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State Banks.  Banks that are organized as state banks under Texas law are subject to regulation and examination
by the Banking Commissioner of the State of Texas. The Commissioner regulates and supervises, and the Texas
Banking Department regularly examines, Hereford State Bank and Stephenville Bank and Trust Co.  The
Commissioner’s supervision and regulation of banks is primarily designed to protect the interests of depositors.
Texas law
• requires each state bank to maintain reserves against deposits,
• restricts the nature and amount of loans that may be made and the interest that may be charged, and
• restricts investments and other activities.
Because our Texas-chartered banks are members of the FDIC, they are also subject to regulation at the federal
level by the FDIC, and are subject to most of the federal laws described below.
Deposit Insurance
Each of our subsidiary banks is a member of the FDIC. The FDIC provides deposit insurance protection that
covers all deposit accounts in FDIC-insured depository institutions and generally does not exceed $100,000 per
depositor. Our subsidiary banks must pay assessments to the FDIC under a risk-based assessment system for federal
deposit insurance protection. FDIC-insured depository institutions that are members of the Bank Insurance Fund pay
insurance premiums at rates based on their risk classification. Institutions assigned to higher risk classifications (i.e.,
institutions that pose a greater risk of loss to their respective deposit insurance funds) pay assessments at higher rates
than institutions that pose a lower risk. An institution’s risk classification is assigned based on its capital levels and
the level of supervisory concern the institution poses to bank regulators. In addition, the FDIC can impose special
assessments to cover the costs of borrowings from the U.S. Treasury, the Federal Financing Bank and the Bank
Insurance Fund member banks.  As of December 31, 2002, the assessment rate for each of our subsidiary banks is at
the lowest level risk-based premium available.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, or FIRREA, an FDIC-
insured depository institution can be held liable for any losses incurred by the FDIC in connection with (1) the
“default” of one of its FDIC-insured subsidiaries or (2) any assistance provided by the FDIC to one of its FDIC-
insured subsidiaries “in danger of default.”  “Default” is defined generally as the appointment of a conservator or
receiver, and “in danger of default” is defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance.
The Federal Deposit Insurance Act, or FDIA requires that the FDIC review (1) any merger or consolidation by
or with an insured bank, or (2) any establishment of branches by an insured bank.  The FDIC is also empowered to
regulate interest rates paid by insured banks. Approval of the FDIC is also required before an insured bank retires
any part of its common or preferred stock, or any capital notes or debentures. Insured banks that are also members of
the Federal Reserve System, however, are regulated with respect to the foregoing matters by the Federal Reserve
System.
Payment of Dividends
We are a legal entity separate and distinct from our banking and other subsidiaries.  We receive most of our
revenue from dividends paid to us by our Delaware holding company subsidiary. Similarly, the Delaware holding
company subsidiary receives dividends from our bank subsidiaries. Described below are some of the laws and
regulations that apply when either we or our subsidiary banks pay dividends.
Each state bank that is a member of the Federal Reserve System and each national banking association is
required by federal law to obtain the prior approval of the Federal Reserve Board and the OCC, respectively, to