greater than         (greater than       (greater than         (greater than
     Total Assets)             $6,175   11.9%  or equal to)  $2,070  or equal to)  4.0%  or equal to)  $2,588  or equal to)   5.0%
  Tangible Capital (to Total                  (greater than         (greater than       (greater than         (greater than
     Adjusted Assets)          $6,175   11.9%  or equal to)  $  777  or equal to)  1.5%  or equal to)  $1,294  or equal to)   2.5%

As of December 31, 2002:
  Total Risk-Based
     Capital (to Risk-                        (greater than         (greater than       (greater than         (greater than
     Weighted Assets)          $6,714   16.8%  or equal to)  $3,193  or equal to)  8.0%  or equal to)  $3,991  or equal to)  10.0%
  Tier I capital (to Risk-                    (greater than         (greater than       (greater than         (greater than
     Weighted Assets)          $6,298   15.8%  or equal to)  $1,596  or equal to)  4.0%  or equal to)  $2,395  or equal to)   6.0%
  Tier I capital (to Adjusted                 (greater than         (greater than       (greater than         (greater than
     Total Assets)             $6,298   13.5%  or equal to)  $1,863  or equal to)  4.0%  or equal to)  $2,329  or equal to)   5.0%
  Tangible Capital (to Total                  (greater than         (greater than       (greater than         (greater than
     Adjusted Assets)          $6,298   13.5%  or equal to)  $  699  or equal to)  1.5%  or equal to)  $1,165  or equal to)   2.5%
</TABLE>

The following is a reconciliation of the Bank's equity capital in accordance
with Generally Accepted Accounting Principles (GAAP) with total risk based
capital at December 31, 2003 and 2002, respectively (in thousands):

                                                     2003           2002
                                                   -------        -------

      GAAP equity capital                          $ 6,420        $ 6,310
      Unrealized gains on available
           for sale securities                          (6)           (12)
      Other deductions                                (239)            --
      Allowance for loan losses                        448            416
                                                   -------        -------

      Total risk-based capital                     $ 6,623        $ 6,714
                                                   =======        =======


                                       66
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

21. Condensed Financial Information on Heritage Bancshares, Inc.

The condensed balance sheet and statement of operations of Heritage as of and
for the period ended December 31, 2003 and 2002 consisted of the following (in
thousands):

                             Condensed Balance Sheet

Assets                                                       2003         2002
------                                                     -------      -------

Cash and due from banks                                    $ 1,414      $    90
Loans                                                          330        1,861
Investment in subsidiary                                     6,420        6,310
Other                                                          262           24
                                                           -------      -------

                                                           $ 8,426      $ 8,285
                                                           =======      =======

Liabilities and Stockholders' Equity

Accrued liabilities                                        $   862      $   368
Stockholders' equity                                         7,564        7,917
                                                           -------      -------

                                                           $ 8,426      $ 8,285
                                                           =======      =======

                        Condensed Statement of Operations

Interest income                                            $    28      $    43
Expenses                                                      (763)        (107)
                                                           -------      -------
Loss before income tax benefit and undistributed
       earnings of subsidiary                                 (735)         (64)
Income tax benefit                                             240           22
                                                           -------      -------
Loss before undistributed earnings of subsidiary              (495)         (42)
Equity in earnings of subsidiary                               117          164
                                                           -------      -------

Net loss                                                   $  (378)     $   122
                                                           =======      =======


                                       67
<PAGE>

Item 8. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.

      Not applicable.

Item 8a. Controls and Procedures

      As of the end of the period covered by this Form 10-KSB, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of its disclosure controls and
procedures (as defined in rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act)). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are effective alerting
them on a timely basis to material information relating to the Company
(including our consolidated subsidiaries) that is required to be included in the
Company's periodic filings under the Exchange Act.


                                       68
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

      Directors

      The following lists the directors of Heritage Bancshares, Inc. ("Heritage"
or the "Company"), their ages, and a description of their business experience
and positions held. The Board consists of six directors. Directors are divided
into three classes as nearly equal in number as possible. The members of each
class are elected for terms of three years and until their successors are
elected and qualified, with one of the three classes of directors to be elected
each year at the annual meeting of the stockholders of the Company. Each of the
directors listed below were directors of Heritage Bank prior to Heritage Bank's
conversion into a holding company structure.

      J. Pat Baker, 67, has served as a director and Chairman of the Board of
the Company since 1973. Mr. Baker is a retired former Chief Executive Officer of
Terrell Federal Savings & Loan Association in Terrell, Texas.

      John H. Mackey, 58, has served as the Company's President, Chief Executive
Officer and a member of the Board of Directors since September 2001. From May
2000 to February 2001, Mr. Mackey was a Supervisory Agent with the Texas Savings
and Loan Department in Austin, Texas. From October 1993 to May 2000, Mr. Mackey
was a Management Consultant with Control Systems, Inc. in Boston, Massachusetts.
Mr. Mackey has over twenty-five years experience in the banking industry,
including serving as president and chief executive officer of several savings
associations.

      Joy Milton Catlin, 66, has served as a director of the Company since 1992.
Mr. Catlin retired in 1999 as a manager with Kaufman County Title & Abstract Co.
in Kaufman, Texas. He had been with Kaufman County Title & Abstract Co. since
1960.

      Switzer L. Deason, 62, has served as a director of the Company since 2001.
Mr. Deason has been the President of Crux Financial Services, Inc. in Belton,
Texas since 1984. Mr. Deason also served as President of First National Bank
Texas in Killeen, Texas from January 1997 to May 2000, and as Chairman of First
State Bank in Bryan, Texas from August 1993 to December 1996.

      Mary Gayle Ramsey, 51, has served as a director of the Company since 1988.
Ms. Ramsey is an attorney in private practice with Mary Gayle Ramsey, P.C. in
Terrell, Texas.

      Thomas J. Wageman, 69, has served as a director of the Company since 2001.
Since 1994, Mr. Wageman has been a consultant, advisor and managing general
partner of TLT, Ltd. in Savoy, Texas. TLT, Ltd. has been the Trustee of the
LMUSA Creditors Trust and Agent of the Nomas Collecting Agency since 1996. Mr.
Wageman was President of Nomas Corp. in Dallas, Texas from 1996 to 1999, and has
been a director of Nomas Corp. since 1996. Mr. Wageman was also the President of
ST Lending in Dallas, Texas from 1996 to 1999, and has been a director since
1996. Mr. Wageman is a director of First Horizon Asset Securities Inc. and Saxon
Capital, Inc.

Advisory Director

      Effective March 2002, Joe Thomas Rogers, 77, became an Advisory Director
of Heritage Bank for a one year term. He was reappointed for an additional
one-year term in March 2003. Mr. Rogers was


                                       69
<PAGE>

a director and Secretary of the Company from September 2001 to March 2002 and a
director Secretary of Heritage Bank from 1984 to March 2002. Mr. Rogers is a
retired engineer with the U.S.D.A., Soil Conservation Service in Terrell, Texas.

Executive Officers

      The following sets forth certain information concerning the executive
officers of the Company and Heritage Bank based on information furnished by
them. All executive officers are elected annually by the Board of Directors and
serve at the discretion of the Board of Directors.

      Information concerning Mr. Mackey, our president and chief executive
officer, appears under the heading "Directors" above.

      James C. Champion, 36, has been Executive Vice President and Chief Lending
Officer of Heritage Bank since February 2002. From July 2000 to January 2002,
Mr. Champion was the President of First State Bank of Texas in Terrell, Texas.
From May 2000 to July 2000, he was an Assistant Vice President with United
Central Bank in Garland, Texas. From April 1998 to May 2000, Mr. Champion was a
Loan Officer of Heritage Bank. From 1997 to 1998, he was an Agent with Farm
Bureau Insurance in Kaufman, Texas.

      Jon D. Patterson, 60, has been Executive Vice President and Chief
Financial Officer of the Company and Heritage Bank since November 2002 and
Secretary of the Company since March 2003. He was a consultant to Heritage Bank
from October 2002 to November 2002. From January 2002 to June 2002, Mr.
Patterson was a Consultant with Paradigm Construction, LLP in El Paso, Texas.
From September 2001 to January 2002, he was a Consultant-Advisory Director with
Capital Savings Bank, SSB, ("Capital Bank") in El Paso, Texas. Mr. Patterson was
President, Chief Executive Officer and director of Capital Bank from December
2000 to August 2001. He was the Chief Operating Officer, Chief Financial
Officer, Secretary and Treasurer of Capital Bank from May 1999 to December 2000.
Mr. Patterson also served as Senior Vice President of Nations Bank, N.A.
(formerly Sun World Savings Bank, FSB ("Sun World") then Sun World N.A.), from
January 1996 to April 1999, and Senior Vice President, Chief Operating Officer,
Chief Financial Officer and director of Sun World from August 1989 to January
1996.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of the Company's Common Stock to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the National Association of Securities Dealers, Inc.
Officers, directors and 10% stockholders are required by regulation to furnish
the Company with copies of all Section 16(a) forms they file. The Company knows
of no person who owns 10% or more of the Company's Common Stock.

Code of Ethics

      In accordance with the requirements of Item 406 of Regulation S-B, the
Board of Directors of Heritage has adopted a Code of Ethics governing its Chief
Executive Officer, Chief Financial Officer, banking officers and employees of
both Heritage and the Bank. Heritage's Code of Ethics, which is a supplement to
the Bank's Employee Handbook, is available on the main page of Heritage's
website at www.bankheritage.com under "Code of Ethics."


                                       70
<PAGE>

Item 10. Executive Compensation.

      The following table sets forth a summary of certain information regarding
the compensation awarded to or paid by the Company or its subsidiaries for
services rendered in all capacities during the last three fiscal years to the
President and Chief Executive Officer. No executive officer received a salary
and bonus of $100,000 or more.

<TABLE>
<CAPTION>
                                                                     Annual Compensation
                                                                     -------------------

                                                                                     Other
                                                                                     Annual            All Other
             Name and Title(1)                 Year        Salary        Bonus   Compensation(2)    Compensation(3)
             -----------------                 ----       -------       ------   ---------------    ---------------
<S>                                            <C>         <C>          <C>           <C>                <C>
                                               2003       $94,583           --         --               $12,114
John H. Mackey                                 2002        90,000           --         --                18,160
   President and Chief Executive Officer       2001        74,368       $9,000         --                24,038
</TABLE>

      (1) On February 21, 2001, John H. Mackey was elected by the Company's
Board of Directors as director, President and Chief Executive Officer. From May
24, 2000 to February 20, 2001, Mr. Mackey was a supervisory representative of
the Texas Savings and Loan Department to Heritage Bank.

      (2) Does not include amounts attributable to miscellaneous benefits
received by Mr. Mackey, including maintenance of an automobile. In the opinion
of management of the Company, the costs to the Company of providing such
benefits to the named executive officer during the year ended December 31, 2003
did not exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus reported for such individual.

      (3) During the year ended December 31, 2003, consists of $5,200 in
directors' fees and estimated allocations under the ESOP of $6,914. During the
year ended December 31, 2002, consists of $5,600 in directors' fees and
estimated allocations under the ESOP of $12,560. During the year ended December
31, 2001, consists of $5,600 in directors' fees, $7,500 to cover relocation
expenses and $10,938 in supervisory fees.

Employee Stock Ownership Plan

      Heritage has established an ESOP for employees of Heritage and Heritage
Bank. Full-time employees who have been credited with at least 1,000 hours of
service during a 12-month period and who have attained age 21 are eligible to
participate in the Company's employee stock ownership plan.

      The ESOP borrowed funds from Heritage to purchase 39,317 shares of Common
Stock in the Bank's Conversion. The loan to the ESOP will be repaid principally
from the Company's contributions to the ESOP over a period of ten years, and the
collateral for the loan will be the Common Stock purchased by the ESOP. Heritage
may, in any plan year, make additional discretionary contributions for the
benefit of plan participants in either cash or shares of common stock, which may
be acquired through the purchase of outstanding shares in the market or from
individual stockholders, upon the original issuance of additional shares by
Heritage or upon the sale of treasury shares by Heritage. Such purchases, if
made, would be funded through additional borrowings by the ESOP or additional
contributions from Heritage. The timing, amount and manner of future
contributions to the ESOP will be affected by various factors, including
prevailing regulatory policies, the requirements of applicable laws and
regulations and market conditions. The ESOP is subject to the requirements of
the Employee Retirement Income Security Act of 1974, and the regulations of the
Internal Revenue Service and the Department of Labor thereunder.


                                       71
<PAGE>

Change of Control Agreements

      On October 30, 2003, Heritage entered into change of control agreements
with Messrs. Mackey, Champion and Patterson. Each of the agreements terminates
two years after a Change in Control (as defined) of the Company. During the term
of the agreement, the annual base salary under the respective change of control
agreements is $95,000 per year for Mr. Mackey, $78,750 per year for Mr.
Champion, and $70,000 per year for Mr. Patterson. In the event of a Change in
Control, each of Messrs. Mackey, Champion and Patterson will be entitled to
receive $300,000, $150,000 and $140,000, respectively, in cash, less any balance
in his respective Executive Participant Account (as defined in Section 1.39 of
the ESOP). In addition, if within two years following a Change in Control of the
Company, the Company or the Bank terminates the executive's employment or the
executive terminates his employment with the Bank or the Company for Good Reason
(as defined), the executive will be entitled to receive, in either 24 equal
monthly installments or in a lump sum, a cash severance amount equal to twice
the executive's annual base salary.

      The Merger discussed in "Recent Developments" on page 1 will be a Change
in Control of Heritage as defined in the change of control agreements. The
change of control agreements have been amended but such amendments will become
effective only upon consummation of the Merger. Under the terms of the Merger
Agreement, Heritage, as the surviving corporation, must expressly assume the
obligations of the Company under the amended change of control agreements. Under
the terms of Mr. Mackey's change of control agreement, as amended, Mr. Mackey
will be entitled to receive $300,000 in cash, less any balance in his Executive
Participant Account, and upon execution of a separation agreement, Mr. Mackey
will be entitled to a cash amount equal to $128,000.

      Under the terms of each of Messrs. Champion and Patterson's change of
control agreement, as amended, they will still be entitled to receive $150,000
and $140,000, respectively, in cash, less any balance in their respective
Executive Participant Account. However, if within two years following the
consummation of the Merger, the executive's employment with Heritage, as the
surviving corporation, is terminated by Heritage, as the surviving corporation,
without Cause (as defined) or by the executive for Good Reason, then upon
execution of a separation agreement, the executive will be entitled to receive a
cash severance amount equal to two times his annual base salary in cash in
addition to the respective $150,000 or $140,000. If, however, such termination
of employment occurs after two years following the consummation of the Merger,
the executive will be entitled to receive a cash severance amount equal to 25%
of his annual base salary in addition to the respective $150,000 or $140,000.

      Any payment made pursuant to a change of control agreement is subject to
reduction where such payment would constitute a "parachute payment" under
Section 280G of the Internal Revenue Code of 1986, as amended.

Directors' Compensation

      Directors of the Company do not receive fees for Board meetings. The
Company has an Audit Committee and a Compensation Committee, but not a
Nominating Committee. Each director of Heritage Bank currently receives $400 for
each Board meeting attended and $50 for certain committee meetings attended
(other than Mr. Mackey who does not receive committee fees).

Audit Committee

      The Company has a separately designated standing Audit Committee
established in accordance with Section 3(a)(58)A of the Exchange Act. The Audit
Committee reviews the Company's records and affairs to determine its financial
condition, reviews the Company's systems of internal control with


                                       72
<PAGE>

management and the independent auditors, and monitors the Company's adherence in
accounting and financial reporting to generally accepted accounting principles.
The Audit Committee, currently composed of Ms. Ramsey and Messrs. Baker, the
Chairman, Catlin, Deason, and Wageman, met five times during 2003. The members
are independent as defined in Rule 4200(a)(14) of the listing standards of the
Nasdaq Stock Market. The Board of Directors has not adopted an Audit Committee
Charter. At this time the Audit Committee does not have an "audit committee
financial expert" as defined under final rules adopted by the Securities and
Exchange Commission. The Company's Board of Directors considered numerous
factors regarding the current composition of the Audit Committee, the
qualifications required to be considered an "audit committee financial expert",
and the Company's particular circumstances relative to audit matters. The Audit
Committee as currently comprised provides a blend of business and legal
backgrounds, all of which include significant experience with financial matters.
In addition, the Company and its subsidiaries are regulated and periodically
examined by the Federal Deposit Insurance Corporation, Texas Savings and Loan
Department and the Office of Thrift Supervision. The examinations in combination
with internal audit and audits performed annually by independent auditors
provide the Board of Directors with a sufficient level of confidence in the
Company's financial statements and its internal controls. The Board of Directors
periodically will review and monitor the need for an audit committee financial
expert.

Report of the Audit Committee

      The Audit Committee has reviewed and discussed the audited financial
statements with management. The Audit Committee has discussed with the
independent auditors the matters required to be discussed by Statement on
Auditing Standards No. 61 "Communication with Audit Committees," as may be
modified or supplemented. The Audit Committee has received the written
disclosures and the letter from the independent accountants required by
Independence Standards Board Standard No. 1, as may be modified or supplemented,
and has discussed with the independent accountant, the independent accountant's
independence. Based on the review and discussions referred to above in this
report, the Audit Committee recommended to the Board of Directors that the
audited financial statements be included in the Company's Annual Report on Form
10-KSB for the year ended December 31, 2003 for filing with the SEC.

                                        J. Pat Baker (Chairman)
                                        Joy Milton Catlin (Secretary)
                                        Switzer L. Deason
                                        Mary Gayle Ramsey
                                        Thomas J. Wageman

Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters.

      The following table sets forth information as to the common stock
beneficially owned, as of March 22, 2004, by (i) the only persons or entities,
including any "group" as that term is used in Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), who or which was known to
Heritage to be the beneficial owner of more than five percent of the issued and
outstanding Heritage common stock, (ii) each director of Heritage, (iii) certain
of Heritage's executive officers, and (iv) all directors and executive officers
of Heritage and Heritage Bank as a group.


                                       73
<PAGE>

<TABLE>
<CAPTION>
                                                    Amount and Nature of      Percent
Name and Address of Beneficial Owner               Beneficial Ownership(1)   of Class
------------------------------------               -----------------------   --------
<S>                                                       <C>                  <C>
Heritage Bancshares, Inc.                                 39,317(2)             8.3%
Employee Stock Ownership Plan Trust
102 West High Street
Terrell, Texas 75160

Lance S. Gad                                              45,950(3)             9.7%
1250 Fence Row Drive
Fairfield, Connecticut 06430

Jeffrey L. Gendell                                        42,000(4)             8.9%
Tontine Financial Partners, L.P.
237 Park Avenue, 9th Floor
New York, New York 10017

J. Pat Baker                                               6,000(5)             1.3%
Joy Milton Catlin                                          3,000(6)               *
James C. Champion                                          2,441(7)               *
Switzer L. Deason                                         36,000(8)             7.6%
John H. Mackey                                             7,500(9)             1.6%
Jon D. Patterson                                               0                  *
Mary Gayle Ramsey                                          6,000(10)            1.3%
Thomas J. Wageman                                         36,000(11)            7.6%
Directors and executive officers of Heritage and
Heritage Bank as a group (8) persons                      96,941(12)          20.48%
</TABLE>

*     Amounts to less than 1.0% of the outstanding common stock.

(1)   Pursuant to rules promulgated by the Securities and Exchange Commission
      under the Exchange Act, a person or entity is considered to beneficially
      own shares of common stock if the person or entity has or shares (i)
      voting power, which includes the power to vote or to direct the voting of
      the shares, or (ii) investment power, which includes the power to dispose
      or direct the disposition of the shares. Unless otherwise indicated, a
      person has sole voting power and sole investment power with respect to the
      indicated shares.

(2)   The Heritage Bancshares, Inc. Employee Stock Ownership Plan Trust
      ("Trust") was established pursuant to the Heritage Bancshares, Inc.
      Employee Stock Ownership Plan ("ESOP"). As of the record date, 31,416
      shares held in the Trust were unallocated, and 7901 shares held in the
      Trust had been allocated to the accounts of participating employees.
      Unallocated shares held in the ESOP will be voted by the ESOP Trustees in
      the same proportion as the allocated shares, subject to the ESOP Trustees'
      fiduciary duties and applicable law.

(3)   Based on a Schedule 13G filing on March 11, 2002 made on behalf of Lance
      S. Gad. Mr. Gad possesses sole power to vote and direct the disposition of
      the 45,950 shares.

(4)   Based on a Schedule 13D joint filing made on March 8, 2002 on behalf of
      Tontine Financial Partners, L.P. ("TFP"), Tontine Management, L.L.C.
      ("TM") and Jeffrey L. Gendell. TM is the


                                       74
<PAGE>

      general partner of TFP, a private investment limited partnership, and Mr.
      Gendell is the managing member of TM (collectively, the "Reporting
      Persons"). The reporting persons have shared voting and dispositive power
      over the 42,000 shares.

(5)   Includes 6,000 shares owned jointly with Mr. Baker's wife with whom voting
      and dispositive power is shared.

(6)   Includes 3,000 shares owned jointly with Mr. Catlin's wife with whom
      voting and dispositive power is shared.

(7)   Includes 441 shares held by the ESOP for the account of Mr. Champion and
      2,000 shares owned jointly with Mr. Champion's wife with whom voting and
      dispositive power is shared.

(8)   Includes 6,000 shares owned jointly with Mr. Deason's wife with whom
      voting and dispositive power is shared.

(9)   Includes 1,500 shares held by the ESOP for the account of Mr. Mackey and
      1,500 shares held by Mr. Mackey's wife's IRA.

(10)  Includes 5,600 shares held in Ms. Ramsey's IRA, 200 shares held by Ms.
      Ramsey's husband's IRA and 200 shares held as custodian for children.

(11)  Includes 6,000 shares owned jointly with Mr. Wageman's wife with whom
      voting and dispositive power is shared and 30,000 shares held by TLT,
      Ltd., a family limited partnership, of which the reporting person is the
      managing general partner and a limited partner. The reporting person
      disclaims beneficial ownership of Heritage Bancshares, Inc., common stock
      held by TLT, Ltd., except to the extent of his pecuniary interest therein.

(12)  Also includes 1,941 shares which are held by the ESOP which have been
      allocated to the account of Messrs. Champion and Mackey.

Item 12. Certain Relationships and Related Transactions.

      In accordance with applicable federal laws and regulations, Heritage Bank
offers mortgage loans to its directors, officers and full-time employees for the
financing of their primary residences as well as various consumer loans. These
loans are generally made on substantially the same terms as those prevailing at
the time for comparable transactions with non-affiliated persons. It is the
belief of management that these loans neither involve more than the normal risk
of collectibility nor present other unfavorable features.

      Section 22(h) of the Federal Reserve Act generally provides that any
credit extended by a savings institution to its executive officers, directors
and, to the extent otherwise permitted, principal stockholder(s), or any related
interest of the foregoing, must (i) be on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions by the savings association with non-affiliated parties;
(ii) be pursuant to underwriting standards that are no less stringent than those
applicable to comparable transactions with non-affiliated parties; (iii) not
involve more than the normal risk of repayment or present other unfavorable
features; and (iv) not exceed, in the aggregate, the institution's unimpaired
capital and surplus, as defined.


                                       75
<PAGE>

      At December 31, 2003, Heritage Bank had no loans outstanding to directors
and executive officers of Heritage Bank, or members of their immediate families.

Item 13. Exhibits and Reports on Form 8-K.

(a)   (1)   Financial Statements

            Included in Part II of this Report:

            Independent Auditors' Report

            Consolidated Balance Sheets as of December 31, 2003 and 2002.

            Consolidated Statements of Income for the Years Ended December 31,
            2003 and 2002.

            Consolidated Statement of Changes in Stockholders' Equity for the
            Years Ended December 31, 2003 and 2002.

            Consolidated Statement of Cash Flows for the Years Ended December
            31, 2003 and 2002.

            Notes to Consolidated Financial Statements.

      (2)   Financial Statement Schedules

            All schedules for which provision is made in the applicable
            accounting regulation of the Commission are omitted because they are
            not applicable or the required information is included in the
            Consolidated Financial Statements or notes thereto.

      (3)   Exhibits

            The following exhibits are filed herewith or incorporated by
            reference herein (according to the number assigned to tem in Item
            601 of Regulation S-B), as noted:

      No.                                   Description
      ---         --------------------------------------------------------------

      2.1         Agreement and Plan of Merger dated as of January 14, 2004
                  between HGroup Acquisition Co. and Heritage Bancshares, Inc.
                  (incorporated by reference to Exhibit 2.1 of Heritage
                  Bancshares Inc.'s Current Report of Form 8-K filed on January
                  15, 2004). (The Agreement and Plan of Merger is subject to
                  stockholder and regulatory approval. A special meeting of
                  Heritage stockholders has been scheduled for April 29, 2004.)

      3.1         Certificate of Incorporation of Heritage Bancshares, Inc.
                  (incorporated by reference from the Registration Statement on
                  Form SB-2 (Registration No. 333-70782) filed by Heritage
                  Bancshares Inc. filed on October 2, 2001, as amended).

      3.2         Amended and Restated Bylaws of Heritage Bancshares, Inc.
                  (incorporated by reference to Exhibit 3.2 of Heritage
                  Bancshares' Form 10-KSB for the year ended December 31, 2002).

      4.1         Form of Stock Certificate of Heritage Bancshares, Inc.
                  (incorporated by reference from the Registration Statement on
                  Form SB-2 (Registration No. 333-70782) filed by Heritage
                  Bancshares Inc. filed on October 2, 2001, as amended).

      10.1        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and John H. Mackey dated October 30, 2003
                  (incorporated by reference to Exhibit 10.1 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)


                                       76
<PAGE>

      10.2        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and Jon D. Patterson dated October 30,
                  2003 (incorporated by reference to Exhibit 10.2 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)

      10.3        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and James C. Champion dated October 30,
                  2003 (incorporated by reference to Exhibit 10.3 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)

      10.4        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and John H.
                  Mackey dated January 14, 2004 (incorporated by reference to
                  Annex E-1 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.)(1)

      10.5        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and Jon D.
                  Patterson dated January 14, 2004 (incorporated by reference to
                  Annex E-2 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.) (1)

      10.6        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and James C.
                  Champion dated January 14, 2004 (incorporated by reference to
                  Annex E-3 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.) (1)

      14*         Code of Ethics

      21*         Subsidiaries of the Registrant.

      31.1*       Section 302 Certification of Chief Executive Officer.

      31.2*       Section 302 Certification of Chief Financial Officer.

      32.1*       Certification of Chief Executive Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

      32.2*       Certification of Chief Financial Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

----------

      *     Filed with this Form 10-KSB.

      (1)   Management contract or compensatory plan or agreement.

(b)   Reports filed on Form 8-K.


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<PAGE>

      On January 15, 2004, Heritage Bancshares, Inc. filed a Form 8-K under Item
5 announcing the execution of a definitive Agreement and Plan of Merger with
HGroup Acquisition Co., a Delaware corporation, pursuant to which ("HGroup").
Pursuant to the Merger Agreement and subject to the satisfaction of certain
conditions set forth in the Merger Agreement, HGroup will acquire Heritage
effective as of the filing of the Certificate of Merger with the Secretary of
State of Delaware, by merging HGroup with and into Heritage, with Heritage
surviving and continuing to exist as a registered savings and loan holding
company.

Item 14. Principal Accountant Fees and Services.

Audit Fees

      The aggregate fees billed for professional services rendered by Payne
Falkner Smith & Jones, P.C. ("PFS&J") for the audit of the Company's financial
statements for each of the fiscal years ended December 31, 2003 and December 31,
2002, and the reviews of the financial statements included in the Company's
Forms 10-QSB for such fiscal years were $22,386 and $28,843  respectively.

Audit-Related Fees

      The aggregate fees billed for each of the fiscal years ended December 31,
2003 and December 31, 2002 for assurance and related services rendered by PFS&J
that are reasonably related to the performance of the audit or review of the
Company's financial statements but not reportable as Audit Fees were $3,900 and
$1,450 respectively. Audit-Related Fees in 2003 and 2002 were primarily for
advice on audit and accounting matters that arose during or as a result of the
audit or the review of interim financial statements, and the preparation of an
annual "management letter" on internal control matters.

Tax Fees

      The aggregate fees billed for professional services rendered by PFS&J for
tax compliance, tax advice, and tax planning for each of the fiscal years ended
December 31, 2003 and December 31, 2002 were $3,700 and $2,500 respectively.
Tax Fees in 2003 and 2002 include the fees related to the planning and
preparation of federal, state and local tax returns, compliance with federal,
state and local taxing authorities and regulations, assistance with tax audits
and appeals before the IRS and similar local and state agencies and the review
of federal, state and local income, franchise and other tax-related matters.

All Other Fees

      There were no fees billed for services rendered by PFS&J not reportable as
Audit Fees, Audit Related Fees or Tax Fees for each of the fiscal years ended
December 31, 2003 and December 31, 2002 were.


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<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                       HERITAGE BANCSHARES, INC.


Date: March 30, 2004                   By: /s/ John H. Mackey
                                           ------------------------------
                                           John H. Mackey
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities and on
the dates indicated.


/s/ J. Pat Baker                                                  March 30, 2004
------------------------------
J. Pat Baker
Chairman of the Board


/s/ John H. Mackey                                                March 30, 2004
------------------------------
John H. Mackey
Director, President and Chief Executive Officer
(Principal Executive Officer)


/s/ Jon D. Patterson                                              March 30, 2004
------------------------------
Jon D. Patterson
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


/s/ Joy Milton Catlin
------------------------------
Joy Milton Catlin                                                 March 30, 2004
Director


/s/ Switzer L. Deason                                             March 30, 2004
------------------------------
Switzer L. Deason
Director


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<PAGE>


/s/ Mary Gayle Ramsey                                             March 30, 2004
------------------------------
Mary Gayle Ramsey
Director


/s/ Thomas J. Wageman                                             March 30, 2004
------------------------------
Thomas J. Wageman
Director


                                       80
<PAGE>

                                INDEX TO EXHIBITS

      No.                                  Description
      ---         --------------------------------------------------------------

      2.1         Agreement and Plan of Merger dated as of January 14, 2004
                  between HGroup Acquisition Co. and Heritage Bancshares, Inc.
                  (incorporated by reference to Exhibit 2.1 of Heritage
                  Bancshares Inc.'s Current Report of Form 8-K filed on January
                  15, 2004). (The Agreement and Plan of Merger is subject to
                  stockholder and regulatory approval. A special meeting of
                  Heritage stockholders has been scheduled for April 29, 2004.)

      3.1         Certificate of Incorporation of Heritage Bancshares, Inc.
                  (incorporated by reference from the Registration Statement on
                  Form SB-2 (Registration No. 333-70782) filed by Heritage
                  Bancshares Inc. filed on October 2, 2001, as amended).

      3.2         Amended and Restated Bylaws of Heritage Bancshares, Inc.
                  (incorporated by reference to Exhibit 3.2 of Heritage
                  Bancshares' Form 10-KSB for the year ended December 31, 2002).

      4.1         Form of Stock Certificate of Heritage Bancshares, Inc.
                  (incorporated by reference from the Registration Statement on
                  Form SB-2 (Registration No. 333-70782) filed by Heritage
                  Bancshares Inc. filed on October 2, 2001, as amended).

      10.1        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and John H. Mackey dated October 30, 2003
                  (incorporated by reference to Exhibit 10.1 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)

      10.2        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and Jon D. Patterson dated October 30,
                  2003 (incorporated by reference to Exhibit 10.2 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)

      10.3        Change of Control Agreement between Heritage Bancshares, Inc.,
                  Heritage Bank, SSB, and James C. Champion dated October 30,
                  2003 (incorporated by reference to Exhibit 10.3 of Heritage
                  Bancshares, Inc.'s Form 10-QSB for the period ended September
                  30, 2003).(1)

      10.4        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and John H.
                  Mackey dated January 14, 2004 (incorporated by reference to
                  Annex E-1 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.)(1)


                                       81
<PAGE>

      10.5        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and Jon D.
                  Patterson dated January 14, 2004 (incorporated by reference to
                  Annex E-2 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.) (1)

      10.6        Amendment No. 1 to Change of Control Agreement between
                  Heritage Bancshares, Inc., Heritage Bank, SSB, and James C.
                  Champion dated January 14, 2004 (incorporated by reference to
                  Annex E-3 of Heritage Bancshares Inc.'s Proxy Statement filed
                  March 23, 2004). (The Amendment No. 1 is contingent upon the
                  closing of transaction contemplated in the Agreement and Plan
                  of Merger dated as of January 14, 2004 between HGroup
                  Acquisition Co. and Heritage Bancshares, Inc. The Agreement
                  and Plan of Merger is subject to stockholder and regulatory
                  approval. A special meeting of Heritage stockholders has been
                  scheduled for April 29, 2004.) (1)

      14*         Code of Ethics

      21*         Subsidiaries of the Registrant.

      31.1*       Section 302 Certification of Chief Executive Officer.

      31.2*       Section 302 Certification of Chief Financial Officer.

      32.1*       Certification of Chief Executive Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

      32.2*       Certification of Chief Financial Officer Pursuant to Section
                  906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).

----------

      *     Filed with this Form 10-KSB.

      (1)   Management contract or compensatory plan or agreement.


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