<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D. C. 20549

                                   FORM 10-Q

(Mark One)

     [X]  Quarterly Report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934 for the Quarter ended September 30, 1998

     [_]  Transition Report pursuant to Section 13 or 15(d) of the Securities
          Exchange Act of 1934

                       Commission File Number  000-24553

                             CNBT BANCSHARES, INC.
            (Exact name of registrant as specified in its charter)
          Texas                                           76-0575813

      (State or other jurisdiction                      (I.R.S. employer
 of incorporation or organization)                    identification no.)

                            5320 Bellaire Boulevard
                             Bellaire, Texas 77401
         (Address of principal executive offices, including zip code)

                                 713-661-4444
             (Registrant's telephone number, including area code)
                                        
     Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 ("Act") during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

                                Yes [X] No [_]

At October 29, 1998, 4,912,601 shares of Citizens National Bank of Texas, common
stock, $1.00 par value, were outstanding.
<PAGE>
 
                             CNBT BANCSHARES, INC.

                                     INDEX

<TABLE> 
<CAPTION> 
                                                                                           Page
                                                                                           ----
PART I.   FINANCIAL INFORMATION
     <S>      <C>                                                                           <C>  
      Item 1.  Financial Statements

               Consolidated Balance Sheets at September 30, 1998 and 1997 
               and at December 31, 1997.............................................         3
 
               Consolidated Statements of Income for the Three Months
               Ended September 30, 1998 and September 30, 1997 and the Nine Months
               Ended September 30, 1998 and September 30, 1997......................         4
              
               Consolidated Statements of Comprehensive Income for the
               Three Months Ended September 30, 1998 and 1997 and the Nine
               Months Ended September 30, 1998 and 1997.............................         5
              
               Consolidated Statements of Stockholders' Equity for the
               Year Ended December 31, 1997 and for the Nine Months
               Ended September 30, 1998.............................................         6
              
               Consolidated Statements of Cash Flows for the Nine Months
               Ended September 30, 1998 and 1997....................................         7
              
               Notes to Interim Consolidated Financial Statements...................         8
 
      Item 2.  Management's Discussion and Analysis of Financial Condition and
               Results of Operations
 
               Overview.............................................................        10
 
               Results of Operations................................................        11
 
               Financial Condition..................................................        15
 
     Item 3.   Quantitative and Qualitative Disclosures About Market Risk...........        23
 
PART II.  OTHER INFORMATION
 
     Item 1.   Legal Proceedings....................................................        23
 
     Item 6.  Exhibits and Reports on Form 8-K......................................        23
 
SIGNATURES..........................................................................        23

</TABLE>

                                       2
<PAGE>
 
PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

                      CNBT BANCSHARES, INC AND SUBSIDIARY
                          CONSOLIDATED BALANCE SHEETS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
                                                                          SEPTEMBER 30,      DECEMBER 31,
                                                                       ------------------    ------------ 
                                                                       1998          1997       1997
                                                                       ------------- ----    ------------
<S>                                                                   <C>        <C>          <C>
                                                                          (UNAUDITED)
ASSETS
  Cash and due from banks......................................        $ 12,453   $ 12,520     $ 12,099
  Due from banks - interest bearing overnight funds............             189        298        3,177
  Investment securities available-for-sale.....................         127,538     87,612       93,036
  Investment securities held-to-maturity (approximate
    market value of $107,225 and $78,081 at September 30,
    1998 and 1997, respectively (unaudited), and
    $77,569 at December 31, 1997)..............................         105,779     77,229       76,795
  Loans, net...................................................         107,646     99,582      101,866
  Bank premises and equipment, net.............................           5,927      5,471        5,384
  Other assets.................................................           3,009      2,849        3,249
                                                                       --------   --------     --------
TOTAL ASSETS...................................................        $362,541   $285,561     $295,606
                                                                       ========   ========     ========
LIABILITIES AND STOCKHOLDERS' EQUITY
 
LIABILITIES
  Deposits
   Demand......................................................        $ 66,904   $ 52,576     $ 54,598
   NOW Accounts................................................          20,336     19,922       20,209
   Savings.....................................................           7,522      6,706        6,932
   Money market................................................          78,048     66,801       68,786
   Time, $100,000 and over.....................................          41,566     30,490       31,173
   Other time..................................................          93,442     78,312       79,209
                                                                       --------   --------     --------
    TOTAL DEPOSITS.............................................         307,818    254,807      260,907
  Other borrowed funds.........................................          17,750      8,300            0
  Accrued interest and other liabilities.......................           2,026      1,205        2,483
  Federal income taxes payable.................................             251         79           35
  Deferred income taxes payable................................             746        436          534
                                                                       --------   --------     --------
    TOTAL LIABILITIES..........................................         328,591    264,827      263,959
 
COMMITMENTS AND CONTINGENT LIABILITIES
 
STOCKHOLDERS' EQUITY
 Common stock, $1.00 par value, September 30, 1998
   and $2.03 par value at September 30, and December 31,
   1997 respectively 30,000,000 shares authorized, 5,065,601
   (unaudited), 3,893,091 (unaudited), and 5,044,181 shares
   issued and outstanding at September 30, 1998 and 1997
   and December 31, 1997, respectively.........................           5,065      7,905       10,242
  Surplus......................................................          21,899      7,905       16,656
  Retained earnings............................................           5,506      4,036        3,637
  Net unrealized gains on available-for-sale securities, net
   of deferred income taxes of $763, $457 and $573
   at September 30, 1998 and 1997 (unaudited),
   and December 31, 1997, respectively.........................           1,480        888        1,112
                                                                       --------   --------     --------
    TOTAL STOCKHOLDERS' EQUITY.................................          33,950     20,734       31,647
                                                                        --------   --------     -------
TOTAL LIABILITIES AND STOCKHOLDERS'
  EQUITY.......................................................        $362,541   $285,561     $295,606
                                                                       ========   ========     ========
</TABLE>
      See accompanying notes to interim consolidated financial statements.

                                       3
<PAGE>
 
                      CNBT BANCSHARES, INC AND SUBSIDIARY
                       CONSOLIDATED STATEMENTS OF INCOME
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
                                        
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     NINE MONTHS ENDED
                                                       SEPTEMBER 30,         SEPTEMBER 30,
                                                    ------------------     ----------------  
                                                     1998        1997       1998      1997
                                                    ------      ------     ------    ------
<S>                                                  <C>        <C>       <C>      <C>
                                                                                 
INTEREST INCOME                                                                  
 Interest and fees on loans..................         $2,769     $2,439   $ 8,045   $ 6,988
 Interest on investment securities:                                              
  Taxable....................................          2,750      2,113     7,355     6,192
  Nontaxable.................................            707        507     2,092     1,376
                                                      ------     ------   -------   -------
   Total interest on investment securities...          3,457      2,620     9,447     7,568
                                                      ------     ------   -------   -------                       
  TOTAL INTEREST INCOME......................          6,226      5,059    17,492    14,556
                                                                                   
INTEREST EXPENSE                                                                  
 Interest on deposits and FHLB borrowings....          2,977      2,395     8,104     6,757
                                                      ------     ------   -------   -------
  Net interest income........................          3,249      2,664     9,388     7,799
                                                                                   
PROVISION FOR LOAN LOSSES....................            100        180       432       507
                                                      ------     ------   -------   -------
 Net interest income after provision                                               
     for loan losses.........................          3,149      2,484     8,956     7,292
                                                                                   
OTHER INCOME                                                                      
 Service fees................................            507        481     1,487     1,460
 Net realized gains on sale of                                                     
  available-for-sale securities..............            198        146       248       133
 Other operating income......................            100         76       496       213
                                                      ------     ------   -------   -------
  TOTAL OTHER INCOME.........................            805        703     2,231     1,806
                                                                                   
OTHER EXPENSES                                                                    
 Salaries and employee benefits..............          1,235        980     3,535     2,859
 General and administrative..................            376        270     1,062       801
 Data processing.............................            229        200       680       587
 FDIC assessments............................              9          7        24        21
 Occupancy expenses, net.....................            157        140       432       390
 Equipment maintenance.......................            140        137       422       375
 Postage and printing fees...................            117        110       342       304
 Professional fees...........................            114         72       377       215
                                                      ------     ------   -------   -------
  TOTAL OTHER EXPENSES.......................          2,377      1,916     6,874     5,552
                                                      ------     ------   -------   -------
INCOME BEFORE FEDERAL INCOME                                                      
  TAXES......................................          1,577      1,271     4,313     3,546
                                                                                   
 Applicable federal income taxes.............            407        358     1,078       962
                                                      ------     ------   -------   -------
NET INCOME...................................         $1,170     $  913   $ 3,235   $ 2,584
                                                      ======     ======   =======   =======
 Earnings per common share:                                                       
  Basic Earnings Per Share...................           $.23       $.23      $.64   $    66
                                                      ======     ======   =======   =======
  Fully Diluted Earnings Per Share...........           $.23       $.23      $.63   $    66
                                                      ======     ======   =======   =======
                                                                            
     See accompanying notes to interim consolidated financial statements.
</TABLE>

                                       4

<PAGE>
 
                      CNBT BANCSHARES, INC AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                    THREE MONTHS ENDED     NINE MONTHS ENDED
                                                       SEPTEMBER 30,        SEPTEMBER 30,
                                                    ------------------    ----------------  
                                                     1998        1997      1998      1997
                                                    ------      ------    ------    ------
<S>                                                  <C>        <C>       <C>      <C>
                                                                 (UNAUDITED) 
Net income......................................      $1,170     $  913    $3,235   $2,584
 
Other comprehensive income, net of tax:
 Unrealized gains on securities:
 Unrealized holding gains arising
   during period.................................        455        111       204      560
 Less:  reclassification adjustment for gains
   included in net income........................        131         96       164       88
                                                      ------     ------    ------   ------
                                                         586        207       368      648
                                                      ------     ------    ------   ------ 
Comprehensive income............................      $1,756     $1,120    $3,603   $3,232
                                                      ======     ======    ======   ====== 
</TABLE>


      See accompanying notes to interim consolidated financial statements.

                                       5
<PAGE>
 
                      CNBT BANCSHARES, INC AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                  (UNAUDITED)
                                        
<TABLE>
<CAPTION>
                                                                                             ACCUMULATED 
                                                  COMMON STOCK                                  OTHER    
                                               -----------------                               COMPRE-   
                                                             PAR                  RETAINED     HENSIVE
                                               SHARES      VALUES      SURPLUS    EARNINGS     INCOME     TOTAL
                                               ------      ------      -------    --------   -----------  -----
<S>                                         <C>           <C>         <C>         <C>         <C>        <C>
BALANCE, DECEMBER 31, 1996................   3,886,491     $ 6,303     $ 6,303     $ 5,025     $  240     $17,871
  Par value change.........................          0       1,590       1,594      (3,184)         0           0
  Proceeds from exercise of                                                     
   stock options...........................      7,690          14           9           0          0          23
  Cash dividends ($.10 per share)..........          0           0           0        (389)         0        (389)
  Cash dividends ($.30 per share)..........          0           0           0      (1,513)         0      (1,513)
  Net proceeds from issuance of stock                                           
   through initial public offering.........  1,150,000       2,335       8,750           0          0      11,085
  Comprehensive income:                                                         
  Unrealized gains on investment                                                
   securities available-for-sale, net                                           
   of deferred income taxes of $334........          0           0           0           0        872         872
  Net income...............................          0           0           0       3,698          0       3,698
                                             ---------     -------     -------     -------     ------     -------
  Total comprehensive income...............                                                                 4,570
                                                                                                          -------

 BALANCE, DECEMBER 31, 1997................  5,044,181      10,242      16,656       3,637     $1,112      31,647
  Proceeds from exercise of stock                                               
   options (unaudited).....................     21,420          43          23           0          0          66
  Cash dividends ($.09) per share                                               
   (unaudited).............................          0           0           0      (1,366)         0      (1,366)
  Re-capitalization of company.............          0      (5,220)      5,220           0          0           0
  Comprehensive income:                                                         
  Unrealized gain on investment                                                 
   securities available for-sale, net                                           
   of deferred income taxes of                                                  
   $190 (unaudited)........................          0           0           0           0        368         368
  Net income (unaudited)...................          0           0           0       3,235          0       3,235
                                             ---------     -------     -------     -------     ------     -------
  Total comprehensive income (unaudited)...                                                                 3,603
                                                                                                          -------

BALANCE, SEPTEMBER 30, 1998                                                     
  (UNAUDITED)..............................  5,065,601     $ 5,065     $21,899     $ 5,506    $ 1,480     $33,950
                                             =========     =======     =======     =======     ======     =======
</TABLE>


      See accompanying notes to interim consolidated financial statements.

                                       6
<PAGE>
 
                      CNBT BANCSHARES, INC AND SUBSIDIARY
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (DOLLARS IN THOUSANDS)
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                                 -------------------
                                                                  1998         1997
                                                                 -------------------
<S>                                                              <C>         <C> 
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income..................................................   $  3,235    $  2,585
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation..............................................        314         295
    Premium amortization net of discount accretion............        (16)          3
    Provision for loan losses.................................        432         507
    Net realized (losses) on available-for-sale
     securities...............................................       (248)       (133)
    Loss on disposal of bank premises and equipment
      and other assets........................................         78          31
    Provision (benefit) for deferred taxes....................         22         (21)
  Changes in assets and liabilities:
    Accrued interest receivable...............................        465        (125)
    Other assets..............................................       (235)       (262)
    Accrued expenses..........................................        440         344
    Accrued interest payable..................................        160          84
    Federal income taxes payable..............................        216        (179)
                                                                 --------    --------        
   NET CASH PROVIDED BY OPERATING
    ACTIVITIES................................................      4,863       3,129
 
CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of available-for-sale securities..................    (64,902)    (18,280)
  Proceeds from sales of available-for-sale securities........     24,982       9,275
  Proceeds from maturities of available-for-sale securities...      6,189       1,599
  Purchases of held-to-maturity securities....................    (59,511)    (29,911)
  Proceeds from maturities of held-to-maturity securities.....     30,578      21,091
  Loans originated, net of principal collected................     (6,395)     (9,605)
  Proceeds from sales of other real estate and repossessed
   assets.....................................................        115          94
  Cash paid for bank premises and equipment...................       (857)       (581)
                                                                 --------    --------        
   NET CASH USED IN INVESTING ACTIVITIES......................    (69,801)    (26,318)
 
CASH FLOWS FROM FINANCING ACTIVITIES
  Net increase in demand deposits, NOW,
   savings, and money market accounts.........................     22,285       8,144
  Proceeds from sales of time deposits, net of payments
   for maturing time deposits.................................     24,626       8,603
  Net increase in other borrowed funds........................     17,750       8,300
  Proceeds from exercise of stock options.....................         66          20
  Dividends paid..............................................     (2,423)     (1,449)
                                                                 --------    --------        
   NET CASH PROVIDED BY FINANCING
    ACTIVITIES................................................     62,304      23,618
                                                                 --------    --------        
NET INCREASE (DECREASE) IN CASH AND CASH
   EQUIVALENTS................................................     (2,634)        429
 
CASH AND CASH EQUIVALENTS AT BEGINNING
   OF PERIOD..................................................     15,276      12,389
                                                                 --------    --------        
 CASH AND CASH EQUIVALENTS AT END OF
   PERIOD.....................................................   $ 12,642    $ 12,818
                                                                 ========    ======== 
</TABLE>

      See accompanying notes to interim consolidated financial statements.

                                       7
<PAGE>
 
                      CNBT BANCSHARES, INC AND SUBSIDIARY
              NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
                              SEPTEMBER 30, 1998
                                  (UNAUDITED)
               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                        

(1)  Basis of Presentation

     The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the rules and regulations of the Securities and
Exchange Commission.  Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.  In the opinion of management, all adjustments (consisting
of normal recurring items) considered necessary for a fair presentation have
been included.  Operating results for the nine-month period ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.

     For further information, refer to the consolidated financial statements and
footnotes thereto included in the Annual Report on Form 10-K for the year-ended
December 31, 1997, of Citizens National Bank of Texas (the "Bank") as filed with
the Comptroller of the Currency, and included as Exhibit 99.1 to the Form S-4
Registration Statement (File No. 333-50039) of CNBT Bancshares, Inc. filed with
the Securities and Exchange Commission on April 14, 1998.

(2)  Earnings Per Common Share

     Earnings per common share was computed based on the following (in 
thousands, except per share amounts):
<TABLE>
<CAPTION>
                                                             Three Months Ended             Nine Months Ended
                                                              September 30,                   September 30,
                                                            ------------------              -----------------
                                                         1998               1997           1998         1997
                                                         ----               ----           ----         ----
                                                                                (Unaudited)
<S>                                                    <C>             <C>             <C>          <C>
 
Net income...................................           $    1,170      $      913      $    3,235   $    2,584
                                                                    
 Divided by weighted average common                                 
     shares and common share equivalents:                           
        Weighted average common shares.......            5,065,601       3,893,091       5,057,925    3,889,537
        Weighted average common share                               
          equivalents........................               71,828          51,332          88,560       54,549
                                                        ----------      ----------      ----------   ---------- 
 Total average common shares and                                    
     common share equivalents................            5,137,429       3,944,423       5,146,485    3,944,086
                                                        ==========      ==========      ==========   ==========
 Earnings per common share - Basic...........           $     0.23      $     0.23      $     0.64   $     0.66
                                                        ==========      ==========      ==========   ==========
 Earnings per common share - Fully Diluted...           $     0.23      $     0.23      $     0.63   $     0.66
                                                        ==========      ==========      ==========   ==========
</TABLE>

     Note: Common shares, common share equivalents, and earnings per share for
1997 have been adjusted to reflect a 10% stock dividend declared in May 1997.
See note (3) below for additional information regarding the stock split.

(3)  Common Stock

     On March 25, 1997, the Board of Directors authorized an increase in the par
value of common stock from $1.784 to $2.03 per share which effectively increased
common stock by $1,590,000 and surplus by $1,594,000 with a corresponding charge
to retained earnings of $3,184,000.  Additionally, a 10% stock dividend
representing 353,797 shares of common stock was declared to stockholders of
record on April 30, 1997.  During the nine months ended September 30, 1997, a
dividend of $.10 per share was declared and paid to stockholders of record in
May 1997 totaling $389,000.

                                       8
<PAGE>
 
     On October 6, 1997, the Bank completed the sale of 1,150,000 shares of its
Common Stock, $2.03 par value per share, in an initial public offering.  The
Bank realized proceeds, net of the underwriting discount, of $11,085,000.  The
Bank is using the net proceeds of the sale for general corporate purposes,
including the development or acquisition of additional branches or the
acquisition of other financial institutions.  Pending the application of the net
proceeds, the Bank has invested such proceeds in accordance with its normal
investment policies.

     The Bank's Board of Directors declared cash dividends to be payable to
stockholders of record for the quarters ending September 30, 1998, June 30, 1998
and March 31, 1998.  The cash dividends were each $0.09 per share and were
payable October 15, 1998, July 15, 1998 and April 15, 1998, respectively.

     On July 2, 1998, the Board of Directors authorized the formation of a
holding company. The transaction was consummated with an exchange of the Bank's
common stock ($2.03 par value) for common stock in the newly created Bank
Holding Company ($1.00 par value) which resulted in a decrease in Common Stock
of $5,220,000 and a corresponding increase in Surplus of $5,220,000. This
transaction has been accounted for at historical cost in a manner similar to a
pooling of interest.

     As of September 30, 1998, an additional 21,314 shares of common stock were
issuable (without regard to vesting restrictions) upon exercise of outstanding
employee stock options under the Bank's 1992, 1994, 1995, and 1997 Stock Option
Plans.

(4)  Comprehensive Income

     In June 1997, SFAS No. 130, Reporting Comprehensive Income was issued.
Comprehensive income is comprised of net income and all changes to stockholders'
equity, except those due to investments by owners (changes in paid in capital)
and distributions to owners (dividends).  This statement is effective for fiscal
years beginning after December 15, 1997.  For the three and nine months periods
ended September 30, 1998 and 1997, unrealized holding gain (losses) on debt and
equity securities available-for-sale is the Bank's only other comprehensive
income component. Prior periods have been reclassified to reflect the
application of the provisions of SFAS No. 130.  The following table sets forth
the amounts of other comprehensive income included in equity along with the
related tax effect for the three and nine months ended September 30, 1998 and
1997:
<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                               ------------------------------------------------------------
                                                    September 30, 1998           September 30, 1997
                                               ---------------------------  -------------------------------
                                                           Tax          Net               Tax        Net
                                                         Expense      of Tax             Expense    of Tax
                                               Pretax   (Benefit)     Amount   Pretax   (Benefit)   Amount
                                               ------   ---------     ------   ------   ---------   ------
<S>                                           <C>        <C>         <C>       <C>        <C>       <C>
   Net unrealized gain (loss) on
     securities available-for-sale......        $690      $(235)      $455      $168      $ (57)     $111
                                          
   Less:  reclassification adjustment     
     for net gain (loss) realized in      
     net income.........................         198        (67)       131       146        (50)       96
                                               -----      -----       ---       ----      -----      ----
   Other comprehensive income...........        $888      $(302)      $586      $314      $(107)     $207
                                                ====      =====       ====      ====      =====      ====
</TABLE>

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            Nine Months Ended
                                                       -----------------------------------------------------------
                                                            September 30, 1998             September 30, 1997
                                                       -----------------------------  ---------------------------- 
                                                                  Tax         Net                Tax        Net
                                                                  Expense     of Tax             Expense    of Tax
                                                       Pretax    (Benefit)    Amount   Pretax   (Benefit)   Amount
                                                       ------    ---------    ------   ------   ---------   ------
<S>                                                     <C>       <C>         <C>      <C>       <C>        <C>
   Net unrealized gain (loss) on
     securities available-for-sale......                 $310      $(106)      $204     $849      $(289)     $560
 
   Less:  reclassification adjustment
     for net gain (loss) realized in
     net income.........................                  248        (84)       164      133        (45)       88
                                                         ----       ----       ----     ----      -----      ----  

   Other comprehensive income...........                 $558      $(190)      $368     $982      $(334)     $648
                                                         ====      =====       ====     ====      =====      ====
</TABLE>

(5)  Recent Accounting Standards

     In June 1997, SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information was issued. This statement requires public companies to
report certain information about their operating segments in their annual
financial statements and quarterly reports issued to stockholders. It also
requires public companies to report certain information about their products and
services, the geographic areas in which they operate, and their major customers.
This statement is effective for fiscal years beginning after December 15, 1997.
Earlier application is encouraged. Implementation of SFAS No. 131 should have no
material effect on the Company's Consolidated Financial Statements.

(6)  General

     CNBT Bancshares, Inc., a Texas corporation, was incorporated under the laws
of the State of Texas on April 8, 1998, primarily to serve as a holding company
for the Bank.  All requisite regulatory approvals and the satisfaction of all
other conditions to the organization of the Bank into a holding company
structure have been completed.  The reorganization was effective on July 2,
1998.  For further discussion of the holding company formation, the reader is
directed to the Company's Form S-4 Registration Statement (File No. 333-50039)
filed with the Securities and Exchange Commission on April 14, 1998, as amended.

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

Overview

     CNBT Bancshares, Inc. (the "Company") is a bank holding company
headquartered in Bellaire, Texas, which derives substantially all of its income
from the operation of its wholly-owned bank subsidiary, Citizens National Bank
of Texas (the "Bank"). The Company was formed in July 1998 as a bank holding
company for the Bank, which was chartered in 1983.

     For the nine months ended September 30, 1998, the Company had net income of
$3.2 million, an increase of $600,000 or 23.1% from the same time period in
1997.  This earnings growth was due primarily to an increase in net interest
income, which resulted from strong loan growth.  Net income per share, basic and
fully diluted, decreased to $0.64 and $0.63, respectively, for the nine months
ended September 30, 1998, from $0.66 and $0.66 for the same time period in 1997.
The Company's annualized return on average assets was 1.31% and the annualized
return on average common equity was 13.35% for the nine months ended September
30, 1998, compared to 1.28% and 18.33% for the same time period in 1997.
Earning per share and return on equity declined as a result of the issuance of
1,150,000 shares in October 1997.

     Total assets increased to $362.5 million at September 30, 1998, from $285.6
million at September 30, 1997, an increase of $76.9 million or 26.9%, and from
$295.6 million at December 31, 1997, an increase of $66.9 million or 22.6%.  The
increase was due primarily to an increase in the deposits.  Deposits increased
to $307.8 million at September 30, 1998, from $254.8 million at September 30,
1997, an increase of $53.0 million or 20.8%, and from $260.9 million at December
31, 1997, an increase of $46.9 million or 18.0%. Total stockholders' equity was
$34.0 million at September 30, 1998, representing an increase of $13.3 million
or 64.3% over total stockholders' equity of 

                                       10
<PAGE>
 
$20.7 million at September 30, 1997, and an increase of $2.4 million or 7.6%
over stockholders' equity of $31.6 million at December 31, 1997. The significant
increase in stockholders' equity is attributable to the initial public offering
in October 1997.

Results of Operations

  Net Interest Income

     Net interest income for the nine months ended September 30, 1998, was $9.4
million, an increase of $1.6 million or 20.5% from $7.8 million for the nine
months ended September 30, 1997. The Company's net interest margin was 4.06% and
4.12% and the net interest spread was 2.94% and 3.18% for the nine months ended
September 30, 1998 and 1997, respectively.  The decrease in net interest margin
resulted from a smaller increase in net interest income relative to the increase
in total average interest-earning assets.  There was a decrease in the yield on
total interest-earning assets of 0.12% and an increase of 0.12% in the rate paid
on interest-bearing liabilities which resulted in a decrease in net interest
spread.

     The increase in net interest income resulted from increases in the loan and
securities portfolios.  Interest income from loans increased to $8.0 million
from $7.0 million for the nine months ended September 30, 1998 and 1997,
respectively, an increase of $1.0 million or 14.3%.  The yield in the loan
portfolio increased to 10.01% for the nine months ended September 30, 1998, from
9.82% for the nine months ended September 30, 1997.  Interest income from the
securities portfolio increased to $9.4 million for the nine months ended
September 30, 1998, from $7.6 million for the nine months ended September 30,
1997, a $1.8 million or 23.7% increase.  This was due primarily to a 27.2%
increase in average securities held and a yield that decreased to 6.27% for the
nine months ended September 30, 1998, compared to the same period in 1997.
Partially offsetting the interest income growth was an increase in interest
expense, which grew to $8.1 million for the nine months ended September 30,
1998, compared to $6.8 million for the nine months ended September 30, 1997.
This increase was the result of strong growth in average deposits, in
particular, money market and savings deposits and certificates of deposit.

                                       11
<PAGE>
 
     The following table presents, for the periods indicated, the total dollar
amount of average balances, interest income from average interest-earning assets
and the resulting yields, as well as the interest expense on average interest-
bearing liabilities, expressed both in dollars and rates.  No tax equivalent
adjustments were made and all average balances are average daily balances.
Nonaccruing loans have been included in the tables as loans carrying a zero
yield.
<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED                   NINE MONTHS ENDED
                                                           SEPTEMBER 30, 1998                  SEPTEMBER 30, 1997
                                                -----------------------------------   -----------------------------------
                                                  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.....................................      $107,116    $ 8,045     10.01%      $ 94,895    $ 6,989      9.82%
   Securities................................       199,408      9,370      6.27        156,828      7,553      6.42
   Federal funds sold and other
        earning assets.......................         1,532         77      6.70            519         14      3.60
                                                   --------    -------                 --------    -------     
        Total interest-earning assets........       308,056     17,492      7.57        252,242     14,556      7.69
Less:  allowance for loan losses.............         1,055                                 716
                                                   --------                            --------                 
Total earning assets, net of allowance.......       307,001                             251,526
Nonearning assets............................        21,617                              17,724
                                                   --------                            --------                
 
        Total Assets.........................      $328,618                            $269,250
                                                   ========                            ======== 

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
   Interest-bearing demand deposits..........      $ 20,649    $   273      1.76%      $ 19,190    $   253      1.76%
   Savings and money market
        accounts.............................        80,402      2,307      3.83         70,587      1,933      3.65
   Certificates of deposit...................       121,898      5,101      5.58        104,036      4,292      5.50
   Borrowed funds............................        10,251        423      5.50          5,987        279      6.21
                                                   --------    -------                 --------    -------     
        Total interest-bearing liabilities...       233,200      8,104      4.63        199,800      6,757      4.51
                                                               -------                             -------
Noninterest-bearing liabilities:
   Noninterest-bearing demand
        deposit..............................        60,786                              49,267
   Other liabilities.........................         2,332                               1,387
                                                   --------                            --------
        Total liabilities....................       296,318                             250,454
Stockholders' equity.........................        32,300                              18,796
                                                   --------                            --------
        Total liabilities and
          stockholders' equity...............      $328,618                            $269,250
                                                   ========                            ======== 

Net interest income..........................                  $ 9,388                             $ 7,799
                                                               =======                             =======   
Net interest spread (1)......................                               2.94%                               3.18%
Net interest margin (2)......................                               4.06%                               4.12%
 
</TABLE>
(1)  The interest rate spread is the difference between the average yield in
     interest-earning assets and the average rate paid on interest-bearing
     liabilities.
(2)  The net interest margin is equal to the net interest income divided by the
     average interest-earning assets.

                                       12
<PAGE>
 
     The following table presents for the periods indicated 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:
<TABLE>
<CAPTION>
                                                           NINE MONTHS ENDED
                                                      SEPTEMBER 30, 1998 VS. 1997
                                                     -----------------------------
                                                      INCREASE (DECREASE)
                                                            DUE TO
                                                      ------------------
                                                     VOLUME       RATE       TOTAL
                                                     ------       ----       -----
                                                          (DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
<S>                                                  <C>            <C>        <C> 
 Loans............................................   $  848      $ 208       $1,056
 Securities.......................................    2,202       (385)       1,817
 Other earning assets.............................       19         44           63
                                                     ------      -----       ------
  Total increase (decrease) in interest income....    3,069       (133)       2,936
                                                           
INTEREST-BEARING LIABILITIES:                              
 Interest-bearing demand deposits.................       19          1           20
 Savings and money market accounts................      235        139          374
 Certificates of deposit..........................      713         96          809
 Borrowed funds...................................      219        (75)         144
                                                     ------      -----       ------
  Total increase (decrease) in interest expense...    1,186        161        1,347
                                                     ------      -----       ------
Increase (decrease) in net interest income........   $1,883      $(294)      $1,589
                                                     ======      =====       ======
</TABLE>

  Provisions for Loan Losses

     The provision for loan losses was $423,000 for the nine months ended
September 30, 1998, and $507,000 for the same period in 1997, a decrease of
$84,000 or 16.7%.

  Noninterest Income

     Noninterest income for the nine months ended September 30, 1998, was $2.2
million, an increase of $400,000 or 22.2% from $1.8 million in the same period
in 1997.  The following table presents, for the periods indicated, the major
categories of noninterest income:

                                                       NINE MONTHS ENDED
                                                         SEPTEMBER 30,
                                                      ---------------------
                                                       1998           1997
                                                       ----           ----
                                                      (DOLLARS IN THOUSANDS)

Service fees.....................                       $1,487   $1,460
Net realized gains on sale of                       
 available-for-sale securities...                          248      133
Other operating income...........                          496      213
                                                        ------   ------
Total noninterest income.........                       $2,231   $1,806
                                                        ======   ======

     For the nine months ended September 30, 1998, service fees on deposit
accounts were comparable to the amount for the same periods in 1997.  Even
though deposit accounts grew from 22,576 at September 30, 1997 to 25,093 at
September 30, 1998, service fee income remained comparable due to competition
involving free checking accounts.  Other operating income increased to $496,000
for the nine months ending September 30, 1998, an increase of $283,000 or 132.9%
over the same period in 1997.  The increase is primarily attributed to a
recovery received in the amount of $229,000 from the bonding company due to a
former employee's defalcation.

                                       13
<PAGE>
 
  Noninterest Expenses

     In the nine-month period ended September 30, 1998, noninterest expenses
increased $1.3 million or 23.2% to $6.9 million from the 1997 comparable period.
For the nine months ended September 30, 1998, the efficiency ratio, calculated
by dividing total noninterest expenses (excluding securities gains and losses)
by net interest income plus noninterest income, increased to 60.5% for the nine
months ended September 30, 1998, from 58.6% for the nine months ended September
30, 1997.  This increase was primarily due to an increase in salaries and
employee benefits along with other general and administrative expenses.

     Salaries and benefit expense and general administrative expenses, for the
nine months ended September 30, 1998, was $4.6 million, an increase of $900,000
or 24.3% from $3.7 million in the same period of 1997.  The increase was due to
additional personnel required to accommodate the growth and the opening of a new
branch office in Northwest Houston.  Total full-time equivalent employees at
September 30, 1998, increased to 108 from 95 at September 30, 1997.

     Occupancy expense and equipment maintenance increased to $854,000 for the
nine-month period ended September 30, 1998, from $765,000 for the nine-month
period ended September 30, 1997.  Major categories included within occupancy
expense are building lease expense, depreciation expense, and maintenance
expense.  Depreciation expense increased to $315,000 for the nine-month period
September 30, 1998, an increase of $18,000 or 6.1% from $297,000 for the same
period in 1997.  This increase was primarily due to equipment purchases.
Maintenance expense for the nine-month period ended September 30, 1998, was
$199,000, an increase of $26,000 or 15.0% over the same period in 1997.

     Data processing expense for the nine-month period ended September 30, 1998,
was $680,000, as compared to $587,000 for the same period in 1997, an increase
of $93,000 or 15.8%.  The increase is due to the Bank's re-negotiation of its
contract for data processing services which are handled by a third party vendor,
and the increase in the number of the Bank's deposit accounts and loans, along
with the increase in the number of items processed.

  Income Taxes

     Income tax expense includes the regular federal income tax at the statutory
rate.  The amount of federal income tax expense is influenced by the amount of
taxable income, the amount of tax-exempt income, the amount of nondeductible
interest expense, and the amount of other nondeductible expenses. In the first
nine months of 1998, income tax expense was $1.1 million, an increase of
$100,000 or 10.0% from $1.0 million of income tax expense for the same period in
1997. The higher income tax expense in the first nine months of 1998 compared to
the first nine months of 1997 is principally due to the increase in taxable
income. The effective tax rates were 25.0% for the nine months ended September
30, 1998, and 27.1% for the nine months ended September 30, 1997.

                                       14
<PAGE>
 
FINANCIAL CONDITION

  Loan Portfolio

     Loans, net of unearned interest, were $108.8 million at September 30, 1998,
an increase of $5.9 million or 5.7% from $102.9 million at December 31, 1997.
At September 30, 1998, loans as a percentage of assets and deposits were 30.0%
and 35.3%, respectively.

     The following table summarizes the loan portfolio of the Bank by type of
loan as of September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
 
                                                   SEPTEMBER 30, 1998     DECEMBER 31, 1997
                                                   ------------------     -----------------
                                                    AMOUNT    PERCENT     AMOUNT    PERCENT
                                                    ------    -------     ------    -------
                                                             (DOLLARS IN THOUSANDS)
 
<S>                                              <C>           <C>     <C>          <C>
Commercial and industrial............             $ 22,337      20.5%   $ 25,230      24.5%
Real estate:
 Construction and land development...               12,821      11.8      10,673      10.4
 1-4 family residential..............               10,987      10.1      10,808      10.5
 Commercial owner occupied...........               23,853      21.9      17,846      17.3
 Other...............................                  617       0.6         378       0.4
Consumer.............................               38,135      35.1      37,940      36.9
                                                  --------      ----    --------      ---- 
 
 Total loans.........................             $108,750     100.0%   $102,875     100.0%
                                                  ========     =====    ========     =====
</TABLE>
  Nonperforming Assets

     The Bank's conservative lending policies have resulted in strong asset
quality.  Nonperforming assets were $550,000 at September 30, 1998, compared to
$1.3 million at December 31, 1997.  This resulted in a ratio of nonperforming
assets to loans plus other real estate of 0.50% and 1.3% at September 30, 1998,
and December 31, 1997, respectively, and a ratio of nonperforming assets to
total assets of 0.15% and 0.46% at September 30, 1998 and December 31, 1997,
respectively.

     The Bank has well developed procedures in place to maintain a high quality
loan portfolio.  These procedures include credit quality policies that begin
with approval of lending policies and underwriting guidelines by the Board of
Directors, an independent loan review conducted by outside auditors, low
individual lending limits for officers, Loan Committee approval for large credit
relationships, and quality loan documentation procedures.  The Bank's lending
officers and loan personnel identify and analyze weaknesses in the portfolio and
report credit risk changes on a monthly basis to the Bank's Board of Directors.
The Bank performs monthly and quarterly concentration analyses based on
collateral types, business lines, large credit sizes, and officer portfolio
loads.  The Bank also monitors its delinquency levels for any negative or
adverse trends. There can be no assurance, however, that the Bank's loan
portfolio will not become subject to increasing pressures from deteriorating
borrower credit due to general economic conditions.

     The Bank 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 collateralized 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 Bank is sometimes
required to revise a loan's interest rate or repayment terms in a troubled debt
restructuring.

                                       15
<PAGE>
 
     The following table presents information regarding nonperforming assets at
September 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
                                                                   SEPTEMBER 30,    DECEMBER 31,
                                                                       1998            1997
                                                                       ----            ----
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                                   <C>            <C> 
Nonaccrual loans............................................           $ 273          $  279
Accruing loans 90 or more days past due.....................             234           1,016
Restructured loans..........................................              43              54
Other real estate and foreclosed property...................               0               0
                                                                       -----          ------ 
 Total nonperforming assets.................................           $ 550          $1,349
                                                                       =====          ======
 
Nonperforming assets to total loans and other real estate...             .51%           1.31%
Nonperforming assets to total assets........................             .15%            .46%
</TABLE>
  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.  Based on an evaluation of
the loan portfolio, management presents a monthly review of the allowance for
loan losses to the Board of Directors, indicating any changes 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 Bank'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 Bank's financial statements by its independent auditors.
Charge-offs occur when loans are deemed to be uncollectible.

     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
Bank's historical charge-off experience.  The Bank then charges to operations a
provision for loan losses determined on an annualized basis to maintain the
allowance for loan losses at an adequate level determined according to the
foregoing methodology.

     Management believes that the allowance for loan losses at September 30,
1998, is adequate to cover losses inherent in the portfolio as of such date.
There can be no assurance, however, that the Bank will not sustain losses in
future periods, which could be greater than the size of the allowance at
September 30, 1998.

                                       16
<PAGE>
 
     The following table presents, for the periods indicated, an analysis of the
allowance for loan losses and other related data:
<TABLE>
<CAPTION>
                                                            NINE MONTHS
                                                              ENDED         YEAR ENDED
                                                           SEPTEMBER 30,    DECEMBER 31,
                                                              1998             1997
                                                           -------------    ------------
                                                               (DOLLARS IN THOUSANDS)
<S>                                                        <C>              <C>
 
Allowance for loan losses at beginning of period...         $ 1,009          $  687
Provision for loan losses..........................             432             877
Charge-offs........................................            (436)           (636)
Recoveries.........................................              99              81
                                                            -------          ------ 
    
Allowance for loan losses at end of period.........         $ 1,104          $1,009
                                                            =======          ======
 
                                                           SEPTEMBER 30,    DECEMBER 31,
                                                              1998             1997
                                                           -------------    ------------
 
Allowance to period-end loans......................            1.02%            .98%
Net charge-offs (recoveries) to average loans......             .31%            .57%
Allowance to period-end nonperforming loans........          200.73%          74.80%
</TABLE>
  Securities

     The Company's securities portfolio as of September 30, 1998, totaled $233.3
million, as compared to $169.8 million at December 31, 1997, and $164.8 million
at September 30, 1997.  The year-to-date increase of $63.5 million or 37.4% is a
result of the reinvestment of excess liquidity in U.S. Government and agency and
mortgage-backed securities and municipal bonds.  The Company is required to
classify its debt and equity securities into one of three categories: held-to-
maturity, trading or available-for-sale. Investments in debt securities are
classified as held-to-maturity and measured at amortized cost in the financial
statements only if management has the intent and ability to hold these
securities to maturity. Securities that are bought and held principally for the
purposes 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.  Securities 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 components of stockholders' equity until realized.  Gains and losses on
sales of securities are determined using the specific-identified method.

     As of September 30, 1998, the held-to-maturity portfolio totaled $105.8
million and the available-for-sale portfolio totaled $127.5 million. The net
unrealized gain in the available-for-sale portfolio was $2.3 million as of
September 30, 1998.  The Company tracks but does not record market changes on
its held-to-maturity portfolio.  At September 30, 1998, the market value of the
held-to-maturity portfolio was $107.2 million.

                                       17
<PAGE>
 
     The following table presents the amortized cost of securities classified as
available-for-sale and their approximate fair values at September 30, 1998, and
December 31, 1997:

<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30, 1998
                                                    ------------------------------------------------
                                                                    GROSS        GROSS
                                                    AMORTIZED     UNREALIZED   UNREALIZED     FAIR
                                                       COST          GAIN         LOSS        VALUE
                                                    ------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                 <C>            <C>           <C>       <C>
U.S. Government and agency securities...             $ 23,983       $  295        $   0     $ 24,278
Mortgage-backed securities..............               43,268          356          (52)      43,572
Obligations of state and political
 subdivisions...........................               55,317        1,778          (62)      57,033
Other securities........................                2,655            0            0        2,655
                                                     --------       ------        -----     --------
 
Total securities........................             $125,223       $2,429        $(114)    $127,538
                                                     ========       ======        =====     ========
 
                                                                     DECEMBER 31, 1997
                                                    ------------------------------------------------
                                                                    GROSS        GROSS
                                                    AMORTIZED     UNREALIZED   UNREALIZED     FAIR
                                                       COST          GAIN         LOSS        VALUE
                                                    ------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                 <C>            <C>           <C>       <C>
 
U.S. Government and agency securities...             $ 17,085       $  262        $  (1)    $ 17,346
Mortgage-backed securities..............               22,757          259            0       23,016
Obligations of state and political
 subdivisions...........................               48,884        1,363          (81)      50,166
Other securities........................                2,508            0            0        2,508
                                                     --------       ------        -----     --------
 Total securities.......................             $ 91,234       $1,884        $ (82)    $ 93,036
                                                     ========       ======        =====     ========
</TABLE>

     The following table presents the amortized cost of securities classified as
held-to-maturity and their approximate fair values at September 30, 1998, and
December 31, 1997:
<TABLE>
<CAPTION>
                                                                    SEPTEMBER 30, 1998
                                                    ------------------------------------------------
                                                                    GROSS        GROSS
                                                    AMORTIZED     UNREALIZED   UNREALIZED     FAIR
                                                       COST          GAIN         LOSS        VALUE
                                                    ------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                 <C>            <C>           <C>       <C>
 
U.S. Government and agency securities...             $ 51,834       $1,068        $ (21)   $ 52,881
Mortgage-backed securities..............               53,945          415          (16)     54,344
                                                     --------       ------        -----    -------- 
 Total securities.......................             $105,779       $1,483        $ (37)   $107,225
                                                     ========       ======        =====    ========
</TABLE> 

                                       18
<PAGE>

<TABLE> 
<CAPTION> 
 
                                                                     DECEMBER 31, 1997
                                                    ------------------------------------------------
                                                                    GROSS        GROSS
                                                    AMORTIZED     UNREALIZED   UNREALIZED     FAIR
                                                       COST          GAIN         LOSS        VALUE
                                                    ------------------------------------------------
                                                                  (DOLLARS IN THOUSANDS)
<S>                                                 <C>            <C>           <C>       <C>
U.S. Government and agency securities...             $ 49,055       $  982        $ (24)   $ 50,013
Mortgage-backed securities..............               27,740          195         (379)     27,556
                                                     --------       ------        -----    --------  
 Total securities.......................             $ 76,795       $1,177        $(403)   $ 77,569
                                                     ========       ======        =====    ========
</TABLE>

     U.S. Government and agency securities are primarily securities issued by
the Federal National Mortgage Association (Fannie Mae) ("FNMA"), Federal Home
Loan Bank ("FHLB"), and Federal Home Loan Mortgage Corporation (Freddie Mac)
("FHLMC"). Mortgage-backed securities are securities that have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the FNMA, FHLMC and the Governmental National Mortgage
Association (Ginnie Mae) ("GNMA"). These securities have high credit ratings,
and minimum regular monthly cash flows of principal and interest are guaranteed
by the agencies. The Company has no mortgage-backed securities that have been
issued by non-agency entities.

  Deposits

     Total deposits as of September 30, 1998, were $307.8 million, as compared
to $254.8 million at September 30, 1997, an increase of $53.0 million or 20.8%,
resulting from growth in same location deposits, combined with the additional
deposits of the branch offices. When compared to total deposits of $260.9
million on December 31, 1997, the amount at September 30, 1998, represents a
year-to-date increase of $46.9 million, as the strong deposit growth experienced
in 1997 continued through the first nine months of 1998.

     Non-interest bearing demand deposits at September 30, 1998, were $66.9
million, as compared to $52.6 million at September 30, 1997, an increase of
$14.3 million or 27.2%.  When compared to non-interest bearing demand deposits
of $54.6 million on December 31, 1997, the September 30, 1998, amount represents
a year-to-date increase of $12.3 million.  The percentage of non-interest
bearing deposits to total deposits as of September 30, 1998, continued strong at
21.7%.

     The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposits consist of demand, savings, NOW
accounts, money market, and time accounts. The Bank relies primarily on
advertising, competitive pricing policies, and customer service to attract and
retain these deposits. As of September 30, 1998, the Bank had no deposits
classified as brokered funds. Deposits provide generally all the funding for the
Bank's lending and investment activities and the interest paid for deposits must
be managed carefully to control the level of interest expense.

                                       19
<PAGE>
 
     The Bank's ratios of average non-interest bearing deposits to average total
deposits at September 30, 1998, and December 31, 1997, were 21.4%, and 20.4%,
respectively. The daily average balances and weighted average rates paid on
deposits for the nine month period ended September 30, 1998 and the year ended
December 31, 1997, are presented below:
<TABLE>
<CAPTION>
 
                                         NINE MONTHS ENDED        YEAR ENDED
                                        SEPTEMBER 30, 1998    DECEMBER 31, 1997
                                        ------------------    -----------------
                                         AMOUNT      RATE      AMOUNT      RATE
                                         ------      ----      ------      ----
                                                 (DOLLARS IN THOUSANDS)
<S>                                     <C>          <C>      <C>         <C>
  NOW accounts.......................     $ 20,649    1.76%    $ 19,348    1.76%
  Regular savings....................        7,361    2.23        6,731    2.24
  Money Market.......................       73,041    3.98       65,010    3.84
  CDs less than $100,000.............       68,489    5.55       61,097    5.53
  CDs $100,000 and over..............       33,801    5.57       27,544    5.52
  IRAs & QRPs........................       19,608    5.69       16,706    5.62
                                          --------    ----     --------    ----
   Total interest-bearing deposits...      222,949    4.59      196,436    4.49
 
  Noninterest-bearing deposits.......       60,786       0       50,494       0
                                          --------    ----     --------    ----
  Total deposits.....................     $283,735    3.61%    $246,930    3.57%
                                          ========    ====     ========    ====
</TABLE>

     The following table sets forth the maturity and repricing of the Bank's
certificates of deposit that are $100,000 or greater at September 30, 1998, and
December 31, 1997:
<TABLE>
<CAPTION>
                                    SEPTEMBER 30,   DECEMBER 31,
                                       1998            1997
                                    -------------   -----------
                                       (DOLLARS IN THOUSANDS)
<S>                                     <C>            <C>
 
  3 months or less..............         $10,701        $ 9,000
  Between 3 months and 1 year...          24,701         15,110
  Over 1 year...................           6,164          7,063
                                         -------        -------
  Total CDs $100,000 and over...         $41,566        $31,173
                                         =======        =======
</TABLE>
  Borrowings

     Other short-term borrowings generally represent borrowings from the FHLB
with maturities ranging from one to thirty days.  Information relating to these
borrowings as of September 30, 1998, is summarized as follows:
<TABLE>
<CAPTION>
  
                                               SEPTEMBER 30,     DECEMBER 31,
                                                   1998             1997
                                               ------------      -----------
                                                   (DOLLARS IN THOUSANDS)
<S>                                               <C>              <C>
Other short-term borrowings:
  Average.................................         $ 3,120         $ 4,582
  Period-end..............................           7,750               0
Maximum month-end balance during period...
 (all FHLB borrowings)....................          17,750          15,100
Interest rate:
  Average.................................            5.50%           5.46%
  Period-end (weighted average)...........            5.58%           0.00%
</TABLE>

     At period ending September 30, 1998, the Bank had three separate borrowing
programs in effect. The Bank borrowed $7.8 million in overnight funds at a rate
of 5.86%. Also, the Bank borrowed $10,000,000 that had a five-year stated
maturity with a two-year lockout. Those borrowings consist of $5,000,000 at
5.335% and $5,000,000 at 5.385%. At December 31, 1997, there were no borrowings
outstanding.

                                       20
<PAGE>
 
  Interest Rate Sensitivity

     The Company analyzes its interest rate risk position by use of a simulation
model and shock analysis. As of September 30, 1998 the simulation model
indicates that, in the event of a 200 basis point increase in underlying market
interest rates, the Company's net interest income would decrease 10.8%.
Correspondingly, in the event of a 200 basis point decrease in market interest
rates, the Company's net interest income would increase by 8.5%.  The results of
this "rate shock test", which assumes a parallel shift in the yield curve,
indicate that the present mix of interest earning assets and interest-bearing
liabilities should provide reasonable protection from changes in interest rates.
However, because the Company maintains a significant percentage of its assets in
investment securities and a significant portion of its investment securities
consist of fixed rate securities rather than adjustable rate securities, a rapid
increase or decrease in interest rates could have a greater adverse effect on
the Company's net interest margin and results of operation.  The simulation
model also provides a detailed interest rate sensitivity gap ("GAP") analysis,
which the Company uses as a secondary source in analyzing its asset/liability
mix.  At September 30, 1998 the GAP measurement of interest rate sensitive
assets minus interest rate sensitive liabilities divided by total assets
indicates a cumulative negative GAP of 24.7% through one year and a cumulative
negative GAP of 0.81% for all periods.  The Company seeks to maintain the
cumulative GAP to total assets within 35% for one year.

     The Company's Investment-Asset/Liability Committee has adopted specific
investment policies directed at reducing the length of maturity of securities
that it purchases and shifting a portion of the securities portfolio to
adjustable rate securities.

  Capital Resources and Liquidity

     Stockholders' equity increased to $34.0 million at September 30, 1998, from
$31.6 million at December 31, 1997, an increase of $2.4 million or 7.6%.  This
increase was primarily attributable to $3.2 million in earnings along with a net
unrealized gain on securities of $400,000.  Additionally, the Company declared
dividends of $1.4 million.

     Liquidity involves the Company's ability to raise funds through asset
growth and reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements, and to operate the Company on an
ongoing basis. During the nine months ended September 30, 1998, the Company's
liquidity needs have primarily been met by growth in deposits, as previously
discussed. The cash position was further supplemented by the amortization of the
securities and loan portfolios. Additionally, access to borrowed funds from the
FHLB was available and has been utilized to take advantage of investment
opportunities.

     FHLB advances may be utilized from time to time as either a short-term
funding source or a long-term funding source.  FHLB advances can be particularly
attractive as a long-term funding source to balance interest rate sensitivity
and reduce interest rate risk.  The Company is eligible for two borrowing
programs through the FHLB.  The first, called "Short-Term Fixed" (STF), requires
delivery of eligible securities for collateral.  At September 30, 1998, the
Company had approximately $136.2 million available as a short-term funding
source in this program.  Maturities under this program range from 1-35 days.

     The second borrowing program, the "Blanket Borrowing Program" (BBP), is
under an overnight borrowing agreement which does not require the delivery of
specific collateral. Borrowings are limited to a maximum of 65% of the Company's
1-4 family mortgage loans. At September 30, 1998, the Company had approximately
$22.9 million in potential borrowings available under this program. Under this
program, the Company must hold approximately $1 in FHLB stock for each $10 in
borrowings. In addition, under the Blanket Borrowing Program, the Company may
deliver specific collateral which will dramatically increase total potential
borrowings. Upon delivery, the FHLB will review the collateral and assign a
loan-to-value ratio of approximately 90%. In addition to real estate loans, 
the FHLB will accept delivery of credit card and installment loans. The advances
are limited to 50% of assets or total eligible collateral, whichever is less. 
The advances are subject to the stock purchase requirements as mentioned above.
At September 30, 1998, the Company had total potential borrowings under the
various programs discussed above of $159.1 million.

     The Bank's risk-based capital ratios remain above the levels designated as
"well capitalized".  At September 30, 1998, the Bank's tier 1 capital to assets,
tier 1 risk-based capital, and tier 1 leverage ratios were 8.96%, 21.61% and
9.88%, respectively.

                                       21
<PAGE>
 
  Year 2000 Issue

     The Year 2000 issue is the result of many existing computer programs using
two digits rather than four to identify a year in a date field.  These programs
were designed and developed without considering the impact of the upcoming
change in the century.  Computer hardware, date-driven automated equipment, and
computer software may recognize a date using "00" as the year 1900 rather than
the year 2000.  If not corrected, many computer systems could fail or create
erroneous results causing disruptions of operations, including a temporary
inability to process transactions or engage in normal business activities.  The
Year 2000 issue affects virtually all companies and organizations.

     In May 1997, the OCC issued an advisory letter to all national banks
concerning the Year 2000 issue.  The OCC has directed that all national banks
must largely complete all software code enhancements and revisions, hardware
upgrades, and other associated changes by December 31, 1998. Between January 1,
1999 and the end of the year, banks must test and implement their Year 2000
conversion projects.  In addition, the OCC is conducting an examination of each
bank's Year 2000 preparedness.

    The Company has completed an internal review of all computer hardware, date-
sensitive automated equipment, and software. Some of the Company's software will
require modification or replacement so that applications and computer systems
will properly use dates beyond December 31, 1999. The Company is using both
internal and external resources to correct or replace and test in-house code to
ensure uninterrupted customer service. The Company believes that through
modifications to existing software and conversion to new software, the Year 2000
issue will be adequately addressed. The Company is also working with its third
party data processing vendor to coordinate their Year 2000 activities with the
Company's to ensure Year 2000 readiness.

     The Company plans to complete its Year 2000 readiness project within one
year and began significant testing of programs during the month of October 1998.
The Company currently expects to incur approximately $100,000 in programming and
equipment costs in connection with the Year 2000 project which is being funded
through operating cash flows, will be expensed or capitalized as incurred over
the next two years, and is not expected to have any material adverse effect on
the Company's results of operations.

     The Company is also reviewing its loan portfolio and deposit base to assess
Year 2000 compliance by its significant borrowers and depositors.

     The Company's Year 2000 readiness project costs include the estimated costs
and time associated with the impact of the Company's primary third party data
processing vendor's Year 2000 issues and are based on presently available
information.  The costs associated with the Year 2000 readiness project and the
date on which the Company plans to complete the project are based on
management's best estimates, which were derived using assumptions of future
events including the availability of certain resources, third party vendors Year
2000 plans, and other factors.  There is no assurance that the Company's
estimates will be realized and actual results could differ materially.  Specific
factors that might cause such a material difference include the availability and
cost of trained programming personnel and the ability to locate and correct all
relevant computer code.  In addition, there can be no assurance that the systems
and applications of other companies on which the Company's systems and
applications rely will be timely converted, that a fail to convert by another
company, or that a conversion that is incompatible with the Company's systems
and applications would not have a material adverse impact on the Company.

                                       22
<PAGE>
 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

  Not applicable.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

     On June 15, 1998, Marsha Emmons, a former employee of the Bank, filed a
lawsuit against the Bank in the United States District Court for the Southern
District of Texas, Houston Division under the caption Marsha Emmons v. Citizens
National Bank, Civil Action No. H-98-1846.  The plaintiff alleges that she
suffered employment discrimination on the basis of sex and seeks injunctive
relief restoring her to employment, lost pay, medical benefits, compensatory
damages, punitive damages, and her costs of the lawsuit, together with
prejudgment and postjudgment interest. The case has not yet entered the
discovery stage.  The Bank intends to vigorously defend against this action and
believes the ultimate resolution of this suit will not have a material adverse
effect on the Bank's financial position or results of operations.


Item 6.  Exhibits and Reports on Form 8-K.

     (a)  Exhibits.

     Exhibit No.                Item
     -----------                ----

     11      Computation of Earnings Per Share (Included as Note (2) to Interim
             Consolidated Financial Statements on page 8 of this Form 10-Q)

     27      Financial Data Schedule

     (b)  Reports on Form 8-K.

          None
                                  SIGNATURES
                                        
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused the report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                           CNBT BANCSHARES, INC.
                                                 (Registrant)


By    /s/ B. Ralph Williams                      October 30, 1998
    --------------------------------------       Date
    B. Ralph Williams, President and Chief  
    Executive Officer                      

By    /s/ Randall W. Dobbs                       October 30, 1998
    --------------------------------------       Date
    Randall W. Dobbs, Executive Vice
    President and Chief Operations
    Officer (Chief Accounting Officer)

                                       23