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SECURITIES AND EXCHANGE COMMISSION


Washington, D. C. 20549


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FORM 10-KSB





Mark One





|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------




For the fiscal year ended December 31, 2001





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------




For the transition period
from  to





Commission File Number: 000-33201





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REPUBLIC BANCSHARES OF TEXAS, INC.


(Exact name of small business issuer as specified in its charter)





Texas

76-0691991State or other jurisdiction of incorporation or
organization)

(I.R.S. Employer Identification No.)


6809 fm 1960 West, Houston Texas

77069(Address of principal executive offices)

(Zip Code





281-315-1100


(Issuers telephone number)





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Securities registered pursuant to Section 12(b) of the Act:





Title of each class:

Name of each exchange on which registered:None

None:





Securities registered pursuant to Section 12(g) of the Act:





Title of class:





Common Stock,
$1.00 par value





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to
Form 10-KSB.  x





Issuers revenues (interest income and other income) for
the fiscal year ended December 31, 2001 were: $21,071,000.





As of February 28, 2002, the aggregate market value of the common
stock held by non-affiliates of the issuer was approximately $26,929,000.





The number of shares of common stock of the issuer
outstanding as of February 28, 2002, was 1,925,460.




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Documents incorporated by reference. Portions of the Companys Proxy Statement for the
2002 Annual Meeting of Shareholders, which will be filed within 120 days after December 31, 2001, are incorporated by reference into Part III, Items 10-13 of this Form 10-KSB.





Transitional Small Business Disclosure Format:  Yes  ̈ No  x





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CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS





This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the
financial condition, results of operations, cash flows, dividends, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive positions, growth opportunities, benefits from new
technology, plans and objectives of management, and other matters. Statements in this document that are not historical facts are hereby identified as forward-looking statements for the purpose of the safe harbor provided by Section 21E
of the Securities Exchange Act of 1934, as amended and Section 27A of the Securities Act of 1933, as amended. Such forward-looking statements include, without limitation, those relating to the future business prospects, revenues, working capital,
liquidity, capital needs, interest costs and income, wherever they occur in this document, are necessarily estimates reflecting the best judgment of the senior management of Republic Bancshares of Texas, Inc. (the Company) and involve a
number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Such forward-looking statements should, therefore, be considered in light of various important factors,
including those set forth in this document. Important factors that could cause actual results to differ materially from estimates or projections contained in the forward-looking statements include, without limitation:





| |  |  | changes in interest rates and market prices, which could reduce the Companys net interest margins, asset valuations and expense expectations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the timing, impact and other uncertainties of the Companys ability to establish a significant presence in new geographic service areas and capitalize on growth
opportunities;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the failure of assumptions underlying the establishment of and provisions made to the allowance for loan losses;
| | - |  | ----------------------------------------------------------------------------------------------------------------




| |  |  | changes in statutes and government regulations or their interpretations applicable to national banks;
| | - |  | -----------------------------------------------------------------------------------------------------




| |  |  | the effects of vigorous competition in the markets in which the Company operates, including the impact on revenues and earnings of competitive changes to existing price
structures and underlying interest rates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | requirements imposed (or latitude allowed to competitors) by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation (FDIC), or state regulatory bodies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | general economic or business conditions that may be less favorable than expected, resulting in, among other things, lower than expected revenues or greater than expected credit
problems among the Companys customer and potential customer base;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the ability of the Company to acquire, operate and maintain cost effective and efficient systems without incurring unexpectedly difficult or expensive but necessary
technological changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | the loss of senior management or operating personnel and the potential inability to hire qualified personnel at reasonable compensations levels; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | adverse changes in debt and capital markets.
| | - |  | --------------------------------------------




The words estimate, project, intend, expect, believe and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at
various places throughout this document and the other documents incorporated herein by reference. All written and oral forward-looking statements attributable to the Company are expressly qualified in their entirety by these cautionary statements.
The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless the securities laws require it to do so.




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REPUBLIC BANCSHARES OF TEXAS, INC.





ANNUAL REPORT ON FORM 10-KSB


For the year ended December 31, 2001





Table of Contents





PART I.ITEM 1.

DESCRIPTION OF BUSINESS

5ITEM 2.

DESCRIPTION OF PROPERTIES

11ITEM 3.

LEGAL PROCEEDINGS

11ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

12PART II.ITEM 5.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

13ITEM 6.

MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

13ITEM 7.

FINANCIAL STATEMENTS

24ITEM 8.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

24PART III.ITEM 9.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

24ITEM 10.

EXECUTIVE COMPENSATION

24ITEM 11.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

24ITEM 12.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

24PART IV.ITEM 13.

EXHIBITS AND REPORTS ON FORM 8-K

25




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PART I.





ITEM 1.Description Of Business





General





Republic Bancshares of Texas, Inc. (the Company) was incorporated as a business corporation under the laws of the State of Texas on May 17, 2001 for the purpose of serving as
a bank holding company for Republic National Bank (the Bank). On June 20, 2001 RBT Holdings, Inc. (RBT) was incorporated under the laws of Delaware. Pursuant to the terms of an agreement and plan of reorganization dated May
30, 2001, the Bank became a wholly-owned subsidiary of RBT and RBT became a wholly-owned subsidiary of the Company. The reorganization was consummated on September 7, 2001. The reorganization was accounted for in a manner similar to that in
pooling-of-interests accounting and all financial statements reflect the consolidated operations as if the reorganization had taken place prior to the periods covered by such consolidated financial statements. The Bank was chartered as a national
banking association which began operations on November 13, 1998. At December 31, 2001, the Company had total assets of $312.2 million, total gross loans of $258.5 million, total deposits of $288.1 million and shareholders equity of $22.9
million.





The Company offers a diversified range of commercial and personal banking products and services to small- and
medium-sized businesses and consumers located primarily in the Houston metropolitan area. The Bank presently has five (5) full-service banking offices located in Houston. The Bank offers checking accounts, savings accounts, certificates of deposit,
bank-by-mail and 24-hour depository facilities, drive-up banking, cashiers checks, travelers checks, savings bonds, consumer loans, commercial loans, commercial payroll accounts, merchant bank card services, cash management services, safe
deposit boxes and online banking services. The Banks business emphasis is to provide personal, responsive and dependable banking services to individuals, professionals and owner-operated businesses. The Bank does not presently offer trust
services. Through Star-NET, the Banks online banking product, customers can view their account information, transfer funds and download information to a personal finance software program. Online bill payment services are also available for an
additional fee.





Employees and Employment Relations





As of December 31, 2001, the Bank and Company had 94 full-time equivalent employees, 39 of whom were officers. The Bank provides medical insurance and other benefits to full-time employees and considers relations with
employees to be excellent. The Banks employees are not represented by any collective bargaining group.





Competition





The Company has substantial competition in lending funds and attracting and retaining deposits. The primary factors in competing for loans are the range
and quality of lending services offered, interest rates and loan origination fees. In competing for commercial loans (a targeted growth segment), the Company believes that the personal relationships between lending officers and commercial borrowers
is a primary factor. Competition for the origination of real estate loans normally comes from other commercial banks, savings and loans, mortgage bankers, finance and insurance companies. The primary factors in competing for deposits are the range
and quality of financial services offered, the ability to offer attractive rates and the availability of convenient locations. There is direct competition for deposits from commercial banks, credit unions and savings and loans. Additional
significant competition for savings deposits comes from other investment alternatives, such as money market funds, credit unions, and corporate and government securities.





The Company expects increased competition. For a variety of reasons, including legislative developments relating to interstate branching and the ownership of financial institutions, the
consolidation within the financial services industry will likely continue. For the Company, this trend means that the number of locally-owned financial institutions will decrease and that the Bank will increasingly compete against larger regional
and national banks. While these larger regional and national banks will likely attract the largest Texas businesses (sales over $100 million), the Company believes that these large banks are unable to provide the relationship-oriented, customer
service that the Company provides its target customer base of small and medium-sized businesses, professionals and other individuals. Although




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the Company has been able to compete effectively in its market areas to date, there is no assurance that the Company will continue to do so in the future, especially with the rapid changes
occurring within the financial services industry.





Regulation and Supervision





The following discussion sets forth the material elements of the regulatory framework applicable to bank holding companies and their subsidiaries, and provides certain specific
information relevant to the Company and the Bank. This regulatory framework primarily is intended for the protection of depositors and the deposit insurance funds that insure deposits of banks, and not for the protection of security holders. To the
extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to those provisions. A change in the statutes, regulations or regulatory policies applicable to the Company or its
subsidiaries may have a material effect on its business.





General.    As a bank holding company, the
Company is subject to regulation under the Bank Holding Company Act of 1956, as amended, and to inspection, examination and supervision by the Board of Governors of the Federal Reserve System (FRB). Under the Bank Holding Company Act,
bank holding companies generally may not acquire ownership or control of any company, including a bank, without the prior approval of the FRB. In addition, bank holding companies generally may engage, directly or indirectly, only in banking and
those other activities as are determined by the FRB to be closely related to banking. Under legislation effective in 2000, certain bank holding companies can elect to become financial holding companies and engage in broader financial activities. See
The Gramm-Leach-Bliley Act below.





Various governmental requirements, including Sections 23A and 23B of the Federal
Reserve Act, as amended, limit borrowings by the Company and its non-bank subsidiaries and also limit various other transactions between the Company and its non-bank subsidiaries, on the one hand, and the Company, on the other. Section 23A of the
Federal Reserve Act also generally requires that an insured depository institutions loans to its non-bank affiliates be secured, and Section 23B of the Federal Reserve Act generally requires that an insured depository institutions
transactions with its non-bank affiliates be on arms-length terms.





The Bank is subject to extensive supervision,
examination and regulation by the Office of the Comptroller of the Currency (OCC). The Company and its subsidiaries are also affected by the fiscal and monetary policies of the Federal government and the FRB, and by various other
governmental requirements and regulations.





Liability for the Company.    Under current FRB policy, a
bank holding company is expected to act as a source of financial and managerial strength to a subsidiary bank and to maintain resources adequate to support the subsidiary bank. This support may be required at times when the bank holding company may
not have the resources to provide it. In addition, Section 55 of the National Bank Act permits the OCC to order the pro rata assessment of stockholders of a national bank whose capital has become impaired. If a stockholder fails, within three
months, to pay that assessment, the board of directors has a duty to sell the stockholders stock to cover the deficiency. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a Federal bank
regulatory agency to maintain the capital of a subsidiary bank would be assumed by the bankruptcy trustee and entitled to priority of payment.





Any depository institution insured by the Federal Deposit Insurance Corporation (FDIC) can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC in connection with:





| |  |  | the default of a commonly controlled FDIC-insured depository institution; or
| | - |  | ----------------------------------------------------------------------------




| |  |  | any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
| | - |  | ----------------------------------------------------------------------------------------------------------------------




Default generally is defined as the appointment of a conservator or receiver and in danger of default generally is defined as
the existence of certain conditions indicating that a default is likely to occur in the absence of regulatory assistance. Also, if a default occurred with respect to a bank, any capital loans to the bank from its parent holding company would be
subordinate in right of payment to payment of the banks depositors and certain of its other obligations.




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Capital Requirements.    The Company is subject to risk-based
capital requirements and guidelines imposed by the FRB, which are substantially similar to the capital requirements and guidelines imposed by the OCC on the Bank. For this purpose, a depository institutions or holding companys assets and
certain specified off-balance sheet commitments are assigned to four risk categories, each weighted differently based on the level of credit risk that is ascribed to those assets or commitments. In addition, risk-weighted assets are adjusted for
low-level recourse and market-risk equivalent assets. A depository institutions or holding companys capital, in turn, is divided into three tiers:





| |  |  | core, or Tier 1, capital, which consists primarily of stockholders equity less certain identifiable intangible assets and certain other assets;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | supplementary, or Tier 2, capital, which includes, among other items, certain other debt and equity investments that do not qualify as Tier 1 capital; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | market risk, or Tier 3, capital, which includes qualifying unsecured subordinated debt.
| | - |  | -----------------------------------------------------------------------------------------




Like other bank holding companies, the Company currently is required to maintain Tier 1 and Total Capital (the sum of Tier 1, Tier 2 and Tier 3 capital) equal to at
least 4% and 8% of its total risk-weighted assets (including certain off-balance-sheet items, such as unused lending commitments and standby letter of credit), respectively. At December 31, 2001, the Company met both requirements, with Tier 1 and
Total Capital equal to 8.6% and 9.7%, respectively, of its total risk-weighted assets.





The FRB also requires bank holding
companies to maintain a minimum Leverage Ratio, defined as Tier 1 capital to average adjusted total assets, of 3%, if the bank holding company has the highest regulatory rating and meets certain other requirements, or of at least 4% if
the bank holding company does not meet these requirements. At December 31, 2001, the Companys leverage ratio was 8.6%, which exceeded the minimum leverage ratio to which it was subject.





The FRB may set capital requirements higher than the minimums noted above for holding companies whose circumstances warrant it. For example, bank holding companies experiencing or
anticipating significant growth may be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the FRB has indicated that it will consider a
Tangible Tier 1 Capital Leverage Ratio, which would deduct all intangibles and other indicia of capital strength in evaluating proposals for expansion or new activities.





The Bank is subject to similar risk-based and leverage capital requirements adopted by the OCC. The Company and the Bank were in compliance with the applicable minimum capital
requirements as of December 31, 2001.





Failure to meet capital requirements could subject the Company to a variety of
enforcement remedies, including the termination of deposit insurance by the FDIC, and to certain restrictions on its business, which are described immediately below.





FDICIA.    The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), among other things, identifies five capital categories for
insured depository institutionswell capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalizedand requires Federal bank regulatory agencies to implement systems for prompt
corrective action for insured depository institutions that do not meet minimum capital requirements based on these categories. FDICIA imposes progressively more restrictive constraints on operation, management and capital distributions,
depending on the category in which an institution is classified. Unless a bank is well-capitalized, it is subject to restrictions on its ability to offer brokered deposits and on certain other aspects of its operations. An undercapitalized bank must
develop a capital restoration plan and its parent bank holding company must guarantee the banks compliance with the plan up to the lesser of 5% of a banks assets at the time it became undercapitalized and the amount needed to comply with
the plan.





As of December 31, 2001, the Bank was adequately capitalized, based on the prompt corrective action ratios and
guidelines described above. It should be noted, however, that a banks capital category is determined solely for the




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purpose of applying the OCCs, or the FDICs, prompt corrective action regulations and that the capital category may not constitute an accurate
representation of the banks overall financial condition or prospects.





Dividend
Restrictions.    For the foreseeable future, the principal source of revenues to the Company is the payment of dividends by the Bank. Federal and state statutory provisions limit the amount of dividends that the Bank can pay
to the Company without regulatory approval. Dividend payments by national banks are limited to the lesser of:





| |  |  | the level of undivided profits; and
| | - |  | -----------------------------------

| |  |  | absent regulatory approval, an amount not in excess of net income for the current year combined with retained net income for the preceding two years.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------




In addition, Federal bank regulatory authorities have authority to prohibit the Bank from engaging in an unsafe or unsound
practice in conducting business. The payment of dividends, depending upon the Banks financial condition at the time of the proposed dividend payment, could be deemed to constitute an unsafe or unsound practice. The Banks ability to pay
dividends in the future is currently, and could be further, influenced by bank regulatory policies and capital guidelines.





The
Company has no plans to pay dividends in the foreseeable future.





Deposit Insurance
Assessments.    The deposits of the Company are insured up to regulatory limits by the FDIC, and, accordingly, are subject to deposit insurance assessments to maintain the Bank Insurance Fund (the BIF), which is
administered by the FDIC. The FDIC has adopted regulations establishing a permanent risk-related deposit insurance assessment system. Under this system, the FDIC places each insured bank in one of nine risk categories based on (1) the banks
capitalization and (2) supervisory evaluations provided to the FDIC by the institutions primary Federal regulator. Each insured banks insurance assessment rate is then determined by the risk category in which it is classified by the
FDIC. The annual insurance premiums on bank deposits insured by the BIF currently vary between $0.00 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $0.27 per $100 of deposits for banks
classified in the lowest capital and supervisory evaluation categories.





Interstate Banking and
Branching.    Under the Riegle-Neal Interstate Banking and Branching Efficiency Act (Interstate Act), subject to certain concentration limits and other requirements:





| |  |  | bank holding companies, such as the Company, are permitted to acquire banks and bank holding companies located in any state;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------




| |  |  | any bank that is a subsidiary of a bank holding company is permitted to receive deposits, renew time deposits, close loans, service loans and receive loan payments as an agent
for any other bank subsidiary of that bank holding company; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | banks are permitted to acquire branch offices outside their home states by merging with out-of-state banks, purchasing branches in other states and establishing de novo branch
offices in other states. The ability of banks to acquire branch offices through purchase or opening of other branches is contingent, however, on the host state having adopted legislation opting in to those provisions of the Interstate
Act. In addition, the ability of a bank to merge with a bank located in another state is contingent on the host state not having adopted legislation opting out of that provision of the Interstate Act.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Control Acquisitions.    The Change in Bank Control Act prohibits a person or group of persons from acquiring
control of a bank holding company, unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting stock of a bank
holding company with a class of securities registered under Section 12 of the Exchange Act, such as the Company, would, under the circumstances set forth in the presumption, constitute acquisition of control of the bank holding company.




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In addition, a company is required to obtain the approval of the FRB under the Bank Holding
Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of outstanding common stock of a bank holding company, or otherwise obtaining control or a controlling influence over
that bank holding company.





The Gramm-Leach-Bliley Act.    In November 1999, the Gramm-Leach-Bliley
Financial Modernization Act of 1999 (the GLBA) was signed into law, which allows bank holding companies to engage in a wider range of nonbanking activities, including greater authority to engage in securities and insurance activities.
Under the GLBA, a bank holding company that elects to become a financial holding company may engage in any activity that the FRB, in consultation with the Secretary of the Treasury, determines by regulation or order is (1) financial in nature, (2)
incidental to any such financial activity, or (3) complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The GLBA makes significant
changes in U.S. banking law, principally by repealing the restrictive provisions of the 1933 Glass-Steagall Act. The GLBA specifies certain activities that are deemed to be financial in nature, including lending, exchanging, transferring, investing
for others, or safeguarding money or securities; underwriting and selling insurance; providing financial, investment, or economic advisory services; underwriting, dealing in or making a market in, securities; and any activity currently permitted for
bank holding companies by the FRB under section 4(c)(8) of the Bank Holding Company Act. The GLBA does not authorize banks or their affiliates to engage in commercial activities that are not financial in nature. A bank holding company may elect to
be treated as a financial holding company only if all depository institution subsidiaries of the holding company are well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act.





National banks are also authorized by the GLBA to engage, through financial subsidiaries, in any activity that is permissible for
a financial holding company (as described above) an any activity that the Secretary of the Treasury, in consultation with the FRB, determines is financial in nature or incidental to any such financial activity, except (1) insurance underwriting, (2)
real estate development or real estate investment activities (unless otherwise permitted by law), (3) insurance company portfolio investments and (4) merchant banking. The authority of a national bank to invest in a financial subsidiary is subject
to a number of conditions, including, among other things, requirements that the bank must be well-managed and well-capitalized (after deducting from the banks capital outstanding investments in financial subsidiaries). The GLBA provides that
state banks may invest in financial subsidiaries (assuming they have the requisite investment authority under applicable state law) subject to the same conditions that apply to national bank investments in financial subsidiaries.





Instability of Regulatory Structure





Various legislation, such as the Gramm-Leach-Bliley Act which expanded the powers of banking institutions and their holding companies, and proposals to overhaul the bank regulatory system and limit the investments that a depository
institution may make with insured funds, is from time to time introduced in Congress. Such legislation may change banking statutes and the environment in which the Company and its banking subsidiaries operate in substantial and unpredictable ways.
Neither the Company nor the Bank can determine the ultimate effect that the Gramm-Leach-Bliley Act will have, or the effect that any other potential legislation, if enacted, or implementing regulations with respect thereto, would have, upon the
financial condition or results of operations of the Company or the Bank.





Expanding Enforcement Authority





One of the major additional burdens imposed on the banking industry by FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve and FDIC are possessed of extensive authority to police unsafe or unsound practices and violations of applicable laws and regulations by depository institutions and their holding
companies. For example, the FDIC may terminate the deposit insurance of any institution which it determines has engaged in an unsafe or unsound practice. The agencies can also assess civil money penalties, issue cease and desist or removal orders,
seek injunctions, appoint conservators and receivers and publicly disclose such actions. FDICIA and other laws have expanded the agencies authority in recent years, and the agencies have not yet fully tested the limits of their powers.




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Monetary Policy





The monetary policies of regulatory authorities, including the Federal Reserve, have a significant effect on the operating results of banks and bank holding companies. The Federal Reserve supervises and regulates the
national supply of bank credit. Among the means available to the Federal Reserve to regulate the supply of bank credit are open market purchases and sales of U.S. government securities, changes in the discount rate on borrowings from the Federal
Reserve System and changes in reserve requirements with respect to deposits. These activities are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits on a national basis, and their use
may affect interest rates charged on loans or paid for deposits.





Federal Reserve monetary policies and the fiscal policies of
the federal government have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The Company cannot predict the nature of future monetary and fiscal policies and the effect of
such policies on the future business and earnings of the Bank or the Company.




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|ITEM |  | 2.Description Of Properties
|---- |  | ---------------------------




Facilities





The Bank currently operates from the following five banking office locations in Houston, Texas, and other than the Northwest Freeway office, all of the locations are leased:





The Champions office is located at 6809 FM 1960 West, where the Bank leases approximately 7,000 square feet
in a building constructed in 1999. This office includes a five lane drive-in facility attached to the building. This office opened for business on November 13, 1998. The remaining term of the building and land lease is for seven years at
approximately $18,159 per month, plus a pro rata share of taxes.





The Cypress Station office is located at
1055 FM 1960 West, where the Bank leases approximately 5,000 square feet in a building constructed in 1999. This office includes a four lane drive-in facility. This office opened for business on February 24, 1999. The remaining term of the lease is
for twelve years at approximately $15,980 per month, plus operating expenses.





The River Oaks office is
located at 4200 Westheimer Road, where the Bank leases approximately 7,000 square feet. This office has a four lane drive-in facility. This office opened for business on July 8, 1999. The remaining term of the lease is for seven years at
approximately $13,290 per month.





The Memorial office is located at 10301-A Katy Freeway, where the Bank
leases approximately 6,800 square feet, which includes a three lane drive-in facility. This office opened for business on February 22, 2000. The remaining term of the lease is for three years at approximately $13,940 per month.





The Northwest Freeway office is located at 14604 Northwest Freeway, where the Banks office building is situated on a
1.436 acre tract at the intersection of U.S. Hwy. 290 at Windfern Road in Northwest Houston. The office contains 10,000 square feet which includes a banking facility with a five lane drive-in and office space for most of the Banks operations.
This office opened for business on September 10, 2001.





The following table sets forth specific information on the Banks
offices, each of which offers full banking operations provided by a full complement of lobby staff (including tellers, new account representatives, and lending professionals on site) and safe-deposit boxes, an automated teller machine, and
drive-through banking services:





Banking Office

Size in Square Feet (Approximate)

Location

Deposits at December 31, 2001(In thousands)Champions

7,000

6809 FM 1960 West

$ 106,668Cypress Station

5,000

1055 FM 1960 West

41,152River Oaks

7,000

4200 Westheimer Road

84,314Memorial

6,800

10301-A Katy Freeway

27,570Northwest Freeway

10,000

14604 Northwest Freeway

19,910





|ITEM |  | 3.Legal Proceedings
|---- |  | -------------------




The Company and the Bank are involved in routine legal
proceedings from time to time in the normal course of business. Management does not believe that there is any pending or threatened proceeding against the Company or the Bank which, if determined adversely, would have a material effect on the
business, financial condition or results of operations of the Company or the Bank.




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ITEM 4.Submission Of Matters To A Vote Of Security Holders





No matters were submitted to a
vote of the Companys security holders during the fourth quarter of 2001.





PART II.





ITEM 5.    
Market For Common Equity And Related Stockholder Matters





There is no public trading market for the
shares of common stock of the Company and it is unlikely that an active market will develop for the common stock in the foreseeable future. The Company has no present plans for listing its common stock on a national or regional securities exchange
or with the National Association of Securities Dealers Automated Quotations System. Trades in shares of the Companys stock are often privately negotiated between the buyer and the seller, and the Company does not know the prices at which some
or all of such transactions took place. In March 2000, the Bank sold 720,000 shares of common stock at $12.50 per share. The only other sales by the Company have been through exercise of stock options or purchases through the Employee Stock Purchase
Plan. As of February 28, 2002, there were 1,925,460 shares outstanding and 660 shareholders of record.





The Company has not
declared or paid any cash dividends since inception. See Description of Business-Regulation and Supervision-Dividend Restrictions for a description of regulatory restrictions that limit the ability to pay dividends on common equity.





ITEM 6.    
Managements Discussion And Analysis Or Plan Of Operation





Managements Discussion and
Analysis of financial condition and results of operation of the Company analyzes the major elements of the Companys consolidated balance sheets and statements of income. This section should be read in conjunction with the Companys
consolidated financial statements and accompanying notes and other financial information appearing elsewhere in this document.





The financial position and results of operations as of December 31, 2001 and for the period of September 7, 2001 to December 31, 2001 represent the Company and the Bank on a consolidated basis and include the effects of the formation of the
Company and RBT Holdings, Inc. as bank holding companies for the Bank on September 7, 2001. The results of operations for the period of January 1, 2001 to September 7, 2001 and the financial position and results of operations as of and for the
year ended December 31, 2000 represent only the Bank.





For The Years Ended December 31, 2001 and 2000





Overview





For the year ended December 31, 2001,
the Company produced net income of $2.2 million, diluted earnings per share of $1.15 and a return on average equity of 10.3% compared with net income of $700,000, diluted earnings per share of $0.40 and a return on average equity of 4.0% for the
year ended December 31, 2000.





For the year ended December 31, 2001, the net interest margin and the net interest rate spread
were 5.0% and 4.0%, respectively, compared to 5.7% and 4.2%, respectively, at December 31, 2000. During the year ended December 31, 2000, the Company reached and surpassed the breakeven point in its day-to-day operations.




12




---




At December 31, 2001, the Company had total assets of $312.2 million, total loans of $258.5
million, total deposits of $288.1 million and shareholders equity of $22.9 million. At December 31, 2000, the Company had total assets of $211.3 million, total loans of $183.6 million, total deposits of $190.1 million and shareholders
equity of $20.6 million. The amounts at December 31, 2001 reflect an increase of $100.9 million or 47.7% in assets, $74.9 million or 40.8% in loans, $98.0 million or 51.6% in deposits and $2.3 million or 11.0% in shareholders equity compared
with the amounts at December 31, 2000. Since the Bank commenced operations on November 13, 1998, the Banks assets, deposits and loans have each increased during each quarter of operation. The Bank incurred losses during the start-up period
(from November 13, 1998 to September, 2000), during which the Bank added four offices and became profitable during the third quarter of 2000. During 2001, the Bank added one office, added officers and grew each of its other offices through the
efforts of their officers and employees.





Results Of Operations





Net interest income





Net interest income represents the
amount by which interest income on interest-earning assets, including investment securities and loans, exceeds interest expense incurred on interest-bearing liabilities, including deposits and other borrowed funds. Net interest income is the
principal source of the Companys income. Interest rate fluctuations, as well as changes in the amount and type of earning assets and liabilities, combine to affect net interest income.





Net interest income before provision for loan losses was $12.2 million for the year ended December 31, 2001 as compared to $8.3 million for the year ended December 31, 2000. This
represents an increase of $3.9 million or 47.9%. An increase in the average earning asset base of $97.1 million partially offset by a decrease in the net interest margin of 64 basis points primarily account for the difference. Along with the
addition of the Northwest Freeway Office in September, 2001, strong growth continued in all aspects of the Companys lending and deposit-gathering efforts throughout the year.





The Companys deposits grew from $190.1 million at December 31, 2000 to $288.1 million at December 31, 2001, an increase of $98.0 million or 51.6%. Growth in
noninterest-bearing deposits accounted for $22.9 million or 43.6% of the increase. The growth of noninterest-bearing deposits helped the Company maintain a differential of 109 basis points between the net interest margin and net interest spread
attained. For the years ended December 31, 2001 and 2000, the Company posted a net interest margin of 5.0% and 5.7%, respectively.




13




---




The following table presents, for the years ended December 31, 2001 and 2000, the total dollar
amount of average balances, interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. Average balances are derived
from average daily balances and the yields and costs are established by dividing income or expense by the average balance or liability. At December 31, 2001 and 2000, the Company had extended no loans for which the interest thereon was exempt from
taxation, had made no investments in tax-exempt portfolio securities and at December 31, 2001 had one loan for $185,345 which was on a nonaccrual basis. There were no such loans at December 31, 2000. Nonaccrual loans are included in the table but
have no interest income reflected.





Years ended December 31,2001


2000Average outstanding balance


Interest income/expense

Average yield/ rate


Average outstanding balance


Interest income/ expense

Average yield/ rate(Dollars in thousands)Assets:Interest-earning assetsLoans

$
222,478


$
19,109

8.59
%

$
130,153


$
12,894

9.91
%Investment securities


1,732



107

6.18



4,430



280

6.33Time deposits


2,596



72

2.77



1,095



71

6.49Federal funds sold


15,959



544

3.41



9,989



641

6.42Total interest-bearing assets

$
242,765


$
19,832

8.17
%

$
145,667


$
13,886

9.53
%Cash and due from banks


15,617









8,020Premises and equipment


6,552









5,185Other assets


1,689









4,585Allowance for loan losses


(2,262
)








(1,273
)Total assets

$
264,361








$
162,184Liabilities:Interest-bearing liabilitiesSavings

$
1,287


$
20

1.55
%

$
777


$
15

1.93
%Money market checking and savings


88,587



2,706

3.05



57,342



2,749

4.79Time deposits


89,931



4,860

5.40



45,478



2,803

6.16Total savings and time deposits

$
179,805


$
7,586

4.22
%

$
103,597


$
5,567

5.37
%Repurchase agreements and other borrowed funds


55



3

5.45



642



43

6.70Total interest-bearing liabilities

$
179,860


$
7,589

4.22
%

$
104,239


$
5,610

5.38
%Noninterest-bearing liabilities:Demand deposits


61,379









37,388Other liabilities


1,257









2,772Total liabilities


242,496









144,399Shareholders equity


21,865









17,785Total liabilities and equity

$
264,361








$
162,184Net interest income





$
12,243








$
8,276Net yield on interest-earning assets








5.04
%








5.68
%




14




---




The following table presents the effects of changes in volume, rate and rate/volume on interest
income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities.





Year ended December 31, 2001 compared with
2000Increase (decrease) due to change inVolume


Rate


Rate/Volume


Net Change(Dollars in thousands)Interest IncomeLoans

$
9,149


$
(2,937
)

$
3


$
6,215Investment securities


97



(97
)


1



1Time deposits


(171
)


(3
)


1



(173
)Federal funds sold


383



(480
)






(97
)Total interest-earning assets


9,458



(3,517
)


5



5,946Interest expenseSavings


10



(5
)






5Money market checking and savings


1,497



(1,541
)


1



(43
)Time deposits


2,738



(683
)


2



2,057Total savings and time deposits


4,245



(2,229
)


3



2,019Repurchase agreements and other borrowed funds


(39
)


(4
)


3



(40
)Total interest-bearing liabilities


4,206



(2,233
)


6



1,979Change in net interest income

$
5,252


$
(1,284
)

$
(1
)

$
3,967





Provision for loan losses





The provision for loan losses is established through charges to income in the form of a provision to bring the total allowance for loan losses to a
level deemed appropriate by management based on the factors discussed below under Allowance for loan losses. During 2001, due to the increase in the loan portfolio, management made additional provisions to the allowance and
believes the allowance for loan losses is adequate to cover losses inherent in the loan portfolio at December 31, 2001. A provision of $1.1 million and $1.2 million was taken for the years ended December 31, 2001 and 2000, respectively.





Noninterest income





The Banks primary source of noninterest income is service charges on deposit accounts and other banking service-related fees. Noninterest income for the years ended December 31, 2001 and 2000 was $1.2 million
and $800,000, respectively, an increase of $400,000 or 64.1%. The increase is primarily due to growth in the number of customers and services rendered. Noninterest income as a percent of total income, after provision for loan losses, was 6.2% and
5.6% for the years ended December 31, 2001 and 2000, respectively.





Noninterest expense





Generally, noninterest expense is composed of all costs associated with operating the Companys business facilities, obtaining and retaining
banking customer relationships and providing bank services. Major components of noninterest expense typically include: (1) employee salaries and benefits, (2) occupancy-related charges to income (including depreciation of furniture, fixtures, and
equipment), (3) data processing fees and technology-related costs, and (4) all other products used and fees incurred. The Company has added employees to the staff in the existing offices to meet additional customer needs due to growth. In addition
to growth in the existing offices, in 2001, the Company had organizational costs and startup expenses related to the opening of the Northwest Freeway office.




15




---




The following table presents for the periods indicated the major categories of noninterest
expense:





Years ended December 31,2001

2000(Dollars in thousands)Salaries and employee benefits

$
5,205

$
3,697Premises and equipment expenses, net


1,465


1,273Data processing equipment and technology


209


156Data service bureau


427


299Other expenses


1,680


1,332Total noninterest expense

$
8,986

$
6,757





Employee compensation and benefits expenses increased $1.5 million or 40.8%
during 2001 and reflect growth in the Banks management and staff from 66 full-time-equivalent employees as of December 31, 2000 to 94 full-time equivalent employees as of December 31, 2001. This increase is entirely attributable to the opening
of the Northwest Freeway Office and to staff hired to accommodate growth in all aspects of the Companys operations. Management expects to continue to add personnel during 2002 due to the increased personnel needs at the offices as both lobby
and support functions grow.





Non-staff expenses were $3.8 million for the year ended December 31, 2001 compared with $3.1
million for the year ended December 31, 2000, an increase of $721,000 or 23.6%. This increase also reflects the Companys growth during 2001 and 2000, and is particularly influenced by the number of banking offices opened and the services
provided. Occupancy costs increased throughout the year primarily due to the opening of the Northwest Freeway office and the increased depreciation due to the purchase of furniture, fixtures, and equipment for this facility and the expansion of the
Banks computers, data systems and telephone technology.





Financial Condition





Total assets steadily increased to $312.2 million at December 31, 2001, up $100.9 million or 47.7% from $211.3 million at December 31, 2000. Loans, the largest single asset, increased to
$258.5 million at December 31, 2001 representing a growth of 40.8% over the $183.6 million in loans at December 31, 2000.





Loan portfolio





The Banks primary lending focus is on commercial loans and owner-occupied real estate
loans to local businesses. Typically, the Banks customers have financing requirements between $100,000 and $500,000. The Bank makes commercial loans primarily to small and medium-sized businesses and to professionals. The Bank offers a variety
of commercial loan products including revolving lines of credit, letters of credit, working capital loans and loans to finance accounts receivable, inventory and equipment. Many of the Banks commercial loans have floating rates, are for
varying terms, generally not exceeding three years, are personally guaranteed by the business owner and are secured by accounts receivable, inventory and/or other business assets. In addition to commercial loans secured solely by non-real estate
business assets, the Bank makes commercial loans that are secured by owner-occupied real estate, as well as other business assets. The Banks commercial mortgage loans are secured by first liens on real estate, typically have floating interest
rates and amortize over a 15 year period with balloon payments due at the end of three years.




16




---




In underwriting commercial real property loans, consideration is given to the propertys
operating history, future operating projections, current and projected occupancy, location and physical condition. The underwriting analysis also includes credit checks, appraisals and a review of the borrowers financial condition. The Bank
makes loans to finance the construction of residential and, to a lesser extent, nonresidential properties. Construction loans generally are secured by first liens on real estate and have floating interest rates. The Bank conducts periodic
inspections, either directly or through an architect or other agent, prior to approval of periodic draws on these loans. Underwriting guidelines similar to those described above with respect to commercial real property are also used in the
Banks construction lending activities. The Bank also makes automobile, boat, home improvement and other loans to consumers, primarily those who have other deposit or loan relationships with the Bank.





The following table summarizes the Banks loan portfolio by type of loan as of December 31, 2001 and 2000:





2001


2000Amount

Percent


Amount

Percent(Dollars in thousands)Commercial

$
113,991

44.1
%

$
76,872

41.9
%Real estate


120,018

46.4
%


91,720

50.0
%Individual


22,340

8.7
%


13,762

7.5
%Other


2,138

0.8
%


1,205

0.6
%Total loans

$
258,487

100.0
%

$
183,559

100.0
%





The increase in total loans from $183.6 million at December 31, 2000 to $258.5
million at December 31, 2001 was primarily due to an increase in the number of banking locations and the addition of loan officers.





Nonperforming assets





The Bank has several procedures in place to assist it in maintaining the overall quality
of its loan portfolio. The Bank has established underwriting guidelines to be followed by its officers, and, when applicable, will also monitor delinquency levels for any negative or adverse trends. The Banks loan review procedures include
approval of lending policies and underwriting guidelines by the Board of Directors, annual independent loan review, approval of large credit relationships by the Banks loan committee and loan quality documentation procedures. There can be no
assurance, however, that the Banks loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.





A loan is placed on nonaccrual status when the loan reaches a past due status of at least 90 days or the loan officer believes the loan may be partially uncollectible. At December 31,
2001 the Bank had one nonaccrual loan with a balance of $185,345 and at December 31, 2000, the Bank had no nonaccrual loans or no accruing loans contractually past due 90 days or more. At December 31, 2001 and 2000, the Bank had one restructured
loan with a balance of $256,000 and $235,000 respectively.




17




---




Allowance for loan lossesCritical Accounting Policy





The Company considers its Allowance for Loan Losses as a policy critical to the sound operations of the Bank. The Company provides for loan losses each
period by an amount resulting from both (a) an estimate by management of loan losses that occurred during the period and (b) the ongoing adjustment of prior estimates of losses occurring in prior periods. The provision for loan losses increases the
allowance for loan losses which is netted against loans on the consolidated balance sheets. As losses are confirmed, the loan is written down, reducing the allowance for loan losses. See Note 3 to the consolidated financial statements for additional
information on loans and the allowance for loan losses.





The allowance for loan losses at December 31, 2001 was $2.9 million
compared with $1.8 million at December 31, 2000. Each of the foregoing amounts constitutes not less than 1.0% of loans outstanding at the respective reporting dates. As of December 31, 2001, $1.9 million of loans had been classified as
substandard. Loans classified as substandard are those loans with clear and defined weaknesses such as a highly-leveraged position, unfavorable financial ratios, uncertain repayment sources, or poor financial condition, any or all of
which may jeopardize recoverability of the debt.





The following table presents an analysis of the allowance for loan losses for
the years ended December 31, 2001 and 2000:





Years ended December 31,2001


2000(In thousands)Balance, beginning of year

$
1,836


$
716Provision for loan losses


1,076



1,204Loans charged off


(55
)


(84
)Recoveries


28



Net charge offs


(27
)


(84
)Balance, end of year

$
2,885


$
1,836




18




---




The following table describes the allocation of the allowance for loan losses among various
categories of loans and provides certain other information for the dates indicated. The allocation is made for analytical purposes and is not necessarily indicative of the categories in which future losses may occur. The total allowance is available
to absorb losses from any segment of the credit portfolio.





December 312001

2000(In thousands)Balance of allowance for loan losses applicable to:Commercial and industrial

$
1,211

$
750Real Estate


1,242


739Individual


342


94Other


90


253Total allowance for loan losses

$
2,885

$
1,836





Where management is able to identify specific loans or categories of loans where
specific amounts of allowance are required, allocations are assigned to those loans. Federal regulators also require that a bank maintain an allowance that is sufficient to absorb an estimated amount of unidentified potential losses based on
managements perception of economic conditions, loan portfolio growth, historical charge-off experience and exposure concentrations. Management of the Bank will monitor these conditions and is committed to maintaining an adequate allowance.





Investment securities





Because of the flatness of the interest rate yield curve throughout 2001 and 2000 and the perceived need to maintain ready funds to meet its strong loan demand, management made no investment security purchases during
2001 or 2000. A portion of the Banks investment securities were called in for redemption due to the downward movement in interest rates in both 2001 and 2000. These securities are all classified as held to maturity.





|The |  | securities held at December 31, 2001 and 2000 mature as follows:
|--- |  | ----------------------------------------------------------------




2001

2000Amortized cost

Gross market value

Amortized Cost

Gross market value( In thousands)Due in one year or less

$


$


$
500

$
500Due after one year through five years


494


516


2,977


2,983Due after five years through ten years











Due after ten years











$
494

$
516

$
3,477

$
3,483




19




---




Deposits





The Banks deposits increased to $288.1 million at December 31, 2001, up from $190.1 million at December 31, 2000, an increase of $98.0 million or 51.6%. The increase was due to the
addition of the Northwest Freeway banking office and officers. Management believes that the increase in noninterest-bearing deposits is even more significant, since noninterest-bearing demand deposits are typically an indicator of the sort of
business banking relationships that constitute the Banks target market. Noninterest-bearing deposits reached $75.4 million at December 31, 2001, up from $52.5 million at December 31, 2000, an increase of 43.6%. For the year ended December 31,
2001, interest-bearing deposits increased 54.6% from $137.6 million at December 31, 2000 to $212.7 million at December 31, 2001.





The daily average balances and weighted average rates paid on deposits for the years ended December 31, 2001 and 2000 are presented below:





Years ended December 31,2001


2000(Dollars in thousands)Interest-bearing demand deposits

$
88,587

3.05
%

$
57,342

4.79
%Savings


1,287

1.55



777

1.99Time


89,931

5.40



45,478

6.16Total interest-bearing deposits


179,805

4.22



103,597

5.37Noninterest-bearing deposits


61,379





37,388Total deposits

$
241,184

3.15
%

$
140,985

3.98
%





Time deposits of $100,000 or more are solicited from markets served by the Bank
and are not sought through brokered sources. Time deposits are a significant source of funds. The following table presents the maturities of time deposits of $100,000 or more as of December 31, 2001:





(In thousands)Maturities of time deposits of $100,000 or moreThree months or less

$
30,398Over three through twelve months


25,918Over one year through three years


2,296Over three years


561Total

$
59,173Weighted average rate on time deposits of $100,00 or more


4.00
%




20




---




Liquidity





Liquidity involves the Banks ability to raise funds to support asset growth or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve
requirements and otherwise to operate the Bank on an ongoing basis. The Banks liquidity needs are primarily met by growth in core deposits. The Bank has arranged access to purchase funds from correspondent banks in the event of need and the
Bank has used these resources during 2000 but does not intend to rely on such sources for an extended period. The cash and federal funds sold positions have been maintained at high levels to create adequate liquidity during the initial operating
period of the Bank, especially in view of the high loan demand experienced to date. Management will, on occasion, take advantage of investment opportunities, and has begun to purchase investment securities as interest rate risk, other debt and
interest market factors, and as Bank liquidity needs warrant. To date, all funds have been invested in U.S. government agency securities. The Banks cash and federal funds sold position, supplemented by receipts of interest income and principal
repayments from such investments along with payments and maturities within the loan portfolio, will remain the primary sources that Bank management will rely on to maintain an adequate liquidity position.





Market risk is the exposure to loss resulting from changes in interest rates. Interest rate risk occurs when assets and liabilities reprice at different
times as interest rates change. For example, if fixed-rate loans are funded with floating-rate deposits, the spread between loan and deposit rates will decline or turn negative if rates increase. The Bank does not engage in trading activities or use
derivative instruments to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Bank does not intend to engage in such activities in the immediate future.





Interest rate risk is managed within the funds management policy of the Bank. The objectives of the funds management policy are to avoid fluctuating net
interest margins and to maintain consistent growth of net interest income through periods of changing interest rates. The Board of Directors oversees implementation of strategies to control interest rate risk. However, because of the volatility of
market rates and uncertainties, there can be no assurance of the effectiveness of management programs to achieve a targeted moderation of risk. Management uses two methodologies to manage interest rate risk: (1) an interest rate shock simulation
model and (2) an analysis of relationships between interest-bearing assets and interest-bearing liabilities.





The following
table summarizes the simulated change in total interest income for parallel shifts of 100 basis points in market interest rates based on the Banks interest-earning asset portfolio at December 31, 2001:





Increase (decrease) in net interest incomeChanges in interest rates (basis points)

Estimated net interest income

Amount


Percent(Dollars in thousands)December 31, 2001+100

$
40,647

$
1,458


3.6
%-


39,189





-100


37,726


(1,463
)

(3.9
%)





The measurements of risk described above are based upon the industry
diversification of the Banks loan portfolio and interest rate exposures at the particular point in time. An instantaneous and sustained 100 basis point change in interest rates is a hypothetical rate scenario, used to calibrate risk.




21




---




The management of interest rate risk is performed by analyzing the maturity and repricing
relationships between interest-earning assets and interest-bearing liabilities over particular periods of time. The interest rate sensitivity gap represents the dollar amount of difference between rate sensitive assets and rate sensitive liabilities
within a given period of time (GAP). A GAP ratio is determined by dividing the rate sensitive assets by the rate sensitive liabilities. A ratio of 1.0 indicates a perfectly matched position, in which case the effect on net interest
income due to interest rate movements would be zero.





The following table summarizes interest rate sensitive assets and
liabilities by their repricing dates at December 31, 2001:





Interest rate sensitivity analysis

1-3 Months


4-6 Months


7-12 Months


1-5 Years


Over 5 years

Total(Dollars in thousands)Loans (1)

$
109,481


$
8,195


$
13,926


$
119,573


$
7,312

$
258,487Securities














494



631


1,125Federal funds sold


30,236


















30,236Total interest bearing assets


139,717



8,195



13,926



120,067



7,943


289,848Savings


1,492


















1,492Money Market checking and savings


116,098


















116,098Time deposits and federal funds purchased


40,187



24,058



20,363



10,495






95,103Total interest-bearing liabilities


157,777



24,058



20,363



10,495






212,693Rate sensitivity GAP (2)

$
(18,060
)

$
(15,863
)

$
(6,437
)

$
109,572


$
7,943

$
77,155Cumulative rate sensitivity GAP

$
(18,060
)

$
(33,923
)

$
(40,360
)

$
69,212


$
77,155Period GAP to total assets


(5.78
)%


(5.08
)%


(2.06
)%


35.10
%Cumulative GAP to total assets


(5.78
)%


(10.87
)%


(13.96
)%


22.17
%


---




|(1) |  | All floating rate loans tied to some form of prime interest rate are classified as 1-3 months.
|--- |  | ----------------------------------------------------------------------------------------------

|(2) |  | Calculated by subtracting rate sensitive interest-bearing liabilities from rate sensitive interest-earning assets.
|--- |  | ------------------------------------------------------------------------------------------------------------------




Capital resources





Shareholders equity increased during 2001 due primarily to the net income in 2001. In 2000, shareholders equity increased primarily due to the proceeds from the sale of $9.0 million of the Companys common stock in March
2000 and the Company achieving profitability in the third quarter of 2000. Shareholders equity stood at $22.9 million at December 31, 2001, up $2.3 million or 11.0% from $20.6 million at December 31, 2000. The ratio of shareholders
equity to total assets was 7.3% at December 31, 2001, compared with 9.7% at December 31, 2000.




22




---




Capital management consists of providing equity to support both current and future operations.
The Company and the Bank are subject to capital adequacy requirements imposed by the Federal Reserve and the OCC. Both the Federal Reserve and the OCC have adopted risk-based capital requirements. The Companys and Banks regulatory
capital amounts and ratios in relation to current regulatory capital requirements for capital adequacy purposes are as follows:





As of December 31, 2001Actual


For capital adequacy purposes


To be well capitalized under prompt corrective action provisionsCapital Requirement

Amount

Ratio


Amount

Ratio


Amount

Ratio(Dollars in thousands)CompanyTotal capital (to risk-weighted assets)

$
25,740

9.7
%

$
21,293

8.0
%


N/A

N/ATier 1 capital (to risk-weighted assets)


22,855

8.6



10,647

4.0



N/A

N/ATier 1 capital (to average assets)


22,855

8.6



10,575

4.0



N/A

N/ABankTotal capital (to risk-weighted assets)

$
25,724

9.7
%

$
21,293

8.0
%

$
26,616

10.0
%Tier 1 capital (to risk-weighted assets)


22,839

8.6



10,647

4.0



15,970

6.0Tier 1 capital (to average assets)


22,839

8.6



10,575

4.0



13,308

5.0





As of December 31, 2000CompanyTotal capital (to risk-weighted assets)

$
22,428

12.0
%

$
14,981

8.0
%


N/A

N/ATier 1 capital (to risk-weighted assets)


20,592

11.0



7,491

4.0



N/A

N/ATier 1 capital (to average assets)


20,592

11.0



6,491

4.0



N/A

N/ABankTotal capital (to risk-weighted assets)

$
22,428

12.0
%

$
14,981

8.0
%

$
18,727

10.0
%Tier 1 capital (to risk-weighted assets)


20,592

11.0



7,491

4.0



11,236

6.0Tier 1 capital (to average assets)


20,592

11.0



6,491

4.0



8,114

5.0




23




---




ITEM 7.Financial Statements





Reference is made to the financial statements, the report thereon, the
notes thereto commencing at page F-1 of this Form 10-KSB, which financial statements, report and notes are incorporated herein by reference.





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





There
have been no disagreements with accountants on any matter of accounting principles or practices or financial statement disclosures during the two-year period ended December 31, 2001.




24




---




PART III.





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





The information under the captions Election of Directors, Identification of Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive Proxy Statement
for its 2002 Annual Meeting of Shareholders (the 2002 Proxy Statement) to be filed with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, is incorporated herein by reference in response to
this item.





ITEM 10.Executive Compensation





The information under the caption Executive Compensation and
Other Matters in the 2002 Proxy Statement is incorporated herein by reference in response to this item.





ITEM
11.Security Ownership of Certain Beneficial Owners and Management





The information under the
caption Beneficial Ownership of Common Stock by Management of the Company and Principal Shareholders in the 2002 Proxy Statement is incorporated herein by reference in response to this item.





ITEM 12.Certain Relationships and Related Transactions





The information under the caption
Interests of Management and Others in Certain Transactions in the 2002 Proxy Statement is incorporated herein by reference in response to this item.




25




---




PART IV.





ITEM 13.Exhibits and Reports On Form 8-k





(A)  REPORTS ON FORM 8-K





No reports on Form 8-K were filed by the Company during the three months ended December 31, 2001.





(B)  EXHIBITS:





Exhibit No.

Description of Exhibit2.1

Agreement and Plan of Reorganization by and among Republic Bancshares of Texas, Inc., Republic National Bank and RBT Holdings, Inc. dated as of May 30, 2001 (incorporated
herein by reference to Exhibit 2.1 to the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on September 27, 2001 (the Form 8-K)).3.1

Articles of Incorporation of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 3.1 to the Companys Form 8-K).3.2

Bylaws of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 3.2 to the Companys Form 8-K).4.1

Specimen certificate for shares of Common Stock of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 4.1 to the Companys Form
8-K).10.1+

Republic Bancshares of Texas, Inc. 1998 Stock Option Plan (incorporated herein by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-8,
Registration No. 333-70458).10.2

Republic Bancshares of Texas, Inc. Employee Stock Purchase Plan (incorporated herein by reference to Exhibit 4.4 to the Companys Registration Statement on Form S-8,
Registration No. 333-70456).21.1

Subsidiaries of Republic Bancshares of Texas, Inc. (incorporated herein by reference to Exhibit 21.1 to the Companys Form 8-K).23.1*

Consent of KPMG LLP


---

|* |  | Filed herewith.
|- |  | ---------------

|+ |  | Represents Management Compensation Agreement.
|- |  | ---------------------------------------------



26




---




SIGNATURES





In accordance with the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.





REPUBLIC BANCSHARES OF TEXAS, INC. (Registrant)By:

/s/    STANLEY H. FLORANCEStanley H. Florance Secretary/Treasurer of the
Company, Executive Vice President and Chief Financial Officer of the Bank





Dated: March 15, 2002





In accordance with the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized. This report to be signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.





Name

Title

Date/s/    C. P. BRYAN C.P. Bryan

Chairman of the Board, President and Chief Executive Officer (Principal
Executive Officer)

March 15, 2002/s/    STANLEY H. FLORANCE Stanley H. Florance

Secretary, Treasurer and Chief Financial Officer (Principal Financial Officer)

March 15, 2002/s/    DONN C. FULLENWEIDER Donn C. Fullenweider

Director

March 15, 2002/s/    WILLIAM H. GRAY William H. Gray

Director

March 15, 2002/s/    JAMES C. HASSELL James C. Hassell

Director

March 15, 2002/s/    WAYNE C. OWEN Wayne C. Owen

Director

March 15, 2002




27




---













Republic Bancshares of Texas, Inc. and Subsidiaries





Consolidated Financial Statements





December 31, 2001 and 2000





(With Independent Auditors Report Thereon)







F-1




---




INDEPENDENT AUDITORS REPORT





The Board of Directors and Shareholders


Republic Bancshares of
Texas, Inc.:





We have audited the accompanying consolidated balance sheets of Republic Bancshares of Texas, Inc. and
subsidiaries (the Company) as of December 31, 2001 and 2000 and the related consolidated statements of income, changes in shareholders 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 Republic Bancshares of Texas, Inc. and
subsidiaries as of December 31, 2001 and 2000 and 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.





KPMG LLP





Houston,
Texas


March 1, 2002







F-2




---

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS





December 31,2001


2000(Dollars in thousands, except share data)AssetsCash and due from banks

$
15,792


$
11,811Federal funds sold


30,236



6,303Total cash and cash equivalents


46,028



18,114Investment securities held to maturity (note 2)


494



3,477Federal Reserve stock


631



593Loans (note 3)


258,487



183,559Less: Allowance for loan losses (note 3)


(2,885
)


(1,836
)Loans, net


255,602



181,723Premises and equipment, net (note 4)


7,544



5,516Accrued interest receivable


1,108



1,153Other assets (note 6)


790



750Total assets

$
312,197


$
211,326Liabilities and shareholders equityLiabilities:Deposits:Noninterest-bearing

$
75,448


$
52,547Interest-bearing (note 5)


212,693



137,550Total deposits


288,141



190,097Accrued interest payable


547



459Other liabilities


654



178Total liabilities


289,342



190,734Commitments and contingencies (notes 7 and 8)Shareholders equity (notes 7 and 9)Common stock, $1 par value; 5,000,000 shares authorized, 1,923,421 issued and outstanding as of December 31, 2001 and 1,922,000
issued and outstanding as of December 31, 2000


1,923



1,922Additional paid-in capital


19,115



19,098Retained earnings (accumulated deficit)


1,817



(428
)Total shareholders equity


22,855



20,592Total liabilities and shareholders equity

$
312,197


$
211,326

















See accompanying notes to consolidated financial statements.




3




---




REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF INCOME





Years ended December 31,2001


2000(Dollars in thousands, except share data)Interest income:Loans, including fees

$
19,109


$
12,894Federal Reserve stock


37



27Investment securities held to maturity


70



253Interest on federal funds sold and interest-bearing deposits in financial institutions


616



712Total interest income


19,832



13,886Interest expense:Interest on interest-bearing deposits


7,586



5,567Other


3



43Total interest expense


7,589



5,610Net interest income before provision for loan losses


12,243



8,276Provision for loan losses


1,076



1,204Net interest income after provision for loan losses


11,167



7,072Noninterest income:Service charges on deposits


777



448Other noninterest income


462



307Total noninterest income


1,239



755Noninterest expense:Salaries and benefits


5,205



3,697Occupancy, net


1,128



1,055Premises and equipment expense


337



218Service bureau fees


427



299Data processing fees


209



156Other


1,680



1,332Total noninterest expense


8,986



6,757Income before federal income tax provision


3,420



1,070Federal income tax provision (benefit) (note 6)Current


1,382



107Deferred


(207
)


257Total federal income tax provision


1,175



364Net income

$
2,245


$
706Earnings per common share:Basic

$
1.17


$
0.41Diluted

$
1.15


$
0.40Shares used in computing per share data:Basic


1,922,258



1,742,005Diluted


1,955,836



1,754,932





See accompanying notes to consolidated financial statements.







4




---

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY





Common stock

Additional Paid-in capital

Retained earnings (accumulated deficit)


Total shareholders equity(Dollars in thousands)Balance at December 31, 1999

$
1,200

$
10,800

$
(1,134
)

$
10,866Issuance of common stock


720


8,280






9,000Exercise of stock options (note 7)


2


18






20Net income








706



706Balance at December 31, 2000


1,922


19,098


(428
)


20,592Issuance of common stock


1


17






18Net income








2,245



2,245Balance at December 31, 2001

$
1,923

$
19,115

$
1,817


$
22,855














See accompanying notes to consolidated financial statements.




F-5




---

REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS





Years ended December 31,2001


2000(In thousands)Cash flows from operating activities:Net income

$
2,245


$
706Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


461



372Accretion of discount on investment securities


(4
)


(9
)Provision for loan losses


1,076



1,204Gain on call of investment securities held to maturity


(13
)


Loss on sale of equipment


2



Deferred income tax (benefit) expense


(207
)


257Decrease (increase) in accrued interest receivable


45



(725
)Increase (decrease) in other assets


167



(271
)Increase in accrued interest payable


88



315Increase in other liabilities


476



217Net cash provided by operating activities


4,336



2,066Cash flows from investing activities:Net increase in loans


(74,955
)


(112,010
)Proceeds from call of investment securities held to maturity


3,000



509Purchases of bank premises and equipment


(2,491
)


(1,574
)Proceeds from sale of assets






15Net purchase of Federal Reserve stock


(38
)


(233
)Net cash used in investing activities


(74,484
)


(113,293
)Cash flows from financing activitiesNet increase in deposit accounts


98,044



90,606Proceeds from the sale of common stock


18



9,000Proceeds from the exercise of stock options






20Net cash provided by financing activities


98,062



99,626Net increase (decrease) in cash and cash equivalents


27,914



(11,601
)Cash and cash equivalents at beginning of year


18,114



29,715Cash and cash equivalents at end of year

$
46,028


$
18,114Supplemental disclosure of cash flow information:Interest paid

$
7,501


$
5,925Taxes paid


1,436



55











See
accompanying notes to consolidated financial statements.




F-6




---




REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2001 AND 2000





(1)    Organization and summary of significant accounting policies





Republic Bancshares of Texas, Inc. (the Company) was incorporated as a business corporation under the laws of the State of Texas on May 17, 2001 for the purpose of serving as
a bank holding company for Republic National Bank (the Bank). On June 20, 2001 RBT Holdings, Inc. (RBT) was incorporated under the laws of Delaware. Pursuant to the terms of an agreement and plan of reorganization dated May
30, 2001, the Bank became a wholly-owned subsidiary of RBT and RBT became a wholly-owned subsidiary of the Company. The reorganization was consummated on September 7, 2001. The reorganization was accounted for in a manner similar to that in
pooling-of-interests accounting and all financial statements reflect the consolidated operations as if the reorganization had taken place prior to the periods covered by such consolidated financial statements. The Bank was chartered as a national
banking association which began operations on November 13, 1998.





The Bank offers a full range of banking services through five
banking offices located in the Houston metropolitan area. The accounting and reporting policies of the Company, RBT and the Bank conform to accounting principles generally accepted in the United States of America and to general practices within the
banking industry.





Use of estimates





The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.





Principles of consolidation





The consolidated financial statements include the amounts of the Company, Bank and RBT. All significant intercompany amounts and transactions have been eliminated in consolidation.





Cash and cash equivalents





Cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold.





Cash and interest-bearing demand deposits of approximately $4.0 million and $1.9 million at December 31, 2001 and 2000, respectively, are maintained to satisfy the Federal Reserve requirement.







F-7




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Investment securities





The Company uses the amortized cost method for investments in debt securities when management has the positive intent and ability to hold such securities to maturity. Investments in
debt securities that are not expected to be held to maturity and equity securities that have readily determinable fair values are to be classified as trading or available for sale and measured at fair value in the consolidated balance sheet.
Unrealized gains and losses on securities classified as trading securities are to be included in the consolidated statement of operations. Unrealized gains and losses on securities classified as available for sale are to be reported as a separate
component of shareholders equity, net of the applicable tax effect. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. All investment securities at December 31, 2001 and 2000 are
classified as held to maturity.





Loans





Interest on commercial and real estate loans is calculated using the simple interest method based on daily average balances of the principal amount outstanding and is included in
earnings. Interest on installment loans is included in earnings using a method that approximates the interest method.





Management continually reviews the loan portfolio to identify loans which, with respect to principal or interest, may become collection problems. When a loan, in managements judgement, becomes doubtful as to the collection of accrued
interest income, it is placed on nonaccrual status and all previously accrued interest is reversed through a charge to earnings. Interest payments received on nonaccrual loans are recognized as income on a cash basis.





Nonrefundable fees (including commitment fees) are recognized into income as the fees occur. The difference in recognizing fees in this manner and in
accordance with Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated withOriginating or Acquiring Loans and Initial Direct Costs of Leases, which generally requires the deferral of
net direct origination fees and costs and subsequent amortization thereof by the interest method, is not material.





A loan is
considered impaired when, based upon current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans are valued using (i) the present
value of expected future cash flows discounted at the effective interest rate of the loan, (ii) the fair value of the underlying collateral, or (iii) the observable market price of the loan.





Provision and allowance for loan losses





The allowance for
loan losses is based on managements evaluation of the loan portfolio under current economic conditions and such other factors as, in managements best judgement, deserve recognition in determining the allowance and resultant provision for
losses.





The real estate properties securing a portion of the Companys loans are primarily located in the Houston, Texas
area. Accordingly, the ultimate collectability of a portion of the Companys loan portfolio is susceptible to changes in market conditions in the area.







F-8




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




Management believes that the allowance for loan losses is adequate. While management uses available information to
recognize loan losses, future additions to the allowance account may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the
Companys allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgements about information available to them at the time of their examination.





Premises and equipment





Premises and equipment are stated at cost, less accumulated depreciation and amortization computed on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the
useful life of the improvements or the remaining term of the lease. Maintenance, repairs and minor improvements are charged to noninterest expense as incurred.





Federal income taxes





Deferred income tax assets and liabilities are determined using the
asset and liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the differences between the book and tax basis of the various balance sheet assets and liabilities and gives current
recognition to changes in tax rates and laws.





Earnings per share





Basic earnings per share (EPS) is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is calculated by dividing net income by
the weighted average diluted shares outstanding. The weighted average number of shares of common stock outstanding were 1,922,358 and 1,742,005 and the weighted average diluted shares outstanding were 1,955,836 and 1,754,932 for the years ended
December 31, 2001 and 2000 respectively.





Stock-based compensation





Statement of Financial Accounting Standards No. 123 (Statement 123), Accounting for Stock-Based Compensation, encourages but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. Management has chosen to account for stock-based compensation in accordance with Statement 123, Accounting for Stock-Based Compensation. Accordingly, compensation cost of stock
options is measured as the excess, if any, of the fair value of the Companys common stock at the date of the grant over the amount an employee must pay to acquire the common stock.





Impaired loans





The Bank adopted Statement of Financial
Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, (Statement 114) as amended by SFAS No. 118,Accounting by Creditors for Impairment of a Loan  Income Recognition and
Disclosures at inception. These pronouncements state that a loan is considered impaired when it is probable that the creditor will be unable to collect all principal and interest amounts due according to the contractual terms of the
loan agreement. Smaller balance homogeneous loans, including single family residential and consumer loans, are excluded from the scope of Statement 114. These loans, however, are considered when determining the adequacy of the allowance for loan
losses.







F-9




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)










Impaired loans are identified and measured
in conjunction with managements review of non-performing loans, classified assets, and the allowance for loan losses. Impairment of large non-homogeneous loans is measured one of three ways: discounting estimated future cash flows, or the
loans market price, or the fair value of the collateral, if the loan is collateral dependent. If the measurement of the loan is less than the recorded amount of the loan, excluding any allowance for credit losses and including accrued
interest, then the impairment is recognized by a charge to operations or an allocation of the allowance for loan losses.





Recent accounting pronouncements





The Financial Accounting Standards Boards (FASB) Statement No. 133
(Statement 133), Accounting for Derivative Instruments and for Hedging Activities, requires companies to recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Statement 133
requires that changes in fair value of a derivative be recognized currently in earnings unless specific hedge accounting criteria are met. Upon implementation of Statement 133, hedging relationships may be redesignated and securities held to
maturity may be transferred to available for sale or trading. The Financial Accounting Standards Boards Statement No. 137 (Statement 137), Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
Statement No. 133, deferred the effective date of Statement 133 to fiscal years beginning after June 15, 2000. The Financial Accounting Standards Boards Statement No. 138 (Statement 138), Accounting for Certain Derivative Instruments
and Certain Hedging Activities, amended the accounting and reporting under Statement 133 for certain derivative instruments, hedging activities, and decisions made by the Derivatives Implementation Group. The Company adopted these statements on
January 1, 2001. The implementation of Statement 133 did not have an impact on the Companys consolidated financial statements as the Company had no derivative instruments.





The FASBs Statement No. 140 (Statement 140), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, replaced the Financial Accounting
Standards Boards Statement No. 125 (Statement 125), Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, but carries over most of Statement 125s provisions without change. Statement 140
elaborates on the qualifications necessary for a special-purpose entity, clarifies sales accounting criteria in certain circumstances, refines accounting for collateral, and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement is effective for transactions occurring after March 31, 2001. Disclosure requirements of this statement and any changes in accounting for collateral were effective for fiscal years ending after December 15, 2000.
The Companys adoption of Statement 140 had no impact on the Companys consolidated financial statements.





In June
2001, the FASB issued Statement No. 141, Business Combinations (Statement 141). Statement 141 requires that any business combination initiated after June 30, 2001 be accounted for using the purchase method of accounting instead of the pooling
of interests method of accounting. Additionally, Statement 141 specifies that intangible assets acquired in a purchase method business combination must need to be recognized and reported apart from goodwill. The implementation of Statement 141 did
not have an impact on the Companys consolidated financial statements as it had no business combinations during the year.




F-10




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)










In June 2001, the FASB issued Statement No.
142, Accounting for Goodwill and Intangible Assets(Statement 142). Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment annually. Any impairment
loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle. Statement 142 also requires that intangible assets with definite useful lives be amortized over their estimated useful
lives to the estimated residual values, and reviewed for impairment in accordance with the FASBs Statement 121 (Statement 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed ofor Statement
144 upon adoption. Statement 142 is effective for the fiscal years beginning after December 15, 2001. The implementation of Statement 142 as of January 1, 2002 did not have an impact on the Companys consolidated financial statements as
the Company does not have any goodwill.





In August, 2001, the FASB issued Statement No. 144, Accounting for the Impairment or
Disposal ofLong-Lived Assets (Statement 144). Statement 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Statement 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for
sale. Assets to be disposed of are reported at the lower of the carrying value less cost to sell. The Company adopted Statement 144 on January 1, 2002 and it did not have any impact on the Companys consolidated financial
statements.





Reclassifications





Certain amounts in the 2000 financial statements have been reclassified to conform to 2001 presentation with no effect on net income or
shareholders equity as previously reported.




F-11




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(2)    Investment securities held to maturity





The amortized cost and estimated market values of investment securities held to maturity at December 31, 2001 follows:





Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value(In thousands)U.S. Government Agencies

$
494

$
22

$


$
516





The amortized cost and estimated market values of investment securities held to
maturity at December 31, 2000 follows:





Amortized cost

Gross unrealized gains

Gross unrealized losses

Estimated fair value(In thousands)U.S. Government Agencies

$
3,477

$
6

$


$
3,483





The securities held at December 31, 2001 and 2000 mature as follows:





2001

2000Amortized cost

Estimated fair value

Amortized cost

Estimated fair value(In thousands)Due in one year or less

$


$


$
500

$
500Due after one year through five years


494


516


2,977


2,983Due after five years through ten years











Due after ten years











$
494

$
516

$
3,477

$
3,483





All investment securities held to maturity at December 31, 2001 and 2000, were
pledged to collateralize public deposits and other purposes required or permitted by law.




F-12




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(3)    Loans





A summary of loans at December 31, 2001 and 2000 follows:





2001

2000(In thousands)Commercial

$
113,991

$
76,872Real estate


120,018


91,720Individual


22,340


13,762Other


2,138


1,205$
258,487

$
183,559





All loans to directors, major shareholders, officers and employees of the Company
and associates of such persons are, in the opinion of management, made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans of like quality
and risk of collectibility. The outstanding balance of such loans as of December 31, 2001 and 2000 was approximately $5.2 million and $1.0 million, respectively.





At December 31, 2001 and 2000, the Company had no recorded investment in impaired loans. At December 31, 2001 and 2000 the Company had an allowance of $2.9 million and $1.8 million
respectively. Management believes the allowance is adequate. One nonaccrual loan with a balance of $185,000 existed at December 31, 2001. No nonaccrual loans existed at December 31, 2000.





The following is a summary of the activity in the allowance for loan losses for the years ended December 31, 2001 and 2000:





2001


2000(In thousands)Balance, beginning of year

$
1,836


$
716Provision for loan losses


1,076



1,204Loans charged off, net of recoveries


(27
)


(84
)Balance, end of year

$
2,885


$
1,836





At December 31, 2001 and 2000, the Bank had one restructured loan in the amount
of $256,000 and $235,000 respectively. The impact to the consolidated financial statements of the restructuring of this loan was insignificant.




F-13




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(4)    Premises and equipment





A summary of premises and equipment, at cost, and accumulated depreciation follows:





Estimated useful lives

December 31,2001


2000(In thousands)Land



$
729


$
729Buildings and leasehold improvements

24 years


4,418



2,998Furniture and equipment

2-10 years


3,328



2,101Construction in progress








161Subtotal




8,475



5,989Less: accumulated depreciation




(931
)


(473
)Premises and equipment, net



$
7,544


$
5,516





Depreciation expense for the years ended December 31, 2001 and 2000 was
approximately $461,000 and $372,000, respectively.





(5)    Interest-bearing deposits





The following table summarizes the types of interest-bearing deposits at December 31, 2001 and 2000:





December 31,2001

2000(In thousands)Savings deposits and NOW accounts

$
21,014

$
14,085Money Market accounts


96,576


57,623Time deposits less than $100,000


35,930


23,734Time deposits of $100,000 or more


59,173


42,108$
212,693

$
137,550





Interest expense on time deposits in denominations of $100,000 or more was
approximately $3,385,000 and $1,908,000 during the years ended December 31, 2001 and 2000, respectively.





The maturities of time
deposits as of December 31, 2001 follows:





In thousands)2002

$
83,1602003


5,9372004


4,2592005


2212006


1,526$
95,103




F-14




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(6)    Federal income taxes





A net deferred tax asset of approximately $532,000 and $325,000 is included in other assets at December 31, 2001 and 2000, respectively. The deferred tax assets relate
primarily to the allowance for loan losses at December 31, 2001 and 2000.





A valuation allowance for the deferred tax assets has
not been recorded as management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.





The income tax expense for the years ended December 31, 2001 and 2000 differs from the amount computed applying the federal income tax rate of 34% to income before federal income tax
provision due to expenses that are nondeductible for tax purposes.





(7)    Compensation plans





Stock compensation





In 1998, the Company adopted
an incentive stock option plan under which options to purchase shares of the Companys common stock may be granted to key employees at a price not less than the par value of the Companys common stock. The options must be exercised within
ten years from the date granted and vest ratably over a period of five years. During 2001 and 2000, the Company granted 13,000 and 69,500 options, respectively.





The Company accounts for the fair value of its grants under those plans in accordance with Statement 123. Compensation expense that was charged against income for the plan described
above was insignificant to the consolidated financial statements for the years ended December 31, 2001 and 2000.





The fair value
of each option grant is estimated on the date of grant using the minimum value method with the following weighted average assumptions as of December 31, 2001 and 2000:





2001


2000Assumptions:Risk-free interest rate

4.3
%

5.9
%Expected life

5 years


5 years







F-15




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







A summary of the status of stock options as of December 31, 2001 and 2000 and the
changes during the years then ended are as follows:





2001

2000Number of shares

Weighted average exercise price

Number of shares


Weighted average exercise priceOutstanding at beginning of year

215,500

$
10.78

158,000


$
10.00Granted

13,000


14.77

69,500



12.50Exercised






(2,000
)


10.00Forfeited






(10,000
)


10.50Outstanding at end of year

228,500

$
11.01

215,500


$
10.78





The following table summarizes information about stock options outstanding at
December 31, 2001 and 2000:





December 31,

Weighted average exercise price

Number of shares

Options outstanding

Options exercisableWeighted average remaining contractual life

Weighted average exercise price

Number of shares

Weighted average exercise price2001

$
11.01

228,500

8.09 years

$
11.01

94,900

$
10.362000


10.78

215,500

9.04 years


10.78

51,200


10.00





Employee stock purchase plan





The Purchase Plan authorizes the offer and sale of up to 300,000 shares of Common Stock to employees of the Company and its subsidiaries, including the Bank. The Purchase Plan is
implemented through three-month purchase periods beginning every January 1, April 1, July 1 and October 1. The offering price per share is an amount equal to 85% of the fair market value of the Common Stock on the last day of the applicable purchase
period. The plan was implemented in August 2001 and a total of 1,421 shares were sold during 2001.





401(k) plan





The Board of Directors has approved a 401(k) plan for employees of the Bank. As of December 31, 2001, the Bank matches 50% of an employees
contributions to the 401(k) plan, up to a maximum of 6% of the employees annual compensation. For the years ended December 31, 2001 and 2000 the Bank contributed approximately $88,600 and $67,300 respectively, to the plan.





(8)  Commitments and contingencies





Commitments to extend credit





In the normal course of business, the Company enters into various transactions
which, in accordance with accounting principles generally accepted in the United States of America, are not included in the consolidated balance sheets. These transactions are referred to as off-balance-sheet commitments. The Company
enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit which involve elements of credit risk in excess of the amounts recognized in the balance
sheet. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.




F-16




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Company enters into contractual commitments to extend credit, normally with
fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds
at specified terms and conditions. Substantially all of the Companys commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated
with certain commitments to extend credit in determining the level of the allowance for loan losses.





Letters of credit are
written conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Companys policies generally require that letters of credit arrangements contain security and debt covenants similar to those
contained in loan agreements.





Cash reserves are commitments to extend credit on a customers transaction deposit account,
whereby the Company will clear draws on the account even if existing funds are insufficient. Outstanding unfunded commitments to extend credit at December 31, 2001 and 2000 are $43,092,000 and $31,678,000, respectively.





The Company is involved in various litigation arising in the normal course of business. In the opinion of management, the ultimate liability, if any,
would not be material to the consolidated financial statements.





Lease commitments





The Company is lessee under operating leases for real estate used for various banking offices. The approximate minimum lease payments under these
leases, at December 31, 2001, for the periods shown are:





Year Ending December 31,

Amount(In thousands)2002

$
7432003


7462004


7802005


6372006


623Thereafter


1,631$
5,160





It is expected that, in the normal course of business, leases that expire will be
renewed or replaced by leases on other property or equipment.





Rent expense under the noncancelable operating leases aggregated
approximately $744,000 and $713,000 for the years ended December 31, 2001 and 2000, respectively.




F-17




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(9)  Regulatory matters





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





Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of
December 31, 2001 and 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject.





As
of December 31, 2001 the most recent notification from the Office of the Comptroller of Currency categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as adequately capitalized
the Bank must maintain minimum total risk-based ratio of 8.0%, Tier 1 risk-based ratio of 4.0% and Tier 1 leverage ratio of 4.0% as set forth in the following table. The Bank maintained ratios in excess of these requirements. There are no conditions
or events that management believes have changed the Banks category.







F-18




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The Companys and Banks regulatory capital amounts and ratios in
relation to its current existing regulatory capital requirements for capital adequacy purposes are as follows:





As of December 31, 2001Actual


For capital adequacy purposes


To be well capitalized under prompt corrective action provisionsCapital Requirement

Amount

Ratio


Amount

Ratio


Amount

Ratio(Dollars in thousands)CompanyTotal capital (to risk-weighted assets)

$
25,740

9.7
%

$
21,293

8.0
%


N/A

N/ATier 1 capital (to risk-weighted assets)


22,855

8.6



10,647

4.0



N/A

N/ATier 1 capital (to average assets)


22,855

8.6



10,575

4.0



N/A

N/ABankTotal capital (to risk-weighted assets)

$
25,724

9.7
%

$
21,293

8.0
%

$
26,616

10.0
%Tier 1 capital (to risk-weighted assets)


22,839

8.6



10,647

4.0



15,970

6.0Tier 1 capital (to average assets)


22,839

8.6



10,575

4.0



13,308

5.0





As of December 31, 2000CompanyTotal capital (to risk-weighted assets)

$
22,428

12.0
%

$
14,981

8.0
%


N/A

N/ATier 1 capital (to risk-weighted assets)


20,592

11.0



7,491

4.0



N/A

N/ATier 1 capital (to average assets)


20,592

11.0



6,491

4.0



N/A

N/ABankTotal capital (to risk-weighted assets)

$
22,428

12.0
%

$
14,981

8.0
%

$
18,727

10.0
%Tier 1 capital (to risk-weighted assets)


20,592

11.0



7,491

4.0



11,236

6.0Tier 1 capital (to average assets)


20,592

11.0



6,491

4.0



8,114

5.0







F-19




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Management intends to continue compliance with all regulatory capital requirements.





For the foreseeable future, the Company does not plan to pay dividends, but instead will retain all earnings to support the
growth of the Company.





|(10)    Disclosures |  | about fair values of financial instruments
|------------------- |  | ------------------------------------------




The following estimated fair values of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgement is
necessarily required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.





The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.





Cash and cash equivalents





For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.





Investment securities held to maturity





Fair values of investment securities held to maturity are estimated based on quoted market prices.





Federal Reserve stock





For Federal Reserve stock held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.





Loans





The
fair value of loans was estimated based on the current market interest rates for similar loans, the remaining maturity, and credit risk. Approximately 42.3% of the Banks loans have variable rates that generally change with market rates.
Consequently, the estimated fair value of these variable rate loans approximates the carrying amount adjusted for anticipated losses as reflected by the allowance for loan losses. The fair value of fixed rate loans has been estimated by discounting
estimated cash flows using current rates at which similar loans would be made.







F-20




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REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Deposits





The fair value of demand deposits, savings accounts and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is
estimated using the rates currently offered for deposits of similar remaining maturities.





Accrued interest receivable and
payable





The carrying amounts of accrued interest approximate their fair values.





The estimated fair values of the Companys financial instruments at December 31, 2001 and 2000 are as follows:





2001

2000Carrying amount

Fair value

Carrying amount

Fair value(In thousands)Financial assets:Cash and cash equivalents

$
46,028

46,028

$
18,114

18,114Investment securities held to maturity


494

516


3,477

3,483Federal Reserve stock


631

631


593

593Loans, net


255,602

264,753


181,723

183,994Accrued interest receivable


1,108

1,108


1,153

1,153Financial liabilities:Deposits

$
288,141

284,086

$
190,097

192,473Accrued interest payable


547

547


459

459





The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2001 and 2000. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been significantly revalued for purposes of these
consolidated financial statements since these dates and, therefore, current estimates of fair value may differ from the amounts presented herein.




F-21




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







(11)  Parent company financial information





Condensed financial information for Republic Bancshares of Texas, Inc. is as follows:





Republic Bancshares of Texas, Inc.





Balance Sheets





December 31,2001

2000(In thousands)Assets:Cash and cash equivalents

$
6

$
Investment in subsidiary


22,849


20,592Total assets

$
22,855

$
20,952Liabilities and shareholders equityShareholders equity

$
22,855

$
20,592Total liabilities and shareholders equity

$
22,855

$
20,592





Republic Bancshares of Texas, Inc.





Statements of Income





Years ended December 31,2001

2000(In thousands)Income:Equity in undistributed earnings of subsidiaries

$
2,245

$
706Net Income

$
2,245

$
706




F-22




---



REPUBLIC BANCSHARES OF TEXAS, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Republic Bancshares of Texas, Inc.





Statements of Cash Flows





Years ended December 31,2001


2000(in thousands)Cash flows from operating activitiesNet income

$
2,245


$
706Adjustments to reconcile net income to net cash provided by (used in )operating activities:Equity in undistributed earnings of subsidiaries


(2,245
)


(706
)Net cash provided by (used in) operating activities






Cash flows from investing activitiesInvestment in subsidiary


(12
)


(9,020
)Net cash used in investing activities


(12
)


(9,020
)Cash flows from financing activitiesProceeds from sale of stock


18



9,000Exercise of stock options (note 7)






20Net cash provided by financing activities


18



9,020Net increase in cash and cash equivalents


6



Cash and cash equivalents at beginning of year






Cash and cash equivalents at end of year

$
6


$





F-23