Exhibit 13


                            HERITAGE BANCSHARES, INC.

                               2002 ANNUAL REPORT





<PAGE>


                                                  TABLE OF CONTENTS



                                                                            Page


President's Letter to Stockholders.............................................i

Management's Discussion and Analysis...............................  ..........1

Independent Auditors' Report of Payne Falkner Smith & Jones, P.C..............13

Consolidated Balance Sheet as of December 31, 2002 and 2001...................14

Consolidated Statement of Income for the Years Ended December 31, 2002
and 2001......................................................................15

Consolidated Statement of Changes in Equity for the Years Ended
December 31, 2002 and 2001....................................................16

Consolidated Statement of Cash Flows for the Years Ended December 31, 2002
   and 2001...................................................................17

Consolidated Financial Statements.............................................18

Stockholder Information.......................................................41

Directors and Executive Officers..............................................43

Heritage Bank Advisory Director...............................................44


<PAGE>

                    [LETTERHEAD OF HERITAGE BANCSHARES, INC.]


Dear Fellow Stockholders:

I am pleased to provide you with our 2002 Annual Report for Heritage Bancshares,
Inc., parent company of Heritage Bank, SSB for the year ended December 31, 2002.
For banking,  the year 2002 was much like the year 2001. Interest rates declined
to historically  low levels,  compressing  interest rate margins.  Equity prices
continued a long slide, despite recent spurts of renewed investor confidence. It
was in this  challenging  economic  environment that your officers and directors
conducted the business of Heritage Bancshares.

Due to the hard work of our directors,  officers and employees and the continued
patronage of our customers, we are pleased to report another successful year.

At the end of 2002,  we  realized  net income of  $122,000,  or $0.29 per share,
basic and diluted.  Our capital  increased  from 10.17% to 16.63%.  Much of this
increase was due to the  successful  completion  of our  conversion to the stock
form in February of 2002. The  transaction  netted the Company over $4.4 million
in new  capital.  Our stock is publicly  traded on the OTC  Electronic  Bulletin
Board, at OTCBB.com, and our stock symbol is HRGB.

Even in the  falling  interest  rate  environment,  Heritage  Bank  was  able to
maintain a 7.41% rate on interest bearing assets during 2002,  compared to 7.94%
during  2001.  We were able to decrease  our average  interest  rate on interest
bearing liabilities to 3.34% compared to 4.81% during 2001, while increasing our
deposit base. The result was an increase in our net average interest rate spread
to 4.07% during 2002 compared to 3.13% during 2001.

This  success  occurred  during  a year  of  dramatic  transition  for  Heritage
Bancshares,  Inc.  Making  effective  use of the  new  capital  from  our  stock
offering,  we expanded the staff from 15 to 24 employees,  and opened additional
loan production offices in Terrell and Greenville, Texas. This expansion allowed
us to continue to substantially  increase our loan production.  The $6.3 million
dollar  increase in our loan  balances  reflects a 20% increase in loans held by
your  Company.  We expect  our  penetration  of loan  markets  to  increase  and
strengthen as our new employees and new facilities take hold.

We are optimistic about Year 2003, as we strive to increase profitability in our
banking  operations  and to gain more  market  share in  Kaufman  County and our
surrounding trade territory. We will do this by delivering banking services that
exceed customer expectations.

On  behalf  of the  directors,  officers  and  employees,  we thank you for your
ongoing  support of Heritage  Bancshares,  Inc. Please continue to recommend our
many banking  services - including a full range of deposit and loan products for
both businesses and consumers - to your family, friends, and neighbors.

Sincerely,


/s/ John H. Mackey
--------------------
John H. Mackey


                                       i


<PAGE>



                      MANAGEMENT'S DISCUSSION AND ANALYSIS

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. (the  "Company")  was
incorporated.

     The Company completed its stock offering in February 2002. The Company sold
491,468 shares of common stock with net proceeds of approximately  $4.5 million.
The Company  became the holding  company  for the Savings  Bank on February  22,
2002.  Because the Company 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 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


                                       -1-
<PAGE>




"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,  2002,  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 $5.568 million or 11.7% of the Company's total assets.

     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, 2002,  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
                                -----------  -----------  -------------  ------------   -----------  ----------
<S>                                <C>          <C>             <C>         <C>            <C>         <C>



                                                            (Dollars In Thousands)


Interest-earning assets:
  Loans (1) ...............        $17,453      $  2,385     $  3,520       $  4,934      $10,114      $38,406
  Investment securities(2).          1,538           333           23              5           22        1,921
  Other(3).................          4,220           197           --            316          713        5,446
                                   -------      --------     ----------      --------      --------     -------
    Total interest-earning
      assets...............         23,211         2,915        3,543          5,255       10,849       45,773
                                    ------       -------       -------        -------      ------       ------

Interest-bearing liabilities:
  Certificates of deposit..          7,447        11,583        5,917          1,699          --        26,646
  Other deposits(4)........            132           396          903            732        3,120        5,283
  Borrowings...............          1,000            --        4,400             --           --        5,400
                                   -------      --------      -------        --------    --------      -------
    Total interest-bearing
      Liabilities..........          8,579        11,979       11,220           2,431        3,120      37,329
                                   -------        ------       ------         -------      -------      ------

Excess (deficiency) of
 interest-earning assets over
 interest-bearing liabilities       14,632        (9,064)      (7,677)          2,824        7,729       8,444
                                    ------        -------     --------        -------      -------     -------

Cumulative excess (deficiency)
  of interest-earning assets
  over interest-bearing
  liabilities................      $14,632      $  5,568     $ (2,109)       $    715      $ 8,444    $  8,444
                                    ======       =======       =======        ========      ======     =======
Cumulative excess (deficiency)
  of interest-earning assets over
  interest-bearing liabilities
  as a percentage of total assets     30.7%         11.7%        (4.4%)          (1.5%)       17.7%      17.7%
                                      =====        ======      ========           =====       =====      =====



</TABLE>

                                  (FOOTNOTES ON FOLLOWING PAGE)

                                       -2-


<PAGE>


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

(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.

     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, 2002.
<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
------------------  ----------------  ---------------     -------------  -------------    ----------
<S>                        <C>              <C>               <C>             <C>            <C>


                                          (Dollars In Thousands)

+300                    $  5,759          $(782)           (12.0%)           12.8%           (1.1%)
+200                       6,020           (521)           (10.0)            13.2             (.7)
+100                       6,286           (255)            (3.9)            13.5             (.4)
--                         6,541             --               --             13.9               --
-100                       6,834            293              4.5             14.3              .4
-200                       6,838            297              4.5             14.2              .3
-300                       6,593             52               .1             13.7             (.2)

-------------------
</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,


                                       -3-
<PAGE>




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:

o    originating adjustable-rate loans;

o    originating  commercial  business  loans with  maturities  of five years or
     less;

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

o    managing its deposits to establish stable deposit relationships;

o    extending the terms of its Federal Home Loan Bank advances; and

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

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND DECEMBER 31, 2001

     Total assets increased approximately $9.0 million or 23.2% to $47.6 million
at December  31, 2002  compared to $38.6  million at  December  31,  2001.  This
increase  in total  assets was  primarily  due to an  increase  in cash and cash
equivalents of approximately  $2.4 million or 115.2% to $4.5 million at December
31,  2002  compared to $2.1  million at  December  31,  2001,  together  with an
increase in net loans of  approximately  $6.3 million.  The increase in cash and
cash  equivalents  was  provided  by  maturities  of  approximately  $360,000 of
interest bearing deposits of other banks,  deposit growth of approximately  $1.4
million and  additional  advances  from Federal Home Loan Bank of  approximately
$3.5  million,  partially  offset by volume  demand  within the loan  portfolio.
Loans,  net of  allowance  for loan losses,  increased  $6.3 million or 20.0% to
$37.9  million at December  31,  2002,  as a result of  increased  loan  demand,
primarily with respect to construction and development loans,  commercial loans,
and consumer loans.  Construction  and development  loans increased  $890,000 or
5.5% to $17.1 million at December 31, 2002 compared to $16.2 million at December
31,  2001.  Commercial  loans  increased  $988,000 or 140.7% to $1.7  million at
December  31, 2002  compared to $702,000 at December 31,  2001.  Consumer  loans
increased $1.2 million or 96.3% to $2.4 million at December 31, 2002 compared to
$1.2 million at December 31, 2001.  This loan growth was primarily  attributable
to increased  marketing  efforts within the Company's lending area together with
the additions of experienced lending officers.  The allowance for loan losses as
a  percentage  of total  loans  increased  from  1.0% to 1.1% due to  additional
provisions  of $160,000  during 2002  together  with a relatively  stable to low
historical  loan loss  percentage as a percentage of gross loans.  The change in
loan mix due to the increase in construction  and development,  commercial,



                                       -4-

<PAGE>

and consumer loans did not adversely affect the allowance for loan losses due to
the majority of Heritage Bank's  construction  loans being for  non-speculative,
pre-sold, one- to four-family residences.

     Deposits increased $1.4 million or 4.4% to $34.1 million at December 31,
2002 compared to $32.7 million at December 31, 2001. The majority of the
increase was sustained in demand accounts which increased $1.5 million or 75.1%
to $3.4 million at December 31, 2002 compared to $1.9 million at December 31,
2001. The increase in demand accounts is attributable to increased marketing
efforts by the Company together with accounts added which related to new loan
customers.

     Total equity capital increased approximately $4.0 million or 101.4% to $7.9
million at December 31, 2002 compared to $3.9 million at December 31, 2001. As
discussed elsewhere within this document, the Company was incorporated in
September 2001 to facilitate the conversion of Heritage Savings Bank from a
mutual to stock form. As a result, the Company issued 491,468 shares of its
common stock in February 2002, for net proceeds of approximately $4.4 million.
Additional transactions affecting equity capital include repurchase of 18,220
shares of common stock for approximately $227,000 and purchase by the ESOP of
39,317 shares of the Company's stock for approximately $393,000 achieved through
a loan to the ESOP by the Company. Total equity capital amounted to 16.6% of
total assets at December 31, 2002, compared to 10.2% at December 31, 2001.


                                       -5-

<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, 2002             2002                               2001
                                            ------------------   ----------------------------    ---------------------------------

                                                      Yield/   Average              Average        Average             Average
                                           Balance   Rate     Balance   Interest   Yield/Rate(1)  Balance  Interest   Yield/Rate(1)
                                           -------   ----     -------   --------   -------------  -------  --------   -------------

<S>                                         <C>          <C>     <C>       <C>           <C>     <C>        <C>           <C>
                                                                                       (Dollars In Thousands)
INTEREST-EARNING ASSETS:
  Loans (2)............................     $  38,406    7.39%   $36,104   $  2,957      8.19%   $28,989    $2,566        8.85%

  Investment securities................         1,921    4.50      2,261        109      4.82      4,701       302        6.42

  Interest-bearing deposits at other
    banks (3)..........................         5,446    2.00      4,473        109      2.44      4,861       194        3.99
                                             --------    ----      -----       ----      ----       ----     -----        ----

    Total interest-earning assets......        45,773    6.63     42,838      3,175      7.41     38,551     3,062        7.94
                                                         ----                  ---      ----                 ----        ----

Non-interest-earning assets............         1,827              1,748                           1,078
                                             --------              -----                          ------
    Total assets.......................     $  47,600            $44,586                         $39,629
                                            =========            =======                         =======

INTEREST-BEARING LIABILITIES:
  Deposits:
    Demand.............................     $   1,176   0.25%    $ 1,162   $      6      0.52%     $ 971      $  7        0.72%

    Money market.......................         2,518   1.00       2,582         25      0.97      2,687        45        1.67

    Savings............................         1,589   0.25       1,731         16      0.92      1,948        24        1.23

    Certificates of Deposit............        26,646   2.96      25,053        949      3.79     27,327     1,470        5.38

  Advances from Federal Home Loan Bank.         5,400   3.37       3,513        142      4.04      1,688       118        6.99
                                             --------   ----     -------        ---      ----    -------    ------        ----

  Total interest-bearing liabilities...        37,329   2.69      34,041      1,138      3.34     34,621     1,664        4.81
                                                        ----                  -----      ----                -----        ----

  Non-interest-bearing liabilities.....         2,354              3,299                           1,286
                                             --------               ----                         -------
    Total liabilities..................        39,683             37,340                          35,907
  Total equity capital(4)..............         7,917              7,246                           3,722
                                              -------               ----                         -------
    Total liabilities and equity capital    $  47,600            $44,586                         $39,629
                                             ========            =======                         =======
  Net interest-earning assets..........     $   8,444              6,303                         $ 3,930
                                             ========              =====                         =======
  Net interest income; interest rate
      spread (5)......................                   3.94%               $2,037      4.07%              $1,398        3.13%
                                                         ====                ======      ====               ======        ====
  Net interest margin(6)...............                                                  4.76%                            3.63%
                                                                                         ====                             ====
  Interest-earning assets to
      interest-bearing liabilities.......                          117.3%                          111.3%
                                                                   =====                           =====
<FN>
-------------------
(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.

</FN>
</TABLE>



                                       -6-


<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,
                                                      --------------------------------------------------


                                                                         2002 vs. 2001
                                                      --------------------------------------------------


                                                             Increase
                                                            (Decrease)
                                                              Due To                             Total
                                                      -----------------------------             Increase
                                                                                               (Decrease)
                                                                                           ------------------
                                                         Rate             Volume
                                                      -------------   -------------
                                                                         (In Thousands)
<S>                                                       <C>              <C>                   <C>
INTEREST-EARNING ASSETS:
  Loans.....................................              $(238)           $  629                $  391
  Investment securities.....................                (36)             (157)                 (193)
  Interest-bearing deposits at other banks..                (70)              (15)                  (85)
                                                           -----             -----                ------
    Total interest-earning assets...........               (344)              457                   113
                                                            ----             -----                ------

INTEREST-BEARING LIABILITIES:
  Deposits:
    Demand..................................                (20)                19                   (1)
    Money market............................                (18)                (2)                 (20)
    Savings.................................                 (5)                (3)                  (8)
    Certificates of Deposit.................               (399)              (122)                (521)
  Advances from Federal Home Loan Bank......               (104)               128                   24
                                                            ----              ----                ------
    Total interest-bearing liabilities......               (546)                20                 (526)
                                                            ----             -----                 -----
  Increase (decrease) in net interest income             $  202              $ 437              $   639
                                                           =====              ====                ======

</TABLE>

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002
AND 2001.

     GENERAL.  Net income  during the years  ended  December  31,  2002 and 2001
amounted to approximately  $122,000 and $425,000,  respectively.  Net income for
the year ended December 31, 2001,  exclusive of the bonding claim  settlement of
$400,000,  amounted to $25,000.  The increase in net income of $97,000 or 388.0%
from 2001 to 2002  exclusive  of the  bonding  claim  settlement  was  primarily
attributable to an increase in net interest income partially offset by decreases
in interest income from investment  securities and by increases in the provision
for  loan  loss  and  in  noninterest  expense.   These  and  other  significant
fluctuations  in the  Company's  results  of  operations  are  discussed  on the
following pages.

                                       -7-
<PAGE>


     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 $639,000 or 45.7% to $2.0 million for
the year ended  December  31, 2002  compared to $1.4  million for the year ended
December 31, 2001. This increase was primarily due to an increase in the average
interest  rate spread to 4.07% for the year ended  December 31, 2002 compared to
3.13% for the year ended  December  31,  2001.  For the same time  periods,  the
Company's net interest margin increased from 3.63% to 4.76%.

     INTEREST INCOME. Interest income increased $113,000 or 3.7% to $3.2 million
for the year ended December 31, 2002 compared to $3.1 million for the year ended
December 31, 2001.  This increase was primarily  attributable  to an increase in
the average balance on loans  receivable  partially  offset by a decrease in the
average balances of investment securities and interest bearing deposits in other
banks and by a decrease in the yield on all interest earning assets. The average
balance of loans  receivable  increased  from $29.0  million  for the year ended
December 31, 2001 to $36.1  million for the year ended  December  31,  2002,  an
increase of $7.1 million,  or 24.5%. The increase was attributable to aggressive
but sound marketing  strategies  within the Company's lending area together with
an increase in experienced lending personnel. The average balances of investment
securities and interest bearing deposits at other banks decreased 2.4 million or
51.1%  and  $388,000  or 8.0%  respectively  in 2002  compared  to  2001.  These
decreases  are  primarily   attributable  to  management's   philosophy  to  use
maturities  of such  investment  to fund higher  yield loan  growth  rather than
replenish such  investments.  The average yield on earning assets decreased from
7.9% in 2001 to 7.4% in 2002, as interest rates continued their declining trend.

     INTEREST  EXPENSE.  Interest  expense  decreased  $526,000 or 31.6% to $1.1
million for the year ended  December  31, 2002  compared to $1.7 million for the
year ended December 31, 2001. This decrease was primarily due to average balance
decreases in higher  interest-bearing money market, savings, and certificates of
deposit accounts and increases in lower  interest-bearing or noninterest-bearing
demand deposit  accounts.  Collectively,  the average  balances of money market,
savings,  and certificates of deposit accounts  decreased $2.6 million,  or 8.1%
from $31.9  million at December 31, 2001 to $29.3  million at December 31, 2002,
while the average balance of demand deposit  accounts  increased $2.7 million or
276.5% from  $971,000 at December 31, 2001 to $3.7 million at December 31, 2002.
The  Company was able to attract  demand  deposit  accounts  related to new loan
customers,   while  it  was  able  to  continue  its  trend  to  reduce   higher
interest-bearing  money  market,  savings,  and  time  deposits.   Additionally,
advances from the Federal Home Loan Bank  increased  $1.8 million or 108.1% from
an average balance of $1.7 million at December 31, 2001 to an average balance of
$3.5  million at December  31,  2002.  This  increase  was required to fund loan
demand.

     COMPARISON OF THE TOTAL ALLOWANCE AND RELATED PROVISION FOR LOAN LOSSES. At
December 31, 2002,  the allowance for loan losses was $415,939,  or 1.03% of the
total loan portfolio, compared to $320,000, or 1.0% at December 31, 2001.


                                       -8-
<PAGE>


     Heritage  Bank  experienced  an  overall  increase  in funded  loans net of
allowance  for loan losses,  from December 31, 2001 to December 31, 2002 of $6.3
million.  Changes in funded  loan mix were as follows:  One-to-four  family real
estate loans decreased from $13.1 million to $11.9 million,  and commercial real
estate loans decreased from $5.5 million to $5.2 million, and construction loans
increased from $11.2 million to $17.1 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, commercial business loans increased from $702 thousand
to $1.7 million and consumer loans  increased from $1.2 million to $2.4 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
increased  from 1.8% at December  31, 2001 to 3.61% at December  31,  2002.  Net
chargeoffs  for the year were  $64,060  compared  to $5,000  for the year  ended
December 31, 2001.  Nearly half, or $684,097  (1.7% of the gross  portfolio) was
accountable  to  one  large  credit   consisting  of  two  large   single-family
construction  loans and one lot loan.  These  loans were  secured by real estate
with loan-to-value ratios of 80%, 90%, and 74% respectively. Management has made
specific allocations in the loan loss reserve for these credits.

     During the year 2002, management enhanced the methodology through which the
adequacy of the  allowance  for loan losses is  calculated.  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 chargeoffs to average loans  outstanding  was
..18% for the year ended  December  31, 2002  compared to .02% for the year ended
December 31, 2001.

     For the years ended December 31, 2002 and 2001, the provision for losses on
loans  amounted to  $160,000  and  $15,000,  respectively.  The  increase in the
provision  for the year ended  December 31, 2002  compared to the same period in
2001 was based on one significant  charge-off  incurred during 2002 and internal
methodologies and assumptions  relative to continued overall loan growth.  While
the Company cannot assure that future chargeoffs  and/or  additional  provisions
will not be necessary,  the Company  believes that, as of December 31, 2002, its
allowance for loan losses was adequate.

     NONINTEREST INCOME. Noninterest income decreased $157,000 from $505,000 for
the year ended  December  31, 2001 to $348,000  for the year ended  December 31,
2002. For the year ended 2001, the Company  realized a bonding claim  settlement
of $400,000. During 1999, Heritage Bank engaged in activities with an investment
broker whereby Heritage Bank


                                       -9-

<PAGE>

purchased government agency securities and long-term  certificates of deposit as
part of the management of Heritage  Bank's interest rate risk. It was determined
subsequent to the purchase of these  investments that the investment  broker had
fraudulently  misrepresented  the  amount of  assets  acquired.  Heritage  Bank,
accordingly, realized a loss in regard to this transaction of approximately $1.6
million which was included in noninterest  expense for the year ending  December
31, 1999.

     Exclusive  of the bonding  claim  settlement  in 2001,  noninterest  income
increased  $243,000  during 2002 compared to 2001. Fee income on service charges
and gain on sales of real  estate  increased.  Fee  income  on  service  charges
increased  $42,000 as a result of the continued  shift to  transactional  demand
deposits  accompanied  by an  increase  in fees  charged.  Gain on sales of real
estate  increased  $182,000  as a result  of  marketing  efforts  employed  by a
subsidiary of Heritage Bank to purchase and resell  residential  lots for future
development by builders.

     NONINTEREST  EXPENSE.  Noninterest  expense increased  $597,000 or 41.4% to
$2.0 million for the year ended  December 31, 2002  compared to $1.4 million for
the same  period in 2001.  This  increase  was  primarily  due to an increase of
$379,000 or 62.3% in compensation and benefits, a $132,000 increase in occupancy
expense,  and a $132,000 increase in other miscellaneous  expense.  Compensation
expense increased due to the addition of three experienced lending officers,  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 $90,000 increase in legal and professional  fees,
a $27,000 increase in advertising  expense,  and a $20,000 increase in insurance
expense. The increase in legal and professional fees was primarily  attributable
to costs  associated with the Company's  stock offering  during 2002,  while the
increase in  advertising  expense was due to marketing  efforts  employed by the
Company to stem loan growth  together  with the addition of two loan  production
offices. The increase in insurance expense is attributable to both expansion and
the national and local trend towards rising costs.

     INCOME TAX EXPENSE.  During 2002, the Company  recognized $63,000 of income
tax  expense  which  represents  the  effective  tax rate  multiplied  by pretax
earnings.  During the year ended  December  31,  2001,  the  Company's  existing
valuation  allowance was reduced to $0 and Heritage Bank  recognized  $20,000 of
income tax expense.

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, 2002 Heritage Bank's  liquidity
was  $6.8  million  with a  liquidity  ratio  of  21.1%.  Heritage  Bank met the
requirement in the prior three quarters.


                                       -10-

<PAGE>


     At December 31, 2002,  the Company had  outstanding  commitments  to extend
credit in regard  primarily to  undisbursed  construction  loan proceeds of $6.8
million. In addition,  as of December 31, 2002, the total amount of certificates
of deposit  which were  scheduled to mature in the following 12 months was $19.0
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 $1.8 million are  available at December 31, 2002
as an additional source of funds.

     For  a  discussion  of  commitments  to  extend  credit,   commitments  and
contingencies,  and significant  group  concentrations of credit risk, see notes
14, 17 and 18 to the Consolidated Financial Statements.

     Heritage Bank is required to maintain regulatory capital sufficient to meet
tier I leverage,  tier I risk-based  and total  risk-based  capital ratios of at
least 4.0%,  4.0% and 8.0%,  respectively.  At December 31, 2002,  Heritage Bank
exceeded each of its capital requirements with ratios of 13.5%, 15.8% and 16.8%,
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 June 2001, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
This  Statement  addresses  financial  accounting  and  reporting  for  acquired
goodwill and other intangible assets and supersedes  Accounting Principles Board
Opinion No. 17, "Intangible Assets." It addresses how intangible assets acquired
individually  or with a group  of other  assets  (but not  those  acquired  in a
business combination) should be accounted for in financial statements upon their
acquisition.  This Statement  also  addresses how goodwill and other  intangible
assets should be accounted for after they have been initially  recognized in the
financial  statements.  The  provisions  of this  Statement  are  required to be
applied starting with fiscal years beginning after December 15, 2001.


                                       -11-

<PAGE>


     In June 2001, the FASB issued Statement No. 143 (FAS 143),  "Accounting for
Asset  Retirement  Obligations."  FAS 143  addresses  financial  accounting  and
reporting for obligations  associated with the retirement of tangible long-lived
assets and the associated  asset  requirement  costs.  It requires that the fair
value of a liability  for an asset  retirement  obligation  be recognized in the
period in which it is incurred if a reasonable estimate of fair market value can
be made. The associated  asset retirement costs are to be capitalized as part of
the carrying  amount of the  long-lived  asset.  The  provisions  of FAS 143 are
required to be applied starting with fiscal years beginning after June 15, 2002.

     In August 2001,  the FASB issued  Statement No. 144 (FAS 144),  "Accounting
for the  Impairment  or  Disposal  of  Long-Lived  Assets."  FAS  144  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets.  FAS 144 retains  previous  requirements to recognize an impairment loss
only if the carrying amount of a long-lived  asset is not  recoverable  from its
undiscounted cash flows and to measure impairment loss as the difference between
the carrying  amount and fair value of the asset.  The provisions of FAS 144 are
required to be applied  starting with fiscal years  beginning after December 15,
2001.

     In October 2002, the FASB issued Statement No. 147 (FAS 147)  "Acquisitions
of Certain  Financial  Institutions."  FAS 147  amends  FASB  Statement  No. 72,
"Accounting  for Certain  Acquisitions  of Banking or Thrift  Institutions"  and
requires that acquisitions of financial  institutions be accounted for under FAS
141 and FAS 142.  In  addition,  FAS 147  amends FAS 144 to include in its scope
long-term  customer  relationship  intangible assets of financial  institutions.
Furthermore, it clarifies that a branch acquisition that meets the definition of
a business  should be accounted for as a business  combination;  otherwise,  the
transaction  should be accounted for as an  acquisition  of net assets that does
not  result  in the  recognition  of  goodwill.  The  provisions  of FAS 147 are
effective for all transactions on or after October 1, 2002.

     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.

     The Company's policy is to adopt recently issued accounting  pronouncements
as of their required  effective  date.  With respect to adoption of FAS 142, FAS
144 and FAS 147 during  2001 and 2002,  there was no  significant  impact on the
Company's  operations.  With respect to planned  adoption of FAS 143 and FAS 148
during  2003 and 2004,  respectively,  the  Company  does not  believe  that the
effects of adoption will have a material impact on its financial statements.


                                       -12-




<PAGE>
                 [PAYNE FALKNER SMITH & JONES, P.C. LETTERHEAD]

                          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, 2002 and 2001 and
the related consolidated statements of income, 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, 2002 and 2001, 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.


/s/ Payne Falkner Smith & Jones, P.C.
-------------------------------------
Dallas, Texas
February 19, 2003

                                       -13-

<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                           Consolidated Balance Sheet

                           December 31, 2002 and 2001

                                 (In Thousands)

                                                          2002         2001
                                                          ----         ----
ASSETS
------

Cash and due from banks                                  $ 3,872     $    978
Federal funds sold                                           600        1,100
                                                         -------     --------
      Total cash and cash equivalents                      4,472        2,078
Interest bearing deposits in other banks                     793        1,151
Securities available for sale                              1,921        1,923
Loans, net                                                37,990       31,669
Accrued interest receivable                                  240          269
Bank premises and equipment, net                             693          604
Other assets                                               1,491          949
                                                        --------     --------
      Total assets                                      $ 47,600     $ 38,643
                                                        ========     ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Deposits                                                $ 34,134     $ 32,682
Advances from Federal Home Loan Bank                       5,400        1,940
Other liabilities                                            149           90
                                                        --------     --------
      Total liabilities                                   39,683       34,712
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            -
    Additional paid-in capital                             4,471            -
    Retained earnings                                      4,017        3,895
    Unearned ESOP shares                                    (361)           -
    Accumulated other comprehensive
         income , net of tax                                  12           36
                                                        --------     --------
                                                           8,144        3,931
     Treasury stock at cost                                 (227)          -
                                                        --------     --------
      Total stockholders' equity                           7,917        3,931
                                                        --------     --------
      Total liabilities and stockholders' equity        $ 47,600     $ 38,643
                                                        ========     ========

          See accompanying notes to consolidated financial statements.

                                       -14-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                        Consolidated Statement of Income

                 For the Years Ended December 31, 2002 and 2001

                                 (In Thousands)


                                                          2002        2001
Interest income:
     Loans                                              $ 2,957     $ 2,566
     Investment securities                                  109         302
     Other                                                  109         194
                                                        -------     -------

             Total interest income                        3,175       3,062
                                                        -------     -------

Interest expense:
     Deposits                                               996       1,546
     Advances from Federal Home Loan Bank                   142         118
                                                        -------     -------

              Total interest expense                      1,138       1,664
                                                        -------     -------

Net interest income                                       2,037       1,398

Provision for loan losses                                   160          15
                                                        -------     -------

Net interest income after provision for loan losses       1,877       1,383
                                                        -------     -------

Noninterest income:
     Fee income and service charges                          91          49
     Net gain on redemption of interest bearing
         deposits in other banks                              6           -
     Bonding claim settlement                                 -         400
     Net gain on sales of real estate                       182           -
     Other                                                   69          56
                                                        -------     -------


              Total noninterest income                      348         505
                                                        -------     -------

Noninterest expense:
     Loss on securities available for sale                    -          52
     Compensation and benefits                              987         608
     Occupancy                                              308         176
     Data processing                                        124         118
     Other                                                  621         489
                                                        -------     -------

              Total noninterest expense                   2,040       1,443
                                                        -------     -------

Income before income tax expense                            185         445

Income tax expense                                           63          20
                                                        -------     -------

Net income                                              $   122     $   425
                                                        =======      ======
Earnings per share - basic and diluted                     0.29         N/A
                                                        =======      ======


          See accompanying notes to consolidated financial statements.

                                       -15-
<PAGE>

<TABLE>
<CAPTION>



                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

            Consolidated Statement of Changes in Stockholders' Equity

                 For the Years Ended December 31, 2002 and 2001

                                 (In Thousands)



                                                                                         Accumulated
                                                                                            Other
                                                  Additional                             ComprehensiveComprehensive
                              Preferred  Common    Paid in      Retained      Unearned      Income       Income     Treasury
                                Stock     Stock     Capital      Earnings     ESOP Shares  (Loss)       (Loss)        Stock    Total
                              --------- --------- -----------  ------------  ------------------------ ------------ ----------  -----
<S>                                <C>       <C>         <C>        <C>             <C>         <C>                    <C>      <C>

Balance January 1, 2001            $ -       $ -         $ -      $  3,470          $ -         $ (2)                  $ -   $3,468


Net income                           -         -           -           425            -            -          425        -      425
Unrealized gains arising
    during the period
               (net of tax)          -         -           -             -            -           38           38        -       38
                                                                                                      ------------
       Total comprehensive
         income                                                                                             $ 463
                                                                                                      ============

                              --------- --------- -----------  ------------  ----------- ------------             --------   -------
Balance December 31, 2001            -         -           -         3,895            -           36                     -     3,931


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

Sale of common stock                 -         5       4,471             -         (393)           -                     -    4,083
Repayment of ESOP note
   payable                           -         -           -             -           32            -                     -       32
Purchase of treasury
   stock                             -         -           -             -            -            -                  (227)    (227)

                              --------- --------- -----------  ------------  ----------- ------------             --------   -------
Balance December 31, 2002         $ -       $ 5     $ 4,471       $ 4,017        $(361)        $ 12                $ (227)  $ 7,917
                              ========= ========= ===========  ============  =========== ============             ========   =======

</TABLE>


          See accompanying notes to consolidated financial statements.

                                       -16-
<PAGE>

<TABLE>
<CAPTION>



                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY

                      Consolidated Statement of Cash Flows

                 For the Years Ended December 31, 2002 and 2001

                                 (In Thousands)


                                                                                   2002             2001
                                                                                   ----             ----

<S>                                                                               <C>            <C>

Cash flows from operating activities:
Net income                                                                        $  122        $   425
     Adjustments to reconcile net income to
        net cash provided by operating activities:
           Depreciation                                                              126             52
           Provision for loan losses                                                 160             15
           Deferred tax expense                                                       63             20
           Loss on sales of securities available for sale                              -             52
           Net gain on sales of real estate                                         (182)             -
           Other gains                                                                (6)             -
           Decrease in loans held for sale                                             -            449
           Decrease (increase) in accrued interest and other assets                  208           (310)
           Increase (decrease) in accrued interest and other liabilities              71            (19)
                                                                                   -----         ------


              Net cash provided by operating activities                               562           684
                                                                                   ------       -------


Cash flows from investing activities:
Net sales, calls and paydowns of securtities available for sale                     1,566         6,965
Purchases of securities available for sale                                         (1,600)            -
Decrease in interest bearing deposits in other banks                                  364         1,809
Net loans originated                                                               (7,083)       (6,899)
Net additions of property and equipment                                              (215)         (258)
                                                                                   ------       -------

              Net cash (used) provided by investing activities                     (6,968)        1,617
                                                                                   ------       -------


Cash flows from financing activities:
Net increase (decrease) in demand, money market and
     savings accounts                                                               1,167        (3,014)
Net proceeds from certificates of deposits                                            285           924
Net increase in advances from Federal Home Loan Bank                                3,460           114
Net proceeds from sale of common stock                                              4,476             -
Purchase of treasury stock                                                           (227)            -
Net increase in unearned ESOP shares                                                 (361)            -
                                                                                   ------       -------

              Net cash provided (used) by financing activities                      8,800        (1,976)
                                                                                   ------       -------

Net increase in cash and cash equivalents                                           2,394           325

Cash and cash equivalents at beginning of year                                      2,078         1,753
                                                                                   ------       -------
Cash and cash equivalents at end of year                                          $ 4,472       $ 2,078
                                                                                  =======       =======

</TABLE>


          See accompanying notes to consolidated financial statements.

                                       -17-

<PAGE>



                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


                   Notes to Consolidated Financial Statements

                           December 31, 2002 and 2001


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. (Bancshares) 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 Bancshares' common stock in an amount equal
to the consolidated pro forma market value of Bancshares after giving effect to
the conversion.

In January 2002, the Bank engaged in an offering of Bancshares' stock with
priority given first to the Bank's eligible account holders, then to Bancshares'
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.


                                       -18-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


With the consummation of the conversion, Bancshares became the holding company
of the Bank. Bancshares 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.

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.

                                       -19-
<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.

                                       -20-
<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.

                                       -21-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


EARNINGS PER SHARE
------------------

Earnings per share is computed in accordance with FAS 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
earnings per share 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, 2002 and
2001, 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.

                                       -22-
<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.

                                       -23-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


2.   RECENT ACCOUNTING PRONOUNCEMENTS
     --------------------------------

In June 2001, the FASB issued Statement No. 143 (FAS 143), "Accounting for Asset
Retirement Obligations". FAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are to be capitalized as part of the carrying
amount of the long-lived asset. The provisions of FAS 143 are required to be
applied starting with fiscal years beginning after June 15, 2002.

In August 2001, the FASB issued Statement No. 144 (FAS 144), "Accounting for the
Impairment or Disposal of Long-Lived Assets". FAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
FAS 144 retains previous requirements to recognize an impairment loss only if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and to measure impairment loss as the difference between
the carrying amount and fair value of the asset. The provisions of FAS 144 are
required to be applied starting with fiscal years beginning after December 15,
2001.

In October 2002, the FASB issued Statement No. 147 (FAS 147) "Acquisitions of
Certain Financial Institutions." FAS 147 amends FAS Statement No. 72,
"Accounting for Certain Acquisitions of Banking or Thrift Institutions" and
requires that acquisitions of financial institutions be accounted for under FAS
141 and FAS 142. In addition, FAS 147 amends FAS 144 to include in its scope
long-term customer relationship intangible assets of financial institutions.
Furthermore, it clarifies that a branch acquisition that meets the definition of
a business should be accounted for as a business combination; otherwise, the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of FAS 147 are
effective for all transactions on or after October 1, 2002.

In December 2002, the FASB issued Statement No. 148 (FAS 148), "Accounting for
Stock-Based Compensation-Transition and Disclosure." FAS 148 amends FAS
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.

The Company's policy is to adopt recently issued accounting pronouncements as of
their required effective date. With respect to adoption of FAS 142, FAS 144 and
FAS 147 during 2001 and 2002, there was no significant impact on the Company's
operations. With respect to planned adoption of FAS 143 and FAS 148 during 2003
and 2004, respectively, the Company does not believe that the effects of
adoption will have a material impact on its financial statements.

                                       -24-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


3.   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, 2002 and 2001 is
presented as follows (in thousands):
                                                   2002            2001

Cash transactions
Interest expense paid                              $ 1,149         $ 1,673
                                               ============    ============

Interest income received                           $ 3,204         $ 3,043
                                               ============    ============

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


Non cash transactions
Net unrealized (depreciation) appreciation
      on securities available for sale               $ (24)           $ 38
                                               ============    ============

Net additions to other real estate owned             $ 602             $ -
                                               ============    ============


4. 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 earnings per share is as follows (in thousands, except share
amounts):



 Net Income                                       $     126
                                                  =========
 Average common shares outstanding                  414,501
                                                  =========
 Basic and diluted earnings per share             $    0.30
                                                  =========

The computation of earnings per share, assuming the offering of Bancshares'
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
                                                  =========



As of and for the year ended December 31, 2001, the Bank was a mutual
institution and, thus, earnings per share is not reported on the results of
operations for the period then ended.

                                       -25-
<PAGE>

5.  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, 2002 and 2001 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, 2002:
  U.S. Government Agency obligations             $ 1,100               $ -               $ -           $ 1,100
  Mortgage-backed securities                         803                18                 -               821
                                               ---------         ----------        ----------          ------
                                                 $ 1,903              $ 18               $ -           $ 1,921
                                               =========         ==========        ==========          =======

  December 31, 2001:
  U.S. Government Agency obligations               $ 500              $ 19               $ -             $ 519
  Mortgage-backed securities                       1,369                35                 -             1,404
                                               ---------         ----------        ----------          ------
                                                 $ 1,869              $ 54               $ -           $ 1,923
                                               =========         ==========        ==========          =======
</TABLE>

Proceeds from the sales of securities classified as available for sale were
approximately $4,480,000 for the year ended December 31, 2001. Gross gains of
approximately $7,000 and gross losses of approximately $59,000 were realized on
those sales during 2001. There were no sales of securities for the year ended
December 31, 2002.

Investment securities with recorded values of approximately $599,000 and
$1,452,000 were pledged as collateral for purposes required or permitted by law
at December 31, 2002 and 2001, respectively.

The amortized cost and estimated market value of debt and equity securities at
December 31, 2002 are shown below (in thousands). Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without prepayment penalties.


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

Due in one year or less                           $ 1,115         $ 1,115
Due from one year to five years                        28              28
Due from five years to ten years                        1               1
Due after ten years                                   759             777
                                                ---------         -------
                                                  $ 1,903         $ 1,921
                                                =========         =======



                                       -26-
<PAGE>



                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


6.       LOANS AND ALLOWANCE FOR LOAN LOSSES
         -----------------------------------

The  composition  of loans at  December  31,  2002  and  2001  consisted  of the
following (in thousands):


                                               2002              2001
                                             --------          --------
Real estate:
          Residential 1- 4 family            $ 11,947          $ 13,076
          Multi-family                            152               455
          Commercial                            5,210             5,449
          Construction & development           17,089            16,200
                                             --------          --------
                                               34,398            35,180
                                             --------          --------
Commercial business                             1,690               702
                                             --------          --------
Consumer:
          Loans secured by deposits               465               282
          Other                                 1,902               924
                                             --------          --------
                                                2,367             1,206
                                             --------          --------
                                               38,455            37,088

Allowance for loan losses                        (416)             (320)
Deferred fees                                     (49)              (62)
Loans in process                                    -            (5,037)
                                             --------          --------
                                             $ 37,990          $ 31,669
                                             ========          ========


A summary of the activity in the allowance for loan losses for the year ended
December 31, 2002 and 2001 is as follows (in thousands):


                                                  2002             2001
                                                 -----             -----
Balance at beginning of year                     $ 320             $ 310
Provision charged to operations                    160                15
Loans charged-off                                  (64)               (5)
Recoveries                                          -                 -
                                                 -----             -----
Balance at end of year                           $ 416             $ 320
                                                 =====             =====


                                       -27-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY



The Company extends commercial and consumer credit loans primarily to borrowers
in the state of Texas. At December 31, 2002 and 2001, 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 $301,000 and
$578,000 at December 31, 2002 and 2001, respectively, has been recognized in
conformity with FAS 114 as amended by FAS 118. The average recorded investment
in impaired loans during 2002 and 2001 was approximately $440,000 and $532,000,
respectively. The total allowance for loan losses related to these loans was
approximately $17,000 and $87,000 at December 31, 2002 and 2001, respectively.
Interest income recognized on impaired loans for such payments received in 2002
and 2001 was insignificant.

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

7.   ACCRUED INTEREST RECEIVABLE
     ---------------------------

Accrued interest receivable at December 31, 2002 and 2001 consisted of the
following (in thousands):

                                                  2002               2001
                                                 -----              -----
  Loans receivable                               $ 219              $ 247
  Mortgage-backed and related securities            21                 22
                                                 -----              -----
                                                 $ 240              $ 269
                                                 =====              =====

                                      -28-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


8.   BANK PREMISES AND EQUIPMENT
     ---------------------------

Bank premises and equipment at December 31, 2002 and 2001 is summarized as
follows (in thousands):

                                                 2002              2001
                                                -----             -----
Land                                             $ 95              $ 90
Building                                          356               441
Furniture fixtures and equipment                  627               342
                                                -----             -----
                                                1,078               873

Less accumulated depreciation and
     amortization                                (385)             (269)
                                                -----             -----
                                                $ 693             $ 604
                                                =====             =====


9.   OTHER ASSETS
     ------------

Other assets at December 31, 2002 and 2001 consisted of the following (in
thousands):

                                                          2002             2001
                                                        ------             -----
         Other real estate owned, net                    $ 602              $ -
         Federal Home Loan Bank and other stock            533              469
         Lots held for residential development             234                -
         Prepaid expenses                                   54              253
         Net deferred tax asset                             38               89
         Other                                              30              138
                                                        ------            ------
                                                       $ 1,491            $ 949
                                                        ======            ======





                                       -29-
<PAGE>
                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


10.  ADVANCES FROM FEDERAL HOME LOAN BANK
     ------------------------------------

Advances from the Federal Home Loan Bank amounted to approximately $5,400,000
and $1,940,000 at December 31, 2002 and 2001, 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 1.42% to
6.99%.

At December 31, 2002, the scheduled repayments of principal due on outstanding
advances are as follows (in thousands):

                                            Amount     Average Rate
                                           -------     ------------
               2003                        $ 1,000         1.42%
               2004                          3,750         3.26%
               2005                            650         6.99%
                                           -------         ----
                                           $ 5,400         3.37%
                                           =======         ====


11.  DEPOSITS
     --------

Deposits at December 31, 2002 and 2001 are summarized as follows (in thousands):

<TABLE>
<CAPTION>


                                              Weighted Average Rate at
                                              ------------------------
                                               2002             2001                   2002                 2001
                                               ----             ----                   ----                 ----
<S>                                            <C>              <C>                  <C>                  <C>

          Demand accounts                      0.15%            0.50%                $ 3,381              $ 1,931
          Money market                         1.00%            1.00%                  2,518                2,553
          Savings                              0.25%            1.00%                  1,589                1,837
                                                                                     -------              -------
                                                                                       7,488                6,321
                                                                                     -------              -------
        Certificates of deposit:
              1.0% to 1.99%                                                            5,122                1,211
              2.0% to 2.99%                                                           10,775                3,504
              3.0% to 3.99%                                                            2,884                5,139
              4.0% to 4.99%                                                            2,350                3,784
              5.0% to 5.99%                                                            2,447                7,500
              6.0% to 6.99%                                                            3,068                5,223
                                                                                     -------              -------
                                                                                      26,646               26,361
                                                                                     -------              -------
        Total deposits                                                              $ 34,134             $ 32,682
                                                                                    ========             ========
</TABLE>

                                       -30-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


At December 31, 2002, scheduled maturities of certificates of deposit are as
follows (in thousands):

                                               Amount      Average Rate
                                             --------      ------------
                        2003                 $ 19,030         2.63%
                        2004                    4,591         3.97%
                        2005                    1,326         3.32%
                        2006                      211         3.50%
                        2007                    1,488         4.27%
                                             --------         -----
                                             $ 26,646         2.96%
                                             ========         ====


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

                                             2002                 2001
                                            -----              -------
Demand deposits                               $ 6                  $ 7
Money market                                   25                   45
Savings                                        16                   24
Certificates of deposit                       949                1,470
                                            -----              -------
                                            $ 996              $ 1,546
                                            =====              =======

12.  INCOME TAXES
     ------------

The provision for income tax for the years ended December 31, 2002 and 2001,
consisted of the following (in thousands):

                                            2002                 2001
        Income tax expense:                 ----                 ----
           Current                          $  -                 $  -
           Deferred                           63                   20
                                            ----                 ----
           Income tax expense               $ 63                 $ 20
                                            ====                 ====



                                       -31-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


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

                                      2002        %            2001        %
                                      ----      ----          -----      ----
   Taxes based on statutory rate      $ 63      34.0          $ 151      34.0
   Reduction in the valuation
      allowance for the net
      deferred tax asset                 -         -           (144)    (32.4)
      Other                              -         -             13       2.9
                                      ----      ----          -----      ----
                                      $ 63      34.0           $ 20       4.5
                                      ====      ====          =====      ====

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, 2002 and 2001 are as follows (in thousands):

                                                                 2002      2001
                                                                 ----      ----
Deferred tax assets:
     Net operating loss carryforward                              $ 3     $ 132
     Allowance for loan losses                                    109        80
     Deferred loan fees and gains                                  55        21
     Other                                                          6         7
                                                                 ----      ----
         Total deferred tax assets                                173       240
                                                                 ----      ----
Deferred tax liabilities:
     Stock dividends not recognized for tax purposes               37        32
     Bank premises & equipment                                     15        17
     Accrual to cash adjustment                                    77        84
     Net unrealized gain on available for sale securities           6        18
                                                                 ----      ----
         Total deferred tax liabilities                           135       151
                                                                 ----      ----
         Net deferred tax asset                                  $ 38      $ 89
                                                                 ====      ====


At December 31, 2002 and 2001, respectively, the Company had net operating loss
carryforwards for federal income tax purposes of approximately $8,000 and
$387,000 that will expire in 2019.

Included in other assets at December 31, 2002 and 2001 are net deferred tax
assets of approximately $38,000 and $89,000, respectively.



                                       -32-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


13.  RELATED PARTY TRANSACTIONS
     --------------------------

In the ordinary course of business, the Company has and expects to continue to
have transactions including borrowings, with its executive officers, directors
and their affiliates. In the opinion of management, such transactions are on the
same terms, including interest rates and collateral requirements, as those
prevailing at the time for comparable transactions with unaffiliated persons.
There were no related party loans at December 31, 2002 and 2001.


14.  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, 2002 and 2001, the
approximate amounts of these financial instruments were as follows (in
thousands):

                                                        2002              2001
                                                       -------           -------
   Financial instruments whose contract
     amounts represent credit risk:
          Commitments to extend variable rate credit   $ 6,244           $ 5,099
          Commitments to extend fixed rate credit          544                 -
          Letters of credit                                  -                 -
                                                       -------           -------
                                                       $ 6,788           $ 5,099
                                                       =======           =======



                                       -33-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


Commitments to extend fixed rate credit and the related interest rates are as
follows at December 31, 2002 (in thousands):

            7.00% to 7.49%              $ 321
            7.50% to 7.99%                 19
            8.00% to 8.49%                193
            8.50% to 8.99%                  -
            9.00% to 9.50%                 11
                                        -----
                                        $ 544
                                        =====


Commitments to extend variable rate credit are at rates ranging from 4.25% to
8.25% as of December 31, 2002, and 5.75% to 10.50% at December 31, 2001.

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.



                                       -34-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


The estimated fair values of the Company's financial instruments were as follows
at December 31, 2002 and 2001 (in thousands):

<TABLE>
<CAPTION>


                                                              2002                                  2001
                                                  Carrying             Fair             Carrying             Fair
                                                    Amount             Value              Amount             Value
                                                  --------             -----            --------             -----
<S>                                                <C>               <C>                 <C>               <C>

Financial assets:
      Cash and due from banks and
           federal funds sold                      $ 4,472           $ 4,472             $ 2,078           $ 2,078
      Interest bearing deposits                        793               728               1,151             1,148
      Federal Home Loan Bank stock                     533               533                 469               469
      Securities available for sale                  1,921             1,921               1,923             1,923
      Loans and loans held for sale                 37,990            37,995              31,669            30,622
      Accrued interest receivable                      240               240                 269               269

Financial liabilities:
      Deposits                                      34,134            34,230              32,682            33,175
      Accrued interest payable                          29                29                  40                40
      Other borrowings                               5,400             5,338               1,940             2,017

Off balance sheet assets:
      Commitments to extend credit                       -                 -                   -                 -
      Standby letters of credit                          -                 -                   -                 -

</TABLE>



15.  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 Bancshares. The
ESOP expense was approximately $54,000 for the year ended December 31, 2002.

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
Bancshares 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, 2002 the
note payable associated with the ESOP was $361,000.



                                       -35-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


16.      OTHER NONINTEREST EXPENSE

Other noninterest expense amounts are summarized as follows at December 31, 2002
and 2001 (in thousands):

                                                       2002             2001
                                                       ----             ----

Advertising and public relations                       $ 63             $ 32
Dues and subscriptions                                    7               12
Exam, assessments and audit expense                      22               75
Consulting fees                                         104               98
Directors fees                                           52               60
Franchise tax expense                                     6                6
Legal fees                                               66               54
Travel                                                   18                -
Office expense                                           27               37
Filing fees                                              44                9
Employee training                                        36               13
Other                                                   176               93
                                                       ----             ----
                                                      $ 621            $ 489
                                                      =====            =====


17.  COMMITMENTS AND CONTINGENCIES
     -----------------------------

The Company is a defendant in two lawsuits filed by former employees for alleged
discrimination and harassment. These suits ask for unspecified damages. Outside
counsel for the Company has advised at this stage in the proceedings an opinion
as to the probable outcome cannot be given. The Company believes these suits are
without merit and is vigorously defending its position.

18.  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.



                                       -36-
<PAGE>

                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


At December 31, 2002, the Company has a concentration of funds on deposit in
excess of federally insured limits at three independent correspondent banks in
the following approximate amounts (in thousands):

                                             Amount

Noninterest bearing accounts                   $ 52

Federal funds sold                              500
                                              -----
                                              $ 552
                                              =====


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

19.  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
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, 2002 and 2001, that the Bank meets all capital adequacy
requirements to which it is subject.

As of December 31, 2002 and 2001, 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, 2002 that management believes have changed the Bank's category.



                                       -37-
<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
                                      Actual                    Adequacy Purposes              Action Provisions
                                -------------------          ----------------------          ---------------------
                                Amount        Ratio          Amount           Ratio          Amount          Ratio
                                ------        -----          ------           -----          ------          -----
<S>                               <C>             <C>          <C>                 <C>         <C>               <C>

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

As of December 31, 2001:
     Total Risk-Based
        Capital (to Risk-
        Weighted Assets)          $ 4,215         16.1%  =>    $ 2,090    =>       8.0%  =>    $ 2,612   =>      10.0%
     Tier I capital (to Risk-
        Weighted Assets)          $ 3,895         14.9%  =>    $ 1,045    =>       4.0%  =>    $ 1,567   =>       6.0%
     Tier I capital (to Adjusted
        Total Assets)             $ 3,895          9.9%  =>    $ 1,566    =>       4.0%  =>    $ 1,957   =>       5.0%
     Tangible Capital (to Total
        Adjusted Assets)          $ 3,895          9.9%  =>      $ 587    =>       1.5%  =>      $ 978   =>       2.5%

</TABLE>



The following is a reconciliation of equity capital in accordance with Generally
Accepted Accounting Principles (GAAP) with total risk based capital at December
31, 2002 and 2001, respectively (in thousands):

                                                      2002             2001
                                                    -------          -------
          GAAP equity capital                       $ 6,310          $ 3,931
          Unrealized gains on available
               for sale securities                      (12)             (36)
          Allowance for loan losses                     416              320
                                                    -------          -------
          Total risk-based capital                  $ 6,714          $ 4,215
                                                    =======          =======



                                       -38-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY





20.  CONDENSED FINANCIAL INFORMATION ON HERITAGE BANCSHARES, INC.
     -----------------------------------------------------------

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



                             CONDENSED BALANCE SHEET

          Assets

          Cash and due from banks                                   $ 90
          Loans                                                    1,861
          Investment in subsidiary                                 6,310
          Other                                                       24
                                                                 -------
                                                                 $ 8,285
                                                                 =======
          Liabilities and Stockholders' Equity

          Accrued liabilities                                      $ 368
          Stockholders' equity                                     7,917
                                                                 -------
                                                                 $ 8,285
                                                                 =======

                           CONDENSED INCOME STATEMENT

          Interest income                                           $ 43
          Expenses                                                  (107)
                                                                 -------
          Loss before income tax benefit and undistributed
               earnings of subsidiary                                (64)
          Income tax benefit                                          22
                                                                 -------
          Loss before undistributed earnings of subsidiary           (42)
          Equity in earnings of subsidiary                           164
                                                                 -------
          Net income                                               $ 122
                                                                 =======


                                       -39-
<PAGE>


                    HERITAGE BANCSHARES, INC. AND SUBSIDIARY


21.  LOSS ON INVESTMENTS
     -------------------

During 1999, the Bank engaged in certain activities with an investment broker
(Broker) whereby the Bank purchased certain government agency securities and
long-term certificates of deposits as part of the management of the Bank's
interest rate risk. It was determined subsequent to the purchase of the relating
investments that the Broker had fraudulently misrepresented the amount of assets
acquired. The Bank, accordingly, realized a loss in regard to this transaction
of approximately $1,599,000 in its 1999 consolidated financial statements.

During June 2001, the Bank agreed to a bonding claim settlement of $400,000. The
amount is included in non-interest income in the accompanying consolidated
statement of income for the year ended December 31, 2001.



                                       -40-
<PAGE>


                             STOCKHOLDER INFORMATION

     Heritage  Bancshares,  Inc. is a Delaware  corporation and savings and loan
holding  company.  Heritage  Bank,  SSB,  its  wholly  owned  subsidiary,  is  a
Texas-chartered  stock savings bank which conducts business from its main office
located at 102 West High Street,  Terrell,  Texas 75160,  telephone number (972)
563-2657.


                                STOCK INFORMATION

     The common stock of Heritage  Bancshares,  Inc. is listed for  quotation on
the OTC Electronic Bulletin Board under the symbol "HRGB." As of March 25, 2003,
there  were 134  stockholders  of record  and  473,248  shares  of common  stock
outstanding.

     The  following  table  shows  the high and low bid  prices  for each of the
quarters  in 2002  following  the  Company's  completion  of its  initial  stock
offering in  February  2002.  The source of the prices is from the OTC  Bulletin
Board web site, which is located at http://www.otcbb.com.

          Quarter Ended             High                     Low
     -----------------------       ------                   ------

     March 31, 2002                $11.85                   $11.05
     June 30, 2002                  12.80                    11.65
     September 30, 2002             12.65                    12.00
     December 31, 2002              13.00                    12.16



                         ANNUAL MEETING OF STOCKHOLDERS

     The Annual Meeting of Stockholders will be held on May 7, 2003 at 9:00 a.m.
at the First Baptist Church of Terrell,  403 North  Catherine  Street,  Terrell,
Texas 75160.


                              STOCKHOLDER REQUESTS

     Requests  for annual  reports,  quarterly  reports and related  stockholder
literature should be directed to the Corporate  Secretary,  Heritage Bancshares,
Inc., 102 West High Street, Terrell, Texas 75160.

     We   make   available   on   our   web   site,    which   is   located   at
http://www.bankheritage.com,  a link to the Securities and Exchange  Commission.
Investors are  encouraged to access our annual report on Form 10-KSB,  quarterly
reports on Form 10-QSB and current  reports on Form 8-K which we  electronically
file with the SEC and the other information about our business and operations on
our web site.


                                       -41-

<PAGE>


     Stockholders  needing  assistance  with stock  records,  transfers  or lost
certificates, please contact the Company's transfer agent.


                                 TRANSFER AGENT

                         Registrar and Transfer Company
                                10 Commerce Drive
                         Cranford, New Jersey 07016-3572
                                 1-800-525-7686






                                       -42-



<PAGE>


                                                     DIRECTORS


J. PAT BAKER                                MARY GAYLE RAMSEY

Chairman of the Board. Retired former       Self employed attorney in private
Chief Executive Officer, Terrell Federal    practice, Mary Gayle Ramsey, P.C.,
Savings & Loan Association, Terrell, Texas  Terrell, Texas


JOHN H. MACKEY                              MILTON LEE RISINGER

President and Chief Executive Officer       Self employed veterinarian, Risinger
of the Company and Heritage Bank            Veterinary Hospital, Terrell, Texas


JOY MILTON CATLIN                           THOMAS J. WAGEMAN

Retired former manager, Kaufman County      Managing General Partner of TLT, Ltd
Title & Abstract Co., Kaufman, Texas        Savoy, Texas-a financial services
                                            consulting business.  Member of the
SWITZER L DEASON                            board of directors of First Horizon
                                            Asset Securities, Inc., Nomas
President, Crux Financial Services Inc.,    Corp. and Saxon Capital, Inc.
Belton, Texas


                               EXECUTIVE OFFICERS

JOHN H. MACKEY                              JON D. PATTERSON

Director, President and Chief Executive     Executive Vice President, Chief
Officer of the Company and Heritage Bank    Financial Officer and Secretary of
                                            the Company and Heritage Bank
JAMES C. CHAMPION

Executive Vice President and Chief
Lending Officer of Heritage Bank


                                       -43-


<PAGE>


                                  HERITAGE BANK
                                ADVISORY DIRECTOR


                     JOE THOMAS ROGERS


                     Former Secretary of the Company and
                     Heritage Bank; retired former engineer,
                     U.S.D.A., Soil Conservation Service,
                     Terrell, Texas




                     INDEPENDENT ACCOUNTANTS

                     Payne Falkner Smith & Jones, P.C.
                     9641 Inwood
                     Dallas, Texas 75220




                                       -44-

<PAGE>




                           HERITAGE BANCSHARES, INC.
                                  P.O. Box 39
                              Terrell, Texas 75160
                       (972) 563-2657 Fax (972) 563-6814