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

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

                                    FORM 10-K

                                 ---------------
(MARK ONE)
[X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
[ ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                        FOR THE TRANSITION PERIOD FROM TO

                         COMMISSION FILE NUMBER 0-23113

                             PRIME BANCSHARES, INC.
             (Exact name of registrant as specified in its charter)

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

                  TEXAS                                      76-0088973
     (State or other jurisdiction of                      (I.R.S. Employer
     incorporation or organization)                    Identification Number)

         12200 NORTHWEST FREEWAY                                77092
             HOUSTON, TEXAS                                  (Zip Code)
(Address of principal executive offices)

               REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
                                 (713) 209-6000

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

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                             Common Stock, par value
                                 $0.25 per share

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

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

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

         As of March 5, 1998, the number of outstanding shares of Common Stock
was 9,353,020. As of such date, the aggregate market value of the shares of
Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market System on such date, was approximately
$109.7 million.

                      DOCUMENTS INCORPORATED BY REFERENCE:

         Portions of the Company's Proxy Statement for the 1998 Annual Meeting
of Shareholders (Part III, Items 10-13).

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                             PRIME BANCSHARES, INC.
                          1997 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

<TABLE>
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                                                                                                               Page
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<S>                                                                                                             <C>
PART I   .........................................................................................................1
         Item 1.  Business........................................................................................1
                  General  .......................................................................................1
                  Business .......................................................................................2
                  Competition.....................................................................................3
                  Employees.......................................................................................3
                  Supervision and Regulation......................................................................4
         Item 2.  Properties.....................................................................................10
         Item 3.  Legal Proceedings..............................................................................12
         Item 4.  Submission of Matters to a Vote of Security Holders............................................12

PART II  ........................................................................................................12
         Item 5.  Market for Registrant's Common Equity and Related Shareholder Matters..........................12
                  Description of Capital Stock...................................................................13
                  Recent Sales of Unregistered Securities........................................................14
                  Use of Proceeds................................................................................14
         Item 6.  Selected Financial Data........................................................................15
         Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations..........16
                  Overview ......................................................................................17
                  Results of Operations..........................................................................17
                  Financial Condition............................................................................22
         Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................37
         Item 8.  Financial Statements and Supplementary Data....................................................37
         Item 9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........38

PART III ........................................................................................................38
         Item 10.  Directors and Executive Officers of the Registrant............................................38
         Item 11.  Executive Compensation........................................................................38
         Item 12.  Security Ownership of Certain Beneficial Owners and Management................................38
         Item 13.  Certain Relationships and Related Transactions................................................38

PART IV  ........................................................................................................38
         Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K..............................38
</TABLE>



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                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Prime Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1984 to serve as a bank
holding company for Prime Bank (the "Bank"), which was chartered in 1958. 
The Company's headquarters are located at 12200 Northwest Freeway, Houston,
Texas 77092, and its telephone number is (713) 209-6000.

         From its inception until 1988, the Bank primarily served individuals
and small businesses in and around its original principal location in the town
of Channelview, located in the northeastern part of the Houston metropolitan
area. In the mid to late 1980s, the record number of bank and savings and loan
failures caused by a severe downturn in the Texas economy presented the Company
with an opportunity to expand its branch network in the greater Houston area and
expand geographically to other parts of the state, as well as enhance its core
deposit base. From 1988 to 1991, the Company acquired the deposits and certain
assets of seven failed financial institutions, five of which were located in the
Houston area, with the others located in Brenham and San Antonio. In 1994, the
Company acquired the deposits and certain assets of nine branch locations from
First Heights Bank fsb, five of which were subsequently sold, with the Company
retaining branches in Orange, Beaumont, Nederland and Houston. In early 1997,
the Company purchased from a commercial bank the deposits and certain assets
related to three additional branches in Beaumont, Port Arthur and Port Neches,
and acquired by merger First Northwestern Bank, N.A. in Houston. Since the
beginning of 1996, the Company has also established a new full-service branch in
the Houston Galleria area and two loan production offices in San Antonio. As a
result of this expansion activity, the Company has grown from an organization
with two banking locations and assets of $81.2 million at December 31, 1987 to
its current 18 full-service bank locations and assets of $958.4 million at
December 31, 1997.

         The Company has developed a super community banking network, with most
of its offices located either in separate communities or portions of urban areas
that function as distinct communities. Lending and investment activities are
funded from a strong core deposit base consisting of approximately 97,000
deposit accounts from approximately 54,000 households. Each of the Company's
offices has a manager with the authority and flexibility to make pricing
decisions within overall ranges developed by the Company as a form of quality
control. The Company believes that its responsiveness to local customers and
ability to adjust deposit rates and price loans at each location gives it a
distinct competitive advantage. Adequate staffing is provided at each location
to ensure that customers needs are well addressed, and employees are committed
to quality service and developing long-term customer relationships. The Company
provides economic incentives to its officers to develop additional business for
the Company and to cross sell additional products and services to existing
customers.

         The Company continues to look for additional expansion opportunities,
either through acquisitions of existing financial institutions or by
establishing de novo branches or loan production offices. The Company intends to
consider various strategic acquisitions of banks, banking assets or financial
service entities related to banking in those areas that management believes
would complement and help grow the Company's existing business. The Company is
particularly optimistic about the growth potential in the Houston and San
Antonio markets and in 1997 acquired First Northwestern Bank, N.A. in
Houston and opened two loan production offices in San Antonio.

         On December 30, 1997, the Company, the Bank, IBID, Inc., a wholly-owned
subsidiary of the Company and Sunbelt National Bank ("Sunbelt") entered into an
Agreement and Plan of Reorganization (the "Consolidation Agreement"), pursuant
to which Sunbelt will consolidate with a wholly-owned subsidiary of the Company
and, immediately thereafter, will consolidate with and into the Bank
(collectively, the "Consolidations"). At December 31, 1997, and for the year
then ended, Sunbelt had assets of $93.8 million, loans of $52.8 million,
deposits of $84.4

                                       -1-

<PAGE>   4


million, shareholders' equity of $7.0 million and net income of $483,000. The
Consolidation Agreement, which is subject to approval by Sunbelt's shareholders
and various banking regulatory authorities, provides that each issued and
outstanding share of the common stock of Sunbelt ("Sunbelt Stock") will be
converted into the right to receive 2.0023 shares of the common stock of the
Company subject to adjustment pursuant to the Consolidation Agreement.

         Approximately 82.86% of the outstanding Sunbelt Stock is subject to the
Sunbelt National Bank Voting and Stock Restriction Agreement dated as of May 26,
1984 ("Sunbelt Voting Agreement"). Pursuant to the Sunbelt Voting Agreement, the
voting representatives under the Sunbelt Voting Agreement ("Voting
Representatives") will vote all of the Sunbelt Stock subject to the Sunbelt
Voting Agreement. The Voting Representatives executed a Voting Agreement and
Irrevocable Proxy with the Company whereby they agree to vote the Sunbelt Stock
they represent in favor of the Consolidation Agreement. Therefore, it is
anticipated that the Consolidation Agreement will be approved by the
shareholders of Sunbelt. IBID, Inc., as the sole shareholder of the Bank, is
also expected to approve the Consolidation Agreement. The Company expects
consummation of the Consolidations to occur during the second quarter of 1998.

BUSINESS

         In connection with the geographic expansion, market diversification and
deposit acquisitions discussed above, over the past several years the Company
began to seek new lines of business to diversify its asset mix and to further
enhance its profitability. While each new line of business reflects the
Company's efforts to enrich its asset mix, each of these lines of business is an
outgrowth of the community banking and small to medium-sized business lending
that the Company has performed so profitably over the years. Reflective of the
Company's conservative philosophy, each of these businesses has been developed
deliberately by the Company and is subject to various quality controls. The
Company's principal lines of business are the following:

                - Community Banking. The Company has historically extended
         credit through its branch network to owner-operated small to medium
         sized businesses and to consumers. The Company offers businesses a wide
         variety of lending products including term loans, lines of credit and
         fixed asset loans, including real estate and equipment financing. These
         loans, most of which are collateralized, are made available to
         businesses for working capital (including inventory and receivables),
         business expansion (including acquisitions of real estate and
         improvements) and the purchase of equipment and machinery. As a general
         practice, the Company takes as collateral a lien on any available real
         estate, equipment or other assets and obtains the personal guaranty of
         the owner or owners of the business. Consumer loans made by the Company
         include automobile loans, recreational vehicle loans, boat loans, home
         improvement loans and personal loans (both collateralized and
         uncollateralized).

                - Mortgage Banking. The Company uses its existing branch network
         to offer a complete line of single family residential mortgage
         products. The Company generally retains mortgage loans with shorter
         terms or variable rates and sells into the secondary market longer term
         fixed rate loans. As a result, the Company retains approximately half
         of the mortgage loans that it originates. The Company originates
         mortgage loans only in its market areas, and services only the loans
         that it retains. The Company does not buy mortgage loans from other
         sources. The volume of mortgage loans originated by the Company has
         increased from $11.9 million in 1994 to a volume of $39.3 million in
         1997.

                 - Indirect Lending. In 1993, the Company initiated a program 
         of purchasing indirect loans, which are installment loans with typical
         maturities of three to five years originated primarily by automobile 
         dealers for the purpose of financing consumer purchases and sold by the
         dealers to commercial banks and other sources of financing. The Company
         purchases almost exclusively "A"-rated loans primarily from a select
         list of local auto dealers and others after performing its own analysis
         of the loan package. The indirect loan program is staffed by 12 people
         and managed by an officer with over 20 years of

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<PAGE>   5



         experience in this area and a thorough knowledge of the reliability of
         various dealers. The Company also purchases some indirect boat and
         recreational vehicle loans. The program's delinquency ratios of 0.94%
         for the year ended December 31, 1997 and 0.95% for the year ended
         December 31, 1996 compare favorably to the industry average. Similarly,
         the Company's net charge-off ratio of 0.44% at December 31, 1997 is
         well below the industry average for this type of lending. The Company's
         total amount of indirect loans at December 31, 1997 was $101.5 million.
         The Company plans to maintain its current quality controls and grow the
         indirect loan program at a controlled pace. As a matter of operating
         philosophy, the Company is willing to forego the potentially higher
         yield represented by lower grade loans in exchange for the better
         credit quality of the "A"-rated loans.

                - Commercial Banking. In 1994, the Company established a
         separate commercial lending unit as an outgrowth of the Company's
         historical business of making loans to small and medium-sized
         businesses from its various locations. The commercial lending unit is
         staffed with experienced commercial lenders who generate commercial
         loans through solicitations of potential customers primarily in the
         greater Houston and San Antonio markets. The commercial loan customers
         generally have between $5.0 million and $50.0 million in annual sales,
         and the average commercial loan is approximately $300,000. Most of
         these loans are secured by real estate and are backed by the personal
         guaranty of the owners of the business. The Company makes commercial
         loans to a wide variety of industries. The Company intends to expand
         this business by adding additional experienced commercial lenders,
         preferably bankers with an existing commercial loan portfolio.

         The Company's overall business strategy is to (i) continue to service
its small to medium-sized owner-operated businesses and consumer customers by
providing individualized, responsive, quality service through its supercommunity
banking network, (ii) continue to increase its loan to deposit ratio and thereby
enrich its earning asset mix, and (iii) augment its existing market share by
looking for additional expansion opportunities in growth areas, particularly in
the Houston and San Antonio markets.

COMPETITION

         The banking business is highly competitive, and the profitability of
the Company depends principally upon the Company's ability to compete in the
market areas in which its banking operations are located. The Company competes
with other commercial banks, savings banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. Many of such competitors may have greater
financial and other resources than the Company. The Company has been able to
compete effectively with other financial institutions by emphasizing customer
service, technology and local office decision-making; by establishing long-term
customer relationships and building customer loyalty; and by providing products
and services designed to address the specific needs of its customers.
Competition from both financial and non-financial institutions is expected to
continue.

EMPLOYEES

         As of December 31, 1997, the Company had 408 full-time employees, two
of whom were executive officers. The Company provides medical and
hospitalization insurance to its full-time employees. The Company considers its
relations with employees to be excellent.


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SUPERVISION AND REGULATION

         The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.

         The following description summarizes some of the laws to which the
Company and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.

         THE COMPANY. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and it is subject
to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System ("Federal Reserve"). The BHC Act and other federal laws
subject bank holding companies to particular restrictions on the types of
activities in which they may engage, and to a range of supervisory requirements
and activities, including regulatory enforcement actions for violations of laws
and regulations.

         Regulatory Restrictions on Dividends; Source of Strength. It is the
policy of the Federal Reserve that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. The policy provides that bank
holding companies should not maintain a level of cash dividends that undermines
the bank holding company's ability to serve as a source of strength to its
banking subsidiaries.

         Under Federal Reserve policy, a bank holding company is expected to act
as a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.

         In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.

         Activities "Closely Related" to Banking. The BHC Act prohibits a bank
holding company, with certain limited exceptions, from acquiring direct or
indirect ownership or control of any voting shares of any company which is not a
bank or from engaging in any activities other than those of banking, managing or
controlling banks and certain other subsidiaries, or furnishing services to or
performing services for its subsidiaries. One principal exception to these
prohibitions allows the acquisition of interests in companies whose activities
are found by the Federal Reserve, by order or regulation, to be so closely
related to banking or managing or controlling banks, as to be a proper incident
thereto. Some of the activities that have been determined by regulation to be
closely related to banking are making or servicing loans, performing certain
data processing services, acting as an investment or financial advisor to
certain investment trusts and investment companies, and providing securities
brokerage services. Other activities approved by the Federal Reserve include
consumer financial counseling, tax planning and tax preparation, futures and
options advisory services, check guaranty services, collection agency and credit
bureau services, and personal property appraisals. In approving acquisitions by
bank holding companies of companies engaged in banking-related activities, the
Federal Reserve considers a number of factors, and weighs the expected benefits
to the public (such as greater convenience and increased competition or gains in
efficiency) against the risks of possible adverse effects (such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest, or unsound banking practices). The Federal Reserve

                                       -4-

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is also empowered to differentiate between activities commenced de novo and
activities commenced through acquisition of a going concern.

         Securities Activities. The Federal Reserve has approved applications by
bank holding companies to engage, through nonbank subsidiaries, in certain
securities-related activities (underwriting of municipal revenue bonds,
commercial paper, consumer receivable-related securities and one-to-four family
mortgage-backed securities), provided that the affiliates would not be
"principally engaged" in such activities for purposes of Section 20 of the
Glass-Steagall Act. In limited situations, holding companies may be able to use
such subsidiaries to underwrite and deal in corporate debt and equity
securities.

         Safe and Sound Banking Practices. Bank holding companies are not
permitted to engage in unsafe and unsound banking practices. The Federal
Reserve's Regulation Y, for example, generally requires a holding company to
give the Federal Reserve prior notice of any redemption or repurchase of its own
equity securities, if the consideration to be paid, together with the
consideration paid for any repurchases or redemptions in the preceding year, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve may oppose the transaction if it believes that the transaction would
constitute an unsafe or unsound practice or would violate any law or regulation.
Depending upon the circumstances, the Federal Reserve could take the position
that paying a dividend would constitute an unsafe or unsound banking practice.

         The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their nonbanking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1,000,000 for each day
the activity continues.

         Anti-Tying Restrictions. Bank holding companies and their affiliates
are prohibited from tying the provision of certain services, such as extensions
of credit, to other services offered by a holding company or its affiliates.

         Capital Adequacy Requirements. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, based generally on the perceived credit risk of
the asset. These risk weights are multiplied by corresponding asset balances to
determine a "risk-weighted" asset base. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1997, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 13.96% and its ratio of total capital to total
risk-weighted assets was 15.01%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

         In addition to the risk-based capital guidelines, the Federal Reserve
uses a leverage ratio as an additional tool to evaluate the capital adequacy of
bank holding companies. The leverage ratio is a company's Tier 1 capital divided
by its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of December 31, 1997, the Company's leverage
ratio was 6.82%.

         The federal banking agencies' risk-based and leverage ratios are
minimum supervisory ratios generally applicable to banking organizations that
meet certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.


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         Imposition of Liability for Undercapitalized Subsidiaries. Bank
regulators are required to take "prompt corrective action" to resolve problems
associated with insured depository institutions whose capital declines below
certain levels. In the event an institution becomes "undercapitalized," it must
submit a capital restoration plan. The capital restoration plan will not be
accepted by the regulators unless each company having control of the
undercapitalized institution guarantees the subsidiary's compliance with the
capital restoration plan up to a certain specified amount. Any such guarantee
from a depository institution's holding company is entitled to a priority of
payment in bankruptcy.

         The aggregate liability of the holding company of an undercapitalized
bank is limited to the lesser of 5% of the institution's assets at the time it
became undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.

         Acquisitions by Bank Holding Companies. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve before it
may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own
or control, directly or indirectly, more than 5% of the voting shares of such
bank. In approving bank acquisitions by bank holding companies, the Federal
Reserve is required to consider the financial and managerial resources and
future prospects of the bank holding company and the banks concerned, the
convenience and needs of the communities to be served, and various competitive
factors.

         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 Federal Reserve has been notified and has not objected to the transaction.
Under a rebuttable presumption established by the Federal Reserve, 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 Company.

         In addition, any company is required to obtain the approval of the
Federal Reserve under the BHC Act before acquiring 25% (5% in the case of an
acquiror that is a bank holding company) or more of the outstanding Common Stock
of the Company, or otherwise obtaining control or a "controlling influence" over
the Company.

         THE BANK. The Bank is a Texas-chartered banking association, the
deposits of which are insured by the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF") of the FDIC. The Bank is not a member of the
Federal Reserve System; therefore, the Bank is subject to supervision and
regulation by the FDIC and the Texas Department of Banking ("TDB"). Such
supervision and regulation subjects the Bank to special restrictions,
requirements, potential enforcement actions and periodic examination by the FDIC
and the TDB. Because the Federal Reserve regulates the bank holding company
parent of the Bank, the Federal Reserve also has supervisory authority which
directly affects the Bank.

         Equivalence to National Bank Powers. The Texas Constitution, as amended
in 1986, provides that a Texas- chartered bank has the same rights and
privileges that are or may be granted to national banks domiciled in Texas. To
the extent that the Texas laws and regulations may have allowed state-chartered
banks to engage in a broader range of activities than national banks, the
Federal Deposit Insurance Corporation Improvement Act ("FDICIA") has operated to
limit this authority. FDICIA provides that no state bank or subsidiary thereof
may engage as principal in any activity not permitted for national banks, unless
the institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.


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         Branching. Texas law provides that a Texas-chartered bank can establish
a branch anywhere in Texas provided that the branch is approved in advance by
the TDB. The branch must also be approved by the FDIC, which considers a number
of factors, including financial history, capital adequacy, earnings prospects,
character of management, needs of the community and consistency with corporate
powers.

         Restrictions on Transactions With Affiliates and Insiders. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties which are collateralized by the securities or
obligations of the Company or its subsidiaries.

         Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.

         The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

         Restrictions on Distribution of Subsidiary Bank Dividends and Assets.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and it is anticipated that dividends paid by the Bank to the
Company will continue to be the Company's principal source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may be
paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after
paying the dividend, the Bank will be "undercapitalized." The FDIC may declare a
dividend payment to be unsafe and unsound even though the Bank would continue to
meet its capital requirements after the dividend.

         Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.

         Examinations. The FDIC periodically examines and evaluates insured
banks. Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The TDB also conducts examinations of state banks but may accept the
results of a federal examination in lieu of conducting an independent
examination.

         Audit Reports. Insured institutions with total assets of $500 million
or more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such

                                       -7-

<PAGE>   10



institutions must include members with experience in banking or financial
management, must have access to outside counsel, and must not include
representatives of large customers.

         Capital Adequacy Requirements. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.

         The FDIC's risk-based capital guidelines generally require state banks
to have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0%
and a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Bank as for the Company. As of
December 31, 1997, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 13.60% and its ratio of total capital to total risk-weighted assets
was 14.65%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION".

         The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The TDB has issued a policy which generally requires state chartered
banks to maintain a leverage ratio (defined in accordance with federal capital
guidelines) of 6.0%. As of December 31, 1997, the Bank's ratio of Tier 1 capital
to average total assets (leverage ratio) was 6.64%. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION".

         Corrective Measures for Capital Deficiencies. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8.0% or higher; a Tier 1 risk based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated
a CAMEL 1 in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized.

         In addition to requiring undercapitalized institutions to submit a
capital restoration plan, agency regulations contain broad restrictions on
certain activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured depository institution is prohibited from
making capital distributions, including dividends, and is prohibited from paying
management fees to control persons if the institution would be undercapitalized
after any such distribution or payment.

         As an institution's capital decreases, the FDIC's enforcement powers
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.

         Banks with risk-based capital and leverage ratios below the required
minimums may also be subject to certain administrative actions, including the
termination of deposit insurance upon notice and hearing, or a temporary
suspension of insurance without a hearing in the event the institution has no
tangible capital.

         Deposit Insurance Assessments. The Bank must pay assessments to the
FDIC for federal deposit insurance protection. The FDIC has adopted a risk based
assessment system as required by FDICIA. Under this system, FDIC- insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is

                                       -8-

<PAGE>   11



assigned based on its capital levels and the level of supervisory concern the
institution poses to the regulators. In addition, the FDIC can impose special
assessments in certain instances.

         After the one-time SAIF assessment in 1996, the assessment rate
disparity between BIF and SAIF members was eliminated. The current range of BIF
and SAIF assessments is between 0% and 0.27% of deposits.

         The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, but only within a range of
five cents per $100 above or below the premium schedule adopted. Changes in the
rate schedule outside the five cent range above or below the current schedule
can be made by the FDIC only after a full rulemaking with opportunity for public
comment.

         On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalize the SAIF and assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation in 1987. The BIF rate must equal
one-fifth of the SAIF rate through year-end 1999, or until the insurance funds
are merged, whichever occurs first. Thereafter BIF and SAIF payers will be
assessed pro rata for the FICO bond obligations. With regard to the assessment
for the FICO obligation, the current BIF rate is 0.0126% of deposits and the
SAIF rate is 0.0630% of deposits.

         Enforcement Powers. The FDIC and the other federal banking agencies
have broad enforcement powers, including the power to terminate deposit
insurance, impose substantial fines and other civil and criminal penalties and
appoint a conservator or receiver. Failure to comply with applicable laws,
regulations and supervisory agreements could subject the Company or its banking
subsidiaries, as well as officers, directors and other institution-affiliated
parties of these organizations, to administrative sanctions and potentially
substantial civil money penalties. The appropriate federal banking agency may
appoint the FDIC as conservator or receiver for a banking institution (or the
FDIC may appoint itself, under certain circumstances) if any one or more of a
number of circumstances exist, including, without limitation, the fact that the
banking institution is undercapitalized and has no reasonable prospect of
becoming adequately capitalized; fails to become adequately capitalized when
required to do so; fails to submit a timely and acceptable capital restoration
plan; or materially fails to implement an accepted capital restoration plan. The
TDB also has broad enforcement powers over the Bank, including the power to 
impose orders, remove officers and directors, impose fines and appoint 
supervisors and conservators.

         Brokered Deposit Restrictions. Adequately capitalized institutions
cannot accept, renew or roll over brokered deposits except with a waiver from
the FDIC, and are subject to restrictions on the interest rates that can be paid
on such deposits. Undercapitalized institutions may not accept, renew or roll
over brokered deposits.

         Cross-Guarantee Provisions. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.

         Community Reinvestment Act. The Community Reinvestment Act of 1977
("CRA") and the regulations issued thereunder are intended to encourage banks to
help meet the credit needs of their service area, including low and moderate
income neighborhoods, consistent with the safe and sound operations of the
banks. These regulations also provide for regulatory assessment of a bank's
record in meeting the needs of its service area when considering applications to
establish branches, merger applications and applications to acquire the assets
and assume the liabilities of another bank. FIRREA requires federal banking
agencies to make public a rating of a bank's performance under the CRA. In the
case of a bank holding company, the CRA performance record of the banks involved
in the transaction are reviewed in connection with the filing of an application
to acquire ownership or control of shares or assets of a bank

                                       -9-

<PAGE>   12



or to merge with any other bank holding company. An unsatisfactory record can
substantially delay or block the transaction.

         Consumer Laws and Regulations. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.

         INSTABILITY OF REGULATORY STRUCTURE. Various legislation, including
proposals to overhaul the bank regulatory system, expand the powers of banking
institutions and bank holding companies 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
operating environment of the Company and the Bank in substantial and
unpredictable ways. The Company cannot determine the ultimate effect that
potential legislation, if enacted, or implementing regulations with respect
thereto, would have upon the financial condition or results of operations of the
Company or its subsidiaries.

         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, and publicly disclose such actions. FDICIA, FIRREA and other laws
have expanded the agencies' authority in recent years, and the agencies have not
yet fully tested the limits of their powers.

         EFFECT ON ECONOMIC ENVIRONMENT. The policies of regulatory authorities,
including the monetary policy of the Federal Reserve, have a significant effect
on the operating results of bank holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
deposits. These means are used in varying combinations to influence overall
growth and distribution of bank loans, investments and deposits, and their use
may affect interest rates charged on loans or paid for deposits.

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


ITEM 2.  PROPERTIES

         The Company conducts business at 18 full-service banking locations, ten
of which are located in the greater Houston metropolitan area. The Company also
has six offices located in Southeast Texas, one office (and two loan production
offices) in San Antonio, and one office located in Brenham. The following table
sets forth specific information on each such location. The Company's
headquarters are located at 12200 Northwest Freeway in a six story office
building owned by the Bank.

                                      -10-

<PAGE>   13






<TABLE>
<CAPTION>
Branch                                        Location                                   Own or Lease
------                                        --------                                   ------------
<S>                                           <C>                                        <C>
Houston Area

       Channelview                            811 Sheldon Road                           Own
                                              Channelview, Texas 77530

       Houston Commercial                     3434 Tidwell                               Own   
                                              Houston, Texas 77293

       Houston Cypresswood                    1600 Stuebner Airline                      Lease
                                              Houston, Texas 77391

       Houston Galleria Area                  1800 St. James Place, Suite 100            Lease
                                              Houston, Texas 77056

       Houston I-10 East                      10310 East Freeway                         Own
                                              Houston, Texas 77029                       

       Houston Northshore                     13106 Woodforest                           Own
                                              Houston, Texas 77015

       Houston Northwest                      12200 Northwest Freeway                    Own
                                              Houston, Texas 77092

       Houston Port City                      3601 Eastex Freeway                        Own
                                              Houston, Texas 77026

       Huffman                                25100 FM 2100                              Own
                                              Huffman, Texas 77336

       New Caney-Community                    323 Community Drive                        Own
                                              New Caney, Texas 77357
Southeast Texas
       Beaumont West                          8255 Gladys at Major                       Lease
                                              Beaumont, Texas 77706

       I-10 Beaumont                          595 IH-10 N.                               Own
                                              Beaumont, Texas 77706

       Nederland                              1423 Boston Avenue                         Own
                                              Nederland, Texas 77627

       Orange                                 400 N. 16th Street                         Own
                                              Orange, Texas 77630

       Port Arthur                            4100 Gulfway Drive                         Own
                                              Port Arthur, Texas 77642

       Port Neches                            2905 Nall                                  Own
                                              Port Neches, Texas 77651
</TABLE>


                                      -11-

<PAGE>   14




<TABLE>
<S>                                           <C>                               <C>
San Antonio
       San Antonio-Union                      3570 S.W. Military Drive          Own
                                              San Antonio, Texas 78211

       San Antonio -- Citadel Plaza (1)       1747 Citadel Plaza, Suite 121     Lease
                                              San Antonio, Texas 78209

       San Antonio -- Loop 410 (1)            909 N.E. Loop 410, Suite 602      Lease
                                              San Antonio, Texas 78209

Brenham/Washington County                     200 West Vulcan                   Own
                                              Brenham, Texas 77833
</TABLE>

(1)  Indicates loan production office.

ITEM 3.  LEGAL PROCEEDINGS

         Neither the Company nor the Bank is currently a party to any
material legal proceeding.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         No matters were submitted to a vote of security holders during the
fourth quarter of 1997.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

         In September 1997, the Company filed a registration statement
("Registration Statement") with the Securities and Exchange Commission ("SEC")
pursuant to which 2,494,707 shares of the Company's common stock ("Common
Stock") were sold to the public. Prior to this offering, the Company's Common
Stock was privately held and not listed on any public exchange or actively
traded. The Common Stock began trading on September 26, 1997 and is listed on
the NASDAQ National Market System ("NASDAQ NMS") under the symbol "PBTX". The
Company had a total of 9,317,020 shares outstanding at December 31, 1997. As of
March 5, 1998, there were 187 shareholders of record of Common Stock. The
number of beneficial shareholders is unknown to the Company at this time.

         Prior to trading on the NASDAQ NMS, there was no established trading
market for the Common Stock, however, since the Common Stock began trading on
the NASDAQ NMS, the high and low Common Stock prices by quarter were as follows:


<TABLE>
<CAPTION>
1997                                                   HIGH                      LOW
----                                                   ----                      ---
<S>                                                   <C>                      <C>   
Third quarter (since September 26, 1997)              $19.50                   $19.00
Fourth quarter                                         20.88                    18.25
</TABLE>



         Holders of Common Stock are entitled to receive dividends when, as and
if declared by the Company's Board of Directors out of funds legally available
therefor. While the Company has declared dividends on its Common Stock

                                      -12-

<PAGE>   15



since 1990, and paid quarterly dividends aggregating $0.14 per share per
annum in 1997, there is no assurance that the Company will continue to pay 
dividends in the future.

         The principal source of cash revenues to the Company is dividends paid
by the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "SUPERVISION AND
REGULATION -- THE BANK".

         The cash dividends paid per share by quarter were as follows:


<TABLE>
<CAPTION>
                                                       1997                         1996
                                                       ----                         ----
<S>                                                    <C>                          <C>  
Fourth quarter                                       $0.0400                      $0.0333
Third quarter                                         0.0333                       0.0333
Second quarter                                        0.0333                       0.0333
First quarter                                         0.0333                       0.0333
</TABLE>

DESCRIPTION OF CAPITAL STOCK

         The authorized capital stock of the Company consists of (i) 15,000,000
shares of preferred stock ("Preferred Stock"), issuable in series, 1,250,000
shares of which are designated Series B Preferred Stock, 1,000,000 shares of
which were outstanding as of December 31, 1997 and redeemed in January 1998 and
(ii) 50,000,000 shares of Common Stock, $0.25 per share par value, of which
12,010,980 shares were issued and 9,317,020 shares were outstanding as of
December 31, 1997. The terms of any new series of Preferred Stock may be fixed
by the Board of Directors of the Company within certain limits set by the
Company's Articles of Incorporation. As of December 31, 1997, an additional
600,000 shares of Common Stock were issuable upon exercise of the Company's
outstanding employee and director incentive stock options.

         The following discussion of the terms and provisions of the Company's
capital stock is qualified in its entirety by reference to the Company's
Articles of Incorporation and Bylaws, copies of which have been filed as
exhibits to this Annual Report on Form 10-K.

         Common Stock. The holders of the Common Stock are entitled to one vote
for each share of Common Stock owned. Except as expressly provided by law and
except for any voting rights which may be conferred by the Board of Directors on
any shares of Preferred Stock issued, all voting power is in the Common Stock.
Holders of Common Stock may not cumulate their votes for the election of
directors. Holders of Common Stock do not have preemptive rights to acquire any
additional, unissued or treasury shares of the Company, or securities of the
Company convertible into or carrying a right to subscribe for or acquire shares
of the Company.

         Holders of Common Stock will be entitled to receive dividends out of
funds legally available therefor, if and when properly declared by the Board of
Directors. However, the Board of Directors may not declare or pay cash dividends
on Common Stock, and no Common Stock may be purchased by the Company, unless
full dividends have been declared and paid on outstanding Preferred Stock for
the current dividend period and, with respect to any outstanding cumulative
preferred stock, all past dividend periods.

         On the liquidation of the Company, the holders of Common Stock are
entitled to share pro rata in any distribution of the assets of the Company,
after the holders of shares of Preferred Stock have received the liquidation

                                      -13-

<PAGE>   16



preference of their shares plus any cumulated but unpaid dividends (whether or
not earned or declared), if any, and after all other indebtedness of the Company
has been retired.

RECENT SALES OF UNREGISTERED SECURITIES

         On January 28, 1997, the Registrant sold 3,000 shares of Common Stock
to an officer of the Bank at a price of $2.33 per share pursuant to the
officer's exercise of options granted under the Registrant's 1993 Stock Option
Plan.

         On March 26, 1997, the Registrant sold 42,000 shares of Common Stock to
an executive officer of the Registrant at a price of $.833 per share pursuant to
the officer's exercise of options granted under the Registrant's 1984 Stock
Option Plan.

         On March 26, 1997, the Registrant sold 48,000 shares of Common Stock to
an executive officer of the Registrant at a price of $2.33 per share pursuant to
the officer's exercise of options granted under the Registrant's 1993 Stock
Option Plan.

         The consideration for each sale was cash and each sale was made
pursuant to the registration exemption provided by Section 3(a)(11) of the
Securities Act of 1993. The number of shares of Common Stock and the per share
price for the Common Stock have been adjusted to give effect to a 30 for 1
common stock split effected in the form of a stock dividend issued to
shareholders of record as of July 17, 1997.

USE OF PROCEEDS

         The effective date of the Registration Statement for which use of
proceeds information is being disclosed herein was September 25, 1997 and the
SEC file number assigned to the Registration Statement was 333-33001. The
offering (the "Offering") to which the Registration Statement related commenced
on September 17, 1997 and has been terminated following the sale of all 
securities registered. The managing underwriters for the Offering were Keefe, 
Bruyette & Woods, Inc. and Legg Mason Wood Walker Incorporated. The class of 
securities registered by the Registration Statement was the Company's Common 
Stock, par value $0.25 per share.

         For the account of the Company, the number of shares of Common Stock
registered and sold was 478,000, and the aggregate offering price of such shares
was $8,365,000. For the account of certain selling shareholders of the Company,
the number of shares of Common Stock registered and sold was 2,016,707, and the
aggregate offering price of such shares was $35,292,373.

         In connection with the Offering, the Company incurred expenses of
$586,000 for underwriters' discounts and other expenses of $332,000, resulting
in total expenses of $918,000. No Offering expenses were paid to an
affiliate of the Company.

         The net proceeds of the Offering to the Company were $7.4 million, of
which the Company used $6.0 million for redemption of the Company's Series A
Preferred Stock, which was completed in November 1997, $1.0 million for
redemption of the Company's Series B Preferred Stock, which was completed in
January 1998, and $428,000 for working capital.



                                      -14-

<PAGE>   17



ITEM 6.  SELECTED FINANCIAL DATA

               SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY

         The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto, appearing elsewhere in this Annual Report, and the information
contained in "Management's Discussion and Analysis of Financial Condition and
Results of Operations. The selected historical consolidated financial data as of
and for the five years ended December 31, 1997 are derived from the Company's
Consolidated Financial Statements which have been audited by independent public
accountants.

<TABLE>
<CAPTION>
                                                                   AS OF AND FOR THE
                                                                YEARS ENDED DECEMBER 31,
                                          ---------------------------------------------------------------------
                                            1997           1996           1995           1994           1993
                                          ---------      ---------      ---------      ---------      ---------
                                                      (Dollars in thousands, except per share data)
<S>                                       <C>            <C>            <C>            <C>            <C>      
INCOME STATEMENT DATA:
Interest income ......................... $  66,038      $  53,815      $  55,310      $  38,154      $  30,227
Interest expense ........................    30,017         23,741         27,141         14,542         10,884
                                          ---------      ---------      ---------      ---------      ---------
  Net interest income ...................    36,021         30,074         28,169         23,612         19,343
Provision for loan losses ...............       825          1,246          1,510            580           (200)
                                          ---------      ---------      ---------      ---------      ---------
  Net interest income after provision
    for loan losses .....................    35,196         28,828         26,659         23,032         19,543
Noninterest income ......................     8,956          8,292         10,338          7,208          7,055
Noninterest expenses ....................    26,554         23,056         23,110         18,344         17,006
                                          ---------      ---------      ---------      ---------      ---------
  Earnings before taxes .................    17,598         14,064         13,887         11,896          9,592
Provision for income tax expense ........     6,235          4,842          4,835          4,048          3,251
Cumulative effect of change in
  accounting principle ..................        --             --             --             --            289
                                          ---------      ---------      ---------      ---------      ---------
Net earnings ............................    11,363          9,222          9,052          7,848          6,630
Preferred stock dividend ................       650            700            681            258            320
                                          ---------      ---------      ---------      ---------      ---------
Net earnings available to common
  shareholders .......................... $  10,713      $   8,522      $   8,371      $   7,590      $   6,310
                                          =========      =========      =========      =========      =========
PER SHARE DATA(1):
Basic earnings(2) ....................... $    1.19      $    0.97      $    0.94      $    0.83      $    0.70
Diluted earnings(2) .....................      1.14           0.92           0.89           0.79           0.68
Tangible book value .....................      7.02           6.23           5.81           4.41           3.61
Cash dividends ..........................      0.14           0.13           0.13           0.03           0.03
Dividend payout ratio ...................     12.28%         14.15%         14.69%          4.14%          4.80%
Weighted average common and dilutive
potential common shares outstanding
(in  thousands) .........................     9,422          9,225          9,403          9,605          9,329
BALANCE SHEET DATA:
Total assets ............................ $ 958,360      $ 801,455      $ 758,337      $ 863,461      $ 498,002
Securities ..............................   461,435        440,625        473,911        605,079        350,131
Loans ...................................   422,818        311,293        230,172        197,863        105,649
Allowance for loan losses ...............     4,938          4,436          3,660          2,641          1,788
Total deposits ..........................   865,072        695,170        694,165        813,818        461,093
Total shareholders' equity ..............    71,473         61,969         58,330         46,839         34,891
AVERAGE BALANCE SHEET DATA:
Total assets ............................ $ 928,174      $ 762,455      $ 829,105      $ 595,829      $ 478,484
Securities ..............................   466,271        440,167        541,182        401,872        342,457
Loans ...................................   377,521        267,644        213,454        142,041         93,263
</TABLE>


                                      -15-

<PAGE>   18


<TABLE>
<CAPTION>
                                                                          AS OF AND FOR THE
                                                                      YEARS ENDED DECEMBER 31,
                                               -----------------------------------------------------------------------
                                                1997            1996            1995            1994            1993
                                               -------         -------         -------         -------         -------
                                                             (Dollars in thousands, except per share data)
<S>                                            <C>             <C>             <C>             <C>             <C>    
Allowance for loan losses .............          5,008           3,765           2,855           1,889           2,026
Total deposits ........................        851,603         695,653         772,752         550,568         443,045
Total shareholders' equity ............         66,460          59,823          51,106          40,942          31,884
PERFORMANCE RATIOS:
Return on average assets ..............           1.22%           1.21%           1.09%           1.32%           1.39%
Return on average common equity .......          17.73           16.13           18.98           19.49           21.28
Net interest margin ...................           4.14            4.20            3.62            4.25            4.36
Efficiency ratio(3) ...................          59.04           60.09           59.99           59.07           64.37
ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans and
  other real estate ...................           0.32%           0.09%           0.71%           0.73%           1.06%
Net loan charge-offs (recoveries) to
  average loans .......................           0.21            0.18            0.23            0.14           (0.37)
Allowance for loan losses to total
  loans ...............................           1.17            1.43            1.59            1.33            1.69
Allowance for loan losses to
  nonperforming loans(5) ..............         570.87        1,540.28          459.22          184.56          350.59
CAPITAL RATIOS(4):
Leverage ratio ........................           6.82%           7.96%           6.99%           5.39%           6.98%
Average shareholders' equity to average
  total assets ........................           7.16            7.85            6.16            6.87            6.66
Tier 1 risk-based capital ratio .......          13.96           17.37           20.41           20.15           26.21
Total risk-based capital ratio ........          15.01           18.62           21.66           21.30           27.46
</TABLE>

----------

(1)      Adjusted for a 30 for one stock split.

(2)      Basic earnings per share is based upon the weighted average number of
         common shares outstanding during the period. Diluted earnings per share
         is based on the weighted average number of common and dilutive
         potential common shares outstanding during the period.

(3)      Calculated by dividing total noninterest expenses, excluding securities
         losses, by net interest income plus noninterest income.

(4)      At period end, except net loan charge-offs (recoveries) to average 
         loans and average shareholders' equity to average total assets.

(5)      Nonperforming loans consist of nonaccrual loans and restructured loans.

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

         Management's Discussion and Analysis of Financial Condition and Results
of Operations analyzes the major elements of the Company's balance sheets and
statements of earnings. This section should be read in conjunction with the
Company's financial statements and accompanying notes and other detailed
information appearing elsewhere in this Annual Report.


                                      -16-

<PAGE>   19



              FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

OVERVIEW

         The Company engaged in several transactions in 1995, 1996 and 1997
which had a significant impact on the Company's performance in each of those
years. In the last half of 1995, the Company sold five of the nine branch
locations (including $77.4 million in deposits) it acquired in 1994 from a large
federal savings bank and recorded a $2.4 million gain on the branch sales. In
1996, the Company paid a one-time FDIC assessment of $1.8 million with respect
to the Company's deposits insured by the SAIF of the FDIC. The year ended
December 31, 1997 was marked by strong balance sheet growth due to the Company's
acquisition of approximately $99.2 million in deposits related to three branch
locations acquired from a commercial bank and the acquisition of First
Northwestern Bank, N.A. with approximately $60.2 million in deposits, the
transactions together referred to herein as the "Acquisitions." The Company's
earnings growth, however, was affected by the non-recurring expenses (data
processing conversion, severance benefits and other items) related to those
transactions.

         Net earnings available to common shareholders were $10.7 million, $8.5
million and $8.4 million for the years ended December 31, 1997, 1996 and 1995,
respectively, and net earnings per common share on a diluted basis were $1.14,
$0.92 and $0.89 for these same periods. The increase in earnings from 1996 to
1997 resulted primarily from higher net interest income generated by the
Acquisitions and loan growth. Earnings growth from 1995 to 1996 resulted
principally from strong internal loan growth and a higher net interest margin.
The Company posted returns on average assets of 1.22%, 1.21% and 1.09% and
returns on average common equity of 17.73%, 16.13% and 18.98% for the years
ended 1997, 1996 and 1995, respectively. Without the one-time FDIC assessment in
1996, the Company's return on average assets and return on average common
equity, respectively, would have been 1.36% and 18.36%.

         Total assets at December 31, 1997, 1996 and 1995 were $958.4 million,
$801.5 million and $758.3 million, respectively. Total deposits at December 31,
1997, 1996 and 1995 were $865.1 million, $695.2 million and $694.2 million,
respectively. The Company retained a major portion of the deposits acquired
during 1994 while repricing maturing deposits into a lower rate structure. The
result was an improved net interest margin and steady deposit levels from 1995
to 1996. Loans were $422.8 million at December 31, 1997, an increase of $111.5
million or 35.8% from $311.3 million at the end of 1996. Loans were $230.2
million at year end 1995. Common shareholders' equity was $70.5 million, $55.0
million and $51.3 million at December 31, 1997, 1996 and 1995, respectively.
Changes in common shareholders' equity reflect fluctuations in the net
unrealized appreciation on available-for-sale securities, net of tax in the
amounts of a $1.2 million decrease in 1997, a $3.2 million decrease in 1996 and 
a $4.7 million increase in 1995.

RESULTS OF OPERATIONS

Net Interest Income

         Net interest income represents the amount by which interest income on
interest-earning assets, including 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
earnings. Interest rate fluctuations, as well as changes in the amount and type
of earning assets and liabilities, combine to affect net interest income.

         1997 versus 1996. Net interest income increased from $30.1 million in
1996 to $36.0 million in 1997, a $5.9 million increase, primarily due to growth
in interest income of $12.2 million. This increase was partially offset by an
increase in interest expense of $6.3 million. This resulted in net interest
margins of 4.14% and 4.20% and net interest spreads of 3.38% and 3.44% for 1997
and 1996, respectively.

         The increase in interest income was driven by growth in average
interest-earning assets of $154.9 million or 21.6%. Growth in interest-earning
assets included average loan growth of $109.9 million or 41.1% and growth in

                                      -17-

<PAGE>   20



average securities of $26.1 million or 5.9%. Also, the yield on average
interest-earning assets increased 7 basis points from 1996 to 1997.

         1996 versus 1995. Net interest income totaled $30.1 million in 1996
compared to $28.2 million in 1995, an increase of $1.9 million or 6.8%. The
increase resulted mainly from lower interest expense on deposits and higher
interest income on loans. Interest expense decreased $3.4 million and was only
partially offset by a decline of $1.5 million in total interest income. This
resulted in net interest margins of 4.20% and 3.62% and net interest spreads of
3.44% and 2.98% for 1996 and 1995, respectively.

         The decline in interest expense from 1995 to 1996 was due primarily to
lower average interest-bearing deposits of $580.8 million in 1996 versus $659.0
million in 1995. The decline in average interest-bearing deposits, which
included the sale of branches in the last half of 1995, was comprised of $61.2
million or 78.3% in certificates of deposit, and the remainder was primarily in
savings accounts. Accordingly, the cost of average interest-bearing deposits
declined to 4.08% in 1996 from 4.12% in 1995. Interest income on loans increased
to $24.7 million in 1996 from $19.4 million in 1995. The increase was driven by
growth in the average loan portfolio of $54.2 million or 25.4% and an increase
in the yield on average loans to 9.22% in 1996 from 9.07% in 1995. Meanwhile,
the average securities portfolio declined $101.0 million, and its yield rose 15
basis points.

                                      -18-

<PAGE>   21

         The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are yearly average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.



<TABLE>
<CAPTION>
                                                                              YEARS ENDED DECEMBER 31,
                                                  ------------------------------------------------------------------------------- 
                                                                    1997                                       1996               
                                                 -----------------------------------------   ------------------------------------
                                                   AVERAGE       INTEREST          AVERAGE     AVERAGE        INTEREST    AVERAGE
                                                 OUTSTANDING      EARNED/           YIELD/   OUTSTANDING       EARNED/     YIELD/
                                                   BALANCE         PAID             RATE       BALANCE          PAID       RATE 
                                                 -----------     --------          -------   -----------     ---------    -------
                                                                                (DOLLARS IN THOUSANDS)
<S>                                               <C>            <C>                <C>       <C>            <C>           <C>  
ASSETS
Interest-earning assets:
  Loans .....................................     $ 377,521      $  34,343          9.10%     $ 267,644      $  24,673     9.22%
  Securities ................................       466,271         30,233          6.48        440,167         28,722     6.53
  Federal funds sold and
    other temporary
    investments .............................        26,796          1,462          5.46          7,901            420     5.32
                                                  ---------      ---------          ----      ---------      ---------     ---- 
         Total interest-earning
           assets ...........................       870,588         66,038          7.59%       715,712         53,815     7.52%
                                                  ---------      ---------          ----      ---------      ---------     ---- 
Less allowance for loan
  losses ....................................        (5,008)                                     (3,765)                       
                                                  ---------                                   ---------                         
Total interest-earning
  assets, net of allowance ..................       865,580                                     711,947                        
Nonearning assets ...........................        62,594                                      50,508                        
                                                  ---------                                   ---------                         
         Total assets .......................     $ 928,174                                   $ 762,455                        
                                                  =========                                   =========                         
LIABILITIES AND
  SHAREHOLDERS' EQUITY
Interest-bearing
  liabilities:
  Interest-bearing demand
    deposits ................................     $ 123,896          2,517          2.03%     $ 110,992          2,509     2.26%
  Savings and money market
    accounts ................................       161,700          4,787          2.96        130,599          3,500     2.68
  Certificates of deposit ...................       423,365         22,480          5.31        339,209         17,670     5.21
  Federal funds purchased
    and securities sold
    under repurchase
    agreements ..............................         4,860            233          4.79          1,099             62     5.64
                                                  ---------      ---------          ----      ---------      ---------     ---- 
         Total interest-bearing
           liabilities ......................       713,821         30,017          4.21%       581,899         23,741     4.08%
                                                  ---------      ---------          ----      ---------      ---------     ---- 
Noninterest-bearing
  liabilities:
  Noninterest-bearing
    demand deposits .........................       142,642                                     114,853                        
  Other liabilities .........................         5,251                                       5,880                        
                                                  ---------                                   ---------                         
         Total liabilities ..................       861,714                                     702,632                        
                                                  ---------                                   ---------                         
Shareholders' equity ........................        66,460                                      59,823                        
                                                  ---------                                   ---------                         
         Total liabilities and
           shareholders' equity..............     $ 928,174                                   $ 762,455                        
                                                  =========                                   =========                         
  Net interest income .......................                    $  36,021                                   $  30,074         
                                                                 =========                                   =========          
  Net interest spread .......................                                       3.38%                                  3.44%
                                                                                    ====                                   ==== 
  Net interest margin .......................                                       4.14%                                  4.20%
                                                                                    ====                                   ==== 

<CAPTION>
                                                         YEARS ENDED DECEMBER 31,
                                                  -------------------------------------- 
                                                                  1995
                                                  -------------------------------------- 
                                                   AVERAGE        INTEREST        AVERAGE
                                                 OUTSTANDING      EARNED/          YIELD/
                                                   BALANCE         PAID             RATE
                                                  ---------      ---------          ---- 
                                                           (DOLLARS IN THOUSANDS)
<S>                                               <C>            <C>                <C>  
ASSETS
Interest-earning assets:
  Loans .....................................     $ 213,454      $  19,357          9.07%
  Securities ................................       541,182         34,514          6.38
  Federal funds sold and
    other temporary
    investments .............................        24,311          1,439          5.92
                                                  ---------      ---------          ---- 
         Total interest-earning
           assets ...........................       778,947         55,310          7.10%
                                                  ---------      ---------          ---- 
Less allowance for loan
  losses ....................................        (2,855)                            
                                                  ---------   
Total interest-earning
  assets, net of allowance ..................       776,092                             
Nonearning assets ...........................        53,013                             
                                                  ---------   
         Total assets .......................     $ 829,105                             
                                                  =========   
LIABILITIES AND
  SHAREHOLDERS' EQUITY
Interest-bearing
  liabilities:
  Interest-bearing demand
    deposits ................................     $ 112,902          2,599          2.30%
  Savings and money market
    accounts ................................       145,782          4,019          2.76
  Certificates of deposit ...................       400,361         20,523          5.13
  Federal funds purchased
    and securities sold
    under repurchase
    agreements ..............................             5             --          6.08
                                                  ---------      ---------          ---- 
         Total interest-bearing
           liabilities ......................       659,050         27,141          4.12%
                                                  ---------      ---------          ---- 
Noninterest-bearing
  liabilities:
  Noninterest-bearing
    demand deposits .........................       113,707                             
  Other liabilities .........................         5,242                             
                                                  ---------   
         Total liabilities ..................       777,999                             
                                                  ---------   
Shareholders' equity ........................        51,106                             
                                                  ---------   
         Total liabilities and
           shareholders' equity..............     $ 829,105                             
                                                  =========   
  Net interest income .......................                    $  28,169              
                                                                 =========   
  Net interest spread .......................                                       2.98%
                                                                                    ==== 
  Net interest margin .......................                                       3.62%
                                                                                    ==== 
</TABLE>



                                      -19-

<PAGE>   22



         The following schedule presents the dollar amount of changes in
interest income and interest expense for the major components of
interest-earning assets and interest-bearing liabilities and distinguishes
between the increase related to higher outstanding balances and the volatility
of interest rates. For purposes of this table, changes attributable to both rate
and volume which can be segregated have been allocated.


<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                ----------------------------------------------------------------------
                                                        1997 VS. 1996                         1996 VS. 1995
                                                --------------------------------     ---------------------------------
                                                      INCREASE (DECREASE)                  INCREASE (DECREASE)
                                                            DUE TO                                DUE TO
                                                --------------------------------     ---------------------------------
                                                VOLUME       RATE         TOTAL      VOLUME        RATE         TOTAL
                                                ------      ------       -------     ------       ------       -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                             <C>         <C>          <C>         <C>          <C>          <C>    
INTEREST-EARNING ASSETS:
     Loans .................................... $10,129     $  (459)     $ 9,670     $ 4,915      $   401      $ 5,316
     Securities ...............................   1,703        (192)       1,511      (6,445)         653       (5,792)
     Federal funds sold and other temporary
       investments ............................   1,004          38        1,042        (971)         (48)      (1,019)
                                                -------     -------      -------     -------      -------      -------
         Total increase (decrease) in
           interest income ....................  12,836        (613)      12,223      (2,501)       1,006       (1,495)
INTEREST-BEARING LIABILITIES:
     Interest-bearing demand deposits .........     292        (284)           8         (44)         (46)         (90)
     Savings and money market accounts ........     833         454        1,287        (419)        (100)        (519)
     Certificates of deposit ..................   4,384         426        4,810      (3,134)         281       (2,853)
     Federal funds purchased and securities
       sold under repurchase agreements .......     212         (41)         171          67           (5)          62
                                                -------     -------      -------     -------      -------      -------
         Total increase (decrease) in
           interest expense ...................   5,721         555        6,276      (3,530)         130       (3,400)
                                                -------     -------      -------     -------      -------      -------
     Increase (decrease) in net interest
       income ................................. $ 7,115     $(1,168)     $ 5,947     $ 1,029      $   876      $ 1,905
                                                =======     =======      =======     =======      =======      =======
</TABLE>

Provision for Loan Losses

         The 1997 provision for loan losses declined to $825,000 from $1.2
million in 1996, a decrease of $421,000 or 33.8%. The reduced provision in 1997
reflected continued strong asset quality as net charge-offs of loans remained at
relatively low levels totaling $811,000 or 0.21% of average loans, compared to
$470,000 or 0.18% of average loans in 1996. The provision for the year 1996
declined by $264,000 or 17.5% from the year ended 1995 and also reflected strong
asset quality.

Noninterest Income

         Noninterest income is an important source of revenue for financial
institutions in a deregulated environment. The Company's primary source of
noninterest income is service charges on deposit accounts and other banking
service related fees.

         Noninterest income for the year ended December 31, 1997 was $9.0
million, an increase of $664,000 from $8.3 million in 1996 and down from $10.3
million in 1995. The year ended December 31, 1995 included a gain of $2.4
million on the sale of five branches. Excluding this gain, noninterest income
was $399,000 greater in 1996 than in 1995. This results in annual percentage
increases of 8.0% and 5.1% for 1997 and 1996, respectively. The following table
presents for the periods indicated the major categories of noninterest income:


                                      -20-

<PAGE>   23




<TABLE>
<CAPTION>
                                            YEARS ENDED DECEMBER 31,
                                        -------------------------------
                                         1997        1996         1995
                                        -------     -------     -------
                                            (DOLLARS IN THOUSANDS)
<S>                                     <C>         <C>         <C>    
Service charges on deposit accounts ... $ 7,045     $ 6,319     $ 6,106
Retail services income ................   1,396       1,200       1,074
Mortgage banking ......................     175         174         140
Investment services ...................     242         165         143
Securities lending ....................      77         118          82
Branch sale premiums ..................      --          --       2,445
Other noninterest income ..............      21         316         348
                                        -------     -------     -------
          Total noninterest income .... $ 8,956     $ 8,292     $10,338
                                        =======     =======     =======
</TABLE>

         The increase in noninterest income from 1996 to 1997 was due primarily
to service charge income generated by branches acquired with the Acquisitions.
After excluding the gain from the sale of branches in 1995, the increase in
noninterest income from 1995 to 1996 resulted mainly from service charges on
deposit accounts. Service charges on deposit accounts increased $213,000 from
1995 to 1996 in conjunction with new product pricing which was implemented in
the first quarter of 1996. Additionally, the Company's increased emphasis on fee
based services resulted in greater income from retail services, mortgage
banking, and investment services.

Noninterest Expense

         For the years ended 1997, 1996 and 1995, noninterest expenses totaled
$26.6 million, $23.1 million and $23.1 million, respectively. The 15.2% increase
in 1997 was primarily the result of operating expenses in branches acquired with
the Acquisitions. The slight decline in 1996 reflects several major offsetting
factors: a $1.8 million FDIC assessment on SAIF deposits which was offset by
lower overall fees on FDIC insured deposits and the effect of the sale of five
branches in the last half of 1995. The Company's efficiency ratios, calculated
by dividing total noninterest expenses (excluding securities losses) by net
interest income plus noninterest income, were 59.04% in 1997, 60.09% in 1996 and
59.99% in 1995. The efficiency ratio was constant over this period, reflecting
the Company's continued efforts to control operating expenses. The following
table presents for the periods indicated the major categories of noninterest
expense:


<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                      -------------------------------
                                                       1997        1996         1995
                                                      -------     -------     -------
                                                      (DOLLARS IN THOUSANDS)
<S>                                                   <C>         <C>         <C>    
Employee compensation and benefits .................. $16,354     $13,070     $12,887
Non-staff expenses:
  Net bank premises expense .........................   1,339       1,246       1,262
  Equipment rentals, depreciation and maintenance ...   1,232         975       1,000
  Data processing ...................................   1,932       1,438       1,401
  Professional fees .................................     813         695         875
  Special FDIC assessment ...........................      --       1,782          --
  Regulatory assessments ............................     114         522       1,345
  Ad valorem and franchise taxes ....................     543         420         453
  Net realized losses on available-for-sale
     securities .....................................      --          --           9
  Other .............................................   4,227       2,908       3,878
                                                      -------     -------     -------
          Total non-staff expenses ..................  10,200       9,986      10,223
                                                      -------     -------     -------
          Total noninterest expense ................. $26,554     $23,056     $23,110
                                                      =======     =======     =======
</TABLE>

         Employee compensation and benefit expense for the year ended December
31, 1997 was $16.4 million, an increase of $3.3 million or 25.1% from $13.1
million for 1996. This increase is the result of expenses in the branches
acquired with the Acquisitions and the hiring of additional lending staff.
Employee compensation and benefit expense for the year 1996 was up $183,000 or
1.4% from 1995. The increase in 1996 resulted mainly from additions to the loan
staff but was mitigated by the branch sales which occurred in the last half of
1995. Total full-time equivalent employees at December 31, 1997, 1996 and 1995
were 439, 386, and 372, respectively.


                                      -21-

<PAGE>   24



         Non-staff expenses were $10.2 million in 1997, an increase of $214,000
from $10.0 million in 1996. The 1996 level declined from 1995 non-staff expenses
of $10.2 million. The decline in 1996 occurred in spite of the $1.8 million
special assessment from the FDIC on SAIF deposits and was due to reduced expense
levels resulting from the branch sales, which occurred in the last half of 1995,
as well as lower FDIC fees on all deposits.

Income Taxes

         Income tax expense includes the regular federal income tax at the
statutory rate, plus the income tax component of the Texas franchise tax. The
amount of federal income tax expense is influenced by the amount of taxable
income, the amount of tax-exempt income, the amount of non-deductible interest
expense and the amount of other non-deductible expenses. Taxable income for the
income tax component of the Texas franchise tax is the federal pre-tax income,
plus certain officers salaries, less interest income from federal securities.
The income tax component of the Texas franchise tax was zero in 1997, 1996 and
1995. In 1997, income tax expense was $6.2 million, an increase of $1.4 million
from 1996. In 1996, income tax expense was $4.8 million, approximately the same
as 1995. The effective tax rates in 1997, 1996 and 1995, respectively, were
35.43%, 34.03% and 34.41%.


Impact of Inflation

         The effects of inflation on the local economy and on the Company's
operating results have been relatively modest for the past several years. Since
substantially all of the Company's assets and liabilities are monetary in
nature, such as cash, securities, loans and deposits, their values are less
sensitive to the effects of inflation than to changing interest rates, which do
not necessarily change in accordance with inflation rates. The Company tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities.
SEE "-- INTEREST RATE SENSITIVITY AND LIQUIDITY" BELOW.

FINANCIAL CONDITION

Loan Portfolio

         Total loans increased by $111.5 million or 35.8% to $422.8 million at
December 31, 1997, from $311.3 million at December 31, 1996. Total loans
increased by $81.1 million or 35.2%, from $230.2 million at December 31, 1995.
The growth in loans reflected the improving local economy and the Company's
investment in loan production capacity.

         At December 31, 1997, total loans represented 48.9% of deposits and
44.1% of total assets. Total loans as a percentage of deposits were 44.8% at
December 31, 1996, compared to 33.2% at December 31, 1995.


                                      -22-

<PAGE>   25



         The following table summarizes the loan portfolio of the Company by
type of loan as of the dates indicated:


<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                               ---------------------------------------------------------------------------------------------------
                                    1997                 1996                 1995                 1994                 1993
                               -----------------   ----------------    -----------------    ------------------   -----------------
                                AMOUNT   PERCENT    AMOUNT  PERCENT     AMOUNT   PERCENT     AMOUNT    PERCENT    AMOUNT   PERCENT
                               --------  -------   -------- -------    --------  -------    --------   -------   --------  -------
                             (DOLLARS IN THOUSANDS)
<S>                            <C>         <C>     <C>         <C>     <C>          <C>     <C>          <C>     <C>        <C>   
Commercial and
  industrial ................. $ 40,581    9.60%   $ 27,611    8.87%   $ 21,017     9.13%   $ 16,696     8.44%   $ 11,999   11.36%
Real estate:
  Construction and land
    development ..............   27,579    6.52      17,470    5.61      10,423     4.53       8,776     4.44       2,954    2.80
  1-4 family
    residential ..............   75,996   17.97      51,544   16.56      37,494    16.29      30,014    15.17      23,211   21.97
  Commercial mortgages .......  114,576   27.10      77,220   24.81      50,450    21.92      46,228    23.36      33,448   31.66
  Farmland ...................      666    0.16       1,032    0.33       1,683     0.73       2,623     1.33       2,931    2.77
  Multi-family
    residential ..............    6,404    1.51       4,056    1.30       2,682     1.17       2,962     1.50       1,783    1.69
Consumer:
  Indirect ...................  101,540   24.02      82,814   26.60      65,311    28.37      56,643    28.62      12,914   12.22
  Direct .....................   55,476   13.12      49,546   15.92      41,112    17.86      33,921    17.14      16,409   15.53
                               --------  ------    --------  ------    --------   ------    --------   ------    --------  ------ 
    Total loans .............. $422,818  100.00%   $311,293  100.00%   $230,172   100.00%   $197,863   100.00%   $105,649  100.00%
                               ========  ======    ========  ======    ========   ======    ========   ======    ========  ====== 
</TABLE>

         The primary lending focus of the Company is on small and medium-sized
business and consumer loans. The Company offers a variety of commercial lending
products including term loans, lines of credit and fixed asset loans, including
real estate and equipment financing. A broad range of short to medium-term
commercial loans, primarily collateralized, are made available to businesses for
working capital (including inventory and receivables), business expansion
(including acquisitions of real estate and improvements), and the purchase of
equipment and machinery. The purpose of a particular loan generally determines
its structure.

         Although its legal lending limit is substantially higher, the Company
generally does not make loans larger than $3.0 million. Loans up to $400,000 are
evaluated and acted upon by an officers' loan committee, which meets twice per
week. Loans above that amount must be approved by the Executive Loan Committee,
which meets weekly.

         Generally, the Company's commercial loans are underwritten in the
Company's primary market area on the basis of the borrower's ability to service
such debt from income. As a general practice, the Company takes as collateral a
lien on any available real estate, equipment or other assets and obtains a
personal guaranty. Working capital loans are primarily collateralized by
short-term assets whereas term loans are primarily collateralized by long-term
assets.

         In addition to commercial loans secured by real estate, the Company
makes commercial mortgage loans to finance the purchase of real property which
generally consists of real estate on which structures have already been
completed. Additionally, a portion of the Company's lending activity has
consisted of the origination of single-family residential mortgage loans
collateralized by owner-occupied properties located in the Company's market
areas. The Company offers a variety of mortgage loan products which generally
are amortized over five to 30 years.

         Loans collateralized by single-family residential real estate generally
have been originated in amounts of no more than 80% of appraised value or have
mortgage insurance. The Company requires mortgage title insurance and hazard
insurance in the amount of the loan. Of the mortgages originated, the Company
generally retains mortgage loans with short terms or variable rates and sells
longer term fixed-rate loans and loans that do not meet the Company's credit
underwriting standards. As a result, the Company retains approximately half of
the mortgage loans that it originates.

         The Company's commercial mortgage loans are secured by first liens on
real estate, typically have fixed interest rates and amortize over a 10 to 15
year period with balloon payments due at the end of three to five years. In
underwriting commercial mortgage loans, consideration is given to the property's
operating history, future operating

                                      -23-

<PAGE>   26



projections, current and projected occupancy, location and physical condition.
The underwriting analysis also includes credit checks, appraisals and a review
of the financial condition of the borrower.

         The Company makes loans to finance the construction of residential and,
to a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.

         Consumer loans made by the Company include automobile loans,
recreational vehicle loans, boat loans, home improvement loans, home equity
loans, personal loans (collateralized and uncollateralized) and deposit account
collateralized loans. The terms of these loans typically range from 12 to 84
months and vary based upon the nature of collateral and size of loan.

         Approximately 64.7% of the Company's consumer loan portfolio as of
December 31, 1997, was comprised of indirect loans (representing 24.0% of the
Company's total loan portfolio). These are installment loans, with typical
maturities of three to five years, which are originated mostly by automobile
dealers for the purpose of financing consumer automobile purchases and sold by
automobile dealers to commercial banks and other sources of financing. The
Company also purchases some indirect boat and recreational vehicle loans. The
average yield on the Company's indirect loan portfolio was 8.47% for 1997.

         The Company's indirect loan programs are administered by a staff
specially trained in evaluating and servicing this particular type of loan. The
Company competes for these loans with a number of other financial and
non-financial institutions, including the captive financial services
subsidiaries of automobile manufacturers, on the basis of interest rate and
quality of service.

         The Company generally receives credit applications on a daily basis
from one or more of the automobile dealerships and others from which it actively
purchases indirect loans. Upon receipt of a credit application, the Company
undertakes a credit analysis of the prospective purchaser, ordering credit
reports on the borrower which are analyzed by one of the officers specializing
in buying indirect loans. In making credit decisions, such officers evaluate,
among other things, the general credit quality of the applicant, the proposed
income to debt ratio, and residential and employment stability.

         The collection of overdue indirect loans is administered by a staff
specially trained for such purpose. Holders of loans that are 10 days past due
generally receive written notice of such delinquency. When any loan becomes 15
days past due, the collectors establish telephone contact with the borrower. If
the loan remains past due for 30 days, the Company generally sends a demand
letter requiring payment within 10 days before asserting its legal rights. The
Company's collection staff makes all reasonable efforts to work out credit
problems before the accounts are turned over to independent repossession agents.
Repossessed automobiles are sold as soon as possible through a number of means
in order to minimize any potential losses. The Company's ongoing experience with
indirect loan underwriting and collections has contributed to a relatively low
delinquency rate of 0.94% as of December 31, 1997.

         The following table summarizes with respect to the Company's indirect
loans information regarding the amounts of loans originated and outstanding, the
amounts of loans charged off and the delinquency ratios for the periods
indicated:


                                      -24-

<PAGE>   27

<TABLE>
<CAPTION>
                                                     AS OF AND FOR THE
                                                  YEARS ENDED DECEMBER 31,
                                        -----------------------------------------
                                          1997             1996            1995
                                        ---------       ---------       ---------
                                                 (DOLLARS IN THOUSANDS)
<S>                                     <C>             <C>             <C>      
Loans originated during period .......  $  63,906       $  56,416       $  36,042
Loans outstanding at end of period ...    101,540          82,814          65,311
Net loan charge-offs for the period ..       (413)           (150)           (103)
Net loan charge-off ratio ............       0.44%           0.21%           0.17%
Delinquency ratio at end of period ...       0.94%           0.95%           0.98%
</TABLE>

         The contractual maturity ranges of the commercial and industrial and
real estate construction loan portfolio and the amount of such loans with
predetermined interest rates and floating rates in each maturity range as of
December 31, 1997 are summarized in the following table:

<TABLE>
<CAPTION>
                                                    DECEMBER 31, 1997
                                        -------------------------------------------
                                                   AFTER ONE
                                        ONE YEAR    THROUGH      AFTER
                                        OR LESS    FIVE YEARS  FIVE YEARS    TOTAL
                                        -------    ----------   -------     -------
                                                 (DOLLARS IN THOUSANDS)
                                        <C>         <C>         <C>         <C>
Commercial and industrial ............. $17,683     $22,263     $   635     $40,581
Real estate construction ..............  12,978       6,865       7,736      27,579
                                        -------     -------     -------     -------
          Total ....................... $30,661     $29,128     $ 8,371     $68,160
                                        =======     =======     =======     =======
Loans with a predetermined interest
  rate ................................ $16,539     $23,071     $ 5,126     $44,736
Loans with a floating interest rate ...  14,122       6,057       3,245      23,424
                                        -------     -------     -------     -------
          Total ....................... $30,661     $29,128     $ 8,371     $68,160
                                        =======     =======     =======     =======
</TABLE>

         A loan is considered impaired based on current information and events,
if it is probable that the Company will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. The measurement of impaired loans is based on the present
value of expected future cash flows discounted at the loan's effective interest
rate or the loan's observable market price or based on the fair value of the
collateral if the loan is collateral-dependent. The implementation of SFAS No.
114 did not have a material adverse affect on the Company's financial
statements.

Nonperforming Assets

         The Company has several procedures in place to assist it in maintaining
the overall quality of its loan portfolio. The Company has established
underwriting guidelines to be followed by its officers. The Company also
monitors its delinquency levels for any negative or adverse trends. There can be
no assurance, however, that the Company's loan portfolio will not become subject
to increasing pressures from deteriorating borrower credit due to general
economic conditions.

         The Company's conservative lending approach, as well as a healthy local
economy, have resulted in strong asset quality. Nonperforming assets at December
31, 1997 were $1.3 million compared to $288,000 at December 31, 1996 and $1.6
million at December 31, 1995. The increase in nonperforming assets during 1997
was primarily related to assets acquired with the Acquisitions. This resulted in
ratios of nonperforming assets to total loans plus other real estate of 0.32%,
0.09% and 0.71% for the years ended 1997, 1996 and 1995, respectively.

         The Company generally places a loan on nonaccrual status and ceases
accruing interest when loan payment performance is deemed unsatisfactory. All
loans past due 90 days, however, are placed on nonaccrual status, unless the
loan is both well-secured and in the process of collection. Cash payments
received while a loan is classified as nonaccrual are recorded as a reduction of
principal as long as doubt exists as to collection. The Company is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring. The Company had no restructured loans at either December 31, 1997
or December 31, 1996. The Company's internal loan review department

                                      -25-

<PAGE>   28



evaluates additional loans which are potential problem loans as to risk exposure
in determining the adequacy of the allowance for loan losses.

         The Company maintains on an ongoing basis updated appraisals on loans
secured by real estate, particularly those categorized as nonperforming loans
and potential problem loans. In instances where updated appraisals reflect
reduced collateral values, an evaluation of the borrower's overall financial
condition is made to determine the need, if any, for possible writedowns or
appropriate additions to the allowance for loan losses. The Company records
other real estate at fair value at the time of acquisition, less estimated costs
to sell.

         The following table presents information regarding nonperforming assets
at the dates indicated:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                            ------------------------------------------------------
                                             1997        1996        1995        1994        1993
                                            ------      ------      ------      ------      ------
                                                       (DOLLARS IN THOUSANDS)
<S>                                         <C>         <C>         <C>         <C>         <C>   
Nonaccrual loans .......................... $  865      $  288      $  797      $1,431      $  204
Restructured loans ........................     --          --          --          --         306
Other real estate .........................    477          --         848          20         619
                                            ------      ------      ------      ------      ------
          Total nonperforming assets ...... $1,342      $  288      $1,645      $1,451      $1,129
                                            ======      ======      ======      ======      ======
Nonperforming assets to total loans and
  other real estate .......................   0.32%       0.09%       0.71%       0.73%       1.06%
</TABLE>

         The additional interest income the Company would have recorded and the
interest income the Company did record on nonperforming loans for the five year
period ending December 31, 1997 was insignificant.

Allowance for Loan Losses

         The allowance for loan losses is a reserve established through charges
to earnings in the form of a provision for loan losses. Management has
established an allowance for loan losses which it believes is adequate for
estimated losses in the Company's loan portfolio. Based on an evaluation of the
loan portfolio, management presents a quarterly review of the allowance for loan
losses to the Bank's Board of Directors, indicating any change in the allowance
since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Company's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its loan portfolio by the loan review function and the annual
examination of the Company's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.

         The Company follows a loan review program to evaluate the credit risk
in the loan portfolio. Through the loan review process, the Company maintains an
internally classified loan list which, along with the delinquency list of loans,
helps management assess the overall quality of the loan portfolio and the
adequacy of the allowance for loan losses. 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, which may jeopardize recoverability of the debt. At
December 31, 1997, the Company had $2.4 million of such loans, excluding loans
on nonaccrual, which were primarily residential and commercial real estate
loans.

         Loans classified as "doubtful" are those loans which have
characteristics similar to substandard accounts but with an increased risk that
a loss may occur, or at least a portion of the loan may require a charge-off if
liquidated at present. Although loans classified as substandard do not duplicate
loans classified as doubtful, both substandard and doubtful loans include some
loans that are delinquent at least 30 days or on nonaccrual status. Loans
classified as "loss" are those loans which are in the process of being charged
off.

                                      -26-

<PAGE>   29



         In addition to the internally classified loan list and delinquency list
of loans, the Company maintains a separate "watch list" which further aids the
Company in monitoring loan portfolios. Watch list loans show warning elements
where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for loan losses. At December 31, 1997, the Company had $834,000 of
such loans, which were primarily secured by residential and commercial real
estate.

         In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses to maintain the allowance for loan losses
at an adequate level determined by the foregoing methodology.

         For the year ended December 31, 1997, net loan charge-offs totaled
$811,000 or $0.21% of average loans outstanding for the period, compared to
$470,000 or 0.18% in net loan charge-offs during 1996. During 1997, the Company
recorded a provision for loan losses of $825,000 compared to $1.2 million for
1996. At December 31, 1997, the allowance totaled $4.9 million, or 1.17% of
total loans. The Company made a provision for loan losses of $1.2 million during
1996 as compared to a provision of $1.5 million for 1995. At December 31, 1996,
the allowance aggregated $4.4 million or 1.43% of total loans.


                                      -27-

<PAGE>   30



         The following table presents, for the periods indicated, an analysis of
the allowance for loan losses and other related data:


<TABLE>
<CAPTION>
                                                              YEARS ENDED DECEMBER 31,
                                      -------------------------------------------------------------------------
                                        1997             1996            1995           1994            1993
                                      ---------       ---------       ---------       ---------       ---------
                                                               (DOLLARS IN THOUSANDS)
<S>                                   <C>             <C>             <C>             <C>             <C>      
Average loans outstanding ........... $ 377,521       $ 267,644       $ 213,454       $ 142,041       $  93,263
                                      ---------       ---------       ---------       ---------       ---------
Gross loans outstanding at end of
  period ............................   422,818         311,293         230,172         197,863         105,649
                                      ---------       ---------       ---------       ---------       ---------
Allowance for loan losses at
  beginning of period ............... $   4,436       $   3,660       $   2,641       $   1,788       $   1,640
Provision for loan losses ...........       825           1,246           1,510             580            (200)
Adjustments due to
  acquisitions ......................       488              --              --             467              --
Charge-offs:
  Commercial and industrial .........      (191)            (59)            (97)            (44)            (39)
  Real estate .......................       (87)            (70)            (59)            (24)           (667)
  Consumer ..........................      (915)           (656)           (675)           (314)            (84)
Recoveries:
  Commercial and industrial .........        55              27              47              26             501
  Real estate .......................        44              19              32              58             629
  Consumer ..........................       283             269             261             104               8
                                      ---------       ---------       ---------       ---------       ---------
Net loan (charge-offs)
  recoveries ........................      (811)           (470)           (491)           (194)            348
Allowance for loan losses at end
  of period ......................... $   4,938       $   4,436       $   3,660       $   2,641       $   1,788
                                      =========       =========       =========       =========       =========
Ratio of allowance to end of
  period loans ......................      1.17%           1.43%           1.59%           1.33%           1.69%
Ratio of net loan charge-offs to
  average loans .....................      0.21            0.18            0.23            0.14           (0.37)
Ratio of allowance to end of
  period nonperforming loans ........    570.87        1,540.28          459.22          184.56          350.59
</TABLE>


                                      -28-

<PAGE>   31



         The following tables describe the allocation of the allowance for loan
losses among various categories of loans and 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 loans.


<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                        ------------------------------------------------------------------------
                                                                1997                     1996                      1995
                                                        ---------------------    ---------------------    ----------------------
                                                                  PERCENT OF               PERCENT OF                PERCENT OF
                                                                   LOANS TO                 LOANS TO                  LOANS TO
                                                         AMOUNT   TOTAL LOANS     AMOUNT   TOTAL LOANS     AMOUNT    TOTAL LOANS
                                                        --------  -----------    --------  -----------    --------   -----------
                                                                                 (DOLLARS IN THOUSANDS)
<S>                                                     <C>            <C>       <C>            <C>       <C>            <C>  
Balance of allowance for loan losses applicable to:
  Commercial and industrial ........................... $     35       9.60%     $     21       8.87%     $    305       9.13%
  Real estate:
     Construction and land development ................       --       6.52            --       5.61            --       4.53
     1-4 family residential ...........................       57      17.97            62      16.56            94      16.29
     Commercial mortgage ..............................       --      27.10            50      24.81           209      21.92
     Farmland .........................................       --       0.16            --       0.33            --       0.73
     Multi-family .....................................       --       1.51            --       1.30            --       1.17
  Consumer ............................................       41      37.14            49      42.52            75      46.23
  Unallocated .........................................    4,805                    4,254                    2,977
                                                        --------     ------      --------     ------      --------     ------ 
          Total allowance for loan losses ............. $  4,938     100.00%     $  4,436     100.00%     $  3,660     100.00%
                                                        ========     ======      ========     ======      ========     ======
</TABLE>

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                        -----------------------------------------------
                                                               1994                     1993
                                                        ----------------------   ----------------------
                                                                   PERCENT OF               PERCENT OF
                                                                    LOANS TO                 LOANS TO
                                                         AMOUNT    TOTAL LOANS    AMOUNT    TOTAL LOANS
                                                        --------   -----------   --------   -----------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                     <C>            <C>       <C>           <C>   
Balance of allowance for loan losses applicable to:
Commercial and industrial ............................. $     49       8.44%     $     26      11.36%
Real estate:
  Construction and land development ...................       --       4.44            --       2.80
  1-4 family residential ..............................       45      15.17            50      21.97
  Commercial mortgage .................................       10      23.36             3      31.66
  Farmland ............................................       --       1.33            --       2.77
  Multi-family ........................................       --       1.50            --       1.69
Consumer ..............................................       77      45.76           103      27.75
Unallocated ...........................................    2,460                    1,606
                                                        --------     ------      --------     ------
          Total allowance for loan
            losses .................................... $  2,641     100.00%     $  1,788     100.00%
                                                        ========     ======      ========     ======
</TABLE>

         The Company believes that the allowance for loan losses at December 31,
1997 is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that the Company will not sustain losses in
future periods, which could be substantial in relation to the size of the
allowance at December 31, 1997.


Securities

         The Company uses its securities portfolio primarily as a source of
income and secondarily as a source of liquidity. At December 31, 1997,
investment securities totaled $461.4 million, an increase of $20.8 million from
$440.6 million at December 31, 1996. The increase was primarily attributable to
deposits acquired with the Acquisitions. At December 31, 1997, investment
securities represented 48.1% of total assets compared to 55.0% of total assets
at

                                      -29-

<PAGE>   32
December 31, 1996. The yield on the investment portfolio for the year ended
December 31, 1997 was 6.48% compared to a yield of 6.53% for the year ended
December 31, 1996.

         The following table summarizes the amortized cost of investment
securities held by the Company as of the dates shown:


<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                ----------------------------------
                                  1997         1996         1995
                                --------     --------     --------
                                   (DOLLARS IN THOUSANDS)
<S>                             <C>          <C>          <C>     
U.S. Government securities .... $214,652     $275,781     $369,747
Mortgage-backed securities ....  244,352      161,630       96,074
Other securities ..............    1,037           37           37
                                --------     --------     --------
          Total securities .... $460,041     $437,448     $465,858
                                ========     ========     ========
</TABLE>

         The following table summarizes the contractual maturity of investment
securities and their weighted average yields:


<TABLE>
<CAPTION>
                                                          DECEMBER 31, 1997
                        -------------------------------------------------------------------------------------
                                             AFTER ONE         AFTER FIVE 
                              WITHIN       YEAR BUT WITHIN  YEARS BUT WITHIN
                             ONE YEAR        FIVE YEARS         TEN YEARS     AFTER TEN YEARS  
                        ----------------  ----------------  ----------------- ---------------  -----------------
                         AMOUNT    YIELD   AMOUNT    YIELD   AMOUNT   YIELD    AMOUNT   YIELD   TOTAL     YIELD
                        --------   -----  --------   -----  --------  -----   --------  -----  --------  -------
                                                         (DOLLARS IN THOUSANDS)
<S>                     <C>        <C>    <C>        <C>    <C>       <C>    <C>        <C>    <C>        <C>  
U.S. Government
  securities .......... $104,644   6.94%  $109,943   6.67%  $     65   --%    $     --   --%   $214,652   6.80%
Mortgage-backed and
  other securities ....   10,467   6.37     88,303   6.05    113,442  6.56      33,176  6.35    245,389   6.34
                        --------   ----   --------   ----   --------  ----    --------  ----   --------   ----
        Totals ........ $115,111   6.89%  $198,246   6.39%  $113,507  6.56%   $ 33,176  6.35%  $460,041   6.55%
                        ========   ====   ========   ====   ========  ====    ========  ====   ========   ====
</TABLE>

         At the date of purchase, the Company is required to classify debt and
equity securities into one of three categories: held-to-maturity, trading or
available-for-sale. At each reporting date, the appropriateness of the
classification is reassessed. Investments in debt securities are classified as
held-to-maturity and measured at amortized cost in the financial statements only
if management has the positive intent and ability to hold those securities to
maturity. Securities that are bought and held principally for the purpose of
selling them in the near term are classified as trading and measured at fair
value in the financial statements with unrealized gains and losses included in
earnings. Investments not classified as either held-to-maturity or trading are
classified as available-for-sale and measured at fair value in the financial
statements with unrealized gains and losses reported, net of tax, in a separate
component of shareholders' equity until realized.

         The following table summarizes the carrying value and classification of
securities as of the dates shown:


<TABLE>
<CAPTION>
                                           DECEMBER 31,
                               ----------------------------------
                                 1997         1996         1995
                               --------     --------     --------
                                    (DOLLARS IN THOUSANDS)
<S>                            <C>          <C>          <C>     
Available-for-sale ........... $188,048     $324,723     $377,837
Held-to-maturity .............  273,387      115,902       96,074
                               --------     --------     --------
          Total securities ... $461,435     $440,625     $473,911
                               ========     ========     ========
</TABLE>

         At December 31, 1997, securities totaled $461.4 million, an increase of
$20.8 million from $440.6 million at December 31, 1996. The increase resulted
from investing funds acquired with the Acquisitions. During 1996, securities
decreased $33.3 million from $473.9 million at December 31, 1995, reflecting the
Company's use of funds from maturities to fund loans. During 1995, the Company
transferred from held-to-maturity to available-for-sale accounts securities with
an amortized cost of $339.8 million and net unrealized gains of $6.2 million at
the date of transfer. The transfer was made in light of pending branch sales in
order to maintain the Company's interest rate risk position.

                                      -30-

<PAGE>   33



         The following table presents the amortized cost of securities
classified as available-for-sale and their approximate fair values as of the
dates shown:

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 1997                                  DECEMBER 31, 1996
                                       -----------------------------------------------     ---------------------------------------
                                                      GROSS        GROSS                                GROSS     GROSS
                                       AMORTIZED   UNREALIZED   UNREALIZED     FAIR        AMORTIZED UNREALIZED UNREALIZED  FAIR   
                                         COST         GAIN         LOSS        VALUE         COST       GAIN      LOSS     VALUE
                                       --------     --------     --------     --------     --------    -------- --------  --------
                                                                              (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>          <C>          <C>          <C>         <C>      <C>       <C>     
U.S. Government securities ........... $148,956     $  1,436     $     --     $150,392     $275,781    $  3,432 $     77  $279,136
Mortgage-backed securities ............  37,661           31           73       37,619       45,728          40      218    45,550
Other securities ......................      37           --           --           37           37          --       --        37
                                       --------     --------     --------     --------     --------    -------- --------  --------
        Total .........................$186,654     $  1,467     $     73     $188,048     $321,546    $  3,472 $    295  $324,723
                                       ========     ========     ========     ========     ========    ======== ========  ========
<CAPTION>
                                                      DECEMBER 31, 1995
                                       -----------------------------------------------
                                                      GROSS        GROSS
                                       AMORTIZED   UNREALIZED   UNREALIZED     FAIR   
                                         COST         GAIN         LOSS        VALUE
                                       --------     --------     --------     --------
                                                    (DOLLARS IN THOUSANDS)
<S>                                    <C>          <C>          <C>          <C>     
U.S. Government securities $148,956 ...$369,747     $  8,161     $    108     $377,800
Mortgage-backed securities ............      --           --           --           --
Other securities ......................      37           --           --           37
                                       --------     --------     --------     --------
        Total .........................$369,784     $  8,161     $    108     $377,837
                                       ========     ========     ========     ========
</TABLE>

         The following table presents the amortized cost of securities
classified as held-to-maturity and their approximate fair values as of the dates
shown:

<TABLE>
<CAPTION>
                                              DECEMBER 31, 1997                                  DECEMBER 31, 1996
                               -----------------------------------------------     -----------------------------------------------
                                              GROSS        GROSS                                 GROSS         GROSS
                               AMORTIZED   UNREALIZED   UNREALIZED     FAIR        AMORTIZED  UNREALIZED    UNREALIZED     FAIR   
                                 COST         GAIN         LOSS        VALUE         COST        GAIN          LOSS        VALUE
                               --------     --------     --------     --------     --------     --------     --------     --------
                                                                      (DOLLARS IN THOUSANDS)
<S>                           <C>          <C>          <C>          <C>          <C>          <C>          <C>          <C>     
U.S. Government securities ...$ 65,696     $    819     $     --     $ 66,515     $     --     $     --     $     --     $     --
Mortgage-backed securities ... 206,691          699          908      206,482      115,902           68        1,661      114,309
Other securities .............   1,000            2           --        1,002           --           --           --           -- 
                              --------     --------     --------     --------     --------     --------     --------     --------
        Total ................$273,387     $  1,520          908     $273,999     $115,902     $     68     $  1,661     $114,309
                              ========     ========     ========     ========     ========     ========     ========     ========
<CAPTION>
                                             DECEMBER 31, 1995
                              -----------------------------------------------
                                             GROSS        GROSS
                              AMORTIZED   UNREALIZED   UNREALIZED     FAIR   
                                COST         GAIN         LOSS        VALUE
                              --------     --------     --------     --------
                                           (DOLLARS IN THOUSANDS)
<S>                           <C>          <C>          <C>          <C>     
U.S. Government securities ...$     --     $     --     $     --     $     --
Mortgage-backed securities ...  96,074          103          941       95,236
Other securities .............      --           --           --           --
                              --------     --------     --------     --------
        Total ................$ 96,704     $    103     $    941     $ 95,236
                              ========     ========     ========     ========

</TABLE>


         Mortgage-backed securities are securities which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings, and minimum regular monthly cash flows of principal and interest are
guaranteed by the issuing agencies. Included in the Company's mortgage-backed
securities at December 31, 1997 were $26.0 million in agency-issued collateral
mortgage obligations and $516,000 in privately-issued collateral mortgage
obligations.

         At December 31, 1997, 13.5% of the mortgage-backed securities held by
the Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Mortgage-backed securities which are purchased at a premium will
generally suffer decreasing net yields as interest rates drop because home
owners tend to refinance their mortgages. Thus, the premium paid must be
amortized over a shorter period. Therefore, securities purchased at a discount
will obtain higher net yields in a decreasing interest rate environment. As
interest rates rise, the opposite will generally be true. During a period of
increasing interest rates, fixed rate mortgage-backed securities do not tend to
experience heavy prepayments of principal and consequently, the average life of
this security will not be unduly shortened. If interest rates begin to fall,
prepayments will increase. Approximately $39.5 million of the Company's
mortgage-backed securities earn interest at floating rates and reprice within
one year, and accordingly are less susceptible to declines in value should
interest rates increase.

         In December of 1996, the Company purchased $30.4 million of
mortgage-backed securities classified as held- to-maturity. This transaction,
which settled in January of 1997, was the principal cause of the $29.9 million
decline in other liabilities from December 31, 1996 to December 31, 1997. See
"Note N -- Supplemental Statement of Cash Flow Information" to the Financial
Statements.



                                      -31-

<PAGE>   34



Deposits

         The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposits consist of demand, savings,
money market and time accounts. The Company relies primarily on competitive
pricing policies and customer service to attract and retain these deposits. The
Company does not have any brokered deposits.

         Average total deposits during 1997 increased to $851.6 million from
$695.7 million in 1996, an increase of $156.0 million or 22.4%. The increase
resulted primarily from deposits acquired with the Acquisitions. Average total
deposits during 1996 decreased $77.1 million or 10.0% from $772.8 million in
1995. Approximately 79.3% of the decline occurred in certificates of deposit
which lowered the cost of deposits to 3.40% in 1996 from 3.51% in 1995 and
increased the ratio of average demand deposits to average total deposits to
32.5% in 1996 from 29.3% in 1995. The decrease resulted primarily from the sales
of five branch locations with approximately $77.4 million in deposits and the
continued repricing of maturing deposits acquired in the branch acquisitions of
1994 into a lower rate structure. The Company's ratios of average
noninterest-bearing demand deposits to average total deposits for years ended
December 31, 1997, 1996 and 1995 were 16.7%, 16.5% and 14.7%, respectively.

         The Company's lending and investing activities are funded principally
by deposits, approximately 50.5% of which are demand and savings deposits.
Average noninterest-bearing deposits at December 31, 1997 were $142.6 million as
compared to $114.9 million for 1996, an increase of $27.8 million or 24.2%.
Approximately 16.7% of average deposits for the year ended December 31, 1997
were noninterest-bearing. The amount of deposits grew due to a combination of
new location acquisitions and the opening of a new branch in the Galleria area
of Houston.

         The daily average balances and weighted average rates paid on deposits
for each of the years ended December 31, 1997, 1996, and 1995 are presented
below:

<TABLE>
<CAPTION>
                                                                YEARS ENDED DECEMBER 31,
                                         -------------------------------------------------------------------- 
                                                 1997                    1996                     1995
                                         ---------------------    --------------------    ------------------- 
                                          AMOUNT        RATE      AMOUNT        RATE       AMOUNT        RATE
                                         --------     --------    -------     --------     -------       ---- 
                                                                  (DOLLARS IN THOUSANDS)
<S>                                      <C>          <C>         <C>         <C>         <C>             <C>  
Money market checking .................. $123,896         2.03%   $110,992        2.26%   $112,902        2.30%
Regular savings ........................   90,410         2.37      91,630        2.44     109,552        2.63
Money market savings ...................   71,290         3.71      38,969        3.24      36,230        3.16
Time deposits less than $100,000 .......  311,251         5.24     257,958        5.16     307,352        5.00
Time deposits $100,000 and over ........  112,114         5.50      81,251        5.37      93,009        5.54
                                         --------         ----    --------        ----    --------        ---- 
     Total interest-bearing deposits ...  708,961         4.20     580,800        4.08     659,045        4.12
Noninterest-bearing deposits ...........  142,642           --     114,853          --     113,707          --
                                         --------         ----    --------        ----    --------        ---- 
          Total deposits ............... $851,603         3.50%    695,653        3.40%   $772,752        3.51%
                                         ========         ====    ========        ====    ========        ==== 
</TABLE>

         The following table sets forth the amount of the Company's certificates
of deposit that are $100,000 or greater by time remaining until maturity:

<TABLE>
<CAPTION>
                                   DECEMBER 31, 1997
                                ----------------------
                                (DOLLARS IN THOUSANDS)
<S>                                 <C>
3 months or less ...............    $ 48,207
Between 3 months and 6 months ..      29,063
Between 6 months and 1 year ....      24,130
Over 1 year ....................      21,604
                                    --------
          Total ................    $123,004
                                    ========
</TABLE>


                                      -32-

<PAGE>   35



Interest Rate Sensitivity and Liquidity

         The Company's asset and liability management process is utilized to
manage the Company's interest rate risk through structuring the balance sheet to
maximize net interest income while maintaining an acceptable level of risk to
changes in market interest rates. The achievement of this goal requires a
balance between profitability, liquidity, and interest rate risk.

         Interest rate risk is managed by the Investment Committee, which is
composed of senior officers and directors of the Company and the Bank, in
accordance with policies approved by the Company's Board of Directors. The
Company also periodically obtains advice from external sources to assist it in
the management of interest rate risk. The Investment Committee formulates
strategies based on appropriate levels of interest rate risk. In determining the
appropriate level of interest rate risk, the Investment Committee considers the
impact on earnings and capital of the current outlook on interest rates,
potential changes in interest rates, regional economics, liquidity, business
strategies and other factors. The Investment Committee meets regularly to
review, among other things, the sensitivity of assets and liabilities to
interest rate changes, the book and market values of assets and liabilities,
unrealized gains and losses, purchase and sale activity, commitments to
originate loans and the maturities of investments and borrowings. Additionally,
the Investment Committee reviews liquidity, cash flow flexibility and deposit
maturities.

         To effectively measure and manage interest rate risk, the Company uses
simulation analysis to determine the impact on net interest income under various
interest rate scenarios, balance sheet trends and strategies. From these
simulations, interest rate risk is quantified and appropriate strategies are
developed and implemented. Additionally, duration and market value sensitivity
measures are utilized when they provide added value to the overall interest rate
risk management process. The overall interest rate risk position and strategies
are reviewed by executive management and the Company's Board of Directors on an
ongoing basis. The Company manages its business to reduce its overall exposure
to changes in interest rates.

         The Company manages its exposure to interest rates by structuring its
balance sheet in the ordinary course of business. The Company does not currently
enter into instruments such as leveraged derivatives, structured notes, interest
rate swaps, caps, floors, financial options, financial futures contracts or
forward delivery contracts for the purpose of reducing interest rate risk.

         An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest
rate sensitivity reflects the potential effect on net interest income of a
movement in interest rates. A company is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-earning assets maturing
or repricing within a given period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
company is considered to be liability sensitive, or having a negative GAP, when
the amount of its interest-bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. During a period of rising interest rates, a
negative GAP would tend to affect adversely net interest income, while a
positive GAP would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative GAP would tend to result in an
increase in net interest income, while a positive GAP would tend to affect net
interest income adversely.


                                      -33-

<PAGE>   36



         The following table sets forth an interest rate sensitivity analysis
for the Company at December 31, 1997:


<TABLE>
<CAPTION>
                                                         VOLUMES SUBJECT TO REPRICING WITHIN
                                       -------------------------------------------------------------------------
                                         0-30           31-180          181-365           1-3             3-5     
                                         DAYS            DAYS            DAYS            YEARS           YEARS    
                                       ---------       ---------       ---------       ---------       ---------
                                                                (DOLLARS IN THOUSANDS)
<S>                                    <C>             <C>             <C>             <C>             <C>      
Interest-earning assets:
  Securities .....................     $  57,964       $  53,245       $  64,528       $ 193,213       $  35,872
  Loans ..........................        52,997          51,260          44,441         129,788          86,314
  Federal funds sold and other
    temporary investments ........        29,478              --              --              --              -- 
                                       ---------       ---------       ---------       ---------       ---------
        Total
          interest-earning
          assets .................       140,439         104,505         108,969         323,001         122,186
                                       ---------       ---------       ---------       ---------       ---------
Interest-bearing
  liabilities:
  Demand, money market and
    savings deposits .............       284,632              --              --              --              -- 
  Certificates of deposit
    and other time
    deposits .....................        47,801         161,796          94,695          93,256          29,811
  Federal funds purchased
    and securities sold
    under repurchase
    agreements ...................        17,132              --              --              --              -- 
                                       ---------       ---------       ---------       ---------       ---------
        Total
          interest-bearing
          liabilities ............       349,565         161,796          94,695          93,256          29,811
                                       ---------       ---------       ---------       ---------       ---------
Period GAP .......................     $(209,126)      $ (57,291)      $  14,274       $ 229,745       $  92,375
Cumulative GAP ...................     $(209,126)      $(266,417)      $(252,143)      $ (22,398)      $  69,977
Period GAP to total
  assets .........................        (21.82)%         (5.98)%          1.49%          23.97%           9.64%
Cumulative GAP to total
  assets .........................        (21.82)%        (27.80)%        (26.31)%         (2.34)%          7.30%
Cumulative interest-earning
  assets to cumulative
  interest-bearing liabilities ...         40.18%          47.90%          58.40%          96.80%         109.60%
<CAPTION>
                                         VOLUMES SUBJECT TO REPRICING WITHIN
                                       ---------------------------------------
                                                      GREATER              
                                         5-10           THAN               
                                         YEARS        10 YEARS         TOTAL 
                                       ---------      --------       ---------
                                               (DOLLARS IN THOUSANDS)
<S>                                    <C>            <C>            <C>      
Interest-earning assets:
  Securities .....................     $  54,847      $     372      $ 460,041
  Loans ..........................        46,443         11,575        422,818
  Federal funds sold and other
    temporary investments ........            --             --         29,478
                                       ---------      ---------      ---------
        Total
          interest-earning
          assets .................       101,290         11,947        912,337
                                       ---------      ---------      ---------
Interest-bearing
  liabilities:
  Demand, money market and
    savings deposits .............            --             --        284,632
  Certificates of deposit
    and other time
    deposits .....................           912             15        428,286
  Federal funds purchased
    and securities sold
    under repurchase
    agreements ...................            --             --         17,132
                                       ---------      ---------      ---------
        Total
          interest-bearing
          liabilities ............           912             15        730,050
                                       ---------      ---------      ---------
Period GAP .......................     $ 100,378      $  11,932      $ 182,287
Cumulative GAP ...................     $ 170,355      $ 182,287            
Period GAP to total
  assets .........................         10.47%          1.25%           
Cumulative GAP to total
  assets .........................         17.78%         19.02%           
Cumulative interest-earning
  assets to cumulative
  interest-bearing liabilities ...        123.34%        124.97%           
</TABLE>

         The Company's one-year cumulative GAP position at December 31, 1997 was
negative $252.1 million or 26.31% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management,
shortcomings are inherent in GAP analysis since certain assets and liabilities
may not move proportionally as interest rates change. Consequently, in addition
to GAP analysis the Company uses a simulation model to test the interest rate
sensitivity of net interest income and the balance sheet. Based on the Company's
December 31, 1997 simulation analysis, the Company estimates that a 200 basis
point rise or decline in rates over the next twelve month period would have an
impact of less than 3.0% on its net interest income for the same period. The
change is relatively small, despite the Company's liability sensitive GAP
position. This results primarily from the behavior of demand, money market and
savings deposits. The Company has found that historically, interest rates on
these deposits change more slowly in a rising rate environment than in a
declining rate environment.


                                      -34-

<PAGE>   37

         Liquidity involves the Company'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
Company on an ongoing basis. During the past three years, the Company's
liquidity needs have been met primarily by financing activities, which consisted
mainly of growth in core deposits, supplemented by earnings through operating
activities. In the Company's investing activities, highly liquid securities have
provided much flexibility as demonstrated in meeting the cash demands of the
branch sale in 1995. Although access to purchased funds from correspondent banks
is available and has been utilized on occasion to take advantage of investment
opportunities, the Company does not generally rely on these external funding
sources.

Capital Resources

         Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the TDB. Both the Federal Reserve and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.

         The risk-based capital standards issued by the Federal Reserve apply to
the Company. These guidelines relate a financial institution's capital to the
risk profile of its assets. The risk-based capital standards require all
financial

                                      -35-

<PAGE>   38



institutions to have "Tier 1 capital" of at least 4.0% and "total risk-based"
capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted assets.
"Tier 1 capital" generally includes common shareholders' equity and qualifying
perpetual preferred stock together with related surpluses and retained earnings,
less deductions for goodwill and various other intangibles. "Tier 2 capital" may
consist of a limited amount of intermediate-term preferred stock, a limited
amount of term subordinated debt, certain hybrid capital instruments and other
debt securities, perpetual preferred stock not qualifying as Tier 1 capital, and
a limited amount of the general valuation allowance for loan losses. The sum of
Tier 1 capital and Tier 2 capital is "total risk-based capital".

         The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.

         Pursuant to Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), each federal banking agency revised its risk-based capital
standards to ensure that those standards take adequate account of interest rate
risk, concentration of credit risk and the risks of nontraditional activities,
as well as reflect the actual performance and expected risk of loss on
multifamily mortgages. The Bank is subject to capital adequacy guidelines of the
FDIC that are substantially similar to the Federal Reserve's guidelines. Also
pursuant to FDICIA, the FDIC has promulgated regulations setting the levels at
which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The Bank is classified
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations. SEE "SUPERVISION AND REGULATION -- THE COMPANY" AND "-- THE
BANK".

         Shareholders' equity increased to $71.5 million at December 31, 1997
from $62.0 million at December 31, 1996, an increase of $9.5 million or 15.3%.
This increase was primarily the result of net income of $11.4 million, net
proceeds from an initial public offering of $7.4 million, offset by a decline in
the net unrealized appreciation on available-for-sale securities of $1.2
million, dividends paid of $1.9 million, and the redemption of preferred stock
of $6.0 million. During 1996, shareholders' equity increased by $3.6 million or
6.2%, from $58.3 million at December 31, 1995. In addition to net income of $9.2
million, the increase reflected a decline of $3.2 million in net unrealized
appreciation on available-for-sale securities and dividends paid of $1.9
million.

         The following table provides a comparison of the Company's and the
Bank's leverage and risk-weighted capital ratios as of December 31, 1997 to the
minimum and well-capitalized regulatory standards:


<TABLE>
<CAPTION>
                                                                               ACTUAL RATIO AT
                                       MINIMUM REQUIRED    WELL-CAPITALIZED   DECEMBER 31, 1997
                                       ----------------    ----------------   -----------------
<S>                                        <C>                <C>               <C>   
The Company
  Leverage ratio...................        3.00%(1)             N/A               6.82%
  Tier 1 risk-based capital ratio..        4.00%                N/A              13.96%
  Risk-based capital ratio.........        8.00%                N/A              15.01%
The Bank     
  Leverage ratio...................        3.00%(2)            5.00%              6.64%
  Tier 1 risk-based capital ratio..        4.00%               6.00%             13.60%
  Risk-based capital ratio.........        8.00%              10.00%             14.65%
</TABLE>

----------
(1)      The Federal Reserve may require the Company to maintain a leverage 
         ratio of up to 200 basis points above the required minimum.
(2)      The FDIC may require the Bank to maintain a leverage ratio of up to 
         200 basis points above the required minimum.

                                      -36-

<PAGE>   39



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION--INTEREST RATE SENSITIVITY AND LIQUIDITY". The
Company's principal market risk exposure is to interest rates.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form 10-K.

              CONSOLIDATED QUARTERLY FINANCIAL DATA OF THE COMPANY

         The following table presents certain unaudited quarterly financial
information concerning the Company's results of operations for each of the two
years ended December 31, 1997. The information should be read in conjunction
with the historical Consolidated Financial Statements of the Company and the
Notes thereto included elsewhere in this Annual Report.

<TABLE>
<CAPTION>
                                                     QUARTER ENDED 1997
                                        --------------------------------------------
                                        DEC. 31     SEPT. 30    JUNE 30     MARCH 31
                                        -------     --------    -------     --------
                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>    
Interest income ....................... $17,387     $16,793     $16,685     $15,173
Interest expense ......................   7,842       7,634       7,618       6,923
                                        -------     -------     -------     -------
Net interest income ...................   9,545       9,159       9,067       8,250
Provision for loan losses .............     150         150         150         375
                                        -------     -------     -------     -------
Net interest income after provision
  for loan losses .....................   9,395       9,009       8,917       7,875
Noninterest income ....................   2,337       2,333       2,229       2,057
Noninterest expense ...................   6,915       6,948       6,462       6,229
                                        -------     -------     -------     -------
Earnings before income taxes ..........   4,817       4,394       4,684       3,703
Provision for income taxes ............   1,738       1,603       1,631       1,263
                                        -------     -------     -------     -------
Net earnings .......................... $ 3,079     $ 2,791     $ 3,053     $ 2,440
                                        =======     =======     =======     =======

Earnings per share:
       Basic .......................... $  0.32     $  0.29     $  0.32     $  0.26
       Diluted ........................    0.30        0.28        0.31        0.25
</TABLE>

<TABLE>
<CAPTION>
                                                     QUARTER ENDED 1996
                                        --------------------------------------------
                                        DEC. 31     SEPT. 30    JUNE 30     MARCH 31
                                        -------     --------    -------     --------
                                       (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                     <C>         <C>         <C>         <C>    
Interest income ....................... $13,671     $13,581     $13,430     $13,133
Interest expense ......................   5,871       5,939       5,920       6,011
                                        -------     -------     -------     -------
Net interest income ...................   7,800       7,642       7,510       7,122
Provision for loan losses .............     325         325         596          --
                                        -------     -------     -------     -------
Net interest income after provision
  for loan losses .....................   7,475       7,317       6,914       7,122
Noninterest income ....................   2,074       2,116       2,099       2,003
Noninterest expense ...................   5,895       6,928       5,185       5,048
                                        -------     -------     -------     -------
Earnings before income taxes ..........   3,654       2,505       3,828       4,077
Provision for income taxes ............   1,294         853       1,305       1,390
                                        -------     -------     -------     -------
Net earnings .......................... $ 2,360     $ 1,652     $ 2,523     $ 2,687
                                        =======     =======     =======     =======

Earnings per share:
      Basic ........................... $  0.25     $  0.17     $  0.26     $  0.29
      Diluted .........................    0.24        0.16        0.25        0.27
</TABLE>



                                      -37-
<PAGE>   40

ITEM 9.  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, 1997.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information under the captions "Election of Directors," "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders (the "1998 Proxy Statement") is incorporated herein by
reference in response to this item.

ITEM 11.  EXECUTIVE COMPENSATION

         The information under the caption "Executive Compensation and Other
Matters" in the 1998 Proxy Statement is incorporated herein by reference in
response to this item.

ITEM 12.  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 1998 Proxy
Statement is incorporated herein by reference in response to this item.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The information under the caption "Interests of Management and Others
in Certain Transactions" in the 1998 Proxy Statement is incorporated herein by
reference in response to this item.

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K


CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

         Reference is made to the Financial Statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Annual
Report on Form 10-K. Set forth below is a list of such Financial Statements:

         Report of Independent Certified Accountants
         Consolidated Balance Sheets as of December 31, 1997 and 1996
         Consolidated Statements of Earnings for the Years ended December 31,
                  1997, 1996 and 1995 
         Consolidated Statement of Shareholders' Equity for the Years ended 
                  December 31, 1995, 1996 and 1997
         Consolidated Statements of Cash Flows for the Years ended December 31,
                  1997, 1996 and 1995 
         Notes to Consolidated Financial Statements


                                      -38-

<PAGE>   41



FINANCIAL STATEMENT SCHEDULES

         All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.

EXHIBITS

         Each exhibit marked with an asterisk is filed with this Annual Report
on Form 10-K.

<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION
    -------                                            -----------
    <S>         <C>   <C>
       2.1      --    Agreement and Plan of Reorganization dated as of December 30, 1997 by and among the
                      Company, IBID, Inc., the Bank and Sunbelt (incorporated herein by reference to Exhibit 2 to the
                      Company's Registration Statement on Form S-4 (Registration No. 333-47281)).

       3.1      --    Amended and Restated Articles of Incorporation of the Company (incorporated herein by
                      reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration
                      No. 33-33001) (the "Registration Statement")).

       3.2      --    Amended and Restated Bylaws of the Company (incorporated herein by reference to Exhibit 3.2 to 
                      the Registration Statement).

       4        --    Specimen form of certificate evidencing the Common Stock (incorporated herein by reference
                      to Exhibit 4 to the Registration Statement).

      9.1       --    Voting Agreement and Irrevocable Proxy (included as Exhibit D of the Agreement and Plan of
                      Reorganization filed as Exhibit 2.1 to this Annual Report on Form 10-K).

      10.1      --    Prime Bancshares, Inc. 1997 Stock Incentive Plan (incorporated herein by reference to Exhibit
                      10.1 to the Registration Statement).

      10.2*     --    Prime Bancshares, Inc. 1993 Incentive Stock Option Plan.

      10.3*     --    Prime Bancshares, Inc. 1984 Incentive Stock Option Plan.

      21*       --    Subsidiaries of Prime Bancshares, Inc.
</TABLE>

REPORTS ON FORM 8-K

      The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1997.

                                      -39-

<PAGE>   42



                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Prime Bancshares, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Houston and State of Texas on March 9, 1998.

                                            PRIME BANCSHARES, INC.

                                            By: /s/ E. J. GUZZO
                                               ---------------------------------
                                                  E. J. Guzzo
                                                  President


         Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report or amendment thereto has been signed by the following
persons in the indicated capacities on March 9, 1998.

<TABLE>
<CAPTION>
               SIGNATURE                                    POSITIONS
               ---------                                    ---------
<S>                                       <C>
       /s/ FREDRIC M. SAUNDERS
     ---------------------------
        Fredric M. Saunders               Chairman of the Board, (principal executive
                                          officer)
        /s/ L. ANDERSON CREEL 
     ---------------------------
         L. Anderson Creel                Treasurer (principal financial officer and
                                          principal accounting officer)
          /s/ E. J. GUZZO
     ---------------------------
            E. J. Guzzo                   President and Director

         /s/ DAVID PASTERNAK
     ---------------------------
          David Pasternak                 Director

        /s/ STUART D. SAUNDERS
     ---------------------------
        Stuart D. Saunders                Director

         /s/ JAMES B. WESLEY
     ---------------------------
          James B. Wesley                 Director

        /s/ JERRY S. DOMINY  
     ---------------------------
          Jerry S. Dominy                 Director
</TABLE>



                                      -40-

<PAGE>   43
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                           <C>
PRIME BANCSHARES, INC.
Report of Independent Certified Public Accountants..........  F-2
Consolidated Balance Sheets as of December 31, 1997 and
  1996......................................................  F-3
Consolidated Statements of Earnings for the Years Ended
  December 31, 1997, 1996 and 1995..........................  F-4
Consolidated Statement of Shareholders' Equity for the Years
  Ended December 31, 1995, 1996 and 1997....................  F-5
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1997, 1996 and 1995..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   44
 
               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
 
The Board of Directors and Shareholders
Prime Bancshares, Inc.
 
     We have audited the accompanying consolidated balance sheets of Prime
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Prime Bancshares, Inc. and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
 
GRANT THORNTON LLP
 
Houston, Texas
January 20, 1998
 
                                       F-2
<PAGE>   45
 
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                                  DECEMBER 31,
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents
  Cash and due from banks...................................  $ 18,263    $ 34,006
  Federal funds sold and other temporary investments........    29,478          --
                                                              --------    --------
          Total cash and cash equivalents...................    47,741      34,006
Securities
  Available-for-sale........................................   188,048     324,723
  Held-to-maturity..........................................   273,387     115,902
                                                              --------    --------
          Total securities..................................   461,435     440,625
Loans, net..................................................   417,880     306,857
Premises and equipment, net.................................    15,268       9,761
Accrued interest receivable.................................     6,747       6,453
Other assets................................................     9,289       3,753
                                                              --------    --------
                                                              $958,360    $801,455
                                                              ========    ========
 
                       LIABILITIES AND SHAREHOLDERS' EQUITY
 
Liabilities
  Deposits
     Noninterest-bearing....................................  $152,154    $117,441
     Interest-bearing deposits..............................   712,918     577,729
                                                              --------    --------
          Total deposits....................................   865,072     695,170
  Federal funds purchased and securities sold under
     repurchase agreements..................................    17,132       9,700
  Other liabilities.........................................     4,683      34,616
                                                              --------    --------
          Total liabilities.................................   886,887     739,486
Commitments and contingencies...............................        --          --
Shareholders' equity
  Preferred stock...........................................     1,000       7,000
  Common stock..............................................     3,003       2,980
  Additional capital........................................     9,368       3,824
  Retained earnings.........................................    59,585      50,113
  Net unrealized gain on available-for-sale securities, net
     of tax of $398 and $996................................       772       1,934
                                                              --------    --------
                                                                73,728      65,851
  Less common stock held in treasury -- at cost.............     2,255       3,882
                                                              --------    --------
                                                                71,473      61,969
                                                              --------    --------
                                                              $958,360    $801,455
                                                              ========    ========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-3
<PAGE>   46
 
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
                      CONSOLIDATED STATEMENTS OF EARNINGS
                            YEAR ENDED DECEMBER 31,
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               1997      1996      1995
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Interest income
  Loans.....................................................  $34,343   $24,673   $19,357
  Securities................................................   30,233    28,722    34,514
  Federal funds sold and other temporary investments........    1,462       420     1,439
                                                              -------   -------   -------
          Total interest income.............................   66,038    53,815    55,310
Interest expense............................................   30,017    23,741    27,141
                                                              -------   -------   -------
          Net interest income...............................   36,021    30,074    28,169
Provision for loan losses...................................      825     1,246     1,510
                                                              -------   -------   -------
          Net interest income after provision for loan
            losses..........................................   35,196    28,828    26,659
Noninterest income
  Service charges...........................................    7,045     6,319     6,106
  Gain on sale of branches..................................       --        --     2,445
  Other operating income....................................    1,911     1,973     1,787
                                                              -------   -------   -------
          Total noninterest income..........................    8,956     8,292    10,338
Noninterest expense
  Employee compensation and benefits........................   16,354    13,070    12,887
  Net bank premises expense.................................    1,339     1,246     1,262
  Equipment rentals, depreciation and maintenance...........    1,232       975     1,000
  Net realized losses on available-for-sale securities......       --        --         9
  Other operating expenses..................................    7,629     7,765     7,952
                                                              -------   -------   -------
          Total noninterest expenses........................   26,554    23,056    23,110
                                                              -------   -------   -------
          Earnings before income taxes......................   17,598    14,064    13,887
Provision for income taxes
  Current...................................................    6,680     5,174     5,360
  Deferred benefit..........................................     (445)     (332)     (525)
                                                              -------   -------   -------
                                                                6,235     4,842     4,835
                                                              -------   -------   -------
          NET EARNINGS......................................  $11,363   $ 9,222   $ 9,052
                                                              =======   =======   =======
Basic earnings per common share.............................  $  1.19   $   .97   $   .94
                                                              =======   =======   =======
Diluted earnings per common share...........................  $  1.14   $   .92   $   .89
                                                              =======   =======   =======
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-4
<PAGE>   47
 
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
                 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                        NET UNREALIZED
                                                                                         GAIN (LOSS)
                                                                                        ON SECURITIES     COMMON        TOTAL
                                           PREFERRED   COMMON   ADDITIONAL   RETAINED     AVAILABLE-     STOCK IN   SHAREHOLDERS'
                                             STOCK     STOCK     CAPITAL     EARNINGS      FOR-SALE      TREASURY      EQUITY
                                           ---------   ------   ----------   --------   --------------   --------   -------------
<S>                                        <C>         <C>      <C>          <C>        <C>              <C>        <C>
Balance at January 1, 1995...............   $ 6,000    $2,943     $3,721     $35,587       $   494       $(1,906)      $46,839
Purchase of treasury stock...............        --        --         --          --            --          (100)         (100)
Exchange common stock for series B
  preferred stock........................     1,250        --         --          --            --        (1,250)           --
Redemption of preferred stock............      (250)       --         --          --            --            --          (250)
Dividends................................        --        --         --      (1,871)           --            --        (1,871)
Net change in unrealized gain (loss) on
  available-for-sale securities, net of
  taxes of $2,401........................        --        --         --          --         4,660            --         4,660
Net earnings for the year................        --        --         --       9,052            --            --         9,052
                                            -------    ------     ------     -------       -------       -------       -------
Balance at December 31, 1995.............     7,000     2,943      3,721      42,768         5,154        (3,256)       58,330
Purchase of treasury stock...............        --        --         --          --            --          (626)         (626)
Sale of common stock.....................        --        37        103          --            --            --           140
Dividends................................        --        --         --      (1,877)           --            --        (1,877)
Net change in unrealized gain (loss) on
  available-for-sale securities, net of
  taxes of $1,659........................        --        --         --          --        (3,220)           --        (3,220)
Net earnings for the year................        --        --         --       9,222            --            --         9,222
                                            -------    ------     ------     -------       -------       -------       -------
Balance at December 31, 1996.............     7,000     2,980      3,824      50,113         1,934        (3,882)       61,969
Purchase of treasury stock...............        --        --         --          --            --          (408)         (408)
Sale of common stock.....................        --        23        131          --            --            --           154
Sale of treasury stock in initial public
  offering...............................        --        --      5,745          --            --         2,035         7,780
Stock issuance costs.....................        --        --       (332)         --            --            --          (332)
Redemption of preferred stock............    (6,000)                                            --            --        (6,000)
Dividends................................        --        --         --      (1,891)           --            --        (1,891)
Net change in unrealized gain (loss) on
  available-for-sale securities, net of
  taxes of $598..........................        --        --         --          --        (1,162)           --        (1,162)
Net earnings for the year................        --        --         --      11,363            --            --        11,363
                                            -------    ------     ------     -------       -------       -------       -------
Balance at December 31, 1997.............   $ 1,000    $3,003     $9,368     $59,585       $   772       $(2,255)      $71,473
                                            =======    ======     ======     =======       =======       =======       =======
</TABLE>
 
         The accompanying notes are an integral part of this statement.
 
                                       F-5
<PAGE>   48
 
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            YEAR ENDED DECEMBER 31,
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                1997       1996       1995
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Cash flows from operating activities:
  Net earnings..............................................  $ 11,363   $  9,222   $  9,052
  Adjustments to reconcile net earnings to net cash provided
     by operating activities:
     Depreciation and amortization..........................     2,218      1,218      1,380
     Amortization of premiums, net of (accretion) of
       discounts on securities..............................      (610)      (780)       (81)
     Net realized loss on available-for-sale securities.....        --         --          9
     Provision for loan losses..............................       825      1,246      1,510
     Write-down of other assets.............................        --         50        155
     (Gain) loss on sale of premises, equipment and other
       real estate..........................................       (59)      (210)         8
     Gain on sale of certain branch assets and
       liabilities..........................................        --         --     (2,445)
     Change in assets and liabilities, net of effects
       resulting from the acquisition of a bank, and the
       purchase and sale of certain branch assets and
       liabilities:
       Decrease in accrued interest receivable..............        25      2,469      1,572
       Decrease (increase) in prepaid and other assets......     6,453         23     (1,106)
       (Decrease) increase in other liabilities.............   (29,629)       (68)     1,198
                                                              --------   --------   --------
       Net cash (used) provided by operating activities.....    (9,414)    13,170     11,252
Cash flows from investing activities:
  Purchases of held-to-maturity securities..................  (174,222)        --    (18,589)
  Proceeds from sales and maturities of
     available-for-sale.....................................   143,540    122,607     97,387
Securities
  Purchases of available-for-sale securities................        --    (73,224)   (20,226)
  Proceeds from maturities of held-to-maturity securities...    18,079     10,176     80,017
  Increase in loans, net of the effects resulting from the
     acquisition of a bank, and the purchase and sale of
     certain branch assets and liabilities..................   (71,408)   (81,591)   (36,257)
  Purchases of premises and equipment.......................    (2,029)    (1,449)    (1,703)
  Proceeds from sale of premises, equipment and other real
     estate.................................................       567      1,071         43
  Net decrease in cash resulting from the acquisition of a
     bank...................................................    (4,781)        --         --
  Net increase in cash resulting from acquisition of certain
     branch assets and the assumption of certain
     liabilities............................................    96,502         --         --
  Net decrease in cash resulting from the sale of certain
     branch assets and liabilities..........................        --         --    (72,759)
                                                              --------   --------   --------
       Net cash provided (used) by investing activities.....     6,248    (22,410)    27,913
Cash flows from financing activities:
  Change in deposits, net of the effects resulting from the
     acquisition of a bank, and the purchase and sale of
     certain branch assets and liabilities..................  $ 10,166   $  1,005   $(42,208)
  Change in federal funds purchased and securities sold
     under Repurchase agreements............................     7,432      9,700         --
  Purchase of treasury stock................................      (408)      (613)      (100)
  Redemption of preferred stock.............................    (6,000)        --       (250)
  Sale of treasury stock in initial public offering, net....     7,448         --         --
  Sale of common stock......................................       154        127         --
  Payment of dividends......................................    (1,891)    (1,877)    (1,871)
                                                              --------   --------   --------
       Net cash provided (used) by financing activities.....    16,901      8,342    (44,429)
                                                              --------   --------   --------
       Net increase (decrease) in cash and cash
          equivalents.......................................    13,735       (898)    (5,264)
Cash and cash equivalents at beginning of year..............    34,006     34,904     40,168
                                                              --------   --------   --------
Cash and cash equivalents at end of year....................  $ 47,741   $ 34,006   $ 34,904
                                                              ========   ========   ========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                       F-6
<PAGE>   49
 
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 1997, 1996 AND 1995
                             (DOLLARS IN THOUSANDS)
 
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     A summary of the significant accounting policies applied in the preparation
of the accompanying financial statements follow.
 
1. GENERAL
 
     The Company operates nineteen branches in Southeast and Central Texas. The
Company's primary sources of revenue are derived from investing in various
United States Treasury and Agency securities and granting loans primarily to
customers in Southeast and Central Texas. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent on the economies in those areas.
 
2. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES
 
     The consolidated financial statements include the accounts of the Parent
and its wholly owned subsidiaries, IBID, Inc. (IBID) and Prime Bank (the Bank)
(collectively referred to as the Company). All significant intercompany
transactions and balances have been eliminated in the consolidated report of the
Company.
 
3. CASH AND CASH EQUIVALENTS
 
     The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
 
4. SECURITIES
 
     The Company accounts for securities according to Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities . At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories: held-to-
maturity, trading, or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to-maturity and measured at amortized cost in
the financial statements only if management has the positive intent and ability
to hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and measured at fair value in the financial statements with unrealized
gains and losses included in earnings. Investments not classified as either
held-to-maturity or trading are classified as available-for-sale and measured at
fair value in the financial statements with unrealized gains and losses
reported, net of tax, in a separate component of shareholders' equity until
realized.
 
     Gains and losses on the sale of securities are determined using the
specific-identification method.
 
     Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their carrying value that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.
 
     Premiums and discounts are recognized in interest income using the interest
method over the period to maturity.
 
5. LOANS
 
     Loans are reported at the principal amount outstanding, net of charge-offs,
unearned discounts, purchase discounts and an allowance for loan losses.
Unearned discounts on installment loans are recognized using a
                                       F-7
<PAGE>   50
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
method which approximates a level yield over the term of the loans. Interest on
other loans is calculated using the simple interest method on the daily balance
of the principal amount outstanding.
 
     The Company applies SFAS No. 114, Accounting for Creditors for Impairment
of a Loan, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received. Loans are not again placed on accrual status until payments are
brought current and, in management's judgment, the loan will continue to pay as
agreed.
 
6. ALLOWANCE FOR LOAN LOSSES
 
     The allowance for loan losses is established through a provision for credit
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that collectibility of the principal is
unlikely.
 
     The allowance is an amount that management believes will be adequate to
absorb losses inherent in existing loans and commitments to extend credit, based
on evaluations of the collectibility and prior loss experience of loans and
commitments to extend credit. The evaluations take into consideration such
factors as changes in the nature and volume of the portfolio, overall portfolio
quality, loan concentrations, specific problem loans and current and anticipated
economic conditions that may affect the borrower's ability to pay.
 
7. PREMISES AND EQUIPMENT
 
     Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight-line basis over the estimated useful
life of each type of asset.
 
8. OTHER REAL ESTATE
 
     Real estate acquired by foreclosure is recorded at fair value at the date
of foreclosure or acquisition, establishing a new cost basis. After foreclosure,
management periodically performs valuations and the real estate is carried at
the lower of carrying amount or fair value less cost to sell. Operating expenses
of such properties, net of related income, and gains and losses on their
disposition are included in other expenses.
 
9. GOODWILL
 
     Goodwill represents the aggregate excess of the cost of companies acquired
over the fair value of their net assets at the dates of acquisition. This excess
is being amortized by various methods over periods up to 15 years.
 
10. INCOME TAXES
 
     The Company files a consolidated Federal income tax return. By agreement
with Parent, the Bank records a provision or benefit for Federal income taxes on
the same basis as if it filed a separate Federal income tax return. The asset
and liability method of accounting is used for income taxes where deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. When management
determines that it is more likely than not that a deferred tax asset will not be
realized, a valuation allowance must be established. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
 
                                       F-8
<PAGE>   51
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
 
11. EARNINGS PER SHARE
 
     Basic earnings per common share is calculated by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is calculated by
dividing net earnings available for common shareholders by the weighted average
number of common and dilutive potential common shares. Stock options may be
potential dilutive common shares and are therefore considered in the earnings
per share calculation, if dilutive. Options granted within one year of the
initial public offering (IPO) have been treated as outstanding for all periods
as a component of weighted average dilutive potential common shares. The number
of dilutive potential common shares is determined using the treasury stock
method.
 
12. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
 
     In the ordinary course of business, the Company enters into
off-balance-sheet financial instruments consisting of commitments to extend
credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
 
13. USE OF ESTIMATES
 
     In preparing the financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
14. RECLASSIFICATIONS
 
     Certain reclassifications have been made to conform to the 1997
presentation.
 
NOTE B -- SECURITIES PURCHASED UNDER REPURCHASE AGREEMENTS
 
     At December 31, 1997, the Company purchased $17,132 of government
securities under agreements to sell substantially the identical securities for
an amount equal to the original purchase price plus accrued interest on January
5, 1998. The average interest rate was 5.3%.
 
                                       F-9
<PAGE>   52
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE C -- SECURITIES
 
     The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:
 
<TABLE>
<CAPTION>
                                                                  GROSS         GROSS
                                                   AMORTIZED    UNREALIZED    UNREALIZED      FAIR
                                                     COST         GAINS         LOSSES       VALUE
                                                   ---------    ----------    ----------    --------
<S>                                                <C>          <C>           <C>           <C>
AVAILABLE-FOR-SALE SECURITIES:
  December 31, 1997:
     U.S. Treasury securities....................  $148,956       $1,436        $   --      $150,392
     Mortgage-backed securities..................    37,661           31            73        37,619
     Other.......................................        37           --            --            37
                                                   --------       ------        ------      --------
                                                   $186,654       $1,467        $   73      $188,048
                                                   ========       ======        ======      ========
  December 31, 1996:
     U.S. Treasury securities....................  $275,781       $3,432        $   77      $279,136
     Mortgage-backed securities..................    45,728           40           218        45,550
     Other.......................................        37           --            --            37
                                                   --------       ------        ------      --------
                                                   $321,546       $3,472        $  295      $324,723
                                                   ========       ======        ======      ========
HELD-TO-MATURITY SECURITIES:
  December 31, 1997:
     U.S. Treasury securities....................  $ 65,696       $  819        $   --      $ 66,515
     Municipal securities........................     1,000            2            --         1,002
     Mortgage-backed securities..................   206,691          699           908       206,482
                                                   --------       ------        ------      --------
                                                   $273,387       $1,520        $  908      $273,999
                                                   ========       ======        ======      ========
  December 31, 1996:
     Mortgage-backed securities..................  $115,902       $   68        $1,661      $114,309
                                                   ========       ======        ======      ========
</TABLE>
 
     There were no gross realized gains on sales of available-for-sale
securities for the years ended December 31, 1997, 1996, and 1995. Gross realized
losses on sales of available-for-sale securities were $0, $0, and $9 for the
years ended December 31, 1997, 1996, and 1995.
 
     The following table shows the maturity distribution of the investment
portfolio at December 31, 1997:
 
<TABLE>
<CAPTION>
                                                                               AVAILABLE-FOR-
                                               HELD-TO-MATURITY SECURITIES     SALE SECURITIES
                                               ----------------------------    ---------------
                                                 AMORTIZED                        AMORTIZED
                                                    COST         FAIR VALUE         COST
                                               --------------    ----------    ---------------
<S>                                            <C>               <C>           <C>
Due in one year or less......................     $    170        $    170        $104,474
Due from one to five years...................       66,461          67,282          44,482
Due from five to ten years...................           65              65              --
Mortgage-backed and equity securities........      206,691         206,482          37,698
                                                  --------        --------        --------
                                                  $273,387        $273,999        $186,654
                                                  ========        ========        ========
</TABLE>
 
     Securities with an aggregate book value of approximately $140,617 and
$145,811 at December 31, 1997 and 1996, were pledged as collateral to secure
public deposits.
 
     The Company entered into a securities lending agreement whereby certain
securities owned by the Company are exchanged for a few days for substantially
identical securities. The Company had exchanged securities with market values
totaling $80,359 and $97,978 at December 31, 1997 and 1996.
 
                                      F-10
<PAGE>   53
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE D -- LOANS
 
     Major classifications of loans are as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Commercial..................................................  $ 40,581    $ 27,611
  Real estate:
     Construction...........................................    27,579      17,470
     1-4 family residential.................................    75,996      51,544
     Commercial mortgage....................................   114,576      77,220
     Other..................................................     7,070       5,088
  Consumer..................................................   160,089     135,979
  Overdrafts................................................       210         125
                                                              --------    --------
                                                               426,101     315,037
  Less:
     Unearned discounts.....................................     2,760       3,221
     Allowance for loan losses..............................     4,938       4,436
     Purchase discounts.....................................       523         523
                                                              --------    --------
                                                              $417,880    $306,857
                                                              ========    ========
</TABLE>
 
     Impaired loans were $865 and $288 at December 31, 1997 and 1996. The
reduction in interest income associated with these impaired loans was
insignificant and no valuation allowance for loan losses related to impaired
loans has been established. There were no commitments to lend additional funds
to borrowers whose loans were classified as impaired.
 
     Outstanding loans to directors, significant stockholders and executive
officers of the Company and to their related business interests aggregated $863
and $2,230 at December 31, 1997 and 1996.
 
NOTE E -- ALLOWANCE FOR LOAN LOSSES
 
     Changes in the allowance for loan losses were as follows at December 31:
 
<TABLE>
<CAPTION>
                                                           1997       1996      1995
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Balance at January 1....................................  $ 4,436    $3,660    $2,641
Provision...............................................      825     1,246     1,510
Charge-offs.............................................   (1,193)     (785)     (831)
Recoveries..............................................      382       315       340
Increase resulting from bank acquisition................      488        --        --
                                                          -------    ------    ------
  Balance at December 31................................  $ 4,938    $4,436    $3,660
                                                          =======    ======    ======
</TABLE>
 
                                      F-11
<PAGE>   54
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE F -- PREMISES AND EQUIPMENT
 
     Premises and equipment are summarized as follows at December 31:
 
<TABLE>
<CAPTION>
                                                         ESTIMATED
                                                        USEFUL LIVES    1997      1996
                                                        ------------   -------   -------
<S>                                                     <C>            <C>       <C>
Land..................................................           --    $ 3,959   $ 2,483
Building and improvements.............................  15-33 years     11,150     6,954
Furniture, fixtures and equipment.....................   5-10 years      9,598     8,216
Automobiles...........................................      3 years         68        68
                                                                       -------   -------
                                                                        24,775    17,721
Less accumulated depreciation.........................                   9,507     7,960
                                                                       -------   -------
                                                                       $15,268   $ 9,761
                                                                       =======   =======
</TABLE>
 
     Included in other assets are other real estate and repossessed assets of
$748 and $197 at December 31, 1997 and 1996.
 
NOTE G -- INTEREST BEARING DEPOSITS
 
     The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31:
 
<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------   --------
<S>                                                           <C>        <C>
NOW accounts and interest-bearing checking accounts.........  $120,624   $114,552
Savings and money market accounts...........................   164,008    127,223
Certificates of deposit.....................................   428,286    335,954
                                                              --------   --------
                                                              $712,918   $577,729
                                                              ========   ========
</TABLE>
 
     The aggregate amount of certificates of deposit, each with a minimum
denomination of $100, was approximately $123,004 and $86,032 at December 31,
1997 and 1996. At December 31, 1997, the scheduled maturities of certificates of
deposit are as follows:
 
<TABLE>
<S>                                                 <C>
1998..............................................  $304,290
1999..............................................    62,421
2000..............................................    30,837
2001..............................................    16,280
2002 and thereafter...............................    14,458
                                                    --------
                                                    $428,286
                                                    ========
</TABLE>
 
     Deposits of executive officers, significant stockholders and directors were
$2,406 and $2,041 (including time deposits of $1,239 and $1,114) at December 31,
1997 and 1996.
 
NOTE H -- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
 
     At December 31, 1997, the Company entered into the sale of $17,132 of
government securities under agreements to repurchase substantially the identical
securities on January 5, 1998. The average interest rate was 4.8%. The following
summarizes the sales to related parties at December 31, 1997:
 
<TABLE>
<S>                                                           <C>
Mission Heights Management Co. .............................  $ 7,911
Other related parties.......................................    9,019
                                                              -------
                                                              $16,930
                                                              =======
</TABLE>
 
                                      F-12
<PAGE>   55
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     At December 31, 1996, the Company entered into the sale of a $9,000
government note under an agreement to repurchase substantially the identical
security on January 2, 1997. The interest rate was 7.0%.
 
NOTE I -- PREFERRED AND COMMON STOCK
 
     The following summary of issued and outstanding shares of stock reflects
the effects of a thirty-for-one common shares stock split effective August 4,
1997:
 
<TABLE>
<CAPTION>
                                ISSUED AND OUTSTANDING
                                   PREFERRED STOCK          COMMON          COMMON
                                ----------------------      STOCK           STOCK         TREASURY
                                 SERIES A    SERIES B       ISSUED       OUTSTANDING       STOCK
                                ----------   ---------   ------------    ------------    ----------
<S>                             <C>          <C>         <C>             <C>             <C>
Balance at January 1, 1995....   6,000,000          --    11,770,980      9,160,770      (2,610,210)
  Exchange of common stock for
     preferred stock net of
     redemptions..............          --   1,000,000            --       (300,000)       (300,000)
  Purchase of treasury
     stock....................          --          --            --        (30,000)        (30,000)
                                ----------   ---------    ----------      ---------      ----------
Balance at December 31,
  1995........................   6,000,000   1,000,000    11,770,980      8,830,770      (2,940,210)
  Purchase of treasury
     stock....................          --          --            --       (150,150)       (150,150)
  Sale of common stock........          --          --       147,000        147,000              --
                                ----------   ---------    ----------      ---------      ----------
Balance at December 31,
  1996........................   6,000,000   1,000,000    11,917,980      8,827,620      (3,090,360)
  Redeem preferred stock......  (6,000,000)         --            --             --              --
  Sale of common stock........          --          --        93,000         93,000              --
  Purchase of treasury
     stock....................          --          --            --        (81,600)        (81,600)
  Sale of treasury stock......          --          --            --        478,000         478,000
                                ----------   ---------    ----------      ---------      ----------
Balance at December 31,
  1997........................          --   1,000,000    12,010,980      9,317,020      (2,693,960)
                                ==========   =========    ==========      =========      ==========
</TABLE>
 
     At December 31, 1995 and 1996, the Company had 6,000,000 authorized shares
of Series A-10% preferred stock of $1 par value, 1,250,000 authorized shares of
Series B-10% preferred stock of $1 par value, and 50,000,000 authorized shares
of common stock of $.25 par value ($10 par value before split). The Series A-10%
preferred stock was redeemed in 1997.
 
     The Series B preferred stock pays dividends quarterly. The preferred stock
is not cumulative or participating, has no voting rights and is not convertible.
Preferred stock has liquidation preferences over common stock of the Company.
Dividends on common stock of the Company may not be declared or paid unless
dividends for the same period on preferred stock have been paid or declared. The
stock was redeemed in January 1998.
 
NOTE J -- INCOME TAXES
 
     Deferred tax asset, Federal income tax currently payable, deferred tax
asset, and deferred tax liability, included in other assets and other
liabilities, respectively, are as follows:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------
                                                              1997     1996     1995
                                                             ------   ------   ------
<S>                                                          <C>      <C>      <C>
Current payable............................................  $ (204)  $  (22)  $  318
Deferred tax asset.........................................   1,483    1,340    1,008
Deferred tax liability.....................................    (398)    (996)  (2,657)
</TABLE>
 
                                      F-13
<PAGE>   56
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1997     1996     1995
                                                            ------   ------   -------
<S>                                                         <C>      <C>      <C>
Deferred tax assets:
  Allowance for loan losses...............................  $1,429   $1,077   $   810
  Depreciation and amortization differences...............     302      172        92
  Difference in basis of other real estate................      52       17       132
  Other...................................................    (300)      74       (26)
                                                            ------   ------   -------
                                                            $1,483   $1,340   $ 1,008
                                                            ======   ======   =======
Deferred tax liabilities:
  Unrealized gain on available-for-sale securities........  $ (398)  $ (996)  $(2,655)
  Other...................................................      --       --        (2)
                                                            ------   ------   -------
                                                            $ (398)  $ (996)  $(2,657)
                                                            ======   ======   =======
</TABLE>
 
     The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate is as follows:
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1997     1996     1995
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Statutory federal income tax rate...........................  35.00%   35.00%   35.00%
Effect of utilization of graduated tax rates................   0.00%   (0.69)%  (0.60)%
Other.......................................................   0.43%   (0.28)%    .01%
                                                              -----    -----    -----
Effective income tax rate...................................  35.43%   34.03%   34.41%
                                                              =====    =====    =====
</TABLE>
 
NOTE K -- COMMITMENTS AND CONTINGENCIES
 
     In the normal course of business, Company is party to financial instruments
with off-balance sheet risk to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheet.
 
     The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. Commitments under outstanding standby letters of credit
totaled $1,190 and $735 at December 31, 1997 and 1996. Commitments to extend
credit totaled $49,508 and $36,159 at December 31, 1997 and 1996. The Company
does not anticipate any material losses as a result of these commitments.
 
     Commitments to extend credit are agreements to lend to a customer as long
as there is no violation to any condition established in the contract and have
fixed expiration dates or other termination clauses. Some of the commitments are
expected to expire without being drawn upon, so that the total commitment
amounts do not necessarily represent future cash requirements. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include accounts receivable,
inventory, property, plant, and equipment, and income-producing commercial
properties.
 
     Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. The credit risk involved and collateral
 
                                      F-14
<PAGE>   57
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
required in issuing letters of credit are essentially the same as those involved
in extending loan facilities to customers.
 
     The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with outside legal
counsel, does not believe that the outcome of these actions would have a
material impact on the financial statements of the Company.
 
     The Company leases certain premises and equipment under cancelable and
noncancelable lease arrangements. Total rentals charged to operating expenses
were $262, $187 and $192 in the years ended December 31, 1997, 1996 and 1995.
Future lease commitments under noncancelable leases are not material.
 
     The Company has incentive stock option plans, and at December 31, 1997,
600,000 shares of common stock were reserved for these plans. The exercise price
of each option is equal to the market price of the Company's stock on the date
of grant. The maximum term is 10 years and the shares vest 10% to 20% per year.
 
     The Company's Board of Directors and shareholders approved a new stock
option plan in 1997 (the "1997 Incentive Plan") which authorizes the issuance of
up to 1,000,000 shares of common stock under both "non-qualified" and "incentive
stock" options to employees and "non-qualified" options to directors who are not
employees. Generally, the options vest 60% at the end of the third year
following the date of grant and an additional 20% at the end of the next two
years; however, an individual option may vest as much as 20% a year during the
first two years following the date of the grant if necessary to maximize the
"incentive" tax treatment to the optionee for the particular option being
granted. Options under the 1997 Incentive Plan must be exercised within 10 years
following the date of grant. No options have been granted under the 1997
Incentive Plan.
 
     The Company applies Accounting Principles Board Opinion 25 and related
Interpretations in accounting for its plans. Had compensation cost been
determined based on the fair value at the grant dates for awards consistent with
the method of SFAS No. 123, Accounting for Stock-Based Compensation, the
Company's net earnings and earnings per share would have been reduced as
follows:
 
<TABLE>
<CAPTION>
                                                               1997      1996     1995
                                                              -------   ------   ------
<S>                                                           <C>       <C>      <C>
Net earnings:
  As reported...............................................  $11,363   $9,222   $9,052
  Pro forma.................................................   11,287    9,222    9,052
Basic earnings per share:
  As reported...............................................  $  1.19   $ 0.97   $ 0.94
  Pro forma.................................................     1.19     0.97     0.94
Diluted earnings per share:
  As reported...............................................  $  1.14   $ 0.92   $ 0.89
  Pro forma.................................................     1.13     0.92     0.89
</TABLE>
 
     The fair value of stock options granted in 1997 was estimated on the date
of grant using the Black-Scholes option-pricing model. The weighted average fair
values and related assumptions were:
 
<TABLE>
<S>                                                           <C>
Weighted average fair value.................................  $1.07
Expected volatility.........................................     31%
Risk free interest rate.....................................    5.9%
Expected lives..............................................    2.5 years
Expected dividend yield.....................................    0.8%
</TABLE>
 
                                      F-15
<PAGE>   58
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Following is a summary of the status of the incentive option plans:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF    WEIGHTED AVERAGE
                                                               SHARES       EXERCISE PRICE
                                                              ---------    -----------------
<S>                                                           <C>          <C>
Options outstanding at January 1, 1995 ($.83-$2.67 a
  share)....................................................    600,000          $1.65
Options outstanding at December 31, 1995 ($.83-$2.67 a
  share)....................................................    600,000           1.65
Options exercised ($.83-$2.33 a share)......................   (147,000)           .96
Options outstanding at December 31, 1996 ($.83-$2.67 a
  share)....................................................    453,000           1.87
Options granted ($4.17 a share).............................    240,000           4.17
Options exercised ($.83-$2.33 a share)......................    (93,000)          1.66
Options outstanding at December 31, 1997 ($.83-$4.17 a
  share)....................................................    600,000          $2.83
Options exercisable at
  December 31, 1995.........................................    342,000          $1.44
  December 31, 1996.........................................    285,000          $1.84
  December 31, 1997.........................................    282,000          $1.92
</TABLE>
 
     Following is a summary of the options outstanding at December 31, 1997:
 
<TABLE>
<CAPTION>
                                               OUTSTANDING
                                       ----------------------------
                                                   WEIGHTED AVERAGE
              EXERCISE                                REMAINING         EXERCISABLE
                PRICE                  NUMBER      CONTRACTUAL LIFE       NUMBER
              --------                 -------     ----------------     -----------
<S>                                    <C>         <C>                  <C>
$0.83................................  123,000        0.1 years            93,000
$2.33................................  117,000        5.0 years           117,000
$2.67................................  120,000        6.4 years            72,000
$4.17................................  240,000        9.1 years                --
                                       -------                            -------
                                       600,000                            282,000
                                       =======                            =======
</TABLE>
 
NOTE L -- REGULATORY MATTERS
 
     The Company and the Bank are subject to various regulatory capital
requirements administered by state and 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 and the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company and the Bank must meet specific capital
guidelines that involve quantitative measures of the 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 classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
 
     Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1997, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.
 
     The most recent notification from the Federal Deposit Insurance Corporation
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have
 
                                      F-16
<PAGE>   59
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
changed the institution's category. The Company's and the Bank's actual capital
amounts and ratios are also presented in the table.
 
<TABLE>
<CAPTION>
                                                                                                       TO BE WELL
                                                                                                   CAPITALIZED UNDER
                                                                  FOR CAPITAL                      PROMPT CORRECTIVE
                                         ACTUAL:              ADEQUACY PURPOSES:                   ACTION PROVISIONS:
                                     ---------------   ---------------------------------   ----------------------------------
                                     AMOUNT    RATIO        AMOUNT             RATIO            AMOUNT             RATIO
                                     -------   -----   -----------------   -------------   -----------------   --------------
<S>                                  <C>       <C>     <C>                 <C>             <C>                 <C>
As of December 31, 1997:
  Total Capital (to Risk Weighted
    Assets):
    Prime Bancshares, Inc..........  $70,545   15.01%     > or = $37,819     > or = 8.0%                  N/A
    Prime Bank.....................  $68,914   14.65%     > or = $37,637     > or = 8.0%      > or = $47,046             10.0%
  Tier 1 Capital (to Risk Weighted
    Assets):
    Prime Bancshares, Inc..........  $65,657   13.96%     > or = $18,818     > or = 4.0%                  N/A
    Prime Bank.....................  $63,976   13.60%     > or = $18,818     > or = 4.0%      > or = $28,227              6.0%
  Tier 1 Capital (to Average
    Assets):
    Prime Bancshares, Inc..........  $65,657    6.82%     > or = $38,519   > 4.0%                         N/A
    Prime Bank.....................  $63,976    6.64%     > or = $38,515   > 4.0%             > or = $48,144              5.0%
As of December 31, 1996:
  Total Capital (to Risk Weighted
    Assets):
    Prime Bancshares, Inc..........  $64,311   18.62%     > or = $27,620    > or = 8.00%                  N/A
    Prime Bank.....................  $63,951   18.51%     > or = $27,620    > or = 8.00%      > or = $34,525     > or = 10.00%
  Tier 1 Capital (to Risk Weighted
    Assets):
    Prime Bancshares, Inc..........  $59,995   17.37%     > or = $13,810    > or = 4.00%                  N/A
    Prime Bank.....................  $59,635   17.26%     > or = $13,810    > or = 4.00%      > or = $20,715      > or = 6.00%
  Tier 1 Capital (to Average
    Assets):
    Prime Bancshares, Inc..........  $59,995    7.96%     > or = $30,255    > or = 4.00%                  N/A
    Prime Bank.....................  $59,635    7.91%     > or = $30,254    > or = 4.00%      > or = $37,818      > or = 5.00%
</TABLE>
 
NOTE M -- ACQUISITIONS/DISPOSITIONS
 
     During 1995, the Company sold the assets and liabilities of five branches
originally acquired from First Heights Bank in 1994, resulting in a gain of
$2,445.
 
     During 1997, the Company purchased deposits and certain assets of three
branches of Bank of America Texas, N.A. The purchase price was allocated based
on the fair value of the assets acquired and liabilities assumed, and the excess
of cost over the fair value of the net assets acquired of $1,835, is being
amortized over ten years using an accelerated method. Amortization expense
charged to other operating expense during 1997 was $231.
 
     During 1997, the Company purchased all of the assets and liabilities of
First Northwestern Bank, N. A. and purchase accounting was applied. The
acquisition was for approximately $60,200 in deposits and $40,200 in loans. The
purchase price was allocated based on the fair value of the assets acquired and
liabilities assumed, and the excess of cost over the fair value of the net
assets acquired of $3,621, is being amortized over fifteen years using a
straight line method. Amortization expense charged to other operating expense
during 1997 was $220.
 
                                      F-17
<PAGE>   60
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following summarized proforma information assumes the First
Northwestern acquisition had occurred on January 1, 1996:
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED
                                                                 DECEMBER 31,
                                                              ------------------
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Interest income.............................................  $66,849    $58,633
Net earnings................................................   11,530      9,711
Basic earnings per share....................................     1.21       1.02
Diluted earnings per share..................................     1.15       0.98
</TABLE>
 
     The pro forma financial information should be read in conjunction with the
related historical information and is not necessarily indicative of the results
that would have been attained had the transactions actually taken place.
 
NOTE N -- SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
 
     Cash paid during the period for December 31:
 
<TABLE>
<CAPTION>
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Interest..............................................  $29,557    $23,688    $26,873
Income taxes..........................................  $ 6,130    $ 4,838    $ 5,006
</TABLE>
 
     During 1996, the Company purchased $30,501 of U.S. Agency Securities. The
settlement of the transaction did not occur until January 1997.
 
     During 1995, the Company issued 1,250,000 shares of Series B preferred
stock in exchange for 10,000 common shares.
 
NOTE O -- FAIR VALUES OF FINANCIAL INSTRUMENTS
 
     The fair values of financial instruments are based on management's
estimates and do not purport to represent the aggregate net fair value of the
Company. Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.
 
     The following methods and assumptions were used by the Company in
estimating financial instrument fair values:
 
     - CASH AND CASH EQUIVALENTS, FEDERAL FUNDS PURCHASED/SOLD AND REPURCHASE
       AGREEMENTS
 
       The balance sheet carrying amount approximates fair value.
 
     - SECURITIES TO BE HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE
 
       Fair values for investment securities are based on quoted market prices
       or quotations received from securities dealers. If quoted market prices
       are not available, fair value estimates may be based on quoted market
       prices of similar instruments, adjusted for differences between the
       quoted instruments and the instruments being valued.
 
     - LOANS
 
       Fair values of loans are estimated for segregated groupings of loans with
       similar financial characteristics. Loans are segregated by type such as
       commercial, commercial real estate, residential mortgage and consumer
       loans. Each of these categories is further subdivided into fixed and
       adjustable rate loans
 
                                      F-18
<PAGE>   61
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
       and performing and nonperforming loans. The fair value of performing
       loans is calculated by discounting scheduled cash flows through the
       estimated maturity using estimated market discount rates that reflect the
       credit and interest rate risk inherent in the various types of loans. The
       fair value of nonperforming loans is estimated at the value of the
       underlying collateral.
 
     - DEPOSITS
 
       The fair value of demand deposits, such as non-interest bearing demand
       deposits and interest-bearing transaction accounts such as savings, NOW
       and money market accounts are equal to the amount payable on demand as of
       December 31, 1997 and 1996 (i.e. their carrying amounts).
 
       The fair value of demand deposits is defined as the amount payable, and
       prohibits adjustment for any value derived from the expected retention of
       such deposits for a period of time. That value, commonly referred to as
       the core deposit base intangible, is neither included in the following
       fair value amounts nor recorded as an intangible asset in the balance
       sheet.
 
       The fair value of certificates of deposit is based on the discounted
       value of contractual cash flows. The discount rate used represents rates
       currently offered for deposits of similar remaining maturities. The
       carrying amount of accrued interest payable approximates its fair value.
 
     - OFF-BALANCE-SHEET INSTRUMENTS
 
       Estimated fair values for the Company's off-balance-sheet instruments are
       based on fees, net of related expenses, currently charged to enter into
       similar agreements, considering the remaining terms of the agreements and
       the counterparties' credit standing.
 
     The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1997 and 1996. The fair value of
financial instruments is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
 
<TABLE>
<CAPTION>
                                                               1997                  1996
                                                        -------------------   -------------------
                                                        CARRYING     FAIR     CARRYING     FAIR
                                                         AMOUNT     VALUE      AMOUNT     VALUE
                                                        --------   --------   --------   --------
<S>                                                     <C>        <C>        <C>        <C>
Financial assets:
  Cash and cash equivalents...........................  $ 18,263   $ 18,263   $ 34,006   $ 34,006
  Federal funds sold and other temporary
     investments......................................    29,478     29,478         --         --
  Securities
     Available-for-sale...............................   188,048    188,048    324,723    324,723
     Held-to-maturity.................................   273,387    274,000    115,902    114,000
  Loans, net..........................................   417,880    417,000    306,857    308,000
Financial liabilities:
  Deposits Noninterest-bearing........................  $152,154    152,154   $117,441    117,441
     Interest-bearing transaction and money market
       accounts.......................................   284,632    284,632    241,775    241,775
     Certificates of deposit..........................   428,286    430,000    335,954    338,000
     Federal funds purchased and securities sold under
       repurchase agreements..........................    17,132     17,132      9,700      9,700
</TABLE>
 
                                      F-19
<PAGE>   62
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE P -- EARNINGS PER SHARE
 
     The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock.
 
<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                            -------------------------
                                                             1997      1996     1995
                                                            -------   ------   ------
<S>                                                         <C>       <C>      <C>
Net earnings..............................................  $11,363   $9,222   $9,052
Less: dividends on preferred stock........................      650      700      681
                                                            -------   ------   ------
Net earnings available to common stockholders used in
  basic and diluted EPS...................................  $10,713   $8,855   $8,371
                                                            -------   ------   ------
Weighted average common shares used in basic EPS..........    8,975    8,808    8,861
  Effect of dilutive securities:
     Stock options........................................      447      417      542
                                                            -------   ------   ------
Weighted average common and potential dilutive common
  shares used in dilutive EPS.............................    9,422    9,225    9,403
                                                            =======   ======   ======
</TABLE>
 
NOTE Q -- NEW PRONOUNCEMENTS
 
     The FASB has issued Financial Accounting Standards No. 130, Reporting
Comprehensive Income, which is effective for financial statements issued for
periods beginning after December 15, 1997. The new standard requires an entity
to report and display comprehensive income and its components. Currently for the
Company, comprehensive income will include net income plus net unrealized gain
or loss on securities.
 
NOTE R -- SUBSEQUENT EVENTS
 
     On January 2, 1998, the Board of Directors of the Company declared a cash
dividend of $0.04 per share to all common shareholders of record as of January
5, 1998. The dividend was paid on January 15, 1998.
 
     On December 30, 1997, the Company and Sunbelt National Bank ("Sunbelt"),
agreed in principle that all of Sunbelt's outstanding common stock would be
acquired by the Company. It is anticipated that the transaction will close
during the second quarter of 1998. At closing, each shareholder of Sunbelt will
receive 2.0023 shares of the Company's common stock, in exchange for each share
of Sunbelt stock. At December 31, 1997, Sunbelt had total assets of
approximately $94,000 and total deposits of $84,000. The transaction is expected
to be accounted for as a pooling of interests.
 
                                      F-20
<PAGE>   63
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE S -- PARENT-ONLY FINANCIAL STATEMENTS
 
                             PRIME BANCSHARES, INC.
                                 (PARENT ONLY)
 
                                 BALANCE SHEETS
                                  DECEMBER 31,
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Cash and cash equivalents...................................  $ 1,678    $   358
Other assets................................................        5         --
Investment in subsidiaries..................................   69,799     61,620
                                                              -------    -------
                                                              $71,482    $61,978
                                                              =======    =======
 
                                  LIABILITIES
 
Other liabilities...........................................  $     9    $     9
                                                              -------    -------
          Total liabilities.................................        9          9
Commitments and contingencies...............................       --         --
Shareholders' equity:
  Preferred stock...........................................    1,000      7,000
  Common stock..............................................    3,003      2,980
  Additional capital........................................    9,368      3,824
  Net unrealized appreciation on available-for-sale
     securities, net of tax of $398 in 1997 and $996 in
     1996...................................................      772      1,934
  Retained earnings.........................................   59,585     50,113
                                                              -------    -------
                                                               73,728     65,851
  Less common stock in treasury -- at cost..................    2,255      3,882
                                                              -------    -------
                                                               71,473     61,969
                                                              -------    -------
                                                              $71,482    $61,978
                                                              =======    =======
</TABLE>
 
                                      F-21
<PAGE>   64
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                             PRIME BANCSHARES, INC.
                                 (PARENT ONLY)
 
                             STATEMENTS OF EARNINGS
                            YEAR ENDED DECEMBER 31,
 
<TABLE>
<CAPTION>
                                                               1997      1996      1995
                                                              -------   -------   -------
<S>                                                           <C>       <C>       <C>
Costs and expenses
  General and administrative................................  $    13   $     1   $    --
                                                              -------   -------   -------
     Operating loss.........................................      (13)       (1)       --
  Current income tax benefit................................        5        --        --
                                                              -------   -------   -------
     Loss before equity in net earnings of subsidiaries.....       (8)       (1)       --
Equity in net earnings of subsidiaries......................   11,371     9,223     9,052
                                                              -------   -------   -------
          NET EARNINGS......................................  $11,363   $ 9,222   $ 9,052
                                                              =======   =======   =======
</TABLE>
 
                                      F-22
<PAGE>   65
                    PRIME BANCSHARES, INC. AND SUBSIDIARIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
                             PRIME BANCSHARES, INC.
                                 (PARENT ONLY)
 
                            STATEMENTS OF CASH FLOWS
                            YEAR ENDED DECEMBER 31,
 
<TABLE>
<CAPTION>
                                                                1997      1996      1995
                                                              --------   -------   -------
<S>                                                           <C>        <C>       <C>
Cash flows from operating activities:
  Net earnings
     Net earnings for the year..............................  $ 11,363   $ 9,222   $ 9,052
     Adjustments to reconcile net earnings to net cash used
       in operating activities:
       Earnings of subsidiaries.............................   (11,371)   (9,223)   (9,052)
       Change in assets and liabilities:
          (Increase) decrease in other assets...............        (5)       --         1
          Decrease in other liabilities.....................        --        --        (4)
                                                              --------   -------   -------
          Net cash used in operating activities.............       (13)       (1)       (3)
Cash flows from investing activities:
  Dividend from subsidiary..................................    12,612     2,315     2,515
  Capital contribution to subsidiary........................   (10,582)       --        --
                                                              --------   -------   -------
          Net cash provided by investing activities.........     2,030     2,315     2,515
Cash flows from financing activities:
  Purchase of treasury stock................................      (408)     (626)     (100)
  Dividend payments.........................................    (1,891)   (1,877)   (1,871)
  Redemption of preferred stock.............................    (6,000)       --      (250)
  Sale of treasury stock in initial public offering.........     7,448        --        --
  Sale of common stock......................................       154       140        --
                                                              --------   -------   -------
          Net cash used in financing activities.............      (697)   (2,363)   (2,221)
                                                              --------   -------   -------
Net increase (decrease) in cash and cash equivalents........     1,320       (49)      291
Cash and cash equivalents at beginning of year..............       358       407       116
                                                              --------   -------   -------
Cash and cash equivalents at end of year....................  $  1,678   $   358   $   407
                                                              ========   =======   =======
</TABLE>
 
                                      F-23
<PAGE>   66
                               Index to Exhibits


<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                             DESCRIPTION
    -------                                            -----------
    <S>         <C>   <C>
       2.1      --    Agreement and Plan of Reorganization dated as of December 30, 1997 by and among the
                      Company, IBID, Inc., the Bank and Sunbelt (incorporated herein by reference to Exhibit 2 to the
                      Company's Registration Statement on Form S-4 (Registration No. 333-47281)).

       3.1      --    Amended and Restated Articles of Incorporation of the Company (incorporated herein by
                      reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (Registration
                      No. 33-33001) (the "Registration Statement")).

       3.2      --    Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
                      Registration Statement).

       4        --    Specimen form of certificate evidencing the Common Stock (incorporated herein by reference
                      to Exhibit 4 to the Registration Statement).

      9.1       --    Voting Agreement and Irrevocable Proxy (included as Exhibit D of the Agreement and Plan of
                      Reorganization filed as Exhibit 2.1 to this Annual Report on Form 10-K).

      10.1      --    Prime Bancshares, Inc. 1997 Stock Incentive Plan (incorporated herein by reference to Exhibit
                      10.1 to the Registration Statement).

      10.2*     --    Prime Bancshares, Inc. 1993 Incentive Stock Option Plan.

      10.3*     --    Prime Bancshares, Inc. 1984 Incentive Stock Option Plan.

      21*       --    Subsidiaries of Prime Bancshares, Inc.
</TABLE>