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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

            [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2000

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

                         COMMISSION FILE NUMBER: 1-13472

                                   * * * * * *

                    NATIONAL BANCSHARES CORPORATION OF TEXAS
           (Exact name of business issuer as specified in its charter)

            TEXAS                                       74-1692337
   (State of Incorporation)              (I.R.S. Employer Identification Number)

               12400 HWY 281 NORTH, SAN ANTONIO, TEXAS 78216-2811
                    (Address of principal executive offices)
                        TELEPHONE NUMBER: (210) 403-4200

         Securities registered under Section 12(b) of the Exchange Act:
                          COMMON STOCK, $.001 PAR VALUE
       Securities registered under Section 12(g) of the Exchange Act: None

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

     Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-K contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K [ ].

     Issuer's revenues for its most recent fiscal year: $ 39,951,000 (Total
Interest Income).

     State the aggregate market value of voting stock held by non-affiliates
based upon the closing AMEX sale price on March 20, 2001: $ 71,639,519

     State the number of shares outstanding of each of the issuer's classes of
common equity, as of March 20, 2001 : 3,770,501 shares of Common Stock

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<PAGE>

                                TABLE OF CONTENTS

                                     PART I

<TABLE>
<S>        <C>                                                                <C>
Item   1.  Description of Business...........................................  3
Item   2.  Description of Property...........................................  8
Item   3.  Legal Proceedings.................................................  9
Item   4.  Submission of Matters to a Vote of Security Holders...............  9


                                     PART II

Item   5.  Market for Common Equity and Related Shareholder Matters..........  9
Item   6.  Selected Consolidated Financial Data.............................. 11
Item   7.  Management's Discussion and Analysis.............................. 13
Item  7a.  Quantitative and Qualitative Disclosures About Market Risk........ 24
Item   8.  Financial Statements.............................................. 27
Item   9.  Changes and/or Disagreements with Accountants on Accounting
              and Financial Disclosure....................................... 50


                                    PART III

Item 10.   Directors & Executive Officers of the Registrant ................. 50
Item 11.   Executive Compensation............................................ 52
Item 12.   Security Ownership of Certain Beneficial Owners and Management.... 59
Item 13.   Certain Relationships and Related Transactions.................... 60


                                     PART IV

Item 14.   Exhibits and Reports on Form 8-K.................................. 60
</TABLE>


<PAGE>

                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

     National Bancshares Corporation of Texas (the "Company") is a bank holding
company incorporated in Texas on June 14, 1971, and registered under the Bank
Holding Company Act of 1956, as amended (the "BHC Act"). The Company made the
election to become a financial holding company under the Gramm-Leach-Bliley Act
and the election was made effective by the Federal Reserve Bank on March 11,
2000. The Company successfully emerged from reorganization (the
"Reorganization") under Chapter 11 of the United States Bankruptcy Code in May
1992. As a result of the Reorganization, the Company came under new management
and control and its assets and liabilities were substantially restructured. The
Company now conducts its banking operations through twelve locations which are
owned by three separately chartered banks; NBC Bank-Laredo, N.A., Laredo, Texas,
("NBC-Laredo"), NBC Bank, N.A., Eagle Pass, Texas ("NBC-Eagle Pass"), and NBC
Bank, Rockdale, Texas ("NBC-Rockdale"), (collectively, the "Banks"). On October
1, 2000, NBC Bank-Centra, N.A. (Luling) was merged into NBC-Eagle Pass. On March
31, 2001, NBC-Laredo and NBC-Rockdale will be merged into NBC-Eagle Pass.
NBC-Laredo, NBC-Eagle Pass, and NBC-Rockdale are wholly-owned subsidiaries of
NBT of Delaware, Inc., a Delaware corporation that is a wholly-owned subsidiary
of the Company. The Company operates its data and item processing for the Banks
through NBC Holdings-Texas, Inc., a wholly-owned subsidiary of NBT of Delaware,
Inc. The Company operates a broker-dealer subsidiary, NBC Financial, Inc., a
wholly-owned subsidiary of NBT Securities Holdings, Inc. NBT Securities
Holdings, Inc. is a Delaware corporation that is a wholly-owned subsidiary of
the Company. At December 31, 2000, the Company (on a consolidated basis) had
total assets of $591.3 million, total investments securities of $257.1 million,
total loans of $256.4 million, total deposits of $524.9 million, total
stockholders' equity of $58.6 million and net operating loss carry-forwards for
federal income tax purposes of $83 million. For the year ended December 31,
2000, the Company recorded net income of $5.1 million.

     The Company's executive offices are located at 12400 Hwy 281 North, San
Antonio, Texas 78216-2811, and its telephone number is (210) 403-4200.

THE BANKS

     Each of the Banks is a separate entity which operates under the day-to-day
management of its own board of directors and officers. The Banks grant
agribusiness, commercial, residential and installment loans to customers
primarily in Central and South Texas. The Banks also offer a range of commercial
banking services, including acceptance of deposits. Deposit services include
certificates of deposit, individual retirement accounts, checking accounts,
interest-bearing checking accounts, savings accounts and money market accounts.
In addition, the Banks provide traveler's checks, safe deposit boxes and other
customary nondeposit banking services. The Banks provide limited escrow
services. Loans consist of real estate loans, residential mortgages,
construction loans, commercial loans directed at small to middle market
businesses and loans to individuals. In addition, each of the Banks is subject
to legal lending limits. Such limits generally restrict loans to any one
customer in an amount not to exceed 15% of any one Bank's total capital plus the
allowance for possible loan losses. NBC-Eagle Pass operates five branches,
located in San Antonio, Marble Falls, Eagle Pass, Luling and San Marcos, Texas.
NBC-Eagle Pass also opened a loan production office in Dallas, Texas in January
2001. NBC-Rockdale operates two branches, located in Giddings and Taylor, Texas.
NBC-Laredo operates two branches, located in Laredo.

The following table sets forth certain financial information with respect to the
Banks as of December 31, 2000 (Dollars in thousands):

<TABLE>
<CAPTION>
                                       ASSETS          LOANS         DEPOSITS
                                     ----------     ----------      ----------
<S>                                  <C>            <C>             <C>
          NBC - Eagle Pass           $  356,876     $  152,536      $  321,054

          NBC - Rockdale             $  117,469     $   34,419      $  103,220

          NBC - Laredo               $  117,434     $   69,527      $  100,962
</TABLE>


                                       3
<PAGE>

SERVICES OFFERED BY NBC SUBSIDIARY BANKS

COMMERCIAL BANKING

     The Banks provide the following types of loans for corporations and other
business clients:

     REAL ESTATE LOANS. The Banks have historically engaged in real estate
lending through construction and term mortgage loans, all of which are secured
by deeds of trust on underlying real estate. The majority of the Banks' real
estate loans are small to medium sized real estate loans. The banks also offer
home equity loans.

     COMMERCIAL LOANS. Commercial loans include loans made primarily to small to
medium sized businesses and professionals for working capital. Construction
financing loans are secured by a lien on the real estate and the improvements.

     INSTALLMENT LOANS. Installment loans consist primarily of automobile loans,
loans made to finance small equipment acquisitions, small loans for personal and
household needs and home improvement loans. These loans are made primarily as an
accommodation to existing customers and are not a substantial part of the Banks
lending strategy.

     The Banks also provide deposit products to its commercial customers, as
well as night deposit and wire transfer services.

CONSUMER SERVICES

     The Banks have generated a substantial portion of their deposits from
individuals and small businesses in their respective market areas. Other
consumer bank services include automated teller machines, installment and real
estate loans, home equity loans, drive-in services, safe deposit boxes, Internet
banking, image bank statements, credit and debit card services and brokerage
services. The Banks offer competitive interest rates on money market accounts,
savings accounts and certificates of deposit. NBC-Eagle Pass and NBC-Laredo
enjoy long-term deposit relationships with many Mexican Nationals (in United
States dollars only).

SERVICES OFFERED BY NBC NON-BANK SUBSIDIARIES

     NBC Financial, Inc., a wholly-owned indirect subsidiary of the Company, is
a fully disclosed introducing broker-dealer which began operations in September
1999. All securities transactions for NBC Financial, Inc. are being cleared
through Pershing, a division of Credit Suisse First Boston. NBC Financial, Inc.
provides general securities services for customers of the Banks and the general
public, and operates pursuant to a market-based leasing arrangement in most of
the Banks and branches. NBC Financial, Inc. is also in a marketing arrangement
with Essex Corporation and American Annuity Agency of Texas, Inc. for the sale
of fixed and variable rate annuities.

COMPETITION

     The Banks face substantial competition for deposits and loans throughout
their market areas. Competition comes primarily from other commercial banks,
savings and loans, credit unions, mutual funds and other financial
intermediaries, many of which have financial and marketing resources
substantially greater than those of the Company. The Banks face competition
for deposits and loans throughout their market areas not only from local
institutions but also from out-of-state financial intermediaries which have
opened loan production offices which solicit deposits in its market areas.
Many of the financial intermediaries operating in the Banks' market areas
offer certain services, such as trust and international banking services,
which the Company does not offer directly. Additionally, banks with larger
capitalization and financial intermediaries, not subject to bank regulatory
restrictions, have larger lending limits and are thereby able to serve the
needs of larger customers. Management believes, however, that the Banks'
long-term presence, local expertise and ongoing commitment to the community,
as well as their commitment to quality and personalized banking services,
offers certain competitive advantages.

                                       4
<PAGE>

EMPLOYEES

     At December 31, 2000, the Company employed approximately 262 full-time
equivalent employees. Management believes that its relations with its employees
are satisfactory. Employees of the Company enjoy a variety of employee benefit
programs, including a 401(k) plan, paid vacations and comprehensive medical,
life and accident insurance plans.

SUPERVISION AND REGULATION

     THE COMPANY. The Company, as a registered bank holding company, is subject
to regulation under the BHC Act. The Company is required to file with the
Federal Reserve Board ("FRB") quarterly and annually and also reports such
additional information as the FRB may require pursuant to the BHC Act. The
Company is subject to examination by the FRB. The FRB may require the Company to
terminate an activity or terminate control of or liquidate or divest certain
subsidiaries or affiliates when the FRB believes the activity or the control of
the subsidiary or affiliate constitutes a significant risk to the financial
safety, soundness or stability of any of its banking subsidiaries. The FRB also
has the authority to regulate provisions of certain bank holding company debt,
including authority to impose interest ceilings and reserve requirements on such
debt. Under certain circumstances, the Company must file written notice and
obtain approval from the FRB prior to purchasing or redeeming its equity
securities. Under the BHC Act and regulations adopted by the FRB, a bank holding
company and its nonbanking subsidiaries are prohibited from requiring certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. Further, the Company is required by the FRB
to maintain certain levels of capital. See "Supervision and Regulation--Capital
Adequacy Guidelines."

     The Company is required to obtain prior approval of the FRB for the
acquisition of more than five percent of the outstanding shares of any class of
voting securities or substantially all of the assets of any bank or bank holding
company. Prior approval of the FRB is also required for the merger or
consolidation of the Company and another bank holding company. The Company is
prohibited by the BHC Act, except in certain statutorily prescribed instances,
from acquiring direct or indirect ownership or control of more than five percent
of the outstanding voting shares of any company that is not a bank or bank
holding company and from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks or furnishing services to
its subsidiaries. However, the Company may, subject to the prior approval of the
FRB, engage in any, or acquire shares of companies engaged in, activities that
are deemed by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. The FRB is also empowered
to differentiate between activities commenced DE NOVO and activities commenced
by acquisition, in whole or in part, of a going concern and is generally
prohibited from approving an application by a bank holding company to acquire
voting shares of any commercial bank in another state unless such acquisition is
specifically authorized by the laws of such other state.

     Under FRB regulations, a bank holding company is required to serve as a
source of financial and managerial strength to its subsidiary banks and may not
conduct its operations in an unsafe or unsound manner. In addition, it is the
FRB's policy that in serving as a source of strength to its subsidiary banks, a
bank holding company should stand ready to use available resources to provide
adequate capital funds to its subsidiary banks during periods of financial
stress or adversity and should maintain the financial flexibility and
capital-raising capacity to obtain additional resources for assisting its
subsidiary banks. A bank holding company's failure to meet its obligations to
serve as a source of strength to its subsidiary banks will generally be
considered by the FRB to be an unsafe and unsound banking practice or a
violation of the FRB's regulations or both.


                                       5
<PAGE>

     THE BANKS. Banks are extensively regulated under federal and state law.
NBC-Laredo and NBC-Eagle Pass, as national banks, are subject to primary
supervision, periodic examination and regulation by the Office of the
Comptroller of the Currency (the "OCC"). NBC-Rockdale, a Texas state chartered
bank, is subject to examination and regulation by the Texas State Banking
Department.

     The deposits of the Banks are insured by the Federal Deposit Insurance
Corporation ("FDIC"), which currently insures deposits of each member bank to a
maximum of $100,000 per depositor. For this protection, the Banks, as is the
case with all insured banks, pay a semi-annual statutory assessment and are
subject to the rules and regulations of the FDIC. See "Supervision and
Regulation - FDIC Insurance."

     The regulations promulgated by these federal agencies govern most aspects
of the Banks business, including, without limitation, capital to assets ratios,
reserves against deposits, maximum lending limitations, investments, mergers and
acquisitions, borrowings, dividends and locations of branch offices. The Banks
are also subject to applicable provisions of Texas law, insofar as they do not
conflict with or are not preempted by federal law. Supervision, legal action and
examination of the Banks by the regulatory agencies are generally intended to
protect depositors, and are not intended for the protection of shareholders. The
OCC also has the authority to prohibit national banks from engaging in what, in
the OCC's opinion, constitutes an unsafe or unsound practice in conducting its
business. It is possible, depending upon the financial condition of the bank in
question and other factors, that the OCC could assert that the payment of
dividends or other payments might, under some circumstances, constitute an
unsafe or unsound practice.

     CONTROL ISSUES. Investors in the Common Stock of the Company are
potentially subject to certain change of bank control laws; those contained in
the BHC Act, the Federal Deposit Insurance Act (the "FDIA") and applicable Texas
laws. In general, persons who wish to acquire a number of shares of Common Stock
that, when aggregated with that person's other holdings of common stock, if any,
would equal or exceed 10 percent of the Company's Common Stock, or who otherwise
might be subject to the change of bank control rules, should consult with their
legal counsel regarding the applicability of the provisions of any of these
laws.

     FINANCIAL MODERNIZATION. On November 12, 1999, President Clinton signed
into law the Gramm-Leach-Bliley Act ("GLBA"). This comprehensive legislation
eliminates the barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers. GLBA provides for a new type of
financial holding company structure under which affiliations among these
entities may occur, subject to the "umbrella" regulation of the FRB and
regulation of affiliates by the functional regulators, including the Securities
and Exchange Commission ("SEC") and state insurance regulators. Under GLBA, a
financial holding company may engage in a broad list of financial activities and
any non-financial activity that the FRB determines is complementary to a
financial activity and poses no substantial risk to the safety and soundness of
depository institutions or the financial system. In addition, GLBA permits
certain non-banking financial and financially related activities to be conducted
by financial subsidiaries of a national bank. In addition, GLBA imposes strict
new privacy disclosure and opt-out requirements regarding the ability of
financial institutions to share personal non-public customer information with
third parties.

     Under GLBA, a bank holding company may become certified as a financial
holding company by filing a declaration with the FRB, together with a
certification that each of its subsidiary banks is well capitalized, is well
managed, and has at least a satisfactory rating under the Community Reinvestment
Act of 1977 ("CRA"). The Company has elected to become a financial holding
company under GLBA and the election was made effective by the FRB as of March
11, 2000.

     INTERSTATE BANKING AND BRANCHING. The Riegle-Neal Interstate Branching
Efficiency Act of 1994 ("IBBEA") authorizes interstate acquisitions of banks and
bank holding companies without geographic limitation beginning one year after
enactment. In addition, beginning June 1, 1997, IBBEA authorizes a bank to merge
with a bank in another state as long as neither of the states has opted out of
interstate branching between the date of enactment of IBBEA and May 31, 1997.
IBBEA further provides that states may enact laws permitting interstate bank
merger transactions prior to June 1, 1997. A bank may establish a de novo branch
in a state in which the bank does not maintain a branch if the state expressly
permits de novo branching. Once a bank has established branches in a state
through an interstate merger transaction, the bank may establish and acquire
additional branches at any location in the state where any bank involved in the
merger transaction could have established or acquired branches under applicable
federal or state law. A bank that has established a branch in a state through de
novo branching may establish and acquire additional branches in such state in
the same manner and to the same extent as a bank having a branch in such state
as a result of an interstate merger. If a state opts out of interstate branching
within the specified time period, no bank in any other state may establish a
branch in the opting out state, whether through an acquisition or de novo. On
August 28, 1995, Texas enacted legislation opting out of interstate branching.


                                       6
<PAGE>

     FDIC INSURANCE. The deposits of the Banks are insured by the FDIC. For this
protection, the Banks are subject to the rules and regulations of the FDIC. The
Banks also pay FDIC insurance premiums based on each Bank's annual assessment
rate assigned to it by the FDIC. The assessment rate is based on the
institution's capitalization risk category and "supervisory subgroup." An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup is based on
the FDIC's assessment of the financial condition of the institution and the
probability that FDIC intervention or other corrective action will be required.
See page 17 under "non-interest expense" for the amount of FDIC premiums paid by
the Banks.

     FDICIA REGULATION. The Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") requires, among other things, the federal banking
regulators to take "prompt and corrective action" in respect of depository
institutions insured by the FDIC that do not meet minimum capital requirements.
FDICIA establishes five capital tiers: `"well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," and
"critically undercapitalized." As of December 31, 2000, all of the Banks were
classified as "well capitalized".

     FDICIA directs that each federal banking agency prescribe standards, by
regulation or guidelines, for depository institutions relating to internal
controls, information systems, internal audit systems, loan documentation,
credit underwriting, interest rate exposure, asset growth, compensation, asset
quality, earnings, stock valuation, and such other operational and managerial
standards as the agency deems appropriate. The FDIC, in consultation with the
other federal banking agencies, has adopted a final rule and guidelines with
respect to internal and external audit procedures and internal controls in order
to implement those provisions of FDICIA intended to facilitate the early
identification of problems in financial management of depository institutions.

     FDICIA also contains a variety of other provisions that may affect the
operations of the Company, including reporting requirements, regulatory
standards for real estate lending, "truth in savings" provisions, and the
requirement that a depository institution give ninety (90) days notice to
customers and regulatory authorities before closing any branch. The Federal
regulatory agencies have issued standards establishing loan-to-value limitations
on real estate lending.

     CAPITAL ADEQUACY GUIDELINES. The federal banking agencies have issued
guidelines for risk-based capital requirements. The guidelines are intended to
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among banking
organizations, and takes off-balance sheet items into account in assessing
capital adequacy and minimizes disincentives to holding liquid, low-risk assets.
Under these guidelines, assets and credit equivalent amounts of off-balance
sheet items, such as letters of credit and outstanding loan commitments, are
assigned to one of several risk categories, which range from 0% for risk-free
assets, such as cash and certain U.S. government securities, to 100% for
relatively high-risk assets, such as loans, investments in fixed assets,
premises and other real estate owned. The aggregated dollar amount of each
category is then multiplied by the risk-weight associated with that category.
The resulting weighted values from each of the risk categories are then added
together to determine the total risk-weighted assets.

     The guidelines require a minimum ratio of qualifying total capital to
risk-weighted assets of 8%, of which at least 4% must consist of Tier 1 capital.
A banking organization's qualifying total capital consists of two components:
Tier 1 capital (core capital) and Tier 2 capital (supplementary capital). Tier 1
capital consists primarily of common stock, related surplus, retained earnings,
and qualifying preferred stock. Intangibles, such as goodwill, as well as the
unrealized gain or loss on available for sale securities, are generally deducted
from Tier 1 capital. At least 50% of the banking organization's total regulatory
capital must consist of Tier 1 capital. Tier 2 capital may consist of (i) the
allowance for possible loan losses in an amount up to 1.25% of risk-weighted
assets; (ii) preferred stock not qualifying as Tier 1 capital plus related
surplus; and, (iii) mandatory convertible debt. The inclusions of the foregoing
elements of Tier 2 capital are subject to certain requirements and limitations
of the federal banking agencies. The federal banking agencies have also adopted
a minimum leverage ratio of Tier 1 capital to total assets of 3% for banks that
have a uniform composite ("CAMEL") rating of 1. All other institutions and
institutions experiencing or anticipating significant growth are expected to
maintain capital at least 100 to 200 basis points above the minimum level.
Furthermore, higher leverage ratios are required to be considered "well
capitalized" or "adequately capitalized" under the prompt corrective action
provisions of the FDICIA. See "Management's Discussion and Analysis- Capital
Resources."

     CRA AND FAIR LENDING DEVELOPMENTS. The Banks are subject to certain fair
lending requirements and reporting obligations involving home mortgage lending
operations and Community Reinvestment Act ("CRA") activities. The CRA generally
requires the federal banking agencies to evaluate the record of a financial
institution in meeting the credit


                                       7
<PAGE>

needs of their local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.

     ENVIRONMENTAL LAWS. Under various federal, state and local laws, ordinances
and regulations, a current or previous owner, developer or operator of real
estate may be liable for the cost of removal or remediation of certain hazardous
or toxic substances at, on, under or in its property. The cost of such removal
or remediation of such substances can be substantial. These laws often impose
liability without regard to whether the owner or operator knew of, or was
responsible for, the release or presence of such substances. As a result, the
presence of such substances on any of the real property collateral securing any
of the Banks' loans may render such collateral less valuable or worthless or may
result in the Banks being unwilling to foreclose upon such collateral. In
addition, the Banks may incur substantial environmental liabilities and costs
from owning any collateral previously foreclosed upon that is later determined
to contain such substances. The Banks attempt to reduce this risk by making
inquiry with respect to environmental matters in connection with the extension
of credit; however, there can be no assurance that environmental liabilities do
not or will not exist with respect to the Banks' collateral.

EFFECT OF GOVERNMENTAL POLICIES AND RECENT LEGISLATION

     Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Banks on their deposits and
other borrowings and the interest rate received by the Banks on loans extended
to their customers and securities held in the Banks portfolio comprise the major
portion of the Banks earnings. These rates are highly sensitive to many factors
that are beyond the control of the Banks. Accordingly, the earnings and growth
of the Banks are subject to the influence of local, domestic and foreign
economic conditions, including recession, unemployment and inflation.

     The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
FRB. The FRB implements national monetary policies (with objectives such as
curbing inflation and combating recession) by its open-market operations in
United States Government securities, by adjusting the required level of reserves
for financial intermediaries subject to its reserve requirements and by varying
the discount rate applicable to borrowings by depository institutions. The
actions of the FRB in these areas influence the growth of bank loans,
investments and deposits and also affect the interest rates charged on loans and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted.

     From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the Texas legislature and
before various bank regulatory and other professional agencies. The likelihood
of any major changes and the impact such changes might have on the Company
and/or the Banks are impossible to predict. Certain of the potentially
significant changes which have been enacted and proposals which have been made
recently are discussed above.

ITEM 2. DESCRIPTION OF PROPERTY

     The Company's headquarters are currently located in the NBC-San Antonio
building located at 12400 Hwy 281 North, San Antonio, Texas, occupying premises
of approximately 4,900 square feet. The Company has a lease with an indefinite
term with NBC-Eagle Pass with monthly lease payments of $10,256 per month.

     The Company has entered into a month-to-month sublease with Equibond, Inc.,
a company owned by the Company's Chairman. The lease is for 1,429 square feet in
Suite 1700 at 100 Wilshire Boulevard, Santa Monica, California, with lease
payments of $3,500 per month. This property is for office use.


                                       8
<PAGE>

     NBC-Laredo's main banking facility is located at 104 East Mann Road,
Laredo, Texas. The Bank owns and occupies a 12,000 square foot, two story
building situated on approximately two acres. NBC-Laredo also owns and occupies
a 2,761 square foot branch located at 2302 Blaine Street, Laredo, Texas which
was opened in March 1998. In addition, NBC-Laredo owns and occupies a 6,000
square foot branch located at McPherson Road at Welby Court Laredo, Texas which
was opened in April 2000.

     NBC-Eagle Pass' main banking facility is located at 439 Main Street, Eagle
Pass, Texas, which is within five blocks of the international bridge into
Piedras Negras, Coahuila, Mexico. The Bank owns and occupies a two-story, 22,434
square foot building situated on one city block at this address. NBC-Eagle Pass
also owns and occupies a (a) 4,000 square foot branch bank, NBC-East, located
approximately one mile east of the main bank at 2538 E. Main Street, (b) a
two-story 19,761 square foot branch located at 700 Hwy 281, Marble Falls, Texas,
(c) a 30,000 square foot branch in San Antonio, Texas located at 12400 Hwy 281
North, which was opened in March 1999, (d) a 5,500 square foot branch located at
200 S. Pecan Ave., Luling, Texas, and (e) a 2,925 square foot branch at 1081
Wonder World Drive, San Marcos, Texas.

     NBC-Rockdale's main banking facility is located at 401 E. Cameron Street,
Rockdale, Texas. The Bank owns and occupies a 22,000 square foot two story
building at this location. NBC-Rockdale also owns and occupies a 1,700 square
foot motor bank located at 1401 W. Cameron Street, Rockdale, Texas, a 14,524
square foot branch located at 104 W. Austin, Giddings, Texas and a 15,136 square
foot branch located at 316 N. Main Street, Taylor Texas.

ITEM 3. LEGAL PROCEEDINGS

     The Company and the Banks from time to time are involved in legal actions
arising from normal business activities. Management believes that those actions
are without merit or that the ultimate liability, if any, resulting from them
will not materially affect the Company's financial position.

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

     Not Applicable.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

MARKET PRICE OF COMMON STOCK

     The Common Stock of the Company has been listed on the American Stock
Exchange since April 28, 1995 under the symbol "NBT." Prior to that date, the
Common Stock of the Company was not listed on any stock exchange nor quoted on
the National Association of Securities Dealers Automated Quotation Systems. As
of December 31, 2000, the Company had approximately 871 shareholders of record.


                                       9
<PAGE>

     The following table sets forth the high and low sales/bid prices/quotations
for the Company's Common Stock during 2000 and 1999. These bid quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not necessarily represent actual transactions:

<TABLE>
<CAPTION>
                                                     SALES/BID PRICES
                                               ---------------------------
                                                  HIGH               LOW
                                               ---------         ---------
<S>                                            <C>               <C>
                2000:
                   4TH QUARTER                 $   13.50         $   13.13
                   3RD QUARTER                     13.69             13.00
                   2ND QUARTER                     14.00             13.06
                   1ST QUARTER                     14.88             13.00

                1999:
                   4th Quarter                 $   15.13         $   14.25
                   3rd Quarter                     15.88             14.75
                   2nd Quarter                     15.88             14.13
                   1st Quarter                     16.63             15.00
</TABLE>

DIVIDENDS

     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
therefore. The Company has not previously paid any dividends on the Common
Stock. The Company currently intends to retain future earnings for use in
the expansion and operation of its business. Accordingly, the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
capital requirements, the general financial condition of the Company, as well as
other relevant factors. The Company's principal source of funds to pay dividends
on the Common Stock is the cash dividends the Company receives from the Banks.
The payment of dividends by the Banks to the Company is subject to certain
restrictions imposed by federal banking laws, regulations and authorities.


                                       10
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes thereto and the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
--------------------------------------------------------------------------------------------------------------------------------

                                                             -------------------------------------------------------------------
                                                                                  YEAR ENDED DECEMBER 31,
                                                             -------------------------------------------------------------------
STATEMENT OF INCOME DATA: (dollars in thousands)                2000          1999          1998          1997           1996
                                                             ----------    ----------    ----------    ----------     ----------
<S>                                                          <C>           <C>           <C>           <C>            <C>
    Interest income ......................................   $   39,951    $   35,666    $   33,063    $   27,334     $   20,820
    Interest expense .....................................       19,215        15,707        14,915        11,722          8,112
                                                             ----------    ----------    ----------    ----------     ----------
      Net interest income ................................       20,736        19,959        18,148        15,612         12,708
    Provision (credit) for loan losses ...................          584           625           232            80             (5)
    Non-interest income ..................................        6,081         2,614         5,701         4,387          2,789
    Non-interest expense .................................       18,265        17,586        15,273        12,244          9,586
    Income taxes .........................................        2,904         1,624         3,056         2,811          2,155
                                                             ----------    ----------    ----------    ----------     ----------
      Net income .........................................   $    5,064    $    2,738    $    5,288    $    4,864     $    3,761
                                                             ==========    ==========    ==========    ==========     ==========

COMMON SHARE DATA:
    Basic earnings per share .............................   $     1.26    $     0.66    $     1.17    $     1.04     $     0.81
    Book value ...........................................   $    15.52    $    12.31    $    12.44    $    10.97     $     9.21
    Weighted average shares outstanding ..................    4,033,374     4,154,529     4,503,427     4,658,734      4,639,955

BALANCE SHEET DATA (AT PERIOD END): (dollars in thousands)
    Total assets .........................................   $  591,285    $  549,784    $  512,078    $  470,160     $  327,918
    Investments and federal funds sold ...................      278,174       235,582       272,019       279,991        184,021
    Total loans ..........................................      256,482       247,406       192,219       136,313        113,258
    Allowance for loan losses ............................        3,429         2,841         2,670         2,458          2,408
    Total deposits .......................................      524,906       489,740       447,656       414,415        279,755
    Other debt ...........................................        5,232         7,017        10,143         2,646          3,995
    Total stockholders' equity ...........................       58,583        50,633        52,206        51,098         42,909

PERFORMANCE DATA:
    Return on average total assets .......................         0.88%         0.51%         1.09%         1.25%          1.30%
    Return on average stockholders' equity ...............         9.35%         5.35%        10.24%        10.59%          9.71%
    Net interest margin (tax equivalent) .................         4.04%         4.23%         4.24%         4.42%          4.80%

ASSET QUALITY RATIOS:
    Non-performing loans to total loans ..................         0.97%         1.21%         1.08%         1.16%          1.68%
    Net loan charge-offs (recoveries) to average
    loans ................................................         0.00%         0.21%         0.01%         0.02%        -0.04%
    Allowance for loan losses to total loans .............         1.34%         1.15%         1.39%         1.80%          2.13%

CAPITAL RATIOS:
    Stockholders' equity to average total assets .........        10.23%         9.47%        10.77%        11.78%         13.35%
    Tier 1 risk-based capital * ..........................        16.35%        16.40%        18.37%        27.77%         33.58%
    Total risk-based capital * ...........................        17.56%        17.47%        19.62%        29.02%         34.84%
    Leverage ratio * .....................................         8.01%         7.86%         8.12%         9.13%         13.67%
</TABLE>

*    Calculated in accordance with Federal Reserve guidelines currently in
     effect


                                       11
<PAGE>

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

     Selected quarterly consolidated financial data is presented in the
following tables for the years ended December 31, 2000 and 1999. (Dollars in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                                    -------------------------------------------------------------
                                                                                    2000 QUARTER ENDED (UNAUDITED)
                                                                    -------------------------------------------------------------
                                                                    MARCH 31          JUNE 30       SEPTEMBER 30      DECEMBER 31
                                                                    --------         --------       ------------      -----------
<S>                                                                 <C>              <C>              <C>              <C>
Interest income ...............................................     $  9,447         $  9,788         $ 10,209         $ 10,507
Interest expense ..............................................        4,376            4,579            4,985            5,275
                                                                    --------         --------         --------         --------
  Net interest income .........................................        5,071            5,209            5,224            5,232
Provision for loan loss .......................................          190              138              153              103
Gain on sales of securities ...................................            7              520               48               19
Non-interest income ...........................................        1,092            1,206            1,731            1,458
Non-interest expense ..........................................        4,498            4,661            4,511            4,595
                                                                    --------         --------         --------         --------
  Income before federal income taxes ..........................        1,482            2,136            2,339            2,011
Federal income taxes ..........................................          543              774              839              748
                                                                    --------         --------         --------         --------
  Net income ..................................................     $    939         $  1,362         $  1,500         $  1,263
                                                                    --------         --------         --------         --------
  Basic earnings per share ....................................     $   0.23         $   0.33         $   0.37         $   0.33
                                                                    --------         --------         --------         --------
  Diluted earnings per share ..................................     $   0.22         $   0.33         $   0.37         $   0.32
                                                                    --------         --------         --------         --------

<CAPTION>
                                                                    -------------------------------------------------------------
                                                                                    1999 QUARTER ENDED (UNAUDITED)
                                                                    -------------------------------------------------------------
                                                                    MARCH 31          JUNE 30       SEPTEMBER 30      DECEMBER 31
                                                                    --------         --------       ------------      -----------
<S>                                                                 <C>              <C>              <C>              <C>
Interest income ...............................................     $  8,439         $  8,721         $  9,051         $  9,455
Interest expense ..............................................        3,763            3,768            3,952            4,225
                                                                    --------         --------         --------         --------
  Net interest income .........................................        4,676            4,953            5,099            5,230
Provision for loan loss .......................................          123              153              185              165
Gain (loss) on sales of securities ............................           29                6                7           (1,683)
Non-interest income ...........................................        1,105              986            1,058            1,107
Non-interest expense ..........................................        4,194            4,246            4,416            4,729
                                                                    --------         --------         --------         --------
  Income (loss) before federal income taxes ...................        1,493            1,546            1,563             (240)
Federal income taxes ..........................................          656              394              518               56
                                                                    --------         --------         --------         --------
  Net income (loss) ...........................................     $    837         $  1,152         $  1,045         $   (296)
                                                                    --------         --------         --------         --------
  Basic earnings (loss) per share .............................     $   0.20         $   0.28         $   0.25         $  (0.07)
                                                                    --------         --------         --------         --------
  Diluted earnings (loss) per share ...........................     $   0.20         $   0.27         $   0.24         $  (0.07)
                                                                    --------         --------         --------         --------
</TABLE>


                                       12
<PAGE>

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 OF THE COMPANY ANALYZES THE MAJOR ELEMENTS OF THE COMPANY'S
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME. THIS DISCUSSION SHOULD BE
READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS, ACCOMPANYING
NOTES, AND SELECTED FINANCIAL DATA APPEARING ELSEWHERE IN THIS REPORT.

RESULTS OF OPERATIONS

     Net income for 2000 was $5.1 million, compared to $2.7 million recorded in
1999 and $5.3 million in 1998. Net income per diluted common share in 2000 was
$1.24 compared with $.64 in 1999 and $1.14 in 1998. Earnings included $642,000,
net after tax, of non-recurring items consisting of net realized gains on sales
of securities and other real estate in addition to certain miscellaneous income.
Earnings for 1999 included $1.1 million, net after tax, of non-recurring items
consisting of net securities losses and other real estate gains. Earnings for
1998 included a $1.2 million, net after tax, non-recurring gain on the sale of
investment securities. Excluding these non-recurring items, net operating
earnings for 2000 were $4.4 million or $1.09 per diluted common share compared
with $3.8 million or $0.89 per diluted common share for 1999 and $4.1 million or
$0.87 per diluted common share for 1998. The $600,000 increase in net income
from 1999 to 2000, excluding the non-recurring items, can be attributed to the
$513,000, net after tax, increase in net interest income and to service charge
income on deposit accounts which contributed to the earnings growth by
increasing 27% or $640,000, net after tax. Net earnings for 2000 were also
affected by net expenses of approximately $167,000 due to the opening of a third
location in Laredo, Texas in April 2000 and by $212,000 of net expenses for the
start-up of NBC Financial, Inc., the broker-dealer subsidiary. The $300,000
decrease in net income from 1998 to 1999, excluding the non-recurring items, can
be primarily attributed to the $238,000, net after tax, increase in interest
expense on other debt which was used to repurchase the Company's stock. Earnings
were also affected by the opening of a new branch in San Antonio during March
1999 which increased salary and occupancy expenses by approximately $1.5 million
during 1999. Much of the loan growth the Company has experienced has been in the
San Antonio market area, thereby increasing interest income to partially offset
the additional expenses of the new branch.

     The Company's return on equity for 2000 was 9.33% compared to 5.35% and
10.24% for 1999 and 1998, respectively. The Company's return on assets for 2000
was .88% compared to .51% and 1.09% for 1999 and 1998, respectively. The
Company's return on equity, excluding the non-recurring items, was 8.12%, 7.42%,
and 7.93%, for 2000, 1999, and 1998, respectively. The Company's return on
assets, excluding the non-recurring items was .77%, .71%, and .85% for 2000,
1999, and 1998, respectively.

     Total year-end assets reached $591.3 million at December 31, 2000 from
$549.8 million at December 31, 1999, an increase of $41.5 million or 7.5%. Total
loans at December 31, 2000 grew to $256.5 million, or 3.7% over the previous
year-end total of $247.4 million. Deposits reflect more significant growth,
increasing 7.2% over the same period to $524.9 million from $489.7 million at
December 31, 1999.

     NET INTEREST INCOME. Net interest income constitutes the principal source
of income for the Company and represents the difference between interest income
on earning assets and interest expense on interest-bearing liabilities. Net
interest income increased $777,000, or 3.9% to $20.7 million in 2000 compared to
$19.9 million in 1999. The increase in interest income was primarily due to the
$40.2 million or 8.5% increase in earning assets. The increase was also
facilitated by higher yields on earning assets which was an average of 7.55% in
1999 to an average of 7.79% in 2000. Investment securities accounted for 45% and
48% of average earning assets in 2000 and 1999, respectively. Loans accounted
for 48% and 47% of average earning assets in 2000 and 1999, respectively. The
average rate paid on interest-bearing liabilities and other debt increased 55
basis points from 3.85% in 1999 to 4.40% in 2000 primarily due to the general
increase in short-term interest rates and increased competition in certain Bank
markets. The net interest margin for 2000 was 4.04% compared to 4.23% and 4.24%
for 1999 and 1998, respectively. The decrease in the net interest margin for
2000 is reflective of higher rates being paid on deposits. The net interest
spread decreased 31 basis points to 3.39% in 2000 from 3.70% in 1999.


                                       13
<PAGE>

     The following table analyzes the increases in taxable-equivalent net
interest income stemming from changes in interest rates and from asset and
liability volume, including mix, for the years ended December 31, 2000 and 1999.
Non-accruing loans have been included in assets for calculating this table,
thereby reducing the yield on loans. The changes in interest due to both rate
and volume in the table below have been allocated to volume or rate change in
proportion to the absolute amounts of change in each.

          ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                      -----------------------------------       -----------------------------------
                                                                 2000 VS. 1999                              1999 VS. 1998
                                                      -----------------------------------       -----------------------------------
                                                                       DUE TO CHANGE IN                         DUE TO CHANGE IN
                                                      INCREASE      ---------------------       INCREASE      ---------------------
                                                     (DECREASE)       RATE         VOLUME      (DECREASE)       RATE         VOLUME
                                                      -------       -------       -------       -------       -------       -------
<S>                                                   <C>           <C>           <C>           <C>           <C>           <C>
Taxable-equivalent interest income:
    Interest-bearing accounts ..................      $    84       $    28       $    56       $    31       $   (12)      $    43
    Federal funds sold .........................          680           298           382          (257)         (119)         (138)
    Investment securities ......................          393            58           335          (682)          (33)         (649)
    Loans, net of unearned discount ............        3,124           463         2,661         3,515        (1,758)        5,273
                                                      -------       -------       -------       -------       -------       -------
        Total taxable-equivalent
           interest income .....................        4,281           847         3,434         2,607        (1,922)        4,529
                                                      -------       -------       -------       -------       -------       -------
Interest expense:
    Interest-bearing accounts ..................        3,741         2,552         1,189           431        (1,535)        1,966
    Other debt .................................         (234)          (13)         (221)          361           (20)          381
                                                      -------       -------       -------       -------       -------       -------
        Total interest expense .................        3,507         2,539           968           792        (1,555)        2,347
                                                      -------       -------       -------       -------       -------       -------
Taxable-equivalent
    net interest income ........................      $   774       $(1,692)      $ 2,466       $ 1,815       $  (367)      $ 2,182
                                                      =======       =======       =======       =======       =======       =======
</TABLE>

     Taxable-equivalent net interest income for 2000 increased $774,000 or 3.9%
over 1999. Taxable-equivalent net interest income for 1998 increased $1.8
million or 10% over 1998. As the chart above indicates, interest income
increased in 2000 and 1999 primarily due to the growth in earning assets.
Interest expense increased in 2000 primarily due to the increase in rates paid
from an average of 3.78% in 1999 to a 4.37% average in 2000. Average earning
assets grew 8.5% from 1999 to 2000 while interest-bearing liabilities grew 8.1%
from 1999 to 2000.


                                       14
<PAGE>

<TABLE>
<CAPTION>
                                    --------------------------------------------------------------------------------------------
                                                                      YEAR ENDED DECEMBER 31,
                                    --------------------------------------------------------------------------------------------
                                                 2000                           1999                          1998
                                    ------------------------------- ----------------------------- ------------------------------
INTEREST EARNED/                               INTEREST  AVERAGE          INTEREST  AVERAGE            INTEREST  AVERAGE
INCURRED AND RATES                   AVERAGE   INCOME/   YIELD/  AVERAGE  INCOME/   YIELD/   AVERAGE   INCOME/    YIELD/
(DOLLARS IN THOUSANDS)               BALANCE   EXPENSE    RATE   BALANCE  EXPENSE    RATE    BALANCE   EXPENSE     RATE
----------------------------------- ---------  --------- ------ --------  -------- -------- ---------- --------- -------
<S>                                <C>         <C>       <C>    <C>       <C>        <C>   <C>       <C>           <C>
Earning assets:
 Interest-bearing accounts         $   3,104   $    197  6.35%  $  2,171  $   113    5.20% $  1,360  $      82     6.03%
 Federal funds sold                   30,506      1,927  6.32%    23,988    1,247    5.20%   26,538      1,504     5.67%
 Investment securities (F):
  U.S. Treasuries                    147,847      9,129  6.17%   195,093   12,174    6.24%  231,356     14,527     6.28%
  U.S. Government agencies            82,923      5,368  6.47%    29,375    1,729    5.89%    4,406        279     6.33%
  Other                                  739         59  7.98%     1,580      260   16.46%      639         39     6.10%
                                   ---------   --------  ----- ---------  -------  ------- --------  ---------   -------
   Total investment securities       231,509     14,556  6.29%   226,048   14,163    6.27%  236,401     14,845     6.28%
 Loans, net of discounts (A)         248,061     23,285  9.39%   220,123   20,161    9.16%  163,911     16,646    10.16%
                                   ---------   --------  ----- --------- --------  -------  -------  ---------   -------
   Total earning assets              513,180     39,965  7.79%   472,330   35,684    7.55%  428,210     33,077     7.72%

Non-interest bearing assets:
 Cash and due from banks              20,427                      20,321                     18,204
 Allowance for possible loan
  losses                              (3,141)                     (2,849)                    (2,561)
 Other assets                         42,070                      45,103                     40,944
                                   ---------                   ---------                   --------
  Total assets                     $ 572,536                   $ 534,905                    484,797
                                   =========                   =========                   ========

Interest-bearing liabilities:
 Interest-bearing transaction
  accounts                            81,338      2,479  3.05%    69,974    1,761    2.52%   61,656      1,584     2.57%
 Savings, money market and
  certificates of deposit            347,901     16,261  4.67%   327,232   13,238    4.05%  299,058     12,984     4.34%
  Other debt                           7,139        474  6.64%    10,485      708    6.75%    4,857        347     7.14%
                                   ---------   -------- ------ ---------  -------    ----- --------  ---------   -------
  Total interest-bearing
   liabilities                       436,378     19,214  4.40%   407,691   15,707    3.85%  365,571     14,915     4.08%
Non-interest bearing liabilities:
 Demand deposits                      79,151                      72,752                     63,402
 Other liabilities                     2,866                       3,244                      4,157
                                   ---------                   ---------                   --------
  Total liabilities                  518,395                     483,687                    433,130
Stockholders' equity (F)              54,141                      51,218                     51,667
                                   ---------                   ---------                   --------
  Total liabilities and
   stockholders' equity            $572,536                    $ 534,905                   $484,797
                                   ========                    =========                   ========

Taxable equivalent net interest
 income                                          20,751                    19,977                       18,162
Less:  taxable equivalent
 adjustment                                          15                        18                           14
                                              ---------                 ---------                    ---------
Net interest income                           $  20,736                 $  19,959                    $  18,148
                                              =========                 =========                    =========
Net interest spread (B)                                  3.39%                       3.70%                         3.64%
                                                         ====                        ====                          ====
Net interest margin (C)                                  4.04%                       4.23%                         4.24%
                                                         ====                        ====                          ====
Selected operating ratios:
 Return on assets (D)                                    0.88%                       0.51%                         1.09%
                                                         ====                        ====                          ====
 Return on equity (E)                                    9.35%                       5.35%                         10.24%
                                                         ====                        ====                          =====
</TABLE>

(A)  Non-accrual loans are included in the average balances used in calculating
     this table.

(B)  The net interest spread is the difference between the average rate on total
     interest-earning assets and interest-bearing liabilities.

(C)  The net interest margin is the taxable-equivalent net interest income
     divided by average earning assets.

(D)  The return on assets ratio was computed by dividing net income by average
     total assets.

(E)  The return on equity ratio was computed by dividing net income by average
     total stockholders' equity.

(F)  The average balance has been adjusted to exclude the effect of the net
     unrealized gain or loss on securities available for sale.


                                       15
<PAGE>

     MARKET RISK DISCLOSURE - INTEREST RATE SENSITIVITY. Market risk is the
potential loss arising from adverse changes in the fair value of a financial
instrument due to the changes in market rates and prices. In the ordinary course
of business, the Company's market risk is primarily that of interest rate risk.
The Company's interest rate sensitivity and liquidity are monitored by
management on an ongoing basis. A variety of measures are used to provide for a
comprehensive view of the magnitude of interest rate risk, the distribution of
risk, level of risk over time and exposure to changes in certain interest rate
relationships. The Company continuously monitors and manages the balance between
interest rate-sensitive assets and liabilities. Management seeks to maintain
consistent growth of net interest income through periods of changing interest
rates by avoiding fluctuating net interest margins and to maintain consistent
growth of net interest income through periods of changing interest rates.

     Interest rate sensitivity is the relationship between changes in market
interest rates and changes in net interest income due to repricing
characteristics of assets and liabilities.

     The following table commonly referred to as a "static gap report,"
indicates the Company's interest rate sensitivity position at December 31, 2000
and may not be reflective of positions in subsequent periods.

                 INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                               NON-RATE
                                                                      RATE SENSITIVE                          SENSITIVE
                                                 -------------------------------------------------------      ---------
                                                 IMMEDIATELY      WITHIN         WITHIN                         OVER
                                                  0-30 DAYS       90 DAYS       ONE YEAR         TOTAL         ONE YEAR      TOTAL
                                                  ---------      ---------      ---------      ---------      ---------    ---------
<S>                                               <C>            <C>            <C>            <C>            <C>          <C>
Earning assets:
    Loans, net of discounts                       $  71,068      $   8,151      $  22,391      $ 101,610      $ 154,872    $ 256,482
    Investment securities                             1,625            499          2,008          4,132        253,048      257,180
    Federal funds sold                               18,335             --             --         18,335             --       18,335
    Interest-bearing accounts                           279            100          2,280          2,659             --        2,659
                                                  ---------      ---------      ---------      ---------      ---------    ---------

          Total earning assets                    $  91,307      $   8,750      $  26,679      $ 126,736      $ 407,920    $ 534,656
                                                  =========      =========      =========      =========      =========    =========

Interest-bearing liabilities:
    Interest-bearing transaction,
      savings and money market                      209,898             --             --        209,898             --      209,898
    Certificates and time deposits                   48,703         60,788        111,831        221,322         10,560      231,882
    Debt                                              3,557             75            344          3,976          1,256        5,232
                                                  ---------      ---------      ---------      ---------      ---------    ---------

          Total interest-bearing
             Liabilities                          $ 262,158      $  60,863      $ 112,175      $ 435,196      $  11,816    $ 447,012
                                                  =========      =========      =========      =========      =========    =========

Interest sensitivity gap                          $(170,851)     $ (52,113)     $ (85,496)     $(308,460)
                                                  =========      =========      =========      =========

Cumulative gap                                    $(170,851)     $(222,964)     $(308,460)     $(308,460)
                                                  =========      =========      =========      =========

Ratio of earning assets to
    interest-bearing liabilities                       34.8%          14.4%          23.8%        29.1%
</TABLE>

     The interest rate sensitivity table reflects that the Company is liability
sensitive, on a cumulative basis, during the one year period shown. This gap
analysis is based on a point in time and may not be meaningful because assets
and liabilities must be categorized according to contractual maturities and
repricing periods rather than estimating more realistic behaviors. Generally,
this indicates that the liabilities reprice more quickly than the assets in a
given period, and that a decline in market rates will benefit net interest
income. An increase in market rates would have the opposite effect.

     The Banks utilize earnings simulation models as the primary quantitative
tool in measuring the amount of interest rate risk associated with changing
market rates. The model quantifies the effects of various interest rate
scenarios on the projected net interest income and net income over the ensuing
12 month period. The model was used to measure the impact on net interest income
relative to a base case scenario, of rates increasing or decreasing ratably 100
basis points ("bp") over


                                       16
<PAGE>

the next 12 months. These simulations incorporate assumptions regarding balance
sheet growth and mix, pricing and the repricing and maturity characteristics of
the existing and projected balance sheet. All off-balance sheet financial
instruments are included in the model. The Company's earnings sensitivity
profile as of year-end 2000 and 1999 is stated below.

<TABLE>
<CAPTION>
                                                 Immediate Change in Rates
                                             ---------------------------------
     After tax earnings change                    -100 bp          +100 bp
     -----------------------------           ----------------  ---------------
<S>                                                <C>              <C>
         December 31, 2000                          6.89%           -3.99%
         December 31, 1999                         18.39%            4.07%
</TABLE>

     NON-INTEREST INCOME. The major components of non-interest income are
service charges and fees earned on deposit accounts. The following table
summarizes changes in non-interest income during the past three years:

                               NON-INTEREST INCOME
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                              ---------------------------------------------------------
                                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                              ---------------------------------------------------------
                                                                     2000                      1999               1998
                                                              -------------------      --------------------     -------
                                                               AMOUNT    % CHANGE       AMOUNT     % CHANGE      AMOUNT
                                                              -------     -------      -------      -------     -------
<S>                                                           <C>         <C>          <C>          <C>         <C>
Service charges and fees                                      $ 4,597        26.7%     $ 3,627         11.9%    $ 3,240
Net realized gains (losses) on sales of securities                594       136.2%      (1,640)      -248.7%      1,103
Net trading profits                                                --         0.0%          --       -100.0%        782
Net gains on sales of other real estate owned                     129       268.6%          35        288.9%          9
Miscellaneous income                                              761        28.5%         592          4.4%        567
                                                              -------     -------      -------      -------     -------
    Total non-interest income                                 $ 6,081       132.6%     $ 2,614        -54.1%    $ 5,701
                                                              =======     =======      =======      =======     =======
</TABLE>

     The $3,467,000 or 132.6% increase in non-interest income for 2000 compared
to 1999 is due primarily to the $594,000 net realized securities gain compared
to a $1,640,000 net realized securities loss in 1999. This $2.2 million change
combined with the $970,000 increase in service charges and fees explains the
majority of the increase. Miscellaneous income for 2000 includes $283,000
associated with the resolution of contested matters, which also contributed to
the increase in income.

     NON-INTEREST EXPENSE. Non-interest expense includes all expenses of the
Company other than interest expense, loan loss provision and income tax expense.
The following table summarizes the changes in non-interest expense for the past
three years:

                              NON-INTEREST EXPENSE
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                       ---------------------------------------------------------------------
                                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------------------------------------
                                                                 2000                         1999                   1998
                                                       ------------------------     ------------------------      ----------
                                                         AMOUNT       % CHANGE        AMOUNT       % CHANGE         AMOUNT
                                                       ----------    ----------     ----------    ----------      ----------
<S>                                                     <C>              <C>        <C>               <C>         <C>
Salaries and employee benefits                          $   9,836          7.0%     $    9,192         15.7%      $    7,947
Advertising/marketing                                         301        -20.4%            378         23.5%             306
Occupancy and equipment expenses                            3,411          4.2%          3,273         27.6%           2,566
Data processing fees                                          384         20.4%            319         19.5%             267
FDIC insurance                                                101         98.0%             51          4.1%              49
Insurance                                                     137          3.0%            133         24.3%             107
Office supplies                                               560        -18.2%            685         13.6%             603
Postage and courier                                           531          1.0%            526          5.6%             498
Professional fees                                             909          8.6%            837         -7.5%             905
Goodwill amortization                                         376          0.0%            376          0.0%             376
Miscellaneous other expenses                                1,719         -5.3%          1,816         10.1%           1,649
                                                       ----------    ----------     ----------    ----------      ----------
    Total non-interest expense                         $   18,265          3.9%     $   17,586         15.1%      $   15,273
                                                       ==========    ==========     ==========    ==========      ==========
</TABLE>

     Non-interest expense of $18.3 million for the year ended 2000 represents an
increase of 3.9% or $679,000 compared with $17.6 million for the year ended
1999. As a percentage of average assets, non-interest expense decreased to 3.19%
in 2000 compared to 3.29% in 1999. The increase in non-interest expense is
reflected primarily in salaries and benefit expense. The 7% increase in salaries
and benefits for 2000 is primarily due to the staffing of the broker-dealer
which began operations in October 1999 and to the new branch opened in Laredo in
April 2000 which accounts for approximately


                                       17
<PAGE>

$400,000 or 62% of the increase. Occupancy and equipment increased $138,000 or
4.2% due in part to $102,000 which is associated with the opening of a third
branch in Laredo, Texas in April 2000. Office supplies expense decreased
approximately $125,000 or 18.2% due to the consolidation of certain forms and
improved monitoring of expenses.

     INCOME TAXES. The Company recognized income tax expense of $2.9 million in
2000 compared to $1.6 million in 1999. See Note 13 to the Consolidated Financial
Statements for details of tax expense. At December 31, 2000, the Company had
approximately $83 million in net operating loss carryforwards that will be
available to reduce income tax liabilities in future years. If unused,
approximately $79 million of such carryforwards will expire in 2005, with the
remaining approximately $4 million expiring in 2006. The preconfirmation net
operating loss carryforwards arose from the Company's emergence from bankruptcy
in May 1992.

     INVESTMENT SECURITIES. Total investment securities averaged $231.5 million
in 2000, a 2.4% increase over the 1999 average of $226.0 million. The following
table presents the consolidated investment securities portfolio as of December
31, 2000, by stated maturity with the weighted average interest yield for each
range of maturities. Federal Reserve Bank stock and other equity securities are
included in the classification "over ten years" in the available for sale
category.

                    INVESTMENT PORTFOLIO MATURITY AND YIELDS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                ----------------------------------------------------------------------------------------------------
                                                                          DECEMBER 31, 2000
                                ----------------------------------------------------------------------------------------------------
                                    ONE YEAR                 ONE TO                 FIVE TO              OVER TEN
                                     OR LESS               FIVE YEARS              TEN YEARS               YEARS
                                -------------------    -------------------    -------------------    -------------------    --------
                                 AMOUNT     YIELD       AMOUNT      YIELD      AMOUNT     YIELD       AMOUNT     YIELD        TOTAL
                                --------   --------    --------   --------    --------   --------    --------   --------    --------
<S>                             <C>            <C>     <C>            <C>     <C>            <C>     <C>            <C>     <C>
HELD TO MATURITY SECURITIES:
    (Amortized Cost)
    U.S. Government agency
      and mortgage-backed
      securities                $     --         --    $  1,977       7.49%   $     --         --    $     --         --    $  1,977
    Foreign debt securities           17       7.27%         50       7.59%         --         --          --         --          67
                                --------   --------    --------   --------    --------   --------    --------   --------    --------

      Total held to maturity    $     17       7.27%   $  2,027       7.49%   $     --         --    $     --         --    $  2,044
                                ========   ========    ========   ========    ========   ========    ========   ========    ========

AVAILABLE FOR
SALE SECURITIES:
    (Fair Value)
    U.S. Treasury securities    $  2,008       6.07%   $116,975       6.13%   $  7,375       6.41%   $     --         --    $126,358
    U.S. Government agency
      and mortgage-backed
      securities                     499       5.38%     73,336       6.53%     51,294       6.61%      1,296       6.88%    126,425
    Other securities                  --         --          --         --          --         --       2,353       1.84%      2,353
                                --------   --------    --------   --------    --------   --------    --------   --------    --------

      Total available for sale  $  2,507       5.93%   $190,311       6.28%   $ 58,669       6.58%   $  3,649       3.63%   $255,136
                                ========   ========    ========   ========    ========   ========    ========   ========    ========

      Total investment
         securities             $  2,524       5.94%   $192,338       6.30%   $ 58,669       6.58%   $  3,649       3.63%   $257,180
                                ========   ========    ========   ========    ========   ========    ========   ========    ========
</TABLE>

     The weighted average yield on the investment security portfolio of the
Company at December 31, 2000 was 6.38% compared to a weighted average yield of
5.91% at December 31, 1999. See Note 1 of the Notes to the Consolidated
Financial Statements for a discussion regarding the investment classifications
held to maturity and available for sale.

     Note 2 of the Notes to the Consolidated Financial Statements reflects the
estimated fair value for various categories of investment securities as of
December 31, 2000 and 1999.


                                       18
<PAGE>

     The following table summarizes the carrying amount of the investment
portfolio at December 31, for the past three years:

                     CARRYING AMOUNT OF INVESTMENT PORTFOLIO
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                   --------------------------------------------------------
                                                                         DECEMBER 31,
                                                   --------------------------------------------------------
                                                     2000                    1999                    1998
                                                   --------                --------                --------
<S>                                                <C>                     <C>                     <C>
U.S. Treasury securities ......................    $126,358                $163,237                $222,004
U.S. Government agencies ......................     127,054                  51,530                   1,514
Mortgage-backed securities ....................       1,348                   1,885                   2,460
Other securities ..............................       2,420                   4,682                   6,503
                                                   --------                --------                --------
                                                   $257,180                $221,334                $232,481
                                                   ========                ========                ========
</TABLE>

     LOANS. The following table presents the composition of the Company's loan
portfolio by type of loan:

                                 LOAN PORTFOLIO
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                             ------------------------------------------------------------------------------------------------------
                                                                           DECEMBER 31,
                             ------------------------------------------------------------------------------------------------------
                                         % OF                 % OF                  % OF                 % OF                % OF
                               2000      TOTAL      1999      TOTAL       1998      TOTAL      1997      TOTAL      1996     TOTAL
                             --------  --------   --------  --------    --------  --------   --------  --------   --------  -------
<S>                          <C>          <C>     <C>          <C>      <C>          <C>     <C>          <C>     <C>         <C>
Commercial                   $ 42,322      16.5%  $ 46,203      18.7%   $ 35,389      18.4%  $ 22,911      16.8%  $ 23,992     21.2%
Real estate construction       23,058       9.0%    21,959       8.9%     12,125       6.3%    10,338       7.6%     6,324      5.6%
Real estate mortgage          161,968      63.1%   152,292      61.6%    119,654      62.2%    81,752      60.0%    65,556     57.9%
Consumer installment,
   net of unearned
   discount                    29,134      11.4%    26,952      10.8%     25,051      13.1%    21,312      15.6%    17,386     15.3%
                             --------  --------   --------  --------    --------  --------   --------  --------   --------  -------

   Total loans               $256,482     100.0%  $247,406     100.0%   $192,219     100.0%  $136,313     100.0%  $113,258    100.0%
                             ========  ========   ========  ========    ========  ========   ========  ========   ========  =======
</TABLE>

     The preceding loan composition table shows that in 2000 total loans
increased $9.1 million or 3.7% over 1999. At December 31, 2000, loans were 48.9%
of deposits compared to 50.5% at the previous year-end. $9.7 million of the
growth was in real estate mortgages, $1.1 million of the growth was in real
estate construction, $2.2 million of the growth was in consumer installment
loans and there was a decrease of $3.9 million in commercial loans. All of the
increase is due to internally generated growth.

     The following table presents commercial and real estate construction loans
as of December 31, 2000, based on scheduled principal repayments and the total
amounts of loans due after one year classified according to sensitivity to
changes in interest rates:

                    MATURITIES AND RATE SENSITIVITY OF LOANS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                      OVER ONE YEAR           OVER
                                                     ONE YEAR            THROUGH              FIVE
                                                     OR LESS            FIVE YEARS            YEARS               TOTAL
                                                     -------          -------------          -------             -------
<S>                                                  <C>                 <C>                 <C>                 <C>
Commercial ...................................       $27,004             $14,418             $   900             $42,322
Real estate construction .....................         9,711               9,288               4,059              23,058
                                                     -------             -------             -------             -------
     Total ...................................       $36,715             $23,706             $ 4,959             $65,380
                                                     =======             =======             =======             =======
</TABLE>

Of the loans maturing after one year, $18,657,000 have fixed interest rates and
$10,008,000 have variable interest rates.

     ALLOWANCE FOR POSSIBLE LOAN LOSSES. The allowance for possible loan losses
is established through charges to operations in the form of a provision for loan
losses. Loans, or portions thereof, which are considered to be uncollectible are
charged against the allowance and subsequent recoveries, if any, are credited to
the allowance. The allowance represents the


                                       19
<PAGE>

amount, which in the judgment of each Bank's management, will be adequate to
absorb possible losses. The adequacy of the allowance is determined by
management's continuous evaluation of the loan portfolio and by the employment
of third party loan review consultants. Industry concentrations, specific credit
risks, past loan loss experience, delinquency ratios, current loan portfolio
quality and projected economic conditions in the Bank's market areas are
pertinent factors in determining the adequacy of the allowance for possible loan
losses. Loans identified as losses by management, external loan review or bank
examiners are charged-off.

     The allowance for loan losses at December 31, 2000 totaled $3.4 million
representing a net increase of $588,000 or 20.7% compared to the balance of $2.8
million at December 31, 1999. The Company recorded a $584,000 provision for
possible loan losses during 2000, compared to $625,000 recorded during 1999. The
provision is reflective of the growth in the loan portfolio. The Company
recorded net recoveries of $4,000 for the year ended December 31, 2000 compared
to net charge-offs of $454,000 for 1999.

The following table summarizes, for the periods presented, the activity in the
allowance for possible loan losses arising from provisions credited to
operations, loans charged off and recoveries of loans previously charged off:

                 ANALYSIS OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                ------------------------------------------------------------------
                                                                                     YEAR ENDED DECEMBER 31,
                                                                ------------------------------------------------------------------
                                                                   2000           1999          1998          1997          1996
                                                                ---------      ---------     ---------     ---------     ---------
<S>                                                             <C>            <C>           <C>           <C>           <C>
Average loans outstanding                                       $ 248,061      $ 220,123     $ 163,911     $ 122,604     $  96,787
                                                                =========      =========     =========     =========     =========

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year                                    $   2,841      $   2,670     $   2,458     $   2,408     $   1,906
Allowance on acquired loans                                            --             --            --            --           467
Charge-Offs:
    Commercial                                                         69            468            93            50            76
    Real estate construction                                           --             --            --            --            --
    Real estate mortgage                                                4             --            29            --            --
    Consumer installment                                              185            129           168           222           175
                                                                ---------      ---------     ---------     ---------     ---------
         Total charge-offs                                            258            597           290           272           251
                                                                ---------      ---------     ---------     ---------     ---------
Recoveries:
    Commercial                                                        127             27            22            53            39
    Real estate construction                                           --             --            --            --            --
    Real estate mortgage                                               74             53            64            38            70
    Consumer installment                                               61             63           184           151           182
                                                                ---------      ---------     ---------     ---------     ---------
         Total recoveries                                             262            143           270           242           291
                                                                ---------      ---------     ---------     ---------     ---------
         Net charge-offs (recoveries)                                  (4)           454            20            30           (40)
Provision charged (credited) to operating expense                     584            625           232            80            (5)
                                                                ---------      ---------     ---------     ---------     ---------
Balance of at end of year                                       $   3,429      $   2,841     $   2,670     $   2,458     $   2,408
                                                                =========      =========     =========     =========     =========

Net charge-offs (recoveries) as a percentage
  of average loans outstanding during year                           0.00%          0.21%         0.01%         0.02%       -0.04%
                                                                =========      =========     =========     =========     =========

Allowance for loan losses as a percentage of
    year end loans, net of unearned discount                         1.34%          1.15%         1.39%         1.80%         2.13%
                                                                =========      =========     =========     =========     =========
</TABLE>


                                       20
<PAGE>

     The following table reflects the allocation of the allowance for possible
loan losses to the various loan categories and the corresponding percentage of
total loans that it represents. Management believes that the allowance can be
allocated by category only on an approximate basis.

                ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                           ------------------------------------------------------------------------------------
                                                         YEAR ENDED DECEMBER 31,
                           ------------------------------------------------------------------------------------
                                2000             1999              1998             1997             1996
                           --------------  ----------------  ---------------- ---------------  ----------------
                                    % OF             % OF              % OF            % OF              % OF
                                    TOTAL            TOTAL             TOTAL           TOTAL             TOTAL
                            AMOUNT  LOANS   AMOUNT   LOANS   AMOUNT    LOANS   AMOUNT  LOANS    AMOUNT   LOANS
                           -------  ------ -------- ------- --------  ------- -------- ------  -------   ------
<S>                        <C>      <C>    <C>       <C>    <C>        <C>    <C>      <C>     <C>       <C>
Commercial                 $  824   0.32%  $  608    0.25%  $  382     0.20% $   304   0.22%  $  290     0.26%
Real estate construction      199   0.08%     146    0.06%      87     0.05%      89   0.07%      74     0.07%
Real estate mortgage        1,868   0.73%   1,606    0.65%   1,668     0.87%   1,472   1.08%   1,203     1.06%
Consumer installment          419   0.16%     395    0.16%     414     0.22%     386   0.28%     345     0.30%
Unallocated                   119   0.05%      86    0.03%     119     0.05%     207   0.15%     496     0.44%
                           ------  ------  ------    ----    -----     -----  ------   -----  ------     -----
     Total                 $3,429   1.34%  $2,841    1.15%  $2,670     1.39%  $2,458   1.80%  $2,408     2.13%
                           ======   =====  ======    =====  ======     =====  ======   =====  ======     =====
</TABLE>

     Allocation of a portion of the allowance does not preclude its
availability to absorb losses in other categories. The allocation is
determined by providing specific reserves against each criticized loan in
accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures" plus a portion against the
remaining portfolio based on experience factors, in accordance with SFAS No.
5, "Accounting for Contingencies".

     NON-PERFORMING ASSETS. Non-performing assets at December 31, 2000 were
$2,501,000 representing a $500,000 decrease or 16% compared with $3,001,000 at
December 31, 1999. The balance of non-performing assets was $2,094,000 at
December 31, 1998, $1,585,000 at December 31, 1997, and $1,910,000 at December
31, 1996. Non-performing assets as a percentage of total assets decreased to
 .42% at December 31, 2000 down from .55% one year ago.

     Non-performing assets consist of non-accrual loans, restructured loans and
foreclosed real estate. Loans to a customer whose financial condition has
deteriorated are considered for non-accrual status whether or not the loan is 90
days or more past due. All installment loans past due 90 days or more are
classified as non-accrual unless the loan is well secured or in the process of
collection. On non-accrual loans, interest income is not recognized until
actually collected. At the time the loan is placed on non-accrual status,
interest previously accrued but not collected is reversed and charged against
current income.

     Restructured loans are loans on which the interest and/or the principal has
been reduced due to deterioration in the borrower's financial condition. Even
though these loans are performing, they are included in non-performing assets
because of the loss of revenue related to the reduction in interest and/or
principal.

     Foreclosed real estate consists of property which has been acquired through
foreclosure. At the time of foreclosure, the property is recorded at the lower
of the estimated fair value less selling expenses or the loan balance with any
write-down charged to the allowance for possible loan losses. Any future
write-downs, expenses related to the property, and any gain or loss resulting
from the sale of the property are charged to operations.


                                       21
<PAGE>

     The following table discloses non-performing assets and loans 90 days past
due and still accruing interest as of December 31:

                              NON-PERFORMING ASSETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                 ------------------------------------------------------------------
                                                                                     YEAR ENDED DECEMBER 31,
                                                                 ------------------------------------------------------------------
                                                                  2000           1999           1998           1997           1996
                                                                 ------         ------         ------         ------         ------
<S>                                                              <C>            <C>            <C>            <C>            <C>
Non-accrual loans                                                $2,187         $2,095         $  899         $1,314         $1,195
Foreclosed real estate                                              314            906          1,195            271            715
                                                                 ------         ------         ------         ------         ------
     Total non-performing assets                                 $2,501         $3,001         $2,094         $1,585         $1,910
                                                                 ======         ======         ======         ======         ======

Non-performing assets as a percentage of:
     Total assets                                                  0.42%          0.55%          0.41%          0.34%          0.58%
     Total loans plus foreclosed real estate                       0.97%          1.21%          1.08%          1.16%          1.68%

Accruing loans past due 90 days or more                          $  341         $  239         $  311         $   40         $  182
</TABLE>

     Interest income that would have been earned in 2000 on non-accrual loans,
had such loans performed in accordance with the original contracted terms, was
$38,000. The amounts of interest income that would have been earned related to
1999 and 1998 were $89,000 and $185,000, respectively.

     Independent third party loan reviews of the Banks are performed on an
annual basis. The loans are also reviewed by banking regulators on a twelve to
eighteen month basis. On a monthly basis, the Board of Directors' of each Bank
reviews new loans, renewals and delinquencies. Management of each Bank monitors,
on a continuing basis, loans which it feels should be followed closely. The
Banks are required by the regulatory authorities to have foreclosed real estate
appraised periodically.

     DEPOSITS. The primary source of funds for the Company is the deposits of
the Banks. The Company does not accept brokered deposits. The following table
presents average balances and the corresponding average rates paid for the
deposit categories:

                     AVERAGE DEPOSITS AND AVERAGE RATES PAID
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                         -------------------------------------------------------------------
                                                                               YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------------------------------
                                                                 2000                   1999                    1998
                                                         --------------------    --------------------    -------------------
                                                                       RATE                    RATE                   RATE
                                                          AMOUNT       PAID       AMOUNT       PAID       AMOUNT      PAID
                                                         --------    --------    --------    --------    --------   --------
<S>                                                      <C>             <C>     <C>             <C>     <C>            <C>
Noninterest-bearing demand deposits                      $ 79,151          --    $ 72,752          --    $ 63,402         --
INTEREST-BEARING DEPOSITS:
  Interest-bearing transaction (NOW) accounts              81,338        3.05%     69,974        2.52%     61,656       2.57%
  Savings and money market accounts                       116,786        3.52%    103,745        3.05%     91,054       3.16%
  Certificates and time deposits under $100,000           135,421        5.01%    136,450        4.34%    132,623       4.74%
  Certificates and time deposits greater than $100,000     95,694        5.60%     87,037        4.77%     75,381       5.07%
                                                         --------    --------    --------    --------    --------   --------
Total interest-bearing deposits                           429,239                 397,206                 360,714
                                                         --------                --------                --------
Weighted average rate paid                                               4.37%                   3.78%                  4.04%
                                                                     ========                ========               ========
         Total deposits                                  $508,390                $469,958                $424,116
                                                         ========                ========                ========
</TABLE>

     Total average deposits increased $38.5 million or 8.2% due to internal
growth. Mexico is part of the natural trade territory of the Banks. Thus,
dollar-denominated deposits from Mexican sources have traditionally been a
significant source of deposits. Included in total deposits are $120,121,000,
$110,690,000, and $103,768,000 of Mexican National deposits at December 31,
2000, 1999, and 1998, respectively (in United States dollars only).


                                       22
<PAGE>

     The remaining maturity on certificates of deposit greater than $100,000 as
of December 31, 2000 is presented below: (Dollars in thousands)

<TABLE>
<CAPTION>
                                        THREE          OVER THREE        OVER SIX          OVER
                                        MONTHS          THROUGH          THROUGH           TWELVE
                                       OR LESS         SIX MONTHS      TWELVE MONTHS       MONTHS           TOTAL
                                       -------         ----------      -------------       ------           -----
<S>                                    <C>              <C>              <C>              <C>              <C>
Certificates of deposit of
   $100,000 and greater                $47,305          $18,529          $27,999          $ 1,260          $95,093
                                       =======          =======          =======          =======          =======
</TABLE>

LIQUIDITY

     Liquidity is the ability to have funds available at all times to meet the
commitments of the Company. Asset liquidity is provided by cash and assets which
are readily marketable or pledgeable or which will mature in the near future.
Liquid assets include cash and short-term investments in time deposits in banks,
federal funds sold, and securities available for sale. Liquidity is also
provided by access to core funding sources, primarily core depositors in the
Company's trade area. The Banks have not and do not solicit brokered deposits as
a funding source. The liquidity of the Company is enhanced by the fact that
73.8% of total deposits at December 31, 2000 were "core" deposits. Core
deposits, for this purpose, are defined as total deposits less public funds and
certificates of deposit greater than $100,000.

     At December 31, 2000, the Company's liquid assets amounted to $300 million
or 50.8% of total gross assets, up from $266 million or 48% at December 31,
1999. Secondary sources of liquidity include the Company's ability to sell loan
participations and purchase federal funds. In addition, NBC-Eagle Pass has an
approved federal funds line at a correspondent bank and NBC-Laredo has an
approved line of credit with the Federal Home Loan Bank.

CAPITAL RESOURCES

     Total stockholders' equity increased $8.0 million to $58.6 million at
December 31, 2000 from $50.6 million at December 31, 1999. In addition to net
income of $5.1 million, stockholders' equity increased $2.4 million due to the
reduction in the deferred tax asset valuation allowance and increased $5.6
million due to appreciation in the fair value of securities held as available
for sale. Stockholders' equity was reduced by the 418,333 shares of common stock
repurchased at a cost of $5.7 million, or an average of $13.56 per share, as
part of a stock repurchase plan which was begun in 1997. As of December 31,
2000, the Company has repurchased 976,333 shares. The ratio of total
stockholders' equity to total assets was 9.9% at December 31, 2000 compared with
9.2% at December 31, 1999.

     The Company and the Banks are subject to minimum capital ratios mandated by
their respective banking industry regulators. The table in Note 17 in the
Consolidated Financial Statements illustrates the Company's and the Banks'
compliance with the risk-based capital guidelines of the federal banking
agencies. These guidelines are designed to measure Tier 1 and total capital
while taking into consideration the risk inherent in both on and off-balance
sheet items. Off-balance sheet items at December 31, 2000 include unfunded loan
commitments and letters of credit. Pursuant to the current regulatory
guidelines, the net unrealized gain or loss on securities available for sale is
not included in the calculation of risk-based capital and the leverage ratio.
The leverage ratio is Tier 1 capital divided by quarterly average total assets.
A leverage ratio of 3.0% is the minimum requirement for only the most highly
rated banking organizations and all other institutions are required to maintain
a leverage ratio of 3% to 5%.

     Tier 1 capital for the Company includes common stockholders' equity less
goodwill and the net unrealized loss on investment securities. Total capital
includes Tier 1 capital and the allowance for loan losses. The ratios are
calculated by dividing the qualifying capital by the risk-weighted assets. The
minimum ratio for qualifying total capital is 8.0% of which 4.0% must be Tier 1
capital. For the Company's capital ratios at December 31, 2000 and 1999, see
Note 17 in the Consolidated Financial Statements.


                                       23
<PAGE>

ACCOUNTING MATTERS

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities", which is
required to be adopted in years beginning after June 15, 2000. The Company
adopted the new Statement effective June 1999. The Statement requires the
Company to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The adoption of the new Statement did not
have an impact on the Company's consolidated financial statements.

     The Financial Accounting Standards Board's Statement No. 140 (SFAS No.
140), "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", replaces the Financial Accounting Standards
Board's Statement No. 125 (SFAS No. 125), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", but carries
over most of SFAS No. 125's provisions without change. SFAS No. 140 elaborates
on the qualifications necessary for a special-purpose entity, clarifies sales
accounting criteria in certain circumstances, refines accounting for collateral,
and adds disclosures for collateral, securitizations, and retained interests in
securitized assets. This statement should be applied prospectively and is
effective for transactions occurring after March 31, 2001. Disclosure
requirements of this statement and any changes in accounting for collateral are
effective for fiscal years ending after December 15, 2000. The Company has
adopted the disclosure requirements and does not expect that the adoption of the
remaining provisions of SFAS No. 140 will have a material impact on its
consolidated financial statements.

FORWARD-LOOKING INFORMATION

     This Form 10-K contains certain "forward-looking" statements as such term
is defined in The Private Securities Litigation Reform Act of 1995 and
information relating to the Company and its subsidiaries that are based on the
beliefs of the Company's management. When used in this report, the words
"anticipate," " believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they relate to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Such statements
reflect the current risks, uncertainties and assumptions related to certain
factors including, without limitation, competitive factors, general economic
conditions, customer relations, relationships with vendors, the interest rate
environment, governmental regulation and supervision, seasonality, technological
change, changes in industry practices, one-time events and other factors
described herein and in other filings made by the Company with the Securities
and Exchange Commission. Based upon changing conditions, should any one or more
of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected, or intended. The
Company does not intend to update these forward-looking statements.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this Item is set forth in the section entitled
"Market Risk Disclosure - Interest Rate Sensitivity" included under Item 7 of
this document and is incorporated herein by reference.


                                       24
<PAGE>
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
National Bancshares Corporation of Texas:


We have audited the accompanying consolidated balance sheets of National
Bancshares Corporation of Texas and subsidiaries as of December 31, 2000 and
1999, and the related consolidated statements of income, stockholders' equity
and comprehensive income, and cash flows for each of the years in the two-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Bancshares
Corporation of Texas and subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America.


                                               /s/ KPMG LLP

San Antonio, Texas
March 16, 2001


                                       25
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
National Bancshares Corporation of Texas and Subsidiaries:


We have audited the accompanying consolidated statements of income, changes in
stockholders' equity, and cash flows of National Bancshares Corporation of Texas
and Subsidiaries for the year ended December 31, 1998. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of National Bancshares
Corporation of Texas and subsidiaries for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.


                                            /s/ Padgett, Stratemann & Co.

San Antonio, Texas
March 18, 1999


                                       26
<PAGE>

            NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                     ASSETS
                                                                                                                DECEMBER 31,
                                                                                                       ----------------------------
                                                                                                          2000               1999
                                                                                                       ---------          ---------
<S>                                                                                                    <C>                <C>
Cash and due from banks                                                                                $  24,218          $  30,394
Interest-bearing accounts                                                                                  2,659              2,299
Federal funds sold                                                                                        18,335             11,949
Investment securities available for sale                                                                 255,136            221,268
Investment securities held to maturity                                                                     2,044                 66
Loans, net of discounts                                                                                  256,482            247,406
Allowance for possible loan losses                                                                        (3,429)            (2,841)
                                                                                                       ---------          ---------
   Net loans                                                                                             253,053            244,565
Bank premises and equipment, net                                                                          19,435             19,784
Goodwill                                                                                                   8,051              8,427
Accrued interest and other assets                                                                          8,354             11,032
                                                                                                       ---------          ---------
       Total Assets                                                                                    $ 591,285          $ 549,784
                                                                                                       =========          =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits:
   Demand deposits - non-interest bearing                                                              $  83,126          $  70,629
   Interest-bearing transaction accounts (NOW)                                                            92,157             82,717
   Savings and money market accounts                                                                     117,741            110,433
   Certificates and time deposits under $100,000                                                         136,789            131,322
   Certificates and time deposits $100,000 and over                                                       95,093             94,639
                                                                                                       ---------          ---------
       Total Deposits                                                                                    524,906            489,740
                                                                                                       ---------          ---------
Accrued interest payable and other liabilities                                                             2,564              2,394
Other borrowings                                                                                           2,328              2,317
Long term notes payable                                                                                    2,904              4,700
                                                                                                       ---------          ---------
       Total Liabilities                                                                                 532,702            499,151
Stockholders' Equity:
   Common Stock, $.001 par value, 100,000,000 shares authorized, 4,751,834
     issued and 3,775,501 outstanding at December 31, 2000 and
     4,669,834 issued and 4,111,834 outstanding at December 31, 1999                                           5                  5
   Additional paid-in capital                                                                             33,832             30,909
   Retained earnings                                                                                      36,485             31,421
   Accumulated other comprehensive income (loss), net of tax                                               3,884             (1,751)
   Treasury Stock, at cost (976,333 shares in 2000, 558,000 in 1999)                                     (15,623)            (9,951)
                                                                                                       ---------          ---------
       Total Stockholders' Equity                                                                         58,583             50,633
                                                                                                       ---------          ---------
       Total Liabilities and Stockholders' Equity                                                      $ 591,285          $ 549,784
                                                                                                       =========          =========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       27
<PAGE>

            NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                         -------------------------------------------
                                                                                           2000             1999              1998
                                                                                         --------         --------          --------
<S>                                                                                      <C>              <C>               <C>
INTEREST INCOME:
   Interest and fees on loans                                                            $ 23,270         $ 20,143          $ 16,632
   Interest on investment securities                                                       14,556           14,163            14,845
   Interest on federal funds sold                                                           1,927            1,247             1,504
   Interest on deposits in banks                                                              198              113                82
                                                                                         --------         --------          --------
       TOTAL INTEREST INCOME                                                               39,951           35,666            33,063

INTEREST EXPENSE:
   Interest on deposits                                                                    18,741           14,999            14,568
   Interest on debt                                                                           474              708               347
                                                                                         --------         --------          --------
       TOTAL INTEREST EXPENSE                                                              19,215           15,707            14,915

NET INTEREST INCOME                                                                        20,736           19,959            18,148
   Less: Provision for possible loan losses                                                   584              625               232
                                                                                         --------         --------          --------
NET INTEREST INCOME AFTER PROVISION FOR
   POSSIBLE LOAN LOSSES                                                                    20,152           19,334            17,916

NON-INTEREST INCOME:
   Service charges and fees                                                                 4,597            3,627             3,240
   Net trading account profit                                                                  --               --               782
   Net realized gains (losses) on securities                                                  594           (1,640)            1,103
   Net gains on sales of other real estate and other assets                                   129               35                 9
   Other income                                                                               761              592               567
                                                                                         --------         --------          --------
       TOTAL NON-INTEREST INCOME                                                            6,081            2,614             5,701

NON-INTEREST EXPENSE:
   Salaries and employee benefits                                                           9,836            9,192             7,947
   Occupancy and equipment expenses                                                         3,411            3,273             2,566
   Goodwill amortization                                                                      376              376               376
   Other expenses                                                                           4,642            4,745             4,384
                                                                                         --------         --------          --------
       TOTAL NON-INTEREST EXPENSE                                                          18,265           17,586            15,273

INCOME BEFORE FEDERAL INCOME TAXES                                                          7,968            4,362             8,344
Federal income tax expense                                                                  2,904            1,624             3,056
                                                                                         --------         --------          --------
NET INCOME                                                                               $  5,064         $  2,738          $  5,288
                                                                                         ========         ========          ========

NET INCOME PER SHARE:
   BASIC EARNINGS PER SHARE                                                              $   1.26         $   0.66          $   1.17

   DILUTED EARNINGS PER SHARE                                                                1.24             0.64              1.14
</TABLE>

See accompanying notes to consolidated financial statements.


                                       28
<PAGE>

            NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME
                   (DOLLARS AND NUMBER OF SHARES IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                             ACCUMULATED
                                                                COMMON STOCK                                    OTHER
                                                      -------------------------------                       COMPREHENSIVE
                                                      NUMBER OF     PAR      PAID IN    RETAINED   TREASURY  INCOME(LOSS),   TOTAL
                                                       SHARES                CAPITAL    EARNINGS    STOCK     NET OF TAX
                                                      --------    --------   --------   --------   --------    --------    --------
<S>                                                      <C>      <C>        <C>        <C>        <C>         <C>         <C>
BALANCE AT JANUARY 1, 1998                               4,659    $      5   $ 25,742   $ 23,395         --    $  1,956    $ 51,098
Net Income                                                  --          --         --      5,288         --          --       5,288
Unrealized gain on securities,
     net of tax and reclassification
     adjustment                                             --          --         --         --         --       1,439       1,439
                                                                                                                           --------
     Total comprehensive income                                                                                               6,727
                                                                                                                           --------
Reduction of deferred tax valuation allowance               --          --      2,873         --         --          --       2,873
Exercise of common stock options                             2          --         14         --         --          --          14
Treasury stock purchased                                  (464)         --         --         --     (8,506)         --      (8,506)
                                                      --------    --------   --------   --------   --------    --------    --------
BALANCE AT DECEMBER 31, 1998                             4,197           5     28,629     28,683     (8,506)      3,395      52,206
Net Income                                                  --          --         --      2,738         --          --       2,738
Unrealized loss on securities,
     net of tax and reclassification
     adjustment                                             --          --         --         --         --      (5,146)     (5,146)
                                                                                                                           --------
     Total comprehensive loss                                                                                                (2,408)
                                                                                                                           --------
Reduction of deferred tax valuation allowance               --          --      2,227         --         --          --       2,227
Exercise of common stock options                             9          --         53         --         --          --          53
Treasury stock purchased                                   (94)         --         --         --     (1,445)         --      (1,445)
                                                      --------    --------   --------   --------   --------    --------    --------
BALANCE AT DECEMBER 31, 1999                             4,112           5     30,909     31,421     (9,951)     (1,751)     50,633
Net Income                                                  --          --         --      5,064         --          --       5,064
Unrealized gain on securities,
     net of tax and reclassification
     adjustment                                             --          --         --         --         --       5,635       5,635
                                                                                                                           --------
     Total comprehensive income                                                                                              10,699
                                                                                                                           --------
Reduction of deferred tax valuation allowance               --          --      2,411         --         --          --       2,411
Exercise of common stock options                            82          --        512         --         --          --         512
Treasury stock purchased                                  (418)         --         --         --     (5,672)         --      (5,672)
                                                      --------    --------   --------   --------   --------    --------    --------
BALANCE AT DECEMBER 31, 2000                             3,776    $      5   $ 33,832   $ 36,485   $(15,623)   $  3,884    $ 58,583
                                                      ========    ========   ========   ========   ========    ========    ========


Disclosure of reclassification amount:

2000
Unrealized gain on  securities arising during period                                                                       $  5,243
Reclassification adjustment for gains included in income, net of tax of $202                                                    392
                                                                                                                           --------
Net unrealized gain on securities, net of tax                                                                              $  5,635
                                                                                                                           ========

1999
Unrealized loss on securities arising during period                                                                        $ (4,063)
Reclassification adjustment for losses included in income, net of tax benefit of ($558)                                      (1,083)
                                                                                                                           --------
Net unrealized loss on securities, net of tax                                                                              $ (5,146)
                                                                                                                           ========

1998
Unrealized gain on securities arising during period                                                                        $    711
Reclassification adjustment for gains included in income, net of tax of$375                                                     728
                                                                                                                           --------
Net unrealized gain on securities, net of tax                                                                              $  1,439
                                                                                                                           ========
</TABLE>

See accompanying notes to consolidated financial statements.


                                       29
<PAGE>

            NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                   YEAR ENDED DECEMBER 31,
                                                                                           ----------------------------------------
                                                                                             2000            1999            1998
                                                                                           --------        --------        --------
<S>                                                                                        <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                                 $  5,064        $  2,738        $  5,288
Adjustments to reconcile net income to net cash provided by
  operating activities:
     Depreciation and amortization                                                            2,239           2,264           1,798
     Tax benefit realized from utilization of deferred tax assets                             2,411           2,227           2,888
     Provision for possible loan losses                                                         584             625             232
     Net realized (gain) loss on securities                                                    (594)          1,640          (1,103)
     Net decrease in trading account                                                             --              --           4,908
     Write-down of other real estate owned                                                       50              63              --
     Gain on sale of other real estate owned and other assets                                  (129)            (35)             (9)
     (Increase) decrease in accrued interest receivable and other assets                       (817)         (1,228)             46
     Increase in accrued interest payable and other liabilities                                 170             320              70
                                                                                           --------        --------        --------
         Net cash provided by operating activities                                            8,978           8,614          14,118
CASH FLOWS FROM INVESTING ACTIVITIES:
     Net (increase) decrease in federal funds sold                                           (6,386)         25,246          (7,255)
     Net (increase) decrease in interest-bearing accounts                                      (360)             44          (2,125)
     Net increase in loans                                                                   (9,232)        (55,640)        (56,876)
     Purchases of securities available for sale                                             (75,348)        (52,228)        (27,939)
     Proceeds from sales of securities available for sale                                    46,560          26,549          15,240
     Proceeds from maturities of securities available for sale                                3,877          22,832          11,619
     Purchases of securities held to maturity                                                (1,973)             --          (7,035)
     Proceeds from maturities of securities held to maturity                                     --           4,234          23,649
     Capital expenditures                                                                    (1,345)         (3,556)         (6,480)
     Proceeds from sale of other real estate owned                                              832             258              32
                                                                                           --------        --------        --------
         Net cash used in investing activities                                              (43,375)        (32,261)        (57,170)
CASH FLOWS FROM FINANCING ACTIVITIES:
     Net increase in demand deposits, NOW accounts,
         savings and money-market accounts                                                   29,245          35,150          10,678
     Net increase in certificates of deposit and time deposits                                5,921           6,935          22,563
     Proceeds from advances on other borrowings and long term debt                            4,169           2,413          10,641
     Principal payments on other borrowings and long term debt                               (5,954)         (5,538)         (3,143)
     Purchase of treasury stock                                                              (5,672)         (1,445)         (8,506)
     Proceeds from exercise of common stock options                                             512              53              14
                                                                                           --------        --------        --------
         Net cash provided by financing activities                                           28,221          37,568          32,247


Net (decrease) increase in cash and due from banks                                           (6,176)         13,921         (10,805)
Cash and due from banks at beginning of year                                                 30,394          16,473          27,278
                                                                                           --------        --------        --------
Cash and due from banks at end of year                                                     $ 24,218        $ 30,394        $ 16,473
                                                                                           ========        ========        ========
SUPPLEMENTAL CASH FLOW INFORMATION:
     Interest paid                                                                         $ 18,685        $ 15,545        $ 14,776
     Federal income taxes paid                                                                  156             212              71
Non-cash items:
     Loans originated to facilitate the sale of foreclosed assets                                --             150              22
     Loan foreclosures                                                                          160              --             947
</TABLE>

See accompanying notes to consolidated financial statements.


                                       30
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The accounting and reporting policies of National Bancshares Corporation of
     Texas (the Company) and its wholly-owned subsidiaries conform to accounting
     principles generally accepted in the United States of America and to
     general practices within the banking industry. The preparation of
     consolidated financial statements in conformity with accounting principles
     generally accepted in the United States of America requires management to
     make estimates and assumptions that affect the reported amounts of assets
     and liabilities and disclosure of contingent assets and liabilities at the
     date of the consolidated financial statements and the reported amounts of
     revenues and expenses during the reporting period. Actual results could
     differ from those estimates. Following is a summary of the Company's more
     significant accounting and reporting policies:

     NATURE OF OPERATIONS

     The Company is financial holding company which operates three commercial
     banks and nine branches located in Central Texas and South Texas on the
     Texas-Mexico border.

     CONSOLIDATION

     The consolidated financial statements include the accounts of the Company
     and its wholly-owned subsidiaries, NBT Securities Holdings, Inc. and NBT of
     Delaware, Inc. It also includes the accounts of NBT Securities Holdings,
     Inc.'s wholly-owned subsidiary, NBC Financial, Inc. and the accounts of NBT
     of Delaware, Inc.'s wholly-owned subsidiaries (i) NBC Bank, N.A. (Eagle
     Pass, Texas); (ii) NBC Bank - Laredo, N.A. (Laredo, Texas); (iii) NBC Bank
     (Rockdale, Texas); and (iv) NBC Holdings - Texas, Inc. (San Antonio, Texas)
     (collectively the "Banks"). On October 1, 2000, the accounts of NBC Bank -
     Central, N.A. were merged into NBC Bank, N.A.

     NBC Financial, Inc. was approved by all appropriate regulatory authorities
     as a fully-disclosed introducing broker/dealer, and began operations in
     September 1999. All securities transactions for NBC Financial, Inc. are
     being cleared through Pershing, a division of Credit Suisse First Boston.
     NBC Financial, Inc. provides general securities services for customers of
     our banks and the general public, and operates pursuant to a leasing
     arrangement in several of the banks and/or branches.

     INVESTMENTS IN SECURITIES

     Securities held principally for resale in the near term are classified as
     trading securities and recorded at their fair values. Unrealized gains and
     losses on trading securities are included in other income. Bonds, notes,
     and debentures for which the Company has the positive intent and ability to
     hold to maturity are reported at cost adjusted for amortization of premiums
     and accretion of discounts, which are recognized in interest income using
     the interest method over the period to maturity. Securities available for
     sale consist of bonds, notes, and debentures not classified as trading
     securities nor as securities to be held to maturity. These securities are
     recorded at their fair values. Unrealized holding gains and losses, net of
     tax, on securities for sale are reported as a net amount in a separate
     component of stockholders' equity.

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

     Gains and losses on the sale of securities available for sale are
     determined using the specific-identification method with the exception of
     the investment portfolio maintained at NBT of Delaware, Inc. in which the
     average cost method is used to compute gains and losses on sales. The
     transfer of a security between categories of investments is accounted for
     at fair value.


                                       31
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     ALLOWANCE FOR POSSIBLE LOAN LOSSES

     The allowance is maintained at a level considered adequate by management to
     absorb estimated probable losses inherent in on- and off-balance sheet
     credit exposure. The allowance for credit losses attributable to
     off-balance sheet credit exposure is not material. Management determines
     the adequacy of the allowance based upon reviews of individual loans,
     recent loss experience, current economic conditions, the risk
     characteristics of the various categories of loans, and other pertinent
     factors. In addition, various regulatory agencies, as an integral part of
     their examination process, periodically review the Banks' allowances for
     possible loan losses. Loans deemed uncollectible are charged to the
     allowance. The allowance is increased by provisions charged to operating
     expense and is decreased by charge-offs, net of recoveries.

     Loans are considered to be impaired when, based on current information and
     events, it is probable that the Company will be unable to collect all
     amounts due according to the contractual terms of the loan agreement. This
     assessment for impairment occurs when and while such loans are on
     nonaccrual, or the loan has been restructured. Impaired loans are measured
     based on (1) the present value of expected future cash flows discounted at
     the loan's effective interest rate; (2) the loan's observable market price;
     or (3) the fair value of the collateral if the loan is collateral
     dependent. If the measurement of the impaired loan is less than the
     recorded investment in the loan, an impairment is recognized by creating or
     adjusting an existing allocation of the allowance for possible loan losses.

     BANK PREMISES AND EQUIPMENT

     Land is carried at cost. Bank premises and equipment are stated at cost,
     net of accumulated depreciation. Depreciation is recognized on
     straight-line method over the estimated useful lives of the assets. The
     estimated useful lives range from 3 to 50 years.

     INTEREST INCOME ON LOANS

     Unearned income on discounted loans is credited to the unearned discount
     account when the loan is made and is recorded as interest income over the
     term of the loan to approximate the effective interest method.

     Interest on other loans is accrued and credited to income based on the
     principal amount outstanding. Generally, the accrual of interest on
     impaired loans is discontinued when principal or interest payments become
     90 days past due, and/or in the opinion of management, there is an
     indication that the borrower may be unable to meet payments as they become
     due. Upon such discontinuance, all unpaid accrued interest is reversed.
     Interest income is subsequently recognized only to the extent cash payments
     are received.

     LOAN ORIGINATION FEES AND COSTS

     Loan origination fees and certain direct origination costs are deferred and
     recognized as an adjustment of the yield over the contractual term of the
     related loan.

     OTHER REAL ESTATE OWNED

     Real estate acquired by foreclosure is carried in other assets at the lower
     of the recorded investment in the property or the fair value of the
     property less estimated selling costs. Prior to foreclosure, the value of
     the underlying loan is written down to the fair value of the real estate to
     be acquired by a charge to the allowance for loan losses, if necessary. Any
     subsequent write-downs are charged against operating expenses. Operating
     expenses of such properties, net of related income, are included in other
     expenses.


                                       32
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     INTANGIBLE ASSETS

     The excess cost over fair value of net assets of businesses acquired
     (goodwill) is amortized on a straight-line basis over twenty-five years.
     All such intangible assets are periodically evaluated as to the
     recoverability of their carrying value.

     INCOME TAXES

     The Company and its subsidiaries file an income tax return on a
     consolidated basis. Provisions for income taxes are based on taxes payable
     or refundable for the current year (after exclusion of nontaxable income
     such as interest on state and municipal securities) and deferred taxes on
     temporary differences between the amount of taxable income and pretax
     financial income and between the tax bases of assets and liabilities and
     their reported amounts in the consolidated financial statements. Deferred
     tax assets and liabilities are included in the consolidated financial
     statements at currently enacted income tax rates applicable to the period
     in which the deferred tax assets and liabilities are expected to be
     realized or settled as prescribed in Statement of Financial Standards
     (SFAS) No. 109, "Accounting for Income Taxes." As changes in tax laws or
     rates are enacted, deferred tax assets and liabilities are adjusted through
     the provisions for income taxes.

     Deferred income taxes are provided for the temporary differences between
     the financial reporting basis and the tax basis of the Company's assets and
     liabilities. In accordance with AICPA Statement of Position (SOP) No. 90-7,
     income tax benefits recognized from preconfirmation net operating loss
     carryforwards were used first to reduce reorganization value in excess of
     amounts allocable to identifiable assets and thereafter to increase
     additional paid-in capital (See Note 13).

     CASH AND CASH EQUIVALENTS

     For the purpose of presentation in the consolidated statements of cash
     flows, cash and cash equivalents are defined as those amounts included in
     the consolidated balance sheet caption "cash and due from banks."

     OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS

     In the ordinary course of business, the subsidiary Banks have entered into
     off-balance-sheet financial instruments consisting of commitments to extend
     credit, commercial and standby letters of credit. Such financial
     instruments are recorded in the consolidated financial statements when they
     are funded or related fees are incurred or received.

     The Company or its subsidiaries are not a party to any off-balance-sheet
     derivative financial instruments such as interest rate futures or swap
     contracts.

     NET INCOME PER SHARE OF COMMON STOCK

     Basic earnings per share excludes dilution and is computed by dividing
     income available to common stockholders by the weighted-average number of
     common shares outstanding for the period. Diluted earnings per share
     reflects the potential dilution that could occur if securities or other
     contracts to issue common stock were exercised or converted into common
     stock or resulted in the issuance of common stock that then shared in the
     earnings of the entity.

     TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF
     LIABILITIES

     The Financial Accounting Standards Board's Statement No. 140 ("SFAS No.
     140"), "Accounting for Transfers and Servicing of Financial Assets and
     Extinguishments of Liabilities", replaces the Financial Accounting
     Standards Board's Statement No. 125 ("SFAS No. 125") "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities", but carries over most of SFAS No. 125's provisions without
     change. SFAS No. 140 elaborates on the qualifications necessary for a
     special-purpose entity, clarifies sales accounting criteria in certain
     circumstances, refines


                                       33
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     accounting for collateral, and adds disclosures for collateral,
     securitizations, and retained interests in securitized assets. This
     statement should be applied prospectively and is effective for transactions
     occurring after March 31, 2001. Disclosure requirements of this statement
     and any changes in accounting for collateral are effective for fiscal years
     ending after December 15, 2000. The Company has adopted the disclosure
     requirements and does not expect the adoption of the remaining provisions
     of SFAS No. 140 to have a material impact on its consolidated financial
     statements.

     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

     In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS
     No. 133, "Accounting for Derivative Instruments and Certain Hedging
     Activities." In June 2000 the FASB issued SFAS No. 138, "Accounting for
     Certain Derivative Instruments and Certain Hedging Activity, an Amendment
     of SFAS 133." SFAS No. 133 and SFAS No. 138 require that all derivative
     instruments be recorded on the balance sheet at their respective fair
     values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters
     of all fiscal years beginning after June 30, 2000; the Company adopted SFAS
     No. 133 and SFAS No. 138 on January 1, 2001. The Company does not currently
     hold any derivative instruments and does not have any hedging activity. The
     adoption of SFAS 133 did not have an impact on the Company's consolidated
     financial statements.

     RECLASSIFICATIONS

     Certain amounts have been reclassified from prior presentations at December
     31, 1999 and 1998 to conform to classifications at December 31, 2000. There
     is no effect on previously reported net income or retained earnings.

2.   INVESTMENT SECURITIES

     Investment securities have been classified in the consolidated balance
     sheets according to management's intent. The carrying amount of investment
     securities of the Company and their approximate fair values at December 31
     were as follows: (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31, 2000
                                                                       --------------------------------------------------------
                                                                                        GROSS          GROSS
                                                                       AMORTIZED     UNREALIZED      UNREALIZED     APPROXIMATE
                                                                          COST          GAINS          LOSSES        FAIR VALUE
                                                                       --------------------------------------------------------
<S>                                                                     <C>            <C>            <C>             <C>
     SECURITIES AVAILABLE FOR SALE:
          U.S. Treasury securities                                      $123,122       $  3,236       $     --        $126,358
          U.S. Government agency and mortgage-backed securities          123,009          3,580           (164)        126,425
          Other securities including Federal Reserve Bank stock            3,119             46           (812)          2,353
                                                                        --------       --------       --------        --------
               Total                                                    $249,250       $  6,862       $   (976)       $255,136
                                                                        ========       ========       ========        ========

     SECURITIES HELD TO MATURITY:
          U.S. Government agency and mortgage-backed securities         $  1,977       $     95       $     --        $  2,072
          Foreign debt securities                                             67             --             (2)             65
                                                                        --------       --------       --------        --------
               Total                                                    $  2,044       $     95       $     (2)       $  2,137
                                                                        ========       ========       ========        ========
</TABLE>


                                       34
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                          DECEMBER 31, 1999
                                                                         -------------------------------------------------
                                                                                        GROSS        GROSS
                                                                         AMORTIZED   UNREALIZED    UNREALIZED  APPROXIMATE
                                                                            COST        GAINS        LOSSES     FAIR VALUE
                                                                         -------------------------------------------------
<S>                                                                       <C>          <C>          <C>           <C>
     SECURITIES AVAILABLE FOR SALE:
          U.S. Treasury securities                                        $163,546     $    214     $   (523)     $163,237
          U.S. Government agency and mortgage-backed securities             54,665            7       (1,257)       53,415
          Other securities including Federal Reserve Bank stock              5,710           --       (1,094)        4,616
                                                                          --------     --------     --------      --------
               Total                                                      $223,921     $    221     $ (2,874)     $221,268
                                                                          ========     ========     ========      ========

     SECURITIES HELD TO MATURITY:
          Foreign debt securities                                         $     66     $     --     $     (5)     $     61
                                                                          --------     --------     --------      --------
               Total                                                      $     66     $     --     $     (5)     $     61
                                                                          ========     ========     ========      ========
</TABLE>

     During the year ended December 31, 2000, the Company did not transfer any
     securities between the held to maturity and available for sale categories.
     During the year ended December 31, 1999, the Company transferred securities
     with a fair value of $85,578,000 from the held to maturity category into
     the available for sale category. An unrealized gain of $2,185,036 was
     recorded upon the transfer in 1999.

     The unrealized gains and losses on investment securities held at December
     31, 2000 and 1999 have been judged to be temporary market fluctuations with
     no material financial impact on the Company.

     Investment securities carried at approximately $90,166,000 and $92,225,000
     at December 31, 2000 and 1999, respectively, were pledged to secure public
     funds.

     The scheduled maturities of securities to be held to maturity and
     securities available for sale at December 31, 2000 were as follows (Dollars
     in thousands):

<TABLE>
<CAPTION>
                                                                            DECEMBER 31, 2000
                                                     ----------------------------------------------------------------
                                                          AVAILABLE FOR SALE                   HELD TO MATURITY
                                                     ----------------------------        ----------------------------
                                                     AMORTIZED        APPROXIMATE        AMORTIZED        APPROXIMATE
                                                       COST           FAIR VALUE           COST           FAIR VALUE
                                                     --------          --------          --------          --------
<S>                                                  <C>               <C>               <C>               <C>
     Due in one year or less                         $  2,504          $  2,507          $     --          $     --
     Due in one year to five years                    176,781           181,245             1,058             1,088
     Due from five to ten years                        56,652            58,668                --                --
     Due after ten years                                1,291             1,296                --                --
                                                     --------          --------          --------          --------
         Total                                       $237,228          $243,716          $  1,058          $  1,088
     Equity Securities                                  2,709             1,943                --                --
     Mortgage-backed securities                         8,903             9,067               986             1,049
     Federal Reserve Bank stock                           410               410                --                --
                                                     --------          --------          --------          --------
         Total                                       $249,250          $255,136          $  2,044          $  2,137
                                                     ========          ========          ========          ========
</TABLE>

     Gross realized gains and gross realized losses on sales of securities
     available for sale were $607,976 and $14,028, respectively, in 2000,
     $529,893 and $2,170,099, respectively, in 1999, and $1,128,294 and $25,148,
     respectively, in 1998.


                                       35
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


3.   LOANS AND ALLOWANCE FOR POSSIBLE LOAN LOSSES

     The components of loans in the consolidated balance sheets were as follows
     (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                 ------------------------
                                                                    2000           1999
                                                                 ---------      ---------
<S>                                                              <C>            <C>
     Commercial loans                                            $  38,346      $  39,962
     Real Estate - construction                                     23,058         21,959
     Real Estate - commercial                                       79,144         76,180
     Real Estate - residential                                      82,824         76,112
     Agriculture loans                                               3,278          4,836
     Consumer loans                                                 29,893         27,833
     Other loans                                                       698          1,405
                                                                 ---------      ---------
                                                                   257,241        248,287
     Unearned discount                                                (759)          (881)
                                                                 ---------      ---------
                                                                   256,482        247,406
     Allowance for possible loan losses                             (3,429)        (2,841)
                                                                 ---------      ---------
                                                                 $ 253,053      $ 244,565
                                                                 =========      =========
</TABLE>

     Changes in the allowance for possible loan losses were as follows (Dollars
     in thousands):

<TABLE>
<CAPTION>
                                                                                   DECEMBER 31,
                                                                  -----------------------------------------------
                                                                    2000                1999                1998
                                                                  -------             -------             -------
                                                                              (Dollars in Thousands)
<S>                                                               <C>                 <C>                 <C>
     Balance at beginning of year                                 $ 2,841             $ 2,670             $ 2,458
         Provision for possible loan losses                           584                 625                 232
         Losses charged to the allowance                             (258)               (597)               (290)
         Recoveries credited to the allowance                         262                 143                 270
                                                                  -------             -------             -------
            Net recoveries (charge-offs)                                4                (454)                (20)
                                                                  -------             -------             -------
     Balance at end of year                                       $ 3,429             $ 2,841             $ 2,670
                                                                  =======             =======             =======
</TABLE>

     Impaired loans are those loans where it is probable that all amounts due
     according to contractual terms of the loan agreement will not be collected
     including scheduled principal and interest payments. Substantially all of
     the Company's impaired loans are measured at the fair value of the
     collateral. In limited cases the Company may use other methods to determine
     the level of impairment of a loan if such loan is not collateral dependent.

     As of December 31, 2000, 1999, and 1998, the Banks had impaired loans of
     $2,187,000, $2,334,000, and $899,000, respectively. The allowance for loan
     losses related to those loans was $364,000, $274,000, and $75,000, at
     December 31, 2000, 1999, and 1998, respectively. The average recorded
     investment in impaired loans during the year ended December 31, 2000, 1999,
     and 1998 was $1,915,000, $1,670,000, and $1,546,000, respectively. Interest
     income of approximately $20,000, $67,000, and $50,000 on impaired loans was
     recognized for cash payments received during the year ended December 31,
     2000, 1999, and 1998, respectively. Management of the Company recognizes
     the risks associated with these impaired loans. However, management's
     decision to place loans in this category does not necessarily mean that the
     Company expects losses to occur.


                                       36
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   BANK PREMISES AND EQUIPMENT

     The components of bank premises and equipment included in the consolidated
     balance sheets were as follows (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                         -------------------------
                                                                           2000              1999
                                                                         -------           -------
<S>                                                                      <C>               <C>
     Land                                                                $ 4,345           $ 4,345
     Buildings                                                            15,408            14,523
     Equipment and furniture                                               8,763             8,720
                                                                         -------           -------
          Total Cost                                                      28,516            27,588
     Less: Accumulated depreciation                                        9,081             7,804
                                                                         -------           -------
          Net Book Value                                                 $19,435           $19,784
                                                                         =======           =======
</TABLE>

     Depreciation expense totaled $1,694,000, $1,565,000, and $1,197,000 for the
     years ended December 31, 2000, 1999, and 1998, respectively.

5.   ACCRUED INTEREST AND OTHER ASSETS

     Other assets include the following (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                               DECEMBER 31,
                                                                         -------------------------
                                                                           2000              1999
                                                                         -------           -------
<S>                                                                      <C>               <C>
     Accrued interest receivable                                         $ 6,230           $ 5,073
     Deferred tax asset                                                    1,141             4,362
     Other real estate owned                                                 314               906
     Other                                                                   669               691
                                                                         -------           -------
             Total                                                       $ 8,354           $11,032
                                                                         =======           =======
</TABLE>

6.   DEPOSITS

     Included in total deposits are $120,121,000 and $110,690,000 of Mexican
     National deposits at December 31, 2000 and 1999, respectively.

     The aggregate amount of short-term jumbo certificates of deposit (CDs),
     each with a minimum denomination of $100,000, was approximately $93,833,000
     and $91,775,000 at December 31, 2000 and 1999, respectively.

     At December 31, 2000, the scheduled maturities of CDs are as follows
     (Dollars in thousands):

<TABLE>
<CAPTION>
     Year ending December 31,
<S>                                                           <C>
                         2001                                 $  221,322
                         2002                                      8,266
                         2003                                      1,914
                         2004                                        168
                         2005 and thereafter                         212
                                                              ----------
                                                              $  231,882
                                                              ==========
</TABLE>


                                       37
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.   OTHER BORROWINGS AND LONG-TERM NOTES PAYABLE

     On December 31, 2000, a subsidiary bank holding company maintained a margin
     account which is secured by investment securities. The interest rate is
     variable (6.50% at December 31, 2000). The balances at December 31, 2000
     and December 31, 1999 were $432,187 and $2,317,000, respectively.

     In July 1995, $175,000 was advanced to NBC-Laredo from the Federal Home
     Loan Bank of Dallas. This note bears an interest rate of 6.393% and has a
     maturity date of August 2015. Principal and interest payments are due
     monthly in the approximate amount of $1,300 with the remaining balance due
     at maturity. The outstanding balance at December 31, 2000 and 1999 was
     approximately $148,000 and $153,000, respectively. In September 1998,
     NBC-Laredo borrowed $100,000 from the Federal Home Loan Bank of Dallas.
     This advance bears an interest rate of 5.15% and has a maturity date of
     October 2018. Principal and interest payments are due monthly in the
     approximate amount of $668. The outstanding balance at December 31, 2000
     and 1999 was approximately $93,000 and $96,300, respectively. In December
     1998, NBC-Laredo borrowed $1,250,000 from the Federal Home Loan Bank of
     Dallas. This advance bears an interest rate of 5.13% and has a maturity
     date of January 2004. Principal and interest payments are due monthly in
     the approximate amount of $24,000. The outstanding balance at December 31,
     2000 and 1999 was approximately $808,000 and $1,025,000, respectively. In
     January 1999, NBC-Laredo borrowed $1,000,000 from the Federal Home Loan
     Bank of Dallas. This advance bears an interest rate of 5.216% and has a
     maturity date of February 2004. Principal and interest payments are due
     monthly in the approximate amount of $19,000. The outstanding balance at
     December 31, 2000 and 1999 was approximately $663,000 and $835,600,
     respectively.

     On October 2, 1999, the Company executed a $3,237,000 note with The
     Independent BankersBank in Dallas. The note bears a variable interest rate
     at Wall Street Journal prime (9.50% at December 31, 2000). Principal
     payments of $161,825 plus interest are due quarterly beginning January 2,
     2000 with the balance of unpaid principal plus accrued interest due at
     maturity. The note matures on October 2, 2002. The note is collateralized
     by the common stock of NBT of Delaware, Inc. and the stock of the
     subsidiary banks. The outstanding balances at December 31, 2000 and
     December 31, 1999 were $1,192,000 and $2,555,000, respectively. The Company
     also executed a one year $4 million revolving line of credit dated May 26,
     2000 with The Independent BankersBank. The line bears interest at Wall
     Street Journal prime with any outstanding interest to be paid quarterly.
     The outstanding balance at December 31, 2000 was $1,896,000. The Company
     has met or obtained waivers for all debt convenants at December 31, 2000.

     Aggregate maturities at December 31, 2000 are as follows:

<TABLE>
<CAPTION>
     Year ending December 31,
<S>                                                      <C>
                         2001                            $ 3,431,221
                         2002                              1,024,580
                         2003                                505,228
                         2004                                 72,686
                         2005 and thereafter                 199,054
                                                         -----------
                                                         $ 5,232,769
                                                         ===========
</TABLE>

8.   COMMITMENTS AND CONTINGENT LIABILITIES

     The Company's consolidated financial statements do not reflect various
     commitments and contingent liabilities which arise in the normal course of
     business and which involve elements of credit risk, interest rate risk, and
     liquidity risk. These commitments and contingent liabilities are described
     in Note 15 as financial instruments with off-balance sheet risk.


                                       38
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company and its wholly-owned subsidiaries are defendants in legal
     actions arising from normal business activities. Management believes that
     those actions are without merit or that the ultimate liability, if any,
     resulting from them will not materially affect the Company's financial
     position, results of operations, cash flows, or liquidity.

     The Company has a month-to-month sub-lease agreement for general corporate
     office space which was renewed on December 31, 2000 at $3,500 per month.
     Gross rental expense for the year ended December 31, 2000, 1999, and 1998
     was $42,000, $57,491, and $134,738, respectively.

9.   EARNINGS PER SHARE

     The following provides a reconciliation of basic and diluted earnings per
     share (Dollars in thousands, except shares and per share amounts):

<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                            ----------------------------------------------
                                                               2000              1999               1998
                                                            ----------        ----------        ----------
<S>                                                         <C>               <C>               <C>
     Net income                                             $    5,064        $    2,738        $    5,288
     Weighted average shares outstanding:
           Basic                                             4,033,374         4,154,529         4,503,427
           Diluted                                           4,067,379         4,249,197         4,625,323

     Earnings per share - Basic                             $     1.26        $     0.66        $     1.17
                                                            ==========        ==========        ==========
           Effect of diluted securities:
               stock options
                                                                 (0.02)            (0.02)            (0.03)
                                                            ----------        ----------        ----------
     Earnings per share - Diluted                           $     1.24        $     0.64        $     1.14
                                                            ==========        ==========        ==========
</TABLE>

10.  EMPLOYEE BENEFITS

     The Company has a defined contribution plan for the benefit of
     substantially all employees. The plan includes a 401(k) retirement plan
     feature. Employees are allowed to make contributions to the plan. Each
     subsidiary Bank's contribution to the plan is determined annually by that
     Bank's Board of Directors. Plan expense for the years ended December 31,
     2000, 1999 and 1998 totaled $227,660, $189,391, and $140,767, respectively.

11.  MANAGEMENT AND DIRECTOR STOCK OPTION PLAN

     The Company has various stock option plans under which the Company's
     officers, directors and key employees may be granted options to purchase
     the Company's common stock at 100% of the market price on the day the
     option is granted.

     The Plans are administered by the Board of Directors of the Company. The
     Board of Directors is authorized to determine the terms and conditions of
     all options granted.

     Each option under the plans shall terminate and be unexercisable upon the
     date specified by the applicable administrator, however, this date shall
     not exceed ten years from the grant date of the options.

     Under the "Nonqualified Stock Option Agreement," options are exercisable in
     one-fifth increments commencing one year after the grant date and subject
     to any longer or shorter periods the Administrator may impose.


                                       39
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The following is a summary of transactions for the years presented:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                       ------------------------------------------------------------------
                                                               2000                   1999                   1998
                                                       --------------------   --------------------   --------------------
                                                                   WEIGHTED               WEIGHTED               WEIGHTED
                                                                     AVG                    AVG                    AVG
                                                                   EXERCISE               EXERCISE               EXERCISE
                                                        SHARES      PRICE      SHARES      PRICE      SHARES       PRICE
                                                       --------    --------   --------    --------   --------    --------
<S>                                                     <C>        <C>         <C>        <C>         <C>        <C>
     Outstanding, beginning of year                     374,175    $  11.53    265,700    $   9.70    198,700    $   8.42
     Granted                                             80,000       13.46    117,700       15.29     70,350       13.23
     Exercised                                          (82,000)       6.25     (8,600)       6.14     (2,500)       5.68
     Canceled                                            (9,650)      14.70       (625)      15.25       (850)      13.25
                                                       --------    --------   --------    --------   --------    --------

     Outstanding, end of year                           362,525    $  13.07    374,175    $  11.53    265,700    $   9.70
                                                       ========    ========   ========    ========   ========    ========

     Exercisable at end of year                         185,385    $  11.97    205,520    $   9.21    169,280    $   8.17

     Weighted average fair value of
        options granted during the year                            $   3.89               $   5.24               $   3.55
</TABLE>

     The options outstanding at December 31, 2000, have exercise prices between
     $5.68 and $15.5625 with a weighted average exercise price of $13.07 and a
     weighted average remaining contractual life of 3.41 years. At December 31,
     2000, there remained 192,175 shares reserved for future grants of options
     under the Plans.

     The Company has elected to account for this plan under Accounting
     Principles Board Opinion No. 25, "Accounting for Stock Issued to
     Employees," under which no compensation cost has been recognized for
     options granted. The fair value of the options granted in 2000, 1999 and
     1998 were estimated as of the date of grant using a Black-Scholes options
     valuation model. The Black-Scholes option valuation model was developed for
     use in estimating the fair value of traded options which have
     characteristics which are different from the Company's employee stock
     options. In addition, option valuation models require the input of highly
     subjective assumptions which can significantly impact the estimated fair
     value. The following weighted-average assumptions were used for 2000, 1999
     and 1998: risk-free interest rate of 5.12%, 6.475% and 4.654%,
     respectively; expected dividend yield of 0%; expected volatility of 12.9%,
     14.7% and 12%, respectively; and expected life of 6 years.

     Had compensation cost for the stock option plan been determined based on
     the fair value method established by SFAS No. 123, "Accounting for
     Stock-Based Compensation", the Company's net income and earnings per share
     would have been reduced to the pro forma amounts indicated below.

<TABLE>
<CAPTION>
                                                                     2000             1999             1998
                                                                   --------         --------         --------
<S>                                                                <C>              <C>              <C>
          Net income                          As reported          $  5,064         $  2,738         $  5,288
                                              Pro Forma            $  4,896         $  2,587         $  5,206

          Basic earnings per share            As reported          $   1.26         $   0.66         $   1.17
                                              Pro Forma            $   1.21         $   0.62         $   1.16

          Diluted earnings per share          As reported          $   1.24         $   0.64         $   1.14
                                              Pro Forma            $   1.20         $   0.61         $   1.13
</TABLE>


                                       40
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.  OTHER EXPENSES

     Other expenses include the following (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                 DECEMBER 31,
                                                                               -----------------------------------------------
                                                                                 2000                1999                1998
                                                                               -------             -------             -------
<S>                                                                            <C>                 <C>                 <C>
     Advertising                                                               $   301             $   378             $   306
     Data processing expenses                                                      384                 319                 267
     FDIC insurance                                                                101                  51                  49
     Insurance                                                                     137                 133                 107
     Office supplies                                                               560                 685                 603
     Postage and courier                                                           531                 526                 498
     Professional fees                                                             909                 837                 905
     Miscellaneous                                                               1,719               1,816               1,649
                                                                               -------             -------             -------
            Total                                                              $ 4,642             $ 4,745             $ 4,384
                                                                               =======             =======             =======
</TABLE>

13.  FEDERAL INCOME TAX

     The provision for federal income tax consisted of the following (Dollars in
     thousands):

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                               -----------------------------------------------
                                                                                 2000                1999                1998
                                                                               -------             -------             -------
<S>                                                                            <C>                 <C>                 <C>
     Currently paid or payable                                                 $   157             $   132             $   168
     Deferred expense                                                            2,747               1,492               2,888
                                                                               -------             -------             -------
            Total                                                              $ 2,904             $ 1,624             $ 3,056
                                                                               =======             =======             =======
</TABLE>

     The provision for federal income tax is less than that computed by applying
     the federal statutory rate of 34% to income before income taxes as
     indicated in the following analysis (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                               -----------------------------------------------
                                                                                 2000                1999                1998
                                                                               -------             -------             -------
<S>                                                                            <C>                 <C>                 <C>
     Tax based on statutory rate                                               $ 2,709             $ 1,483             $ 2,837
     Effect of tax-exempt income                                                   (10)                (16)                (15)
     Interest and other nondeductible expenses                                      12                   7                   9
     Alternative minimum tax                                                       157                 132                 167
     Goodwill                                                                       28                  28                  28
     Other, net                                                                      8                 (10)                 30
                                                                               -------             -------             -------
                                                                               $ 2,904             $ 1,624             $ 3,056
                                                                               =======             =======             =======
</TABLE>


                                       41
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The components of the deferred income tax assets and liabilities consist of
     the following (Dollars in thousands):

<TABLE>
<CAPTION>
                                                                                                     YEAR ENDED DECEMBER 31,
                                                                                                    --------------------------
                                                                                                      2000              1999
                                                                                                    --------          --------
<S>                                                                                                 <C>               <C>
     Deferred Tax Assets Related to:
           Net operating loss carryforward                                                          $ 28,065          $ 30,417
           Other real estate owned                                                                        85                67
           Allowance for loan losses                                                                     143                --
           Securities valuation reserve                                                                   31                64
           Non-accrual loan interest                                                                     258               235
           Securities writedown                                                                           --               744
           Other                                                                                          77                90
           Net unrealized depreciation on securities available for sale                                   --               902
                                                                                                    --------          --------
                                                                                                      28,659            32,519
           Less: valuation allowance                                                                  24,874            27,285
                                                                                                    --------          --------
                Total Deferred Tax Assets                                                              3,785             5,234
                                                                                                    --------          --------

     Deferred Tax Liabilities Related to:
           Allowance for loan losses                                                                      --               (17)
           Depreciation                                                                                  (86)              (89)
           Bond accretion                                                                               (557)             (749)
           Goodwill                                                                                       --               (17)
           Net unrealized appreciation on securities available for sale                               (2,001)               --
                                                                                                    --------          --------
                Total Deferred Tax Liabilities                                                        (2,644)             (872)
                     Net Deferred Tax Asset                                                         $  1,141          $  4,362
                                                                                                    ========          ========
</TABLE>

     For federal income tax purposes, the Company had approximately $83 million
     in net operating loss carryforwards as of December 31, 2000 which will be
     available to reduce income tax liabilities in future years. The
     preconfirmation net operating loss carryforwards arose from the Company's
     emergence from a reorganization under Chapter 11 of the United States
     Bankruptcy Code in May 1992. If unused, approximately $79 million of such
     carryforwards will expire in 2005, with the remaining approximately $4
     million expiring in 2006.

     Pursuant to SFAS No. 109, the Company had available certain deductible
     temporary differences and net operating loss carryforwards for use in
     future tax reporting periods, which created deferred tax assets. SFAS No.
     109, requires that deferred tax assets be reduced by a valuation allowance
     if, based on the weight of the available evidence, it is more likely than
     not that some portion or all of the deferred tax assets will not be
     realized. During the year ended December 31, 2000 and 1999, the deferred
     tax asset valuation allowance was reduced by $2,411,000 and $2,227,000,
     respectively, to adjust the recorded net deferred tax asset to an amount
     considered more likely than not to be realized. The net deferred tax asset
     recorded on the books of the Company was $1,141,000 at December 31, 2000.
     Realization of this asset is dependent on generating sufficient taxable
     income prior to the expiration of the loss carryforwards. Realization could
     also be affected by a significant ownership change of the Company over a
     period of three years as prescribed by income tax law. Based upon the level
     of historical taxable income and projections for future taxable income over
     the periods which the deferred tax assets are deductible, management
     believes it is more likely than not the Company will realize the benefits
     of these deductible differences, net of the existing valuation allowances
     at December 31, 2000. The amount of the deferred tax asset considered
     realizable, however, could be reduced in the near term if estimates of
     future taxable income during the carryforward period are reduced.


                                       42
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     In accordance with AICPA SOP No. 90-7, "Financial Reporting by Entities in
     Reorganization Under the Bankruptcy Code", income tax benefits recognized
     from preconfirmation net operating loss carryforwards and other tax assets
     are used first to reduce the reorganization value in excess of amounts
     allocable to identifiable assets and then to increase additional paid-in
     capital.

14.  RELATED PARTY TRANSACTIONS

     The Banks have entered into transactions with their directors, executive
     officers, and their affiliates. Such transactions were made in the ordinary
     course of business on substantially the same terms and conditions,
     including interest rates and collateral, as those prevailing at the same
     time for comparable transactions with other customers, and did not, in the
     opinion of management, involve more than normal credit risk or present
     other unfavorable features. The aggregate amount of loans to such related
     parties at December 31, 2000 and 1999 was $6,407,000 and $6,774,000,
     respectively. During the year ended December 31, 2000 and 1999, new loans
     to such related parties amounted to $2,451,000 and $2,653,000,
     respectively, and repayments amounted to $1,296,000 and $2,670,000,
     respectively.

     During 2000 and 1999, the Company utilized a stock brokerage firm, which is
     100% owned by the Company's Chairman, to execute certain transactions on
     its behalf. The Company uses an unrelated company to act as custodian and
     clearing firm for its investment assets. Net commissions earned by the
     traders at the brokerage firm, excluding the Company Chairman, related to
     investment transactions by the Company in 2000 and 1999 totaled $3,812 and
     $7,128.

15.  FINANCIAL INSTRUMENTS

     The Banks are party to financial instruments with off-balance sheet risk in
     the normal course of business to meet the financing needs of their
     customers. These financial instruments include commitments to extend credit
     and standby letters of credit. Those instruments involve, to varying
     degrees, elements of credit and interest rate risk in excess of the amount
     recognized in the consolidated financial statements. The contract or
     notional amounts of those instruments reflect the extent of the Banks'
     involvement in particular classes of financial instruments.

     The Banks' 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. The Banks use the same credit policies in
     making commitments and conditional obligations as they do for on-balance
     sheet instruments.

     Commitments to extend credit are agreements to lend to a customer as long
     as there is no violation of any condition established in the contract.
     Commitments generally have fixed expiration dates or other termination
     clauses and may require payment of a fee. Since many of the commitments are
     expected to expire without being drawn upon, the total commitment amounts
     do not necessarily represent future cash requirements. The Banks evaluate
     each customer's creditworthiness on a case-by-case basis. The amount of
     collateral obtained, if it is deemed necessary by the Banks upon extension
     of credit, is based on management's credit evaluation of the counterparty.
     Collateral held varies but may include accounts receivable; inventory;
     property, plant, and equipment; and income-producing commercial properties.

     Standby letters of credit are conditional commitments issued by the Banks
     to guarantee the performance of a customer to a third party. Those
     guarantees are primarily issued to support public and private borrowing
     arrangements. The credit risk involved in issuing letters of credit is
     essentially the same as that involved in extending loan facilities to
     customers.


                                       43
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     A summary of the notional amounts of the Bank's financial instruments with
     off-balance sheet risk at December 31, 2000 is as follows:

                                                              NOTIONAL AMOUNT
                                                              ---------------
     Commitments to extend credit                              $   20,162,000
     Commitments to extend credit - Credit Cards                      756,000
     Financial standby letters of credit                              999,000
     Performance standby letters of credit                            760,000
     Commercial letters of credit                                     300,000

     FAIR VALUE OF FINANCIAL INSTRUMENTS

     SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
     requires disclosure of fair value information about financial instruments,
     whether or not recognized in the consolidated balance sheet, for which it
     is practicable to estimate that value. In cases where quoted market prices
     are not available, fair values are based on estimates using present value
     or other valuation techniques. Those techniques are significantly affected
     by the assumptions used, including the discount rate and estimates of
     future cash flows. In that regard, the derived fair value estimates cannot
     be substantiated by comparison to independent markets and, in many cases,
     could not be realized in immediate settlement of the instrument. SFAS No.
     107 excludes certain financial instruments from its disclosure
     requirements. Accordingly, the aggregate fair value amounts presented do
     not represent the underlying value of the Company.

     The following methods and assumptions were used by the Company in
     estimating the fair value of its financial instruments:

          CARRYING AMOUNTS APPROXIMATE FAIR VALUES for cash and due from banks;
     interest bearing deposits in banks; federal funds sold; securities
     available for sale; variable rate loans; accrued interest receivable and
     payable; demand deposits; NOW, money market, and savings accounts; and
     variable rate time deposits.

          QUOTED MARKET PRICES, where available, or if not available, based on
     quoted market prices of comparable instruments for securities to be held to
     maturity.

          DISCOUNTED CASH FLOWS using interest rates currently being offered on
     instruments with similar terms and with similar credit quality, including
     fixed rate loans; fixed rate time deposits; and other debt.

          QUOTED FEES CURRENTLY BEING CHARGED for off-balance-sheet instruments,
     including letters of credit and loan commitments.


                                       44
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The estimated fair values of the Company's financial instruments were as
     follows:

<TABLE>
<CAPTION>
                                                                          DECEMBER 31, 2000                DECEMBER 31, 1999
                                                                       ------------------------        ------------------------
                                                                                       (Dollars in Thousands)
                                                                       CARRYING          FAIR          CARRYING          FAIR
                                                                        AMOUNT           VALUE          AMOUNT           VALUE
                                                                       --------        --------        --------        --------
<S>                                                                    <C>             <C>             <C>             <C>
     Financial Assets:
           Cash and due from banks                                     $ 24,218        $ 24,218        $ 30,394        $ 30,394
           Interest bearing deposits in banks                             2,659           2,659           2,299           2,299
           Federal funds sold                                            18,335          18,335          11,949          11,949
           Securities available for sale                                255,136         255,136         221,268         221,268
           Securities held to maturity                                    2,044           2,137              66              61
           Loans - net                                                  253,053         249,895         244,565         249,357
           Accrued interest receivable                                    6,230           6,230           5,073           5,073

     Financial Liabilities:
           Demand deposits                                               83,126          83,126          70,629          70,629
           NOW, money market, and
               savings accounts                                         209,898         209,898         193,150         193,150
           Time deposits                                                231,882         232,644         225,961         268,420
           Accrued interest payable                                       2,121           2,121           1,591           1,591
           Other debt                                                     5,232           5,232           7,017           7,017
</TABLE>

     The fair value of off-balance sheet assets and liabilities is not
     considered significant.

     LIMITATIONS:

     Fair value estimates are made at a specific point in time, based on
     relevant market information and information about the financial instrument.
     These estimates do not reflect any premium or discount that could result
     from offering for sale at one time the Company's entire holdings of a
     particular financial instrument. Because no market exists for a significant
     portion of the Company's financial instruments, fair value estimates are
     based on judgments regarding current economic conditions, risk
     characteristics of various financial instruments, and other factors. These
     estimates are subjective in nature and involve uncertainties and matters of
     significant judgment and, therefore, cannot be determined with precision.
     Changes in assumptions could significantly affect the estimates.

     Fair value estimates are based on existing on and off-balance sheet
     financial instruments without attempting to estimate the value of
     anticipated future business and the value of assets and liabilities that
     are not considered financial instruments. Other significant assets and
     liabilities that are not considered financial assets or liabilities include
     the deferred tax asset, bank premises and equipment, other real estate
     owned, and other assets. In addition, the tax ramifications related to the
     realization of the unrealized gains and losses can have a significant
     effect on fair value estimates and have not been considered in the
     estimates.

16.  CONCENTRATIONS OF CREDIT

     Substantially all of the Banks' loans, commitments, and letters of credit
     have been granted to customers in the Banks' market areas which include
     South and Central Texas. Substantially all of these customers are
     depositors of the Banks. Investments in state and municipal securities also
     involve governmental entities within the Banks' market areas. The
     concentrations of credit by type of loan are set forth in Note 3. The
     distribution of commitments to extend credit approximates the distribution
     of loans outstanding. Letters of credit are granted primarily to commercial
     borrowers.


                                       45
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


17.  REGULATORY MATTERS

     The amount of dividends that may be declared by the Banks without prior
     approval of the various regulatory agencies is limited by statutory and
     regulatory rules.

     The Company and its subsidiary Banks are required to maintain minimum
     ratios of Tier 1 capital to total average assets and minimum ratios of Tier
     1 and total capital to risk weighted assets, as defined by the banking
     regulators.

     The Company and its subsidiary Banks are subject to various regulatory
     capital requirements administered by the federal banking agencies. Failure
     to meet minimum capital requirements can initiate certain mandatory, and
     possibly additional discretionary, actions by regulators that, if
     undertaken, could have a direct material effect on the Company's financial
     statements. Under capital adequacy guidelines and the regulatory framework
     for prompt corrective action, the Company and its subsidiary Banks must
     meet specific capital guidelines that involve quantitative measures of the
     Company and its subsidiary Banks assets, liabilities, and certain
     off-balance sheet items as calculated under regulatory accounting
     practices. The Company and its subsidiary Banks capital amounts and
     classification 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 its subsidiary Banks to maintain minimum amounts
     and ratios (set forth in the table below) of total and Tier 1 capital (as
     defined in the regulations) to risk-weighted assets (as defined), and of
     Tier 1 capital (as defined) to average assets (as defined). Management
     believes, as of December 31, 2000, that the Company and its subsidiary
     Banks meet all capital adequacy requirements to which it is subject.

     As of December 31, 2000, the most recent notification from the Banking
     regulators categorized the Company and its subsidiary Banks as "well
     capitalized" under the regulatory framework for prompt corrective action.
     To be categorized as "well capitalized" the Company and its subsidiary
     Banks must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
     leverage ratios as set forth in the table. There are no conditions or
     events since that notification that management believes have changed the
     institutions' categories.


                                       46
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


     The Company and its subsidiary Banks actual capital amounts and ratios are
     also presented in the table (Dollars in thousands).

<TABLE>
<CAPTION>
                                                                                                      TO BE WELL CAPITALIZED
                                                                                FOR CAPITAL           UNDER PROMPT CORRECTIVE
     AS OF DECEMBER 31, 2000:                             ACTUAL             ADEQUACY PURPOSES           ACTION PROVISIONS
                                                  ---------------------      ------------------         --------------------
                                                   AMOUNT        RATIO        AMOUNT     RATIO           AMOUNT      RATIO
                                                  --------       ------      --------   -------         --------   ---------
<S>                                               <C>            <C>         <C>        <C>             <C>        <C>
     Total Capital to Risk Weighted Assets:
         CONSOLIDATED                             $ 49,571       17.56%      $ 22,585   >= 8.00%        $ 28,231   >= 10.00%
         Eagle Pass                                 27,465       15.43%        14,239   >= 8.00           17,798   >= 10.00
         Laredo                                      9,833       14.25%         5,521   >= 8.00            6,901   >= 10.00
         Rockdale                                    8,275       24.60%         2,691   >= 8.00            3,364   >= 10.00

     Tier 1 Capital to Risk Weighted Assets:
         CONSOLIDATED                             $ 46,142       16.35%      $ 11,293   >=  4.00%       $ 16,939   >=  6.00%
         Eagle Pass                                 25,294       14.21%         7,119   >=  4.00          10,679   >=  6.00
         Laredo                                      9,054       13.12%         2,761   >=  4.00           4,141   >=  6.00
         Rockdale                                    7,855       23.35%         1,346   >=  4.00           2,019   >=  6.00

     Tier 1 Capital to Average Assets:
         CONSOLIDATED                             $ 46,142        8.01%      $ 23,036   >=  4.00%       $ 28,795   >=  5.00%
         Eagle Pass                                 25,294        7.35%        13,757   >=  4.00          17,196   >=  5.00
         Laredo                                      9,054        7.81%         4,638   >=  4.00           5,797   >=  5.00
         Rockdale                                    7,855        7.08%         4,438   >=  4.00           5,548   >=  5.00
</TABLE>

<TABLE>
<CAPTION>
                                                                                                      TO BE WELL CAPITALIZED
                                                                                FOR CAPITAL           UNDER PROMPT CORRECTIVE
     AS OF DECEMBER 31, 1999:                             ACTUAL             ADEQUACY PURPOSES           ACTION PROVISIONS
                                                  ---------------------      ------------------         --------------------
                                                   AMOUNT        RATIO        AMOUNT     RATIO           AMOUNT      RATIO
                                                  --------       ------      --------   -------         --------   ---------
<S>                                               <C>            <C>         <C>        <C>             <C>        <C>
     Total Capital to Risk Weighted Assets:
         CONSOLIDATED                             $ 46,076       17.47%      $ 21,094   =>  8.00%       $ 26,368   =>  10.00%
         Eagle Pass                                 20,299       13.99%        11,607   =>  8.00          14,509   =>  10.00
         Laredo                                      9,077       15.50%         4,684   =>  8.00           5,856   =>  10.00
         Rockdale                                    7,532       21.86%         2,756   =>  8.00           3,445   =>  10.00
         Luling                                      4,356       22.26%         1,566   =>  8.00           1,957   =>  10.00

     Tier 1 Capital to Risk Weighted Assets:
         CONSOLIDATED                             $ 43,235       16.40%      $ 10,547   =>  4.00%       $ 15,821   =>   6.00%
         Eagle Pass                                 19,104       13.17%         5,804   =>  4.00           8,705   =>   6.00
         Laredo                                      8,377       14.31%         2,342   =>  4.00           3,513   =>   6.00
         Rockdale                                    7,102       20.61%         1,378   =>  4.00           2,067   =>   6.00
         Luling                                      4,108       20.99%           783   =>  4.00           1,174   =>   6.00

     Tier 1 Capital to Average Assets:
         CONSOLIDATED                             $ 43,235        7.86%      $ 21,990   =>  4.00%       $ 27,488   =>   5.00%
         Eagle Pass                                 19,104         6.49%       11,777   =>  4.00          14,721   =>   5.00
         Laredo                                      8,377        8.14%         4,119   =>  4.00           5,148   =>   5.00
         Rockdale                                    7,102        6.45%         4,408   =>  4.00           5,510   =>   5.00
         Luling                                      4,108       13.61%         1,207   =>  4.00           1,509   =>   5.00
</TABLE>


                                       47
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


18.  PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

     Condensed balance sheet information of National Bancshares Corporation of
     Texas (The Parent Company) at December 31, 2000 and 1999, and the related
     statements of income and cash flows for the years ended December 31, 2000,
     1999 and 1998 are as follows (Dollars in thousands):

<TABLE>
<CAPTION>
     BALANCE SHEETS:
                                                                                                               DECEMBER 31,
                                                                                                         ----------------------
                                                                                                           2000          1999
                                                                                                         --------      --------
<S>                                                                                                      <C>           <C>
     ASSETS:
     Cash                                                                                                $    269      $    194
     Investment in subsidiaries                                                                            59,762        50,093
     Fixed assets - net                                                                                        53            78
     Federal tax benefits due                                                                               1,049           923
     Deferred tax asset                                                                                     3,483         3,185
     Other assets                                                                                              83           171
                                                                                                         --------      --------
           Total Assets                                                                                  $ 64,699      $ 54,644
                                                                                                         ========      ========

     LIABILITIES AND STOCKHOLDERS' EQUITY:
     Notes payable                                                                                       $  3,088      $  2,555
     Accrued interest payable and other liabilities                                                           211           186
                                                                                                         --------      --------
           Total Liabilities                                                                                3,299         2,741
                                                                                                         --------      --------
     Common stock                                                                                               5             5
     Surplus - common stock                                                                                33,832        30,909
     Retained earnings                                                                                     36,485        31,421
     Accumulated other comprehensive income (loss)                                                          3,884        (1,751)
     Treasury stock, at cost (770,221 shares in 2000, 475,682 shares in 1999)                             (12,806)       (8,681)
                                                                                                         --------      --------
           Total Stockholders' Equity                                                                      61,400        51,903
                                                                                                         --------      --------
                                                                                                         $ 64,699      $ 54,644
                                                                                                         ========      ========
</TABLE>

<TABLE>
<CAPTION>
     STATEMENTS OF OPERATIONS:
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                           ------------------------------------
                                                                                             2000          1999          1998
                                                                                           --------      --------      --------
<S>                                                                                        <C>           <C>           <C>
     INCOME:
        Dividends from subsidiaries                                                        $  2,450      $  3,936      $  2,300
        Undistributed earnings of subsidiaries                                                3,884             8         3,924
        Other income                                                                             69           128           412
                                                                                           --------      --------      --------

                                                                                              6,403         4,072         6,636
                                                                                           --------      --------      --------
     EXPENSES:
        Salaries and employee benefits                                                          859           773           690
        Occupancy and equipment expenses                                                        218           227           141
        Interest expense                                                                        265           383           202
        Professional fees                                                                       185           200           238
        Other operating expenses                                                                208           173           249
                                                                                           --------      --------      --------

                                                                                              1,735         1,756         1,520
                                                                                           --------      --------      --------
        INCOME BEFORE FEDERAL INCOME TAX BENEFIT                                              4,668         2,316         5,116
        Federal income tax benefit                                                              396           422           172
                                                                                           --------      --------      --------
        NET INCOME                                                                         $  5,064      $  2,738      $  5,288
                                                                                           ========      ========      ========
</TABLE>


                                       48
<PAGE>

                  NATIONAL BANCSHARES OF TEXAS AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
     STATEMENTS OF CASH FLOWS:
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                             ---------------------------------
                                                                                               2000         1999         1998
                                                                                             -------      -------      -------
<S>                                                                                          <C>          <C>          <C>
    CASH FLOWS FROM OPERATING ACTIVITIES:
     Net income                                                                              $ 5,064      $ 2,738      $ 5,288
     Adjustments to reconcile net income to net cash provided by
       operating activities:
          Equity in earnings of subsidiaries                                                  (6,334)      (3,944)      (6,224)
          Dividends received                                                                   2,450        3,936        2,300
          Depreciation                                                                            25           27           28
          Tax benefit realized from utilization of deferred tax assets                         2,411        2,227        2,873
          Provision for deferred income taxes                                                   (298)         (67)        (122)
          Increase in accrued interest receivable and other assets                               (38)         (68)        (235)
          Increase (decrease) in accrued interest payable and other liabilities                   25          (54)         153
                                                                                             -------      -------      -------
              Net cash provided by operating activities                                        3,305        4,795        4,061
     CASH FLOWS FROM INVESTING ACTIVITIES:
          Capital expenditures                                                                    --         (406)        (136)
          Capital contribution to subsidiaries                                                  (150)        (377)          --
                                                                                             -------      -------      -------
              Net cash used in investing activities                                             (150)        (783)        (136)
     CASH FLOWS FROM FINANCING ACTIVITIES:
          Proceeds from advances on debt                                                       3,516           --        6,386
          Principal payments on other debt                                                    (2,983)      (3,631)      (2,500)
          Exercise of common stock options                                                       512           53           14
          Purchase of treasury stock                                                          (4,125)        (600)      (8,081)
                                                                                             -------      -------      -------
              Net cash used in financing activities                                           (3,080)      (4,178)      (4,181)

     Net increase (decrease) in cash and due from banks                                           75         (166)        (256)
     Cash and due from banks at beginning of year                                                194          360          616
                                                                                             -------      -------      -------
     Cash and due from banks at end of year                                                  $   269      $   194      $   360
                                                                                             =======      =======      =======
</TABLE>


                                       49
<PAGE>

ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

     On April 22, 1999 the Company dismissed Padgett, Stratemann & Co., L.L.P.
as its independent accountants as previously reported in the Company's Current
Report on For 8-K for that date. The dismissal was approved by the Audit
Committee and the Company's Board of Directors. The reports of Padgett,
Stratemann & Co., L.L.P. on the financial statements for the two most recent
fiscal years did not contain an adverse opinion, disclaimer of opinion,
qualification or modification as to uncertainty, audit scope or accounting
principles. Furthermore, during the two most recent fiscal years and through
April 22, 1999, there were no disagreements with Padgett, Stratemann & Co.,
L.L.P. on any matter of accounting principles or practices, which disagreements,
if not resolved to the satisfaction of Padgett, Stratemann & Co., L.L.P., that
would have caused that firm to make reference to the subject matter of such
disagreements in its reports on the financial statements for such years.
However, the Company restated its financial statements for 1996, 1997, and 1998
because of an error in the application of an accounting principle related to the
reporting of income taxes. Padgett, Stratemann & Co. L.L.P., has concurred in
the conclusion that there was an error in the prior financial statements
regarding this issue.

     On April 22, 1999, the Company appointed KPMG, L.L.P. as its independent
accountants. During the two most recent fiscal years and through April 22, 1999,
the Company had not consulted with KPMG, L.L.P. regarding the application of
accounting principles to a specific transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information required by this Item with respect to directors of the
Company, as well as executive officers who are also Directors of the Company
is set forth below.

         JAY H. LUSTIG, Mr. Lustig, age 46, has been Chairman of the Board of
the Company since May 1992. Mr. Lustig has been the Chairman of the Board and
CEO of NBI, Inc., a publicly traded holding company, since 1993. Mr. Lustig
has been a member of the Board of Directors of Sightsound.com, Inc. since
1996. In May 1995, Mr. Lustig became President of Equibond, Inc., an
investment firm based in Santa Monica, California. From September 1988 to May
1995, Mr. Lustig had been associated with Drake Capital Securities, Inc., an
NASD member, via J.H.L. Holdings, Inc., a personally owned investment holding
company.

         MARVIN E. MELSON, age 65, has been a Director, Chief Executive
Officer, President, and Secretary of the Company since May 1992; Chairman of
the Board of NBC-Laredo and a Director of NBC-Eagle Pass and NBC-Rockdale
since May 1992; and President of NBC-Laredo from August 1993 to March 1998.
Mr. Melson served as Executive Vice President and Commercial Loan Officer at
Laredo National Bank, Laredo, Texas, from August 1989 to May 1992. From March
1981 to August 1989, Mr. Melson served as Chairman of the Board and President
of NBC-Laredo.

         H. GARY BLANKENSHIP, age 60, has been a Director of the Company
since May 1992. Mr. Blankenship has been Chairman of Greater Southwest
Bancshares, Inc., and its subsidiary, Bank of the West, Irving, Texas, since
1986 (neither of which entities are affiliated with the Company).

         TAMIR HACKER, age 44, has been a Director of the Company since
September 2000. Mr. Hacker has been a stockbroker with Equibond, Inc. since
June 1996. From May 1982 to June 1996 Mr. Hacker was employed as a stock
broker with Oppenheimer & Co.

         JOHN W. LETTUNICH, age 71, has been a Director of the Company since
March 1995, and has been Chairman of the Board of NBC-Eagle Pass since
January 1997. Mr. Lettunich was Chairman of the Board, President and CEO of
NBC-Eagle Pass from 1989 to January 1997.

                                       50
<PAGE>

         CHARLES T. MEEKS, age 66, has been a Director of the Company since
March 1995. Since July 1994, Mr. Meeks has been the principal of the Charles
T. Meeks Company, a bank consulting firm. Mr. Meeks was Senior Vice
President, Alex Sheshunoff Management Services, Inc., from February 1989 to
June 1994. Mr. Meeks is also Chairman of the Board of Texline State Bank in
Texline, Texas (which is not affiliated with the Company).

         No family relationships exist among the executive officers and
directors of the Company.

         Information required by this Item with respect to executive officers
of the Company who are not also directors of the Company is set forth below.

ANNE R. RENFROE, age 36, has been the Chief Financial Officer of the Company
since May 1995. Formerly, Ms. Renfroe was Vice-President and Controller of
Texas Independent Bank, Dallas, Texas from December 1992 to January 1995. In
addition, from August 1989 to December 1992 Ms. Renfroe was an audit
supervisor with Fisk Robinson, P.C., Dallas, Texas. From 1986 to 1989, Ms.
Renfroe was Assistant Controller for NorthPark National Bank in Dallas,
Texas. Ms. Renfroe is a certified public accountant.

MORRIS D. WEISS, age 41, has been Senior Vice President and General Counsel
for the Company since April 1997 with responsibilities for overseeing and
managing the legal affairs of the Company. Prior to joining the Company, Mr.
Weiss was a partner with the law firm of Weil, Gotshal & Manges, LLP from
January 1994 until April 1997 in the Business Finance and Restructuring
Department, and had been an associate at such firm since October 1985.

         The Company also employs eight significant employees who are not
directors or executive officers of the Company but who make or are expected
to make significant contributions to the business of the Company. The
following sets forth biographical information of the persons:

FRANK D. BARROW, age 56, has been Chairman of the Board and President of
NBC-Rockdale since 1986.

MARIO J. GONZALEZ, age 37, has been President and Chief Executive Officer of
NBC-Laredo since March 1998. Formerly, Mr. Gonzalez was Executive Vice
President of NBC-Laredo from April 1993 to March 1998. Prior to joining
NBC-Laredo, Mr. Gonzalez was a National Bank Examiner with the OCC, from
October 1986 until April 1993.

WILLIAM D. HALES, age 54, has been President of NBC-Luling since March 1988.

R. SAMUEL JUVE, age 48, has been President of NBC-Eagle Pass since January
1997. Formerly, Mr. Juve was Executive Vice President of NBC-Eagle Pass,
since April 1993 and Senior Vice President of NBC-Eagle Pass from February
1990 until March 1993.

DWAYNE J. KOLLY, age 48, has been Executive Vice President, Chief Operations
Officer and Information Services Coordinator of NBC-Laredo since March 1998.
Formerly, Mr. Kolly was Senior Vice President Information Services
Coordinator and Cashier for NBC-Laredo from October 1993 to March 1998. Prior
to joining NBC-Laredo, Mr. Kolly was Vice President and Cashier of First
National Bank, Uvalde, Texas, from 1986 to 1993.

THOMAS MCMORRIS, age 60, has been Executive Vice President of NBC-Eagle Pass
and President of NBC-San Antonio since February 1998. Formerly, Mr. McMorris
was Senior Vice President/Community Investment Group of NationsBank of Texas,
San Antonio from 1990 to 1998.

GEORGE W. SCHUH, age 54, has been Executive Vice President, Cashier and
Secretary of NBC-Eagle Pass since March 1994. Formerly, Mr. Schuh was Senior
Vice President, Cashier and Secretary of NBC-Eagle Pass from June 1992 to
March 1994. Prior to joining NBC-Eagle Pass, Mr. Schuh was Senior Vice
President & Cashier for The Bank of the West, Austin, Texas from August 1991
to June 1992.

HECTOR VASQUEZ, JR., age 47, has been Senior Vice President and Information
Services Manager of NBC Holdings - Texas, Inc. since February 1997. Formerly
Mr. Vasquez was Senior Vice President and Management Information Services
Director for Citizens Bank of Corpus Christi, Texas from July 1973 to
February 1997.

                                       51
<PAGE>

          COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors, executive officers, and any persons holding more than
ten percent of the Company's Common Stock to report their initial ownership
of the Company's Common Stock and any subsequent changes in that ownership to
the Securities Exchange Commission and to provide copies of such reports to
the Company. Based upon the Company's review of copies of such reports
received by the Company and written representations of its directors and
executive officers, the Company believes that during the year ended December
31, 2000, all Section 16(a) filing requirements were satisfied except for an
inadvertent late filing of a Form 3 by Tamir Hacker.

ITEM 11.  EXECUTIVE COMPENSATION

                             EXECUTIVE COMPENSATION

BOARD COMPENSATION AND BENEFITS COMMITTEE REPORT ON EXECUTIVE COMPENSATION

          The Compensation Committee of the Board of Directors (the "Committee")
     is committed to maintaining compensation programs for the Company's
     executive officers which further the Company's mission. The Committee
     adheres to the following compensation policies which are intended to
     facilitate the achievement of the Company's business strategies:

         -        Compensation levels for each element of pay should be targeted
                  at rates that are reflective of the median levels of current
                  market practices prevalent in comparable banking
                  organizations. Offering market-comparable pay allows the
                  Company to attract and maintain a stable, successful
                  management team.

         -        The Company's compensation packages should strengthen the
                  relationship between pay and performance with variable,
                  at-risk compensation that is dependent upon the level of
                  success in meeting specified Company and individual
                  performance goals.

         -        Ownership of the Company's Common Stock by executives should
                  be encouraged to further align executives' interests with
                  those of shareholders and the Company and to promote a
                  continuing focus on building profitability and shareholder
                  value.

         -        Sustained superior performance by individual executives over a
                  period of years, including actions to increase revenues,
                  reduce expenses, enhance service and product quality, improve
                  market share and thereby enhancing shareholder value, should
                  be rewarded.

         In evaluating compensation, the Company is aware of the limitations
on deductibility of compensation paid to highly compensated persons as
imposed by the Internal Revenue Code section 162(m). While the Company does
not at this time have any executive officer within the range of compensation
for which limitations are imposed by that provision, the Compensation
Committee's policy is to review the impact of section 162(m), and the
requirements imposed on performance-based compensation described in the
section, in the context of any qualifying compensation that may be proposed
to be paid in the future.

         To preserve objectivity in the achievement of its goals, the
Committee is comprised of two independent, non-employee directors and one
director, Mr. Lustig, who is employed by the Company. It is the Committee's
overall goal to develop compensation policies that are consistent with and
linked to strategic business objectives and Company values. The Committee
approves the design of, assesses the effectiveness of, and administers
compensation programs in support of compensation policies. The Committee also
reviews all salary arrangements and other remuneration for all executive
officers of the Company and the Subsidiary Banks. The various components of
the compensation programs for executive officers are discussed below.

         BASE SALARY. Base salary levels are largely determined through
comparison with banking organizations of a size similar to the Company's.
Surveys are utilized to establish base salaries that are within the range of
those persons with similar years of experience and holding positions of
comparable responsibility at other banking

                                       52
<PAGE>

organizations of a size and complexity similar to the Company. Following the
determination of market-based pay, each officer's individual performance,
achievements, and contributions to the growth of the Company are evaluated
subjectively in determining the individual's base salary. The Committee
reviews the base salary of all executive officers on an annual basis.

         INCENTIVE BONUS PLAN. In March 1995, the Board of Directors of the
Company adopted a Performance Compensation Plan (the "Plan") for its
employees and the employees of its subsidiary Banks. The Plan is administered
by the Committee. The amount of money available for distribution in the Plan
is dependent upon the attainment of performance objectives which the
Committee believes are important for achieving long-term shareholder value.
The Presidents of the subsidiary Banks, in consultation with one or more
principal officers of the respective Bank, determines the amount which will
be awarded from the Plan to the employees of the Bank. The amount of the
bonus available for the Presidents of the subsidiary Banks is determined by
the Committee. The Plan rewards all employees based on the attainment of
certain performance goals of the Company and its subsidiaries. The officers
of the Company are eligible to participate at the same level as all employees
in relationship to their respective base salaries. The performance goals
effective for 2000 included specific goals for profits, asset quality and
operational productivity. All awards under the Plan are contingent on the
Company and the Subsidiaries attaining certain basic financial objectives
such as return on assets.

         STOCK OPTIONS. On May 26, 1995, the Shareholders of the Company
adopted the 1995 Stock Plan (the "1995 Plan"). It is the Company's philosophy
that awarding stock options to executive officers of the Company and
Subsidiary Banks, based upon their respective positions and contributions to
the Company's overall success will help attract and retain high quality,
result-oriented professionals committed to creating long-term shareholder
value. Additionally, because options are subject to forfeiture if the
employee leaves the Company prior to their becoming exercisable, options
provide an incentive to remain with the Company long-term. Options granted in
2000 become exercisable in one-fifth increments beginning one year from the
date of the grant. The option price for shares is the fair market value of
the shares on the date of the grant. The Named Executives who have received
options under the 1995 Plan are, Jay H. Lustig who has received 42,000
options, Marvin E. Melson, who has received 42,000 options, John W. Lettunich
who has received 42,000 options, and Morris D. Weiss who has received 23,500
options.

2000 COMPENSATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER

         Mr. Melson serves as the President and Chief Executive Officer of
the Company. Mr. Melson's 2000 base salary is governed by his employment
agreement entered into by the Company and Mr. Melson in 1999, as described
later. His salary is comparable to a survey of peer group institutions. Mr.
Melson participates in the incentive bonus plan at the Company level. In 2000
he earned an incentive bonus of $30,000, which is approximately 17 percent of
his base salary, which is lower than the average in the survey of the peer
group. The incentive bonus was based on attaining certain performance goals.
Mr. Melson has the right to purchase 16,000 shares of the Company's Common
Stock. He is vested in 7,200 of these shares as of December 31, 2000. Mr.
Melson received 4,000 option grants in 2000 with an exercise price of
$13.5625, the market value on the date of the grant.

CONCLUSION

         The Committee believes these executive compensation policies and
programs serve the interests of shareholders and the Company effectively and
that the various pay vehicles offered are appropriately balanced to provide
increased motivation for executives to contribute to the Company's overall
future successes, thereby enhancing the value of the company for the
shareholders' benefit.

                                       53
<PAGE>

         The Committee will continue to monitor the effectiveness of the
company's total compensation program to meet the current needs of the Company.

                                          Jay H. Lustig, Chairman
                                          H. Gary Blankenship
                                          Charles T. Meeks

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         Mr. Lustig who is a member of the Compensation Committee of the
Board of Directors of the Company was, during 2000, an employee of the
Company. During 2000, no executive officer of the Company (i) served as a
member of the compensation committee of another entity, one of whose
executive officers served on the Compensation Committee of the Company, (ii)
served as a director of another entity, one of whose executive officers
served on the Compensation Committee of the Company, or (iii) was a member of
the compensation committee of another entity, one of whose executive officers
served as a director of the Company.

SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION

         The following table sets forth summary compensation information with
respect to the Company's Chairman and Chief Executive Officer, and the most
highly compensated executive officers of the Company who earned over $100,000
in annual salary and bonus ("the Named Executives"), for the years ended
December 31, 2000, 1999 and 1998:

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                   ANNUAL COMPENSATION       LONG-TERM COMPENSATION
                                             ------------------------------ -----------------------
                                                                             NUMBER OF SECURITIES
             NAME AND                FISCAL                                   UNDERLYING OPTIONS        ALL OTHER
        PRINCIPAL POSITION            YEAR      SALARY          BONUS             GRANTED (#)        COMPENSATION (1)
----------------------------------- -------- ------------- ---------------- ----------------------- ------------------
<S>                                 <C>      <C>           <C>              <C>                     <C>
Jay H. Lustig                        2000         $80,000       $18,000             10,000                  -
Chairman of the Company              1999         $71,667       $18,000               -                     -
                                     1998         $60,000       $18,000               -                     -

Marvin E. Melson                     2000        $175,000       $30,000             4,000                $6,800
President, CEO and Director          1999        $173,625       $30,000               -                  $6,400
of the Company                       1998        $164,000       $30,000               -                  $4,000

John W. Lettunich                    2000         $40,000           -               9,000                $1,600
Director of the Company and          1999         $40,000           -                 -                   $ 400
Chairman of NBC Bank, N.A.           1998        $110,000       $26,000               -                  $3,675

Morris D. Weiss                      2000        $112,042       $18,000             3,500                $5,202
Senior Vice President &              1999         $75,000        $7,500               -                  $3,300
General Counsel of the Company       1998         $75,000        $7,500               -                  $2,060
</TABLE>

 ------------------
(1) All other compensation reflects payments by the Company to the Company's
   401(k) Plan on behalf of the Named Executives.

                                       54
<PAGE>

         The following table sets forth the options granted to the Named
Executives in fiscal year 2000 under the Company's 1995 Plan. No stock
appreciation rights ("SAR's") have been granted by the Company to any of the
Named Executives.

                              OPTION GRANTS IN 2000

<TABLE>
<CAPTION>
                                                                                              POTENTIAL REALIZABLE VALUE
                                NUMBER OF                                                     AT ASSUMED ANNUAL RATES OF
                               SECURITIES        % OF TOTAL                                  STOCK PRICE APPRECIATION FOR
                               UNDERLYING     OPTIONS GRANTED     EXERCISE                            OPTION TERM
                                 OPTIONS      TO EMPLOYEES IN      PRICE       EXPIRATION    ------------------------------
            NAME                GRANTED       FISCAL YEAR (1)   ($/SHARE)         DATE            5%              10%
   ------------------------ ----------------- ---------------- -------------  -------------- --------------  --------------
<S>                         <C>               <C>              <C>            <C>            <C>             <C>
   Jay H. Lustig                      10,000            15.2%     $ 13.5625     04/17/07         $  55,213       $ 128,670

   Marvin E. Melson                    4,000             6.1%     $ 13.5625     04/17/07         $  22,085       $  51,468

   John W. Lettunich                   9,000            13.6%     $ 13.5625     04/17/07         $  49,692       $ 115,803

   Morris D. Weiss                     3,500             5.3%     $ 13.5625     04/17/07         $  19,325       $  45,034
</TABLE>

   ------------------------
   (1) Based on 66,000 options granted to all employees in
   2000.

OPTION EXERCISES AND VALUATION

         The table below reports exercises of stock options by the Named
Executives during fiscal year 2000 and the value of their unexercised stock
options as of December 31, 2000. The stock options were granted pursuant to
the Company's 1994 and 1995 Plans.

                 AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                            AND FY-END OPTION VALUES

<TABLE>
<CAPTION>
                                                         NUMBER OF SECURITIES                VALUE OF UNEXERCISED
                                                        UNDERLYING UNEXERCISED                    IN-THE-MONEY
                          SHARES                         OPTIONS AT 12/31/00                OPTIONS AT 12/31/00(1)
                       ACQUIRED ON       VALUE      -------------- ---------------    -------------- ------------------
        NAME           EXERCISE (#)    REALIZED ($)   EXERCISABLE   UNEXERCISABLE       EXERCISABLE     UNEXERCISABLE
--------------------- --------------- ------------- -------------- ---------------    -------------- ------------------
<S>                   <C>             <C>           <C>            <C>                <C>            <C>
Jay H. Lustig             21,000        $ 157,500       6,600          14,400            $ 1,650           $1,100
Marvin E. Melson          26,000        $ 182,813       7,200           8,800            $ 1,800           $1,200
John W. Lettunich         21,000        $ 141,750       9,200          11,800            $40,150           $  700
Morris D. Weiss             -              -           20,000           3,500            $ 5,000             -
</TABLE>
---------------------
(1)  The value of options is based on the difference between the closing sales
     price of $13.50 per share of Common Stock on December 31, 2000 and the
     exercise price of the option.

DEFERRED COMPENSATION

         No deferred compensation has been awarded to the Named Executives.


                                       55
<PAGE>

COMPENSATION OF DIRECTORS

         Each outside director receives $1,500 for attending each regular
meeting in person of the Board of Directors of the Company and is eligible to
participate in certain of the Company's stock option plans. If a regular
board meeting is held by conference call the outside director receives $750
for participating in the meeting. The Company also pays a fee of $500 per
outside director for participation in any meetings of a committee to which he
has been appointed if the committee meeting is scheduled on a different day
than the board meeting.

EMPLOYMENT AGREEMENTS

         The Company has entered into employment agreements with Jay H.
Lustig, Marvin E. Melson and Morris D. Weiss. Mr. Lustig's agreement,
effective as of June 1, 1999, provides that he shall serve, at the pleasure
and direction of the Company's Board of Directors, as the Chairman of the
Board of the Company. Upon the expiration of the initial three year term, the
agreement shall be automatically renewed for successive periods of one year
each, unless, not later than 30 days prior to the end of the initial term or
any renewal term, either party has given notice that it does not wish to
extend the agreement. During the term of employment, the agreement provides
for an annual base salary of $80,000. Mr. Lustig is also eligible to
participate in any other compensation, tax benefit or other benefit plan of
the Company, and is entitled to reimbursement of all reasonable and customary
expenses incurred in performing services thereunder in accordance with the
Company's policies and procedures. Mr. Lustig's employment agreement also
provides that in the event the Company terminates or elects not to renew the
agreement other than for cause (or if the Company breaches the agreement),
Mr. Lustig will receive the greater of the amount of salary for he would have
otherwise received for the partial term remaining or six month's salary at
the rate then in effect for such period, payable in a lump sum within 30 days
of termination. The agreement obligates the Company to indemnify and hold
harmless the employee to the fullest extent authorized or permitted by Texas
law, and to the fullest extent so permitted, to require the Company to
advance expenses on behalf of the employee as incurred.

         On February 26, 1999, Mr. Melson entered into an employment
agreement with the Company. The term of this agreement is for two years, with
a provision for automatic renewal for continuing one year terms unless either
the Company or Mr. Melson gives prior notice of their intention not to
continue with the agreement. Pursuant to the agreement, Mr. Melson is to
receive an annual base salary of $175,000 to be paid by the Company. Mr.
Melson is also eligible to participate in any other compensation, tax benefit
or other benefit plan of the Company. Mr. Melson is, in addition, entitled to
the use of a Company automobile or to reimbursement for auto rental expenses
related to his employment if no Company automobile is available. If Mr.
Melson is unable to perform his duties under this agreement as a result of
incapacity due to physical or mental illness, Mr. Melson is entitled to
receive, and not in lieu of any disability benefits, the full salary he would
have otherwise received under this agreement for the partial term remaining
in the then current term of this agreement plus, as a lump sum, an additional
amount equal to the greater of (i) the amount of salary Mr. Melson would have
otherwise received for the partial term remaining in the then current term,
or (ii) six months' salary at the rate in effect for such period ("the
Additional Amount"). If Mr. Melson's employment is terminated by death, the
Company shall pay to Mr. Melson's legal representative or beneficiary, the
full salary he would have received under this agreement for the partial term
remaining in the current term of this agreement plus the Additional Amount.
If Mr. Melson's employment is terminated for cause, Mr. Melson shall receive
all amounts due to him through thirty days after notice of termination has
been given. The agreement obligates the Company to indemnify and hold
harmless the employee to the fullest extent authorized or permitted by Texas
law, and to the fullest extent so permitted, to require the Company to
advance expenses on behalf of the employee as incurred. On February 26, 2001,
the Company chose not to renew Mr. Melson's contract, and as a result, Mr.
Melson was paid $87,500 in March 2001 pursuant to the contract. Mr. Melson
continues to serve in his previous capacity on an at will basis.

         On April 7, 2000, Mr. Weiss entered into an employment agreement
with the Company to serve as General Counsel of the Company. The term of this
agreement is for one year, with a provision for automatic renewal for one
year terms unless either the Company or Mr. Weiss gives prior notice, not
later than 90 days prior to the initial term or renewal term, of their
intention not to continue with the agreement. Pursuant to the agreement, Mr.
Weiss is to receive an annual base salary of $90,000 to be paid by the
Company. The contract also provided that the vesting of previously granted
stock options in the amount of 20,000 granted on June 25, 1997, would be
accelerated so that the options would be fully vested at the execution of the
contract. Mr. Weiss is also eligible to participate in any other
compensation, tax

                                       56
<PAGE>

benefit or other benefit plan of the Company and is entitled to reimbursement
of all reasonable and customary expenses incurred in performing services
thereunder in accordance with the Company's policies and procedures. Mr.
Weiss' employment agreement also provides that in the event the Company
terminates or elects not to renew the agreement other than for cause (if
Company breaches the agreement) or if there is a change in control, Mr. Weiss
will receive the greater of, the amount of salary for he would have otherwise
received for the partial term remaining, six month's salary at the rate then
in effect for such period, or any severance payable under the then current
policy of the Company, payable in a lump sum within 30 days of termination.
The agreement obligates the Company to indemnify and hold harmless the
employee to the fullest extent authorized or permitted by Texas law, and to
the fullest extent so permitted, to require the Company to advance expenses
on behalf of the employee as incurred. Mr. Weiss entered into a dual
employment agreement on April 17, 2000 with NBC Financial, Inc., a
broker-dealer subsidiary of the Company to serve as President of the
subsidiary. The terms of the agreement are identical to his other employment
contract with the Company with the exception of the salary which is $35,000
annually and paid by the subsidiary.

                        PENSION AND PROFIT SHARING PLANS

         During 1993, the Company adopted a defined contribution profit
sharing plan (the "401(k) Plan") for the benefit of substantially all
employees. The 401(k) Plan includes a 401(k) retirement plan feature.
Employees are allowed to make contributions to the 401(k) Plan. Each
subsidiary Bank's contribution to the 401(k) Plan is determined annually by
that Bank's Board of Directors. Profit sharing expense for the years ended
December 31, 2000 and 1999, totaled $227,660 and $189,391, respectively. The
Named Executives who received contributions to the 401(k) Plan in 2000 and
1999 were: John W. Lettunich who received $1,600 in 2000 and $400 in 1999;
Marvin E. Melson received $6,800 in 2000 and $6,400 in 1999; and Morris D.
Weiss who received $5,202 in 2000 and $3,300 in 1999.

                                       57
<PAGE>

PERFORMANCE GRAPH

         Below is a performance graph comparing the cumulative total
shareholder return on National Bancshares Corporation of Texas common Stock
with the cumulative total return of companies on the Standard & Poor's 500
Stock Index and American Stock Exchange Bank Index.


                                    [GRAPH]

<TABLE>
<CAPTION>
                                                                       PERIOD ENDING
                                          ------------------------------------------------------------------------
INDEX                                         12/31/95   12/31/96    12/31/97    12/31/98    12/31/99    12/31/00
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>         <C>         <C>         <C>         <C>
National Bancshares Corp.                       100.00     117.07      185.37      162.20      145.12      131.71
S&P 500                                         100.00     122.86      163.86      210.64      254.97      231.74
SNL AMEX Bank Index                             100.00     129.29      220.68      229.52      211.28      199.87
</TABLE>


                                       58
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

                      STOCK OWNERSHIP OF CERTAIN BENEFICIAL

                              OWNERS AND MANAGEMENT

         The following table sets forth information as of March 1, 2001, as
to shares of Common Stock beneficially owned by (i) each director of the
Company, (ii) the directors and executive officers of the Company as a group,
and (iii) each person known by the Company to be the beneficial owner of more
than five percent of the outstanding shares of Common Stock. Except as
otherwise indicated and subject to applicable community property laws, each
person has sole investment and voting power with respect to the shares shown.
Ownership information is based upon information furnished by the respective
individual or entities, as the case may be.

<TABLE>
<CAPTION>
                                                                                     SHARES          % OF TOTAL
                                                                                  BENEFICIALLY         SHARES
                                                                                      OWNED          OUTSTANDING
<S>                                                                               <C>                <C>
DIRECTORS, OFFICERS AND FIVE PERCENT SHAREHOLDERS (1)
--------------------------------------------------

Jay H. Lustig (2)...............................................................     222,725            5.62%

Marvin E. Melson (3)............................................................     144,231            3.64%

John W. Lettunich (3)...........................................................     71,936             1.82%

H. Gary Blankenship (4).........................................................     55,762             1.41%

Charles T. Meeks (4)............................................................     44,200             1.12%

Tamir Hacker (5)................................................................     305,400            7.71%

All directors and executive officers as a group (8 persons)(6)..................     872,354           22.02%
</TABLE>

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

(1)      The business address of the directors and officers of the Company is
         the Company's business address.
(2)      The number of shares beneficially owned by Mr. Lustig includes 157,125
         shares of Common Stock owned of record; 22,400 shares of Common Stock
         owned by his wife and children; 35,600 shares in Prophecy Partners, a
         Delaware limited partnership (an investment partnership managed by an
         entity controlled by Mr. Lustig); and 7,600 shares of Common Stock
         options which are exercisable within 60 days of March 1, 2001.
(3)      The number of shares beneficially owned by Messrs. Melson and Lettunich
         includes 7,600 and 10,100 shares of Common Stock reserved for issuance
         under stock options which are exercisable by each of them within 60
         days of March 1, 2001.
(4)      The number of shares beneficially owned by Messrs. Blankenship and
         Meeks includes 39,200 shares of Common Stock reserved for issuance
         under stock options which are exercisable by each of them within 60
         days of March 1, 2001.
(5)      The number of shares beneficially owned by Mr. Hacker are held in the
         name of Hakatak Enterprises, Inc., Nominee, which holds its shares as
         nominees for HP Partners, a California limited partnership, Tamir
         Hacker, an individual, and Tamir and Teri Hacker as joint tenants. Of
         the shares held by Hakatak Enterprises, Inc., Nominee, 270,000 are for
         HP Partners, 20,400 are for Tamir Hacker and 15,000 are for Tamir and
         Teri Hacker.
(6)      The number of shares of Common Stock beneficially owned by the
         directors and officers as a group includes 103,600 shares of Common
         Stock reserved for issuance under stock options which are exercisable
         within 60 days of March 1, 2001. See footnotes (2),(3) and (5) above.


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<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The Subsidiary Banks, from time to time, have entered into
transactions with some of the executive officers and directors of the
Company. Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features. The Subsidiary
Banks expect to continue to enter into such transactions in the ordinary
course of business on similar terms with the Company's executive officers and
directors.

OTHER TRANSACTIONS

         During 2000, the Company utilized a stock brokerage firm, Equibond,
Inc., which is 100 percent owned by Mr. Lustig, to execute certain
transactions on its behalf. Net revenues earned by the brokerage firm related
to investment transactions by the Company in 2000 totaled $3,812 on purchase
and sale transactions. The Company uses an unrelated company to act as
custodian and clearing firm for its investment assets.

                                     PART IV

ITEM 14.  EXHIBITS AND REPORTS ON FORM 8-K

A.    EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER    DESCRIPTION OF DOCUMENT
<S>               <C>                                                                                           <C>
         2.1      Third Amended Joint Plan of Reorganization, as approved by U.S. Bankruptcy Court,
                  effective May 26, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   *

         3.1      Restated Articles of Incorporation and Statement of Relative
                  Rights and Preferences of Preferred Stock, filed December 29,
                  1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  **

         3.2      Bylaws of the Company . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . .   *

         10.1     Employment Agreement between the Company and Jay H. Lustig, dated June 1, 1999 . . . . . . . . . . .

         10.2     Employment Agreement between the Company
                  and Marvin E. Melson dated February 26, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

         10.3     1994 Non-Qualified Stock Option Plan, adopted March 30, 1994 . . . . . . . . . . . . . . . . . . . .   *

         10.8     Sublease for 100 Wilshire Boulevard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***

         10.9     Form of Stock Subscription Agreement for 1994 Private Placement. . . . . . . . . . . . . . . . . . . ***

         10.10    1995 Stock Option Plan, amended May 19, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

         10.11    Form of Outside Director's Stock Option Agreement for 1995 Stock Option Plan . . . . . . . . . . . . ***

         10.12    Form of Non-Qualified Stock Option Agreement for 1995 Stock Option Plan. . . . . . . . . . . . . . . ***

         10.13    Employment Agreement between the Company and Morris D. Weiss, dated April 7, 2000. . .

                                       60
<PAGE>

         11.1     Computation of Earnings Per Share. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . .

         16       Letter regarding Change in Certifying Accountant. . . . . . . . . . . . . . . .  . . . .  . . . . . ****

         21.1     Subsidiaries of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

         23.2a    Consent of KPMG, LLP, independent auditors  . . . . . . . . . . . . . . . . . . . . . . . . . . . .
         23.2b    Consent of Padgett, Stratemann, LLP, independent auditors . . . . . . . . . . . . . . . . . . . . .

         99.1     First Amended Disclosure Statement with Respect to the Second Amended
                  Joint Plan of Reorganization  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   **

*        Previously filed on November 14, 1994, with the Company's Form 10-SB.
**       Previously filed on March 2, 1995, with the Company's Amendment No. 1 to Form 10-SB.
***      Previously filed on June 19, 1995, with the Company's Form SB-2, File no. 33-93638.
****     Previously filed on April 22, 1999, with the Company's Form 8-K.
</TABLE>

B.    REPORTS ON FORM 8-K

         No reports on Form 8-K were filed with the Securities and Exchange
Commission during the last quarter of the period covered by this Report.


                                       61
<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, National Bancshares Corporation of Texas has duly caused
this report to be signed on its behalf by the undersigned, this 29th day of
March, 2001, thereunto duly authorized.

                    NATIONAL BANCSHARES CORPORATION OF TEXAS

                       By:  /S/ ANNE R. RENFROE
                            -------------------------------------------
                           Anne R. Renfroe
                           Chief Financial Officer and Chief Accounting Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
                SIGNATURE                           TITLE                                      DATE
<S>                                         <C>                                         <C>

/s/ Jay H. Lustig                           Chairman of the Board                       March 29, 2001
----------------------------------------
Jay H. Lustig


/s/ Marvin E. Melson                        Director, President                         March 29, 2001
----------------------------------------    Chief Executive Officer
Marvin E. Melson


/s/ H. Gary Blankenship                     Director                                    March 29, 2001
----------------------------------------
H. Gary Blankenship


/s/ Tom Hacker                              Director                                    March 29, 2001
----------------------------------------
Tom Hacker


/s/ John W. Lettunich                       Director                                    March 29, 2001
----------------------------------------
John W. Lettunich


/s/ Charles T. Meeks                        Director                                    March 29, 2001
----------------------------------------
Charles T. Meeks
</TABLE>


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