[Photograph:U.S. one hundred dollar bills, enclosed in a square]

Diversifying Within Our Markets

[Independent Bankshares logo]

Independent Bankshares, Inc.

1999 Annual Report

<PAGE>

[Illustration of Texas with an inset showing different Texas cities in the West and North Central Regions]
[Independent Bankshares, Inc. Logo]
First State Bank, N.A.
B a n k i n g    L o c a t i o n s    i n    W e s t    T e x a s
==============================================================================

|ABILENE - MAIN BANK
547 Chestnut Street
Abilene, Texas 79602
(915)672-2902                  | AZLE - MAIN BRANCH
150 Industrial Avenue
Azle, Texas 76020
(817) 444-2525           | ODESSA - WINWOOD BRANCH
3898 E. 42nd Street
Odessa, Texas 79762
(915) 366-5903            | SAN ANGELO BRANCH
4112 College
Hills Boulevard
San Angelo, Texas 76904
(915) 942-8757
|------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------
|ABILENE -
WYLIE BRANCH
6301 Buffalo Gap Road
Abilene, Texas 79606
(915) 691-0000            | AZLE - NORTH
BRANCH
11588 FM 730 North
Azle, Texas 76020
(817) 270-1112             | ODESSA - 42ND
STREET BRANCH
4950 E.42nd Street
Odessa, Texas 79762
(915) 362-2106         | STAMFORD BRANCH
210 S. Swenson Street
Stamford, Texas 79553
(915) 773-5755           
|ABILENE - BUFFALO
GAP ROAD BRANCH
4450 Buffalo Gap Road
Abilene, Texas 79606
(915) 793-2477 | LUBBOCK BRANCH
82nd Street and
Nashville Avenue
Lubbock, Texas 79423
(806) 794-8300 | ODESSA - COUNTY
ROAD WEST
BRANCH
2751 County Road West
Odessa, Texas 79763
(915) 335-8200 | WINTERS BRANCH
500 S. Main Street
Winters, Texas 79567
(915) 754-5511                
|                                                                                            | ODESSA - MAIN BRANCH
1330 E. 8th Street
Odessa, Texas 79761
(915) 332-0141          |                                                                                           |                                                                                      
|                                                                                            |                                                                                     |                                                                                          
|                                                                                            |                                                                                     |                                                                                          
|                                                                                            |                                                                                     |                                                                                          

Annual Report 99

<PAGE>

[Photograph: Magnifying glass placed on one hundred dollar bill, enclosed in a square]

[Photograph: Profile of the U.S. President, enclosed in a square]

Financial Highlights 
     1999     THIS YEAR'S
          MONETARY REPORT

|INCOME STATEMENT DATA
FOR THE YEAR                                                   | 1999                                                | 1998                                                | 1997                                               
|------------------------------------------------------------------------------------ | --------------------------------------------------- | --------------------------------------------------- | ---------------------------------------------------
|============================================================================        
|Net Income
Basic Earnings
    Per Common Share
Diluted Earnings
    Per Common Share | $2,452,000
1.12
1.08                                | $2,188,000
1.07
1.02                                | $2,110,000
1.12
1.03                               
|BALANCE SHEET DATA
AT YEAR END                                                       | 1999                                                | 1998                                                | 1997                                               
|============================================================================        
|Assets
Loans
Deposits
Stockholders' Equity                                           | $358,262,000
 186,626,000
 318,299,000
  25,356,000 | $370,178,000
 184,560,000
 330,804,000
  24,505,000 | $264,574,000
 140,853,000
 242,801,000
  20,527,000
|BALANCE SHEET DATA
DAILY AVERAGES                                                    | 1999                                                | 1998                                                | 1997                                               
|============================================================================        
|Assets
Loans
Deposits
Stockholders' Equity                                           | $362,444,000
 184,471,000
 322,520,000
  24,854,000 | $293,579,000
 153,188,000
 265,959,000
  22,114,000 | $258,874,000
 132,891,000
 237,379,000
19,275,000  
|STOCK TRANSFER AGENT                                                                 | STOCK EXCHANGE LISTING                             
|============================================================================        
|First State Bank, N.A.
547 Chestnut Street
P.O. Box 3296
Abilene, Texas 79604        | American Stock Exchange
(AMEX)                      |                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|COMPANY SECURITIES                                                                   | AMEX TRADING SYMBOL                                 | AMEX LISTING                                       
|============================================================================        
|Common Stock
Trust Preferred Securities                                              | IBK
IBK.Pr                                          |                                                     | Indep Bksh
Indep Cap                               
|                                                                                    

1

Independent Bankshares, Inc.

<PAGE>

President's Letter

A   W O R D   T O   O U R   S H A R E H O L D E R S
[Graphic: Profile of the U.S. President, enclosed in a large square and part of a dollar bill, enclosed in a small square]

[PHOTOGRAPH OF BRYAN STEPHENSON AND RANDAL CROSSWHITE]

BRYAN STEPHENSON

President and Chief Executive Officer

RANDAL CROSSWHITE

Senior VP and Chief Financial Officer

[two columns]

[column 1]

For the year ended December 31, 1999, Independent Bankshares, Inc. (the "Company") reported net income of $2,452,000.  This represented an increase of $264,000, or 12.1 percent, over net income reported for the year ended December 31, 1998.  The
increase can be attributed to a 27 basis point increase in the Company's net interest margin (4.57 percent for 1999, compared to 4.30 percent for 1998) and a $125,000 ($83,000 net of tax) reduction in the Company's provision for loan losses for 1999.
Both improvements are directly related to the Company's

[PHOTOGRAPH OF JIM FITZHUGH AND STEVE STRAIN]

[Photograph caption: Jim Fitzhugh(left) Branch President, First State Bank, N.A.,

Abilene Branch, Steve Strain-President, J.H. Strain and Son, Inc.]

[column 2]

decision in the fall of 1997 to reduce its concentration in indirect consumer lending and to focus more on commercial and real estate lending.

This focus over the two year period provided for a $34 million, or 50 percent, increase in commercial and real estate loans (not counting the acquisition of Azle State Bank in September 1998) and has offset the $36
million, or 72 percent, net paydown in the Company's indirect lending portfolio.  Historically, the Company's commercial and real estate loan portfolios have provided a higher yield than the indirect lending portfolio and have generated fewer loan losses
in the last several years.

With the Company's primary market area spanning approximately 100,000 square miles, the success in this endeavor can be attributed to experienced lending and support personnel.  This experience level, in turn, allows for a
decentralized approach to the lending function.  Video conferencing and other forms of technology provide management oversight and the rapid response needed to compete effectively for today's commercial customers.

Experience and oversight are evident in the Company's superior asset quality.  At year-end 1999, the Company's nonperforming assets to total assets ratio was 0.25 percent, compared to a peer group average of 0.65 percent.

2

Annual Report 99

<PAGE>



[two columns]

[column 1, top half of page]

While our lending staff was busy soliciting new relationships, our operational and technical personnel were converting the Company's Azle locations to our data processing system, standardizing product offerings and
expending significant time and energy on Y2K preparation and testing.  The Y2K efforts were rewarded with a smooth transition into the new millennium.

These success, and the successes of past years, have created a desirable franchise.  On March 1, 2000, the Company entered into a definitive agreement with State National Bancshares, Inc., a privately held bank holding
company headquartered in Lubbock, Texas.  The agreement calls for a cash purchase of the Company's common stock for approximately $45,473,000, or $20.00 per share, and the assumption of the Company's $13,000,000 of Trust Preferred Securities.  This
transaction is subject to approval by the shareholders of the Company as well as regulatory agencies and is expected to be completed in the third quarter of 2000.

Because of this pending transaction, in addition to our normal year-to-date graphic analysis of the Company's performance, we have included a brief history of the Company's achievements.  This history contains a brief
description of the 1980's and chronicles the Company's efforts from January 1989, as it began to rise from the ashes of a severely troubled financial

[column 2, top half of page]

Photograph of Virgil Trower, Mike Jarrett, and Mike Trout]

[Photograph caption:  (From left to right) Virgil Trower, President of Trower Realtors Mike Jarrett, President of First State Bank, N.A., Odessa Branch Mike Trout, President of Rototech, Inc.]

institution.  The process involved a dedicated Board of Directors, the retention of experienced employees, the solidification of strong customer relationships, diversification of the Company's markets and, ultimately, the maximization of
shareholder value.  I believe this is all you can ask of a publicly traded company, and I am proud to have been associated with the success.

Sincerely,

/s/ Bryan Stephenson

[heading for columns 1 and 2, bottom half of page]Independent Bankshares, Inc. History

[column 1, bottom half of page]January 1981 - Independent Bankshares, Inc. (the "Company") exchanges shares of its Common Stock for stock in the First State Bank, Abilene, Texas.June 1981 - The Company issues additional shares in an initial public offering.December 1984 - The annual report indicates total deposits of $727 million, total loans of $513.4 million and stockholders equity of $46 million.December 1985 - The Company reports its first of what turns out to be a
string of operating losses, brought on by the "Texas Depression."  Poor oil and gas prices contributed to a collapse in real estate, agriculture and industry.December 1988 - The Company announces its fourth consecutive year of operating losses.  All told, the 
[column 2, bottom half of page]
Company had recorded a total of $60 million in losses since year-end 1984.  With the imminent failure of the Company's lead bank accounted for, deposits totaled $228 million, loans were $143.6 million and stockholders' equity was a negative $18 million.January 1989 -The Company names Bryan Stephenson President and CEO and retains Randal Crosswhite as Chief Financial Officer.  Stephenson presents to the Company's Board of Directors a proposal to save the Company's solvent subsidiaries.  The Board
authorizes Stephenson to implement the proposal.February 1989 - The FDIC declares The First State Bank insolvent, but is unable to close the Company's remaining seven subsidiary banks.March 1989 - the Company reports deposits of $233

3

Independent Banckshares, Inc.

<PAGE>



million, loans of $133.8 million and stockholders' equity of a negative $18 million.  In addition to the negative stockholders' equity, the Company is severely past due on $28 million in debt.  This debt is secured by, among other things, the Common
Stock of the Company's subsidiary banks.  Past due interest totals $8 million.June 1989 - The Company fails to meet the listing requirements for NASDAQ and is delisted.  The Company successfully negotiates a transfer of collateral on $4.5 million of its debt and in the process realizes extraordinary gains of $1.2 million.December 1989 - the Company enters into a restructure agreement on its remaining debt.  The restructure provides for the forgiveness of $15.8 million in principal and $8.8 million in interest in exchange for a new $8 million note, collateralized by
the common stock of the Company's subsidiary banks, and $220,000 of its Series A Preferred Stock.December 1989 - The Company effects a quasi-reorganization which marks the Company's assets to market and allows a transfer of $33 million from surplus to retained earnings allowing for a "fresh start."  As part of the reorganization, the Company
retains $18 million of its net operating loss for utilization in future years.December 1990 - The Company completes a unit offering of its Common Stock and Series C Preferred Stock, raising $1 million.  The Company sells its Muleshoe and Wellington banks for a total of $4.6 million.  Proceeds are applied to the Company's debt.
December 1990 - The Company reports its first operating profit in six years.April 1991 - The Company's Common Stock is relisted on NASDAQ.May 1991 - Because of the reduced size of the Company, its large shareholder base and the need to meet a $3.00 minimum Common Stock price to remain listed on NASDAQ, the Company effects a 1-for-8 reverse stock split.January 1993 - The Company completes the sale of its Olton Bank and applies $1.5 million to its debt.January 1993 - The Company redeems its Series A Preferred Stock.December 1993 - The Company purchases The Winters State Bank, Winters, Texas at a discount to book value.November 1994 - The Company merges its Winters and Stamford banks into First State Bank, N.A., Abilene.September 1995 - The Company lists its Common Stock on the American Stock Exchange.January 1996 - The Company purchases Peoples National Bank, Winters, Texas and merges it into First State Bank, N.A., Abilene.May 1996 - The Company purchases a branch of Coastal Savings Bank in San Angelo, Texas.July 1996 - The Company signs an agreement to purchase Crown Park Bancshares, Inc. and its subsidiary bank, Western National Bank, Lubbock, Texas, for $7,510,000.November 1996 - The Company files a registration statement to raise approximately $4 million in a secondary offering of its Common Stock.December 1996- The Company reports $189.6 million in deposits, $92 million in loans, $14.9 million in stockholders' equity and net income for the year of $1.4 million.  The Company's Odessa bank is merged into First State Bank, N.A., Abilene,
leaving the Company with a single subsidiary bank.January 1997 - The Company completes its stock offering and the purchase of Crown Park Bancshares.  Western National Bank merges into First Sate Bank, N.A., Abilene.October 1997 - First State Bank, N.A., Abilene opens two additional branches located in Albertson's supermarkets in Abilene and Odessa.December 1997 - The Company reports $242.8 million in deposits, $140.9 million in loans, $20.5 million in stockholders' equity and net income for the year of $2.1 million.May 1998 - First State Bank, N.A., opens its third supermarket branch in an Odessa Albertson's.June 1998 - The Company announces that it has entered into a definitive agreement to acquire Azle Bankcorp and it subsidiary, Azle State Bank for $19,025,000.July 1998 - The Company files a registration statement to raise approximately $2.6 million in a secondary offering of its Common Stock and $13 million of Trust Preferred Securities.September 1998 - The Company completes its stock offerings and the purchase of Azle Bancorp and its subsidiary, Azle State Bank.March 1999 - The Company mergers Azle State Bank into First State Bank, N.A., Abilene.December 1999 - The Company reports $318.3 in deposits, $186.6 million in loans, $25.4 million in stockholders' equity and net income of $2.5 million.March 2000 - The Company enters into a definitive agreement with State National Bancshares, Inc.  The agreement calls for a cash purchase of the Company's Common Stock for approximately $45,473,000 or $20.00 per share.
4

Annual Report 99

<PAGE>

[Graphic: Triangle with an eye enclosed in a large square and part of a dollar bill enclosed in a small square]     Performance Highlights

A   L O O K   A T   O U R    E F F O R T S   F O R   1 9 9 9

[Bar Chart illustrating the Company's total assets at year end for each of the ten years in the period ended December 31, 1999]

TOTAL ASSETS

After reaching a low in 1990 of $142 million in assets, the Company grew through the solicitation of new customer relationships and acquisitions.  During 1999, the Company directed its efforts to asset/liability management which resulted in a
reduction in total assets and an increased net interest margin.

[Bar Chart illustrating the Company's total loans at year end for each of the ten years in the period ended December 31, 1999]

TOTAL LOANS

A weak West Texas economy limited loan growth during the early 1990's.  As the economy improved, the Company experienced loan growth due to a favorable competitive environment and acquisitions.

[Bar Chart illustrating the Company's net income at year end for each of the ten years in the period ended December 31, 1999]

NET INCOME

After the resolution in 1994 of litigation pertaining to problems resulting from the 1980's, the Company consistently provided increases in net income.

[Bar Chart illustrating the Company's diluted earnings per share at year end for each of the ten years in the period ended December 31, 1999]

DILUTED EARNINGS PER SHARE

Diluted earnings per share increased from a low of $0.10 in 1991 to a record $1.08 in 1999.



[Bar Chart illustrating the Company's return on average stockholders' equity for each of the ten years in the period ended December 31, 1999]

5

Independent Bankshares, Inc.

<PAGE>

STOCKHOLDERS' EQUITY

The preservation of a large net operating loss carry forward, retained net income and secondary common stock offerings contributed to consistent increases in stockholders' equity.

[Bar Chart illustrating the Company's diluted book value per share for each of the ten years in the period ended December 31, 1999]

DILUTED BOOK VALUE PER SHARE

The Company created shareholder value as diluted book value per share increased approximately 216 percent during the 1990's.

[Graphic: Bank enclosed in a large square and U.S. dollar bills enclosed in a small square]

Board of Directors

|John L. BeckhamAttorney
Beckham, Rector & Eargle, L.L.P.                                                                                   | Marshal M. KellarChairman of the Board
West Texas Wholesale Supply Co.              | James D. Webster, M.D.Physician
Nephrology Associates          
|------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | ---------------------------------------------------------------
|Lee CaldwellAttorney                                                                                                                       | Tammy McAlisterPresident
McAlister, Inc.                                            | C.G. WhittenAttorney, 
Whitten & Young, P.C.                   
|Mrs. William R. (Amber) CreeEntrepreneuse
Randal N. CrosswhiteSenior Vice President & Chief
Financial Officer
Independent Bankshares, Inc. | Bryan W. StephensonPresident & Chief Executive Officer
Independent Bankshares, Inc. | Advisory DirectorsL.H. MosleyPresident
Mosley Investments, Inc.
|Scott L. TaliaferroChairman of the Board
Independent Bankshares, Inc.
President
Scott Oils, Inc.                                          
|J.E. SmithInvestments                                                                                                                     
|Nancy E. JonesExecutive Director
Community Foundation of Abilene                                                                           | John A. Wright*Banking Consultant*Emeritus                                         

6

Annual Report 99

<PAGE>

Report of Independent Accountants
To the Board of Directors and Shareholders of Independent Bankshares, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income and comprehensive income, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial
position of Independent Bankshares, Inc. at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in
the United States.  These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that
our audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP

Fort Worth, Texas
January 28, 2000, except as to the information presented in
Note 21, for which the date is March 1, 2000

7







INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998



ASSETS

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 1999                                                                                                                                                                                                                             | 1998                                                                                                                                                                                                                     
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                  |                                                                                                                                                                                                                          
|Cash and Cash Equivalents:
  Cash and Due from Banks
  Federal Funds Sold
    Total Cash and Cash Equivalents
Securities (Note 3):
  Available-for-sale
  Held-to-maturity
   Total Securities
Loans (Note 4):
  Total Loans
  Less:
   Unearned Income on Installment Loans
   Allowance for Possible Loan Losses
     Net Loans
Intangible Assets (Note 5)
Premises and Equipment (Note 6)
Accrued Interest Receivable
Other Real Estate and Other Repossessed Assets
Other Assets
Total Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $  22,985,00015,775,000
   38,760,000   48,387,00060,516,000
  108,903,000  187,143,000
      517,0001,833,000
 184,793,000  10,158,000
   9,816,000
   3,538,000
     272,0002,022,000
$358,262,000
==========                  | $  22,562,00042,175,000
   64,737,000   30,370,000
   64,838,000
   95,208,000  186,326,000
    1,766,0001,842,000
  182,718,000   10,831,000
   10,294,000
    3,254,000
      630,0002,506,000
$370,178,000
===========
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Liabilities:Deposits (Note 7):
  Noninterest-bearing Demand Deposits
  Interest-bearing Demand Deposits
  Interest-bearing Time Deposits
   Total Deposits
Accrued Interest Payable
Notes Payable (Note 8)
Other Liabilities
   Total Liabilities
Guaranteed Preferred Beneficial Interests in the Company's
  Subordinated Debentures (Note 10)
Commitments and Contingent Liabilities (Notes 15 and 17)Stockholders' Equity (Notes 11 and 18):Preferred Stock - Par Value $10.00; 5,000,000 Shares Authorized:
    Series C Preferred Stock - Stated Value $42.00; 50,000 Shares
    Designated; 5,066 Shares Issued at December 31, 1998
Common Stock - Par Value $0.25; 30,000,000 Shares Authorized;
  2,333,647 and 2,217,296 Shares Issued at December 31, 1999
  and 1998, Respectively
Additional Paid-in Capital
Retained Earnings
Unrealized Gain (Loss) on Available-for-sale Securities (Note 3)
Unearned Employee Stock Ownership Plan Stock
Treasury Stock, 60,000 Shares Held at December 31, 1999, at Cost
    Total Stockholders' Equity
      Total Liabilities and Stockholders' Equity | $  57,441,000
  102,573,000158,285,000  318,299,000
     1,074,000
              0533,000
  319,906,00013,000,000
0
     583,000
  15,955,000
   9,972,000
    (343,000)
    (142,000)(669,000)25,356,000$358,262,000
========== | $  60,086,000
  110,485,000160,233,000  330,804,000
    1,163,000
        1,000705,000
332,673,00013,000,000
51,000
     554,000
  15,933,000
   7,975,000
     161,000
    (169,000)0  24,505,000$370,178,000
==========

See accompanying notes.



-8-

<PAGE>

INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 1999                                                                                                                                                                                                                                                                                                                                                                                               | 1998                                                                                                                                                                                                                                                                                                                                                        | 1997                                                                                                                                                                                                                                                                                                                                          
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Interest Income:
  Interest and Fees on Loans (Note 4)
  Interest on Securities
  Interest on Federal Funds Sold
    Total Interest Income
Interest Expense:
  Interest on Deposits
  Interest on Notes Payable (Note 8)
    Total Interest Expense
      Net Interest Income
  Provision for Loan Losses (Note 4)
          Net Interest Income After Provision for Loan Losses
Noninterest Income:
  Service Charges
  Trust Fees
  Other Income
    Total Noninterest Income
Noninterest Expenses:
  Salaries and Employee Benefits
  Net Occupancy Expense
  Distributions on Guaranteed Preferred Beneficial Interests
    in the Company's Subordinated Debentures (Note 10)
  Equipment Expense
  Amortization of Intangible Assets
  Stationery, Printing and Supplies Expense
  Professional Fees
  Net Costs Applicable to Other Real Estate and Other
   Repossessed Assets
  Other Expenses
    Total Noninterest Expenses
         Income Before Federal Income Taxes
  Federal Income Taxes (Note 9)
         Net Income
  Other Comprehensive Income, Net of Tax: 
  Unrealized Holding Gains (Losses) on Available-for-sale
    Securities Arising During the Period
         Comprehensive Income
Preferred Stock Dividends (Note 11)
Net Income Available to Common Stockholders
Basic Earnings Per Common Share
  Available to Common Stockholders (Note 12)
Diluted Earnings Per Common Share
  Available to Common Stockholders (Note 12) | $17,027,000 
5,847,000 1,332,000 24,206,000 9,898,000 0 9,898,000 14,308,000 445,000 13,863,000 2,842,000 
208,000 217,000 3,267,000 6,046,000 
1,433,000 
1,105,000 
1,103,000 
673,000 
574,000 
436,000 
 
91,000 2,043,000 13,504,000 3,626,000 1,174,000 2,452,000 (504,000)
$1,948,000 
======== 
$   20,000 
======== 
$2,432,000 
======== 
$      1.12 
======== 
 
$      1.08 
======== | $14,150,000
4,425,0001,859,000
20,434,0009,268,0008,000
 9,276,00011,158,000570,000
10,588,0002,227,000
199,000365,0002,791,0004,752,000
1,099,000
304,000
887,000
339,000
442,000
305,000
106,0001,764,0009,998,000
3,381,0001,193,000
2,188,000130,000$2,318,000========$   22,000
========
$2,166,000
========
$      1.07
========
$      1.02
======== | $12,236,000
5,176,000912,000
18,324,0008,600,00059,000
 8,659,0009,665,000250,000
 9,415,0001,605,000
195,000109,000
 1,909,0003,970,000
857,000
0
834,000
218,000
419,000
333,000
23,0001,583,0008,237,0003,087,000977,000
2,110,0006,000$2,116,000
========
$   41,000
========
$2,069,000
========
$      1.12
========$      1.03
========

See accompanying notes.

-9-

<PAGE>

INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | SERIES CPREFERRED STOCK
SHARES     AMOUNT                                                                                                                                           | COMMON STOCK
SHARES   AMOUNT                                                                                                                                                                                                                                                                        | ADDITIONAL
PAID-INCAPITAL                                                                                            | RETAINEDEARNINGS                                                                                                                           | UNREALIZED
GAIN (LOSS)
ON AVAILABLE
FOR-SALESECURITIES                                                              | UNEARNED EMPLOYEE
STOCK OWNERSHIPPLAN STOCK
SHARES       AMOUNT                                                                                                                                                                                                                                                                | TREASUREY STOCK
SHARES       AMOUNT                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|BalancesJanuary 1, 1997
  Net Income  Adjustment to Unrealized Gain 
   on Available-for-sale Securities,
    Net of Tax of $3,000 (Note 3)
  Cash Dividends ($0.19 Per Share)
  Sale of Stock in Secondary Offering
   (Note 11)
  Purchase of Stock in Secondary Offering
    by ESOP, Financed by a Loan from
    the Company - Unearned Stock (Note 11) 
  Principal Payments on Loan to ESOP
   for Stock Purchase - Earned Stock
   (Note 11)
  5-for-4 Stock Split (Note 11) 
  Exercise of Stock Options
  Conversion of Series C Preferred
   Stock (Note 11)
Balances December 31, 1997
  Net Income
Adjustment to Unrealized Gain 
   on Available-for-sale Securities,
   Net of Tax of $67,000 (Note 3) 
Cash Dividends ($0.20 Per Share)
 Sale of Stock in Secondary Offering
   (Note 11)
Principal Payments on Loan to ESOP for
   Stock Purchase - Earned Stock
    (Note 11)
Conversion of Series C Preferred
   Stock (Note 11)
Balances--December 31, 1998
  Net Income
  Adjustment to Unrealized Loss
  on Available-for-sale Securities,
   Net of Tax of $260,000 (Note 3)
  Cash Dividends ($0.20 Per Share)
  Principal Payments on Loan to ESOP
   for Stock Purchase - Earned Stock
   (Note 11)
  Conversion of Series C Preferred
  Stock (Note 11)
  Purchase of Treasury Stock (Note 11)
Balances--December 31, 1999 | 13,478      $135,000(7,888)       (79,000) 5,590          56,000  (524)    (5,000) 
5,066       51,000 
 
(5,066)       (51,000)      _______
0        $        0
=====      ====== | 1,104,644      $276,000
316,250          79,000
388,911         97,000
17,499            5,000147,959         37,0001,975,263       494,000
230,000          57,00012,033        3,0002,217,296       554,000
116,351         29,000
_______     ________
2,333,647   $  583,000
=======    ======= | $9,891,000
3,899,000
(5,000)
94,00042,00013,921,000
2,010,0002,00015,933,000
22,000
__________
$15,955,000
========= | $     4,610,000
2,110,000
(405,000)
(97,000)
6,218,000
2,188,000
(431,000)
7,975,000
2,452,000
(455,000)
__________
$  9,972,000
========= | $   25,000     
6,000         
31,000    
130,000     161,000  
(504,000) 
_____________
$    (343,000)
=========== | 0      $          0     
(15.000)         (214,000)  
1,789             21,000   
 
(3,750)                                        (16,961)          (193,000) 
2,122              24,000           
(14,839)        (169,000)
2,369            27,000 
__________       ________
(12,470)     $(142,000)
=======     ======== | 0           $          0            0                     0         
0                   0(60,000)      (669,000)(60,000)     $(669,000)
=======    ========

See accompanying notes.

-10-





INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997





|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 1999                                                                                                                                                                                                                                                                                                                  | 1998                                                                                                                                                                                                                                                                                                                      | 1997                                                                                                                                                                                                                                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Cash Flows from Operating Activities:
  Net Income
Adjustments to Reconcile Net Income to Net Cash
  Provided by Operating Activities:
   Deferred Federal Income Tax Expense
   Depreciation and Amortization
   Provision for Loan Losses
   Gain on Sale of Premises and Equipment
   Gains on Sales of Other Real Estate and Other Repossessed Assets
   Writedown of Other Real Estate and Other Repossessed Assets
   Increase in Accrued Interest Receivable
   Decrease (Increase) in Other Assets
   Decrease in Accrued Interest Payable
   Increase (Decrease) in Other Liabilities
     Net Cash Provided by Operating Activities
Cash Flows from Investing Activities:
   Proceeds from Maturities of Available-for-sale Securities
   Proceeds from Maturities of Held-to-maturity Securities
   Proceeds from Sale of Available-for-sale Securities
   Purchases of Available-for-sale Securities
   Purchases of Held-to-maturity Securities
   Net Increase in Loans
   Proceeds from Sale of Premises and Equipment
   Additions to Premises and Equipment
   Proceeds from Sales of Other Real Estate and Other Repossessed Assets
   Net Cash and Cash Equivalents Paid in Acquisitions
     Net Cash Provided by (Used in) Investing Activities
Cash Flows from Financing Activities:
   Net Increase (Decrease) in Deposits
   Proceeds from Notes Payable
   Repayment of Notes Payable
   Net Proceeds from Issuance of Equity Securities
   Net Proceeds from Issuance of Guaranteed Preferred Beneficial 
    Interests in the Company's Subordinated Debentures
   Payment of Cash Dividends
   Purchase of Treasury Stock
   Cash Paid for Fractional Shares in Stock Dividend
     Net Cash Provided by (Used in) Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year | $2,452,000
260,000
1,424,000
445,000
(1,000)
(1,000)
6,000
(284,000)
224,000
(89,000)88,000
  4,524,0006,768,000
34,031,000
0
(25,663,000)
(29,918,000)
(3,027,000)
1,000
(273,000)
1,210,0000
(16,871,000)
(12,505,000)
0
(1,000)
0
0
(455,000)
(669,000)0
(13,630,000)
(25,977,000)64,737,000$ 38,760,000
========= | $2,188,000
488,000
962,000
570,000
0
(12,000)
3,000
(190,000)
(698,000)
(92,000)84,000
3,303,00015,766,000
36,745,000
0
(19,489,000)
(22,627,000)
(254,000)
0
(651,000)
1,551,000(10,133,000)908,0007,048,000
4,300,000
(4,356,000)
2,067,000
12,480,000
(431,000)
0021,108,00025,319,00039,418,000$ 64,737,000
========= | $2,110,000
772,000
733,000
250,000
0
(58,000)
2,000
(192,000)
452,000
(182,000)(1,106,000)2,781,00017,809,000
20,195,000
193,000
(8,060,000)
(15,080,000)
(8,692,000)
0
(819,000)
1,352,000(1,236,000)5,662,000(378,000)
1,300,000
(3,572,000)
4,077,000
0
(405,000)
0(5,000)
   1,017,000   9,460,00029,958,000$ 39,418,000
=========



See accompanying notes.

-11-

<PAGE>

INDEPENDENT BANKSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997

NOTE 1:  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

Independent Bankshares, Inc., a Texas corporation (the "Company"), is a bank holding company headquartered in Abilene, Texas. The Company owns all of the common securities of Independent Capital Trust
("Independent Capital") and indirectly owns through a Delaware subsidiary, Independent Financial Corp. ("Independent Financial"), 100% of the stock of First State Bank, National Association, Abilene, Texas (the "Bank"). The Bank currently operates
full-service banking locations in the Texas cities of Abilene (3 locations), Azle (2 locations), Lubbock, Odessa (4 locations), San Angelo, Stamford and Winters.

The Company's primary activities are to assist the Bank in the management and coordination of its financial resources and to provide capital, business development, long range planning and public relations
for the Bank. The Bank operates under the day-to-day management of its own officers and board of directors and formulates its own policies with respect to banking matters.

The principal services provided by the Bank are as follows:

Commercial Services. The Bank provides a full range of banking services for its commercial customers. Commercial lending activities include short-term and medium-term loans, revolving credit
arrangements, inventory and accounts receivable financing, equipment financing and interim and permanent real estate lending. Other services include cash management programs and federal tax depository and night depository services.

Consumer Services. The Bank also provides a wide range of consumer banking services, including checking, savings and money market accounts, savings programs and installment and personal loans. The
Bank makes automobile and other installment loans directly to customers, as well as indirectly through automobile dealers. The Bank makes home improvement, home equity and real estate loans and provide safe deposit services. As a result of sharing
arrangements with the Pulse automated teller machine system network, the Bank provides 24-hour routine banking services through automated teller machines ("ATMs"). The Pulse network provides ATM accessibility throughout the United States. The Bank also
offers investment services and banking by phone or personal computer.

Trust Services. The Bank provides trust and agency services to individuals, partnerships and corporations from its offices in Abilene, Lubbock and Odessa. The trust division also provides investment
management, administration and advisory services for agency and trust accounts, and acts as trustee for pension and profit sharing plans.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company, Independent Capital, Independent Financial and the Bank. All significant intercompany accounts and transactions have been
eliminated upon consolidation.

Statements of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

Securities

Management determines the appropriate classification of securities at the time of purchase. If the securities are purchased with the positive intent and the ability to hold the securities until
maturity, they are classified as held-to-maturity and carried at historical cost, adjusted for amortization of premiums and accretion of fees and discounts using a method that approximates the interest method. Securities to be held for indefinite periods
of time are classified as available-for-sale and carried at fair value. Unrealized gains and losses, net of taxes, related to securities available-for-sale are recorded as a separate component of stockholders' equity. The Company has no securities
classified as trading as of December 31, 1999 and 1998.  The cost of securities sold is based on the specific identification method.

-12-

<PAGE>

Loans

Loans are stated at the principal amount outstanding. Interest on the various types of commercial, real estate and other loans is accrued daily based on the principal balances outstanding. Income on
installment loans is recognized using this method or other methods under which income approximates the effective interest method.

The recognition of income on a loan is discontinued, and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management,
the outstanding interest remains collectible. Interest is subsequently recognized only as received until the loan is returned to accrual status.

Allowance for Possible Loan Losses

The allowance for possible loan losses is maintained at a level that, in management's opinion, is adequate to absorb possible losses in the loan portfolio and unfunded loan commitments. The allowance is
based on a number of factors, including risk ratings of individual credits, current business and economic conditions, the size and diversity of the portfolio, collateral values and past loan loss experience.

Impaired loans, should they occur, are normally placed on nonaccrual status and, as a result, interest income is recorded only as cash is received. There was no interest income recognized on such loans
during the years ended December 31, 1999, 1998 or 1997.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. Depreciation for financial reporting purposes is computed primarily on the straight-line method over the estimated useful lives
of five (5) to forty (40) years. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations for the period.

Intangible Assets

A core deposit intangible resulting from the acquisition of Azle State Bank, Azle, Texas ("Azle State") is being amortized over a twelve (12) year period. Goodwill resulting from the acquisition of Azle
State and other acquisitions accounted for using the purchase method is being amortized on the straight-line method over periods ranging from fifteen (15) to twenty-five (25) years. Management assesses the recoverability of goodwill by comparing the
goodwill to the undiscounted cash flows expected to be generated by the acquired banks during the anticipated period of benefit. As of December 31, 1999, management believes that no impairment has occurred.

Federal Income Taxes

The Company uses the liability method of accounting for deferred income taxes as required by the Financial Accounting Standards Board (the "FASB") Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"). Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Other Real Estate and Other Repossessed Assets

Other real estate and other repossessed assets consist principally of real estate properties and automobiles acquired by the Company through foreclosure. Such assets are carried at the lower of cost
(generally the outstanding loan balance) or estimated fair value, net of estimated costs of disposal, if any. If the estimated fair value of the collateral securing the loan is less than the amount outstanding on the loan at the time the assets are
acquired, the difference is charged against the allowance for possible loan losses. Subsequent declines in estimated fair value, if any, are charged to noninterest expense.

Derivative Instruments and Hedging Activities

In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The new standard requires that all derivatives be recognized as either assets or liabilities in the
consolidated balance

-13-

<PAGE>

specifically designated as a hedging instrument. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. This statement, as
amended, by Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of SFAS No. 133" is effective for all fiscal quarters of fiscal years beginning after June 15,
2000.

Use of Estimates

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

NOTE 2:  BANK ACQUISITIONS

The Company completed the acquisition of Azle Bancorp and its subsidiary bank, Azle State, effective September 22, 1998, for an aggregate cash consideration of $19,025,000. To obtain funding for the
acquisition, the Company sold an aggregate of 230,000 shares of its common stock ("Common Stock") at a price of $11.50 per share, and Independent Capital, a Delaware business trust formed by the Company, sold 1,300,000 of its 8.5% Cumulative Trust
Preferred Se
t of Subordinated Debentures ("Subordinated Debentures") of the Company. The Company also borrowed $4,300,000 from a financial institution in Fort Worth, Texas (the "Fort Worth Bank") to finance a portion of the cost of acquiring Azle Bancorp. The
borrowings from the Fort Worth Bank were paid off on September 30, 1998, from the proceeds of a cash dividend paid to the Company by Azle State. At the date of acquisition, Azle Bancorp had total assets of $93,158,000, total loans, net of unearned income,
of $45,1
lt of this acquisition. The core deposit intangible is being amortized over a period of 12 years and the goodwill is being amortized over a period of 25 years.

The Company completed the acquisition of Crown Park Bancshares, Inc. ("Crown Park") and its wholly owned subsidiary bank, Western National Bank, Lubbock, Texas ("Western National"), effective January 28,
1997, for an aggregate cash consideration of $7,510,000. On the acquisition date, Crown Park was merged with and into a wholly owned subsidiary of the Company and Western National was merged with and into the Bank. To obtain funding for the acquisition,
the Company sold an aggregate of 395,312 shares of Common Stock in an underwritten offering at a price of $11.40 per shares ( the "1997 Offering").  The 1997 Offering included the sale of 51,562 shares covered by the underwriter's over-allotmemt option.
The above number of shares and price per share have been
adjusted for the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to the Company's shareholders in May 1997. The Company borrowed $800,000 from a financial institution in Amarillo, Texas (the "Amarillo Bank") to finance a portion of
the cost of acquiring Crown Park. The $800,000 of borrowings was reduced to $400,000 with the proceeds of the sale of the over-allotment shares. The borrowing was paid off on December 31, 1997. At the date of acquisition, Crown Park had total assets of
$60,420,000, total loans, net of unearned income, of $41,688,000, total deposits of $53,604,000 and stockholders' equity of $4,238,000. This acquisition was accounted for using the purchase method of accounting. A total of $2,486,000 of goodwill was
recorded as a result of this acquisition. Such goodwill is being amortized over a period of 15 years.

A total of $673,000, $339,000 and $218,000 in amortization expense of intangible assets was recorded during the years ended December 31, 1999, 1998 and 1997, respectively.

-14-



<PAGE>

NOTE 3:  SECURITIES

The amortized cost and estimated fair value of available-for-sale securities at December 31, 1999 and 1998, were as follows:

|                                                                                                                                                                                                     | 1999                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------
|                                                                                                                                                                                                     | Amortized
Cost
----------------                                
|                                                                                                                                                                                                     |                                                                
|Obligations of U.S. Government agencies
  and corporations
U.S. Treasury securities
Mortgage-backed securities
Other securities
Total available-for-sale securities                                  | $32,128,000
14,099,000
1,648,0001,019,000
$48,894,000
=========
|                                                                                                                                                                                                     |                                                                
|                                                                                                                                                                                                     | 1998                                                           
|                                                                                                                                                                                                     | Amortized
Cost
----------------                                
|Obligations of U.S. Government agencies
  and corporations
U.S. Treasury securities
Mortgage-backed securities
Other securities
Total available-for-sale securities                                  | $18,085,000
9,031,000
2,426,000583,000
$30,125,000
=========   
|                                                                                                                                                                                                     |                                                                
|The amortized cost and estimated fair value of held-to-maturity securities at December 31, 1999 and 1998, were as follows:                                                                          
|                                                                                                                                                                                                     | 1999                                                           
|                                                                                                                                                                                                     | Amortized
Cost
---------------                                 
|Obligations of U.S. Government agencies
  and corporations
U.S. Treasury securities
Obligations of states and political 
  subdivisions
Mortgage-backed securities
Total held-to-maturity securities | $43,238,000
2,006,000
9,103,0006,169,000
$60,516,000=========  
|                                                                                                                                                                                                     |                                                                
|                                                                                                                                                                                                     | 1998                                                           
|                                                                                                                                                                                                     | Amortized
Cost
------------------                              
|Obligations of U.S. Government agencies
  and corporations
U.S. Treasury securities
Obligations of states and political 
  subdivisions
Mortgage-backed securities
Total held-to-maturity securities | $43,452,000
2,427,000
9,262,0009,697,000
$64,838,000=========  

-15-

<PAGE>

The amortized cost and estimated fair value of securities at December 31, 1999, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment penalties.



|Available-for-sale Securities
-------------------------------------------                                                                                                               | Amortized
Cost
------------------                                               | Estimated
Fair Value
-----------------------                                   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------------------------------------
|Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total available-for-sale securities | $27,037,000
19,190,000
01,019,00047,246,0001,648,000
$48,894,000
=========      | $26,896,000
18,858,000
01,019,00046,773,0001,614,000
$48,387,000
=========     
|                                                                                                                                                                                        |                                                                                 |                                                                                
|Held-to-maturity Securities
-------------------------------------------                                                                                                                 | Amortized
Cost
------------------                                               | Estimated
Fair Value
-----------------------                                   
|Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total held-to-maturity securities   | $5,327,000
44,927,000
3,619,000474,00054,347,0006,169,000
$60,516,000
========= | $5,270,000
43,994,000
3,557,000307,00053,128,0006,093,000
$59,221,000
=========



At December 31, 1999, securities with an amortized cost and estimated fair value of $21,802,000 and $21,647,000, respectively, were pledged as collateral for public and trust fund deposits and for other
purposes required or permitted by law. At December 31, 1998, the amortized cost and estimated fair value of pledged securities were $17,094,000 and $17,355,000, respectively.

During 1999 and 1998, the Company did not sell any securities prior to maturity. During 1997, the Company sold available-for-sale securities with a book value of $193,000 and recorded no gain or loss on
such sale.

NOTE 4:  LOANS

The composition of loans at December 31, 1999 and 1998, was as follows:



|                                                                                                                                                       | 1999                                                                                    | 1998                                                                                    
|------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|                                                                                                                                                       |                                                                                         |                                                                                         
|Real estate loans
Commercial loans
Loans to individuals 
Other loans
  Total loans
Less unearned income
Total loans, net of unearned income            | $  72,268,000
55,270,000
46,748,00012,857,000187,143,000517,000
$186,626,000
========== | $  71,901,000
47,551,000
57,564,0009,310,000186,326,0001,766,000
$184,560,000
==========
|                                                                                                                                                      
|Nonperforming assets at December 31, 1999 and 1998, were as follows:                                                                                  
|                                                                                                                                                       |                                                                                         |                                                                                         
|                                                                                                                                                       | 1999                                                                                    | 1998                                                                                    
|Nonaccrual loans
Accruing loans past due over ninety days
Restructured loans
Other real estate and other repossessed assets
Total nonperforming assets | $    236,000
203,000
186,000272,000
$    897,000
==========                             | $     238,000
198,000
110,000630,000
$   1,176,000
==========                           



The amount of interest income that would have been recorded on nonaccrual loans for the years ended December 31, 1999, 1998 and 1997, based on the loans' original terms was $23,000, $12,000 and $16,000, respectively. A total of $2,000,
$1,000 and $2,000 in interest on nonaccrual loans was actually collected and recorded as income during the year ended December 31, 1999, 1998 and 1997, respectively.

-16-

<PAGE>

A summary of the activity in the allowance for possible loan losses for the years ended December 31, 1999, 1998 and 1997, is as follows:



|                                                                                                                                                 | 1999                                                          | 1998                                                                | 1997                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------------
|Balance at beginning of year
Provision for loan losses
Loans charged off
Recoveries of loans charged off
Bank acquisition
Balance at end of year | $1,842,000 
445,000 
(697,000)
243,000 0
$1,833,000 
======== | $1,173,000 
570,000 
(729,000)
102,000 726,000
$1,842,000 
======== | $  793,000 
250,000 
(581,000)
316,000 395,000
$1,173,000 
========

NOTE 5:  INTANGIBLE ASSETS

The following is a summary of intangible assets at December 31, 1999 and 1998:



|                                                                                     | 1999                                                           | 1998                                                        
|------------------------------------------------------------------------------------ | -------------------------------------------------------------- | ------------------------------------------------------------
|Goodwill
Core deposit intangible
Less accumulated amortization
Net intangible assets | $  8,539,0002,895,00011,434,0001,276,000
$10,158,000
========= | $  8,539,0002,895,00011,434,000603,000
$10,831,000
=========

NOTE 6:  PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 1999 and 1998:





|                                                                                                                 | 1999                                                                 | 1998                                                                  
|---------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ----------------------------------------------------------------------
|Land
Buildings and improvements
Furniture and equipment
Less accumulated depreciation
Net premises and equipment | $1,684,000
9,242,0002,135,00013,061,0003,245,000
$9,816,000
======== | $1,684,000
9,207,0002,573,00013,464,0003,170,000
$10,294,000
=========

NOTE 7:  DEPOSITS

At December 31, 1999, the scheduled maturities of interest-bearing time deposits was as follows:



|                                                                     | Interest-bearingTime Deposits                                                  
|-------------------------------------------------------------------- | -------------------------------------------------------------------------------
|2000
2001
2002
2003
2004
   Total interest-bearing
    time deposits | $  141,073,000
11,720,000
2,556,000
2,107,000829,000
$  158,285,000
===========



At December 31, 1999 and 1998, interest-bearing time deposits of $100,000 or more were $53,232,000, and $49,674,000, respectively.

NOTE 8:  NOTE PAYABLE

The Company has a revolving line of credit with the Fort Worth Bank.  Proceeds of $4,300,000 under the $6,500,000 line of credit were used to fund the purchase of Azle Bancorp on September 22, 1998.
These borrowings were paid off on September 30, 1998, from the proceeds of a $4,500,000 dividend that was paid to the Company by Azle State.  The amount available under the line of credit was reduced to $1,500,000 on January 5, 1999, and further to
$1,000,000 on October 5, 1999.  The line of credit matures on October 1, 2000, bears interest at the floating prime interest rate of the Fort Worth Bank (8.50% at December 31, 1999) and is collateralized by 100% of the stock of Independent Financial and
the Bank. There was no balance outstanding under the line of credit at December 31, 1999 or 1998.

-17-

<PAGE>

At December 31, 1998, the Bank had a $1,000 note payable to an individual which matured in March 1999. Principal, plus interest at 7.5%, was payable monthly. The note was collateralized by a two-story
commercial building in Abilene, Texas.

NOTE 9:  FEDERAL INCOME TAXES

Due to the fact that the Company effected a quasi-reorganization as of December 31, 1989, utilization of any of the Company's net operating loss carryforwards subsequent to that date was not credited to
income. For periods subsequent to December 31, 1994, the effect of such utilization has been credited against the Company's gross deferred tax asset. The Company's deferred tax provision for 1999, 1998 and 1997 totaled $260,000, $488,000 and $772,000,
respectively.

Significant components of the Company's deferred tax assets and liabilities at December 31, 1999 and 1998, were as follows:

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 1999                                                                                                                 | 1998                                                                                                                   
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------
|Deferred tax assets:
  Tax credit carryforwards
  Net operating loss carryforwards
  Retirement plan
  Allowance for possible loan losses
  Other real estate and other repossessed assets
  Net unrealized loss on available-for-sale securities
   Total gross deferred tax assets
   Less valuation allowance for deferred tax assets
    Net deferred tax assets
Deferred tax liabilities:
  Depreciation and amortization
  Net unrealized gain on available-for-sale securities
  Other, net
   Total gross deferred tax liabilities
Net deferred tax asset | $ 48,000
197,000
255,000
200,000
15,000177,000892,000(94,000)798,000(269,000)
0(21,000)
 (290,000)
$508,000
======== | $527,000
211,000
228,000
67,000
55,00001,088,000(132,000)956,000(257,000)
(83,000)(108,000)(448,000)
$508,000
=========

Deferred income taxes reflect the net effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As a result of the
acquisition of Peoples National Bank in Winters, Texas ("Peoples National") in 1996, the Company increased its gross deferred tax asset and the related valuation allowance by $162,000. The Company decreased the valuation allowance relating to Peoples
National and Winters State Bank, Winters, Texas ("Winters State"), which was acquired in 1993, by $35,000 during both 1999 and 1998, respectively, based on the Company's trend of positive operating results. The Company may reduce or increase its valuation
allowance depending on changes in the expectation of future earnings and other circumstances. Management believes that it is more likely than not that the Company will generate sufficient future taxable income to realize the net deferred tax asset less
the related valuation allowance.

At December 31, 1999, the Company had available net operating loss carryforwards of approximately $298,000 acquired as part of the Winters State acquisition and approximately $283,000 acquired as part of the Peoples National
acquisition. For federal income tax purposes, due to certain change of ownership requirements of the Internal Revenue Code, utilization of the Winters State and Peoples National net operating loss carryforwards are limited to approximately $37,000 per
year and $42,000 per year, respectively. If the full amount of these limitations is not used in any year, the amount not used increases the allowable limit in the subsequent year. These net operating loss carryforwards, if not used, expire between 2003
and 2010.

At December 31, 1999, the Company had available an alternative minimum tax credit carryforward of approximately $48,000. The alternative minimum tax credit will carryforward until utilized to reduce future
federal income taxes.

-18-

<PAGE>

The comprehensive provisions for federal income taxes for the years ended December 31, 1999, 1998 and 1997, consist of the following:





|                                                                                                                                                                                                                                                                               | 1999                                                    | 1998                                                | 1997                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------
|Current tax provision
Deferred tax provision 
   Provision for tax expense charged to
     results of operations
Tax provision (benefit) on adjustment to 
  unrealized gain/loss on available-for-sale
  securities
    Comprehensive provision for
     federal income taxes | $  914,000260,0001,174,000(260,000)
$  914,000
======== | $  705,000488,0001,193,00067,000$1,260,000
======== | $  205,000772,000
977,0003,000$ 980,000
========



NOTE 10:     GUARANTEED PREFERRED BENEFICIAL INTERESTS IN THE COMPANY'S SUBORDINATED DEBENTURES

Independent Capital sold 1,300,000 of Trust Preferred Securities at $10.00 per preferred security in the 1998 Offering.  The proceeds from the sale of the Trust Preferred Securities were used by
Independent Capital to purchase an equivalent amount of Subordinated Debentures of the Company.  The Trust Preferred Securities carry a distribution rate of 8.5%, have a stated maturity of September 22, 2028, and are guaranteed by the Company.  The
securities are redeemable at par after September 22, 2003.

Distributions on the Trust Preferred Securities are payable quarterly on March 31, June 30, September 30 and December 31.  Distributions paid during the year ended December 31, 1999 and 1998, totaled
$1,105,000 and $304,000, respectively.

NOTE 11:  STOCKHOLDERS' EQUITY

The Company's Series C Cumulative Convertible Preferred Stock (the "Series C Preferred Stock") paid quarterly dividends at the annual rate of $4.20 per share, was senior to the Common Stock with respect
to dividends and liquidation rights, was convertible into Common Stock at a price of $1.83 per share, adjusted for stock dividends, and had certain voting rights if dividends were in arrears for three quarters. The Series C Preferred Stock was redeemable
in cash and/or Common Stock at the Company's option at $42.00 per share. All of the remaining outstanding shares of Series C Preferred Stock were converted to Common Stock during 1999.

An additional 388,911 shares of Common Stock were issued as a result of the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to stockholders in May 1997. The stock dividend was
accounted for by a transfer from retained earnings to common stock of $97,000, representing the above respective number of shares at a par value of $0.25 per share. Cash paid in lieu of fractional shares was transferred from additional paid-in capital.

The Company's Employee Stock Ownership/401(k) Plan (the "ESOP/401(k) Plan") purchased 18,750 shares of the Company's Common Stock in the 1997 Offering for $214,000. The funds used for the purchase were
borrowed from the Company. The note evidencing such borrowing is due in eighty-four equal monthly installments of $4,000, including interest, and matures on February 27, 2004. The note bears interest at the Company's floating base rate plus 1% (9.50% at
December 31, 1999). The note is collateralized by the stock purchased in the 1997 Offering.

As a result of the lending arrangement between the Company and the ESOP/401(k) Plan, the shares are considered "unearned."  The shares are "earned" on a pro rata basis as principal payments are made on the
note used to purchase the shares. The shares are included in the Company's earnings per share calculations only as they are earned. At December 31, 1999, a total 12,470 shares with an original cost of $142,000 are considered to be unearned.

During the first half of 1999, the Company authorized the repurchase of up to 80,000 shares of the Company's Common Stock in the open market. As of December 31, 1999, the Company had repurchased a total of
60,000 shares of its Common Stock at an average price of $11.15 per share. The repurchased shares are currently being held as treasury shares.

-19-

<PAGE>

NOTE 12:  EARNINGS PER SHARE

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Because the Company's
outstanding Series C Preferred Stock was cumulative, the dividends allocable to such preferred stock reduced income available to common stockholders in the basic earnings per share calculations. In computing diluted earnings per common share for the years
ended December 31, 1999, 1998 and 1997, the conversion of the Series C Preferred Stock and the exercise of any outstanding stock options were assumed, as the effects were dilutive. The following table presents information necessary to calculate earnings
per share for the years ended December 31, 1999, 1998 and 1997 (adjusted for the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to stockholders in May 1997):

|                                                                                                                                                                                               |                                                 |                                                   |                                                
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------------------------- | -----------------------------------------------
|                                                                                                                                                                                               | Year Ended December 31,                        
|                                                                                                                                                                                               | 1999                                            | 1998                                              | 1997                                           
|                                                                                                                                                                                               | (In thousands)                                 
|Basic Earnings Per Common ShareNet income
Preferred stock dividendsNet income available to common stockholders
Weighted average shares outstanding                                             | $    2,452(20)
$    2,432
=======
2,178
======= | $     2,188(22)
$    2,166
========
2,031
======= | $    2,110(41)
$    2,069
=======
1,842
=======
|                                                                                                                                                                                               | Year Ended December 31,                        
|                                                                                                                                                                                               | 1999                                            | 1998                                              | 1997                                           
|                                                                                                                                                                                               | (In thousands)                                 
|Diluted Earnings Per Common Share
Net income
Weighted average shares outstanding
Exercise of stock options
Conversion of Series C Preferred Stock
Adjusted weighted average shares outstanding | $    2,452
=======
2,178
097
2,275
=======      | $    2,188
========
2,031
0120
2,151
=======      | $    2,110
========
1,842
9197
2,048
=======   

NOTE 13:  BENEFIT PLANS

The Company's ESOP/401(k) Plan covers most of its officers and employees. The ESOP/401(k) Plan stipulates, among other things, that vesting in employer contributions begins after one year of service,
each participant will become fully vested in employer contributions after seven years of service and the determination of the level of vesting began with the original date of current employment of each participant with the Company or the Bank.
Contributions made to the employee stock ownership portion of the ESOP/401(k) Plan by the Company were $141,000, $106,000 and $100,000 for the years ended December 31, 1999, 1998 and 1997, respectively. These contributions were used to make distributions
to employees who left the Company's employment in the respective years and to purchase Common Stock of the Company. No contributions were made by the Company to match contributions made by plan participants in the 401(k) portion of the ESOP/401(k) Plan
during the years ended December 31, 1999, 1998 and 1997; however, the Company's board of directors voted to match 25% of up to a maximum of the first 4% of each employees' salary which is deferred and contributed to the 401(k) portion of the ESOP/401(k)
Plan beginning January 1, 2000. The amount of all such contributions is at the discretion of the Company's board of directors. Contributions are invested in various equity, debt and money market investments, including Common Stock of the Company. At
December 31, 1999, 158,307 shares of Common Stock of the Company were held by the ESOP/401(k) Plan.

In February 1999, the Company adopted the 1999 Stock Option Plan (the "1999 Stock Option Plan"), pursuant to which stock options covering an aggregate of 60,000 shares of the Company's Common Stock may be
granted. Options awarded under the 1999 Stock Option Plan (i) can be incentive or nonqualified stock options; (ii) may not be granted at prices less than fair market value on the date of the grant; (iii) generally would become exercisable or vest over a
period of time; (iv) generally would expire five years subsequent to award; and (v) are subject to customary anti-dilution protection. For the year ended December 31, 1999, there were no stock options granted under the 1999 Stock Option Plan, and at
December 31, 1999, there were 60,000 available for grant under the 1999 Stock Option Plan.

NOTE 14:  RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company and the Bank have loans, deposits and other transactions with their respective directors and businesses with which such persons are associated. It is the
Company's policy that all such

-20-

<PAGE>

transactions are entered into on substantially the same terms as those prevailing at the time for comparable transactions with unrelated third parties. The balances of loans to all such persons were $4,113,000, $3,880,000 and $2,511,000
at December 31, 1999, 1998 and 1997, respectively. Additions and reductions on such loans were $6,854,000 and $6,621,000, respectively, for the year ended December 31, 1999.

The Company and its subsidiaries paid $30,000, $39,000 and $42,000 in fees to a director-related company for services rendered on various legal matters during 1999, 1998 and 1997, respectively.

NOTE 15:  COMMITMENTS AND CONTINGENT LIABILITIES

The Company is involved in various litigation proceedings incidental to the ordinary course of business. In the opinion of management, the ultimate liability, if any, resulting from such other
litigation would not be material in relation to the Company's financial condition, results of operations and liquidity.

The Bank leases certain of its premises and equipment under noncancellable operating leases. Rental expense under such operating leases was approximately $436,000, $322,000 and $289,000 in 1999, 1998 and
1997, respectively.

The minimum payments due under these leases at December 31, 1999, are as follows:



|2000
2001
2002
2003
Total | $    502,000
488,000
452,000183,000
$1,625,000
|------------------------- | ----------------------------------------------

NOTE 16:  FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial assets and financial liabilities at December 31, 1999 and 1998, were as follows:

|                                                                                                                                                                                                                                                                       | 1999                                                                | 1998                                                               
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | -------------------------------------------------------------------
|                                                                                                                                                                                                                                                                       | Carrying
Amount
--------------                                      | Fair Value
----------------                                        
|Financial Assets  Cash and due from banks
  Federal funds sold
  Available-for-sale securities
  Held-to-maturity securities
  Loans, net of unearned income
  Accrued interest receivable                                                                             | $ 22,985,000
15,775,000
48,387,000
60,516,000
186,626,000
3,538,000 | $ 22,985,000
15,775,000
48,387,000
59,221,000
187,666,000
3,538,000
|                                                                                                                                                                                                                                                                       |                                                                     |                                                                    
|Financial Liabilities  Noninterest-bearing demand deposits
  Interest-bearing demand deposits
  Interest-bearing time deposits
  Accrued interest payable
  Note payable
  Guaranteed preferred beneficial
    interests in the Company's 
    subordinated debentures | $ 57,441,000
102,573,000
158,285,000
1,074,000
0
13,000,000         | $ 57,441,000
102,573,000
158,393,000
1,074,000
0
8,938,000         



Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

For variable-rate loans that reprice frequently with no significant change in credit risk, fair values are based on carrying values. The fair values of other loans are estimated using discounted cash flow
analyses, which utilize interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

The fair values of noninterest and interest-bearing demand deposits are, by definition, equal to the amount payable on demand, i.e., their carrying amount. The fair values of interest-bearing time deposits
are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar maturities.

-21-

<PAGE>

Fair value for the guaranteed preferred beneficial interests in the Company's subordinated debentures is based on the closing price for the Trust Preferred Securities as quoted on the American Stock
Exchange at December 31, 1999 and 1998.

The carrying amounts for cash and due from banks, federal funds sold, accrued interest receivable, accrued interest payable and note payable approximate the fair values of such assets and liabilities.

Fair values for the Company's off-balance-sheet instruments, which consist of lending commitments and standby and commercial letters of credit, are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. Management believes that the fair value of these off-balance-sheet instruments is not materially different from the commitment amount.

NOTE 17:  FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Company is a party to financial instruments with off-balance-sheet risk entered into in the normal course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the accompanying financial statements. The contractual amounts
of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit or standby or commercial letters of credit is represented
by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Company does not require collateral or
other security to support financial instruments with credit risk. The Company had outstanding loan commitments of approximately $19,233,000 and outstanding standby and commercial letters of credit of approximately $424,000 at December 31, 1999.

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. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include real
estate, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties.

Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support
public and private borrowing arrangements. The credit risk involved in issuing standby or commercial letters of credit is essentially the same as that involved in making loans to customers.

The Company does not expect any material losses as a result of loan commitments or standby or commercial letters of credit that were outstanding at December 31, 1999.

In the normal course of business, the Company maintains deposits with other financial institutions in amounts which exceed FDIC insurance coverage limits.

NOTE 18:  REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause the initiation of
certain mandatory, and possibly additional discretionary, actions by the regulatory authorities that, if undertaken, could have a direct material effect on the Company's and the Bank's respective financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's respective assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company's and the Bank's respective 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 the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital and total
capital (Tier 1

-22-

<PAGE>

and Tier 2) to risk-weighted assets and of Tier 1 capital to adjusted quarterly average assets. At December 31, 1999, the Company and the Bank met all capital adequacy requirements to which they were subject.

At December 31, 1999, the most recent notifications from the Federal Deposit Insurance Corporation (the "FDIC") categorized the Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Company and the Bank must maintain minimum Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and Tier 1 capital to adjusted quarterly average assets ratios as set forth in the
tables. There are no other conditions or events since the most recent notification that management believes have changed either the Company's or the Bank's category.

The minimum regulatory capital ratios, minimum capital ratios for well capitalized bank holding companies and the Company's actual capital amounts and ratios at December 31, 1999 and 1998, were as follows:

|                                                        | December 31,           | Minimum
CapitalRatios | Well
CapitalizedRatios
|------------------------------------------------------- | ---------------------- | --------------------- | ----------------------
|                                                        | 1999                   | 1998                  |                       
|                                                        | (Dollars in thousands)
|Tier 1 capital                                          | $     24,106           | $      21,344         |                       
|Total capital                                           | 30,374                 | 28,356                |                       
|Risk-weighted assets                                    | 199,565                | 205,971               |                       
|Adjusted quarterly average assets                       | 353,065                | 357,815               |                       
|Capital ratios:                                         |                        |                       |                       
|Tier 1 capital to risk-weighted assets                  | 12.08%                 | 10.36%                | 4.00%                 
|Total capital to risk-weighted assets                   | 15.22                  | 13.77                 | 8.00                  
|Tier 1 capital to adjusted quarterly average
    assets | 6.83                   | 5.97                  | 4.00                  



The minimum capital ratios for well capitalized banks and the Bank's actual capital ratios at December 31, 1999, were as follows:



|                                                    | Minimum
Ratios for Well
Capitalized Banks
---------------------------- | Actual Ratios at
December 31, 1999
----------------------------------------
|--------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------------------------------------------
|Tier 1 capital to risk-weighted assets              | 6.00%                                                                  | 13.66%                                                                     
|Total capital to risk-weighted assets               | 10.00                                                                  | 14.58                                                                      
|Tier 1 capital to adjusted quarterly average assets | 5.00                                                                   | 7.70                                                                       



At December 31, 1999, retained earnings of the Bank included approximately $5,071,000 that was available for payment of dividends to the Company without prior approval of regulatory authorities.

-23-

<PAGE>

NOTE 19:  PARENT COMPANY FINANCIAL INFORMATION

Condensed financial statements of the Company, parent only, are presented below:

INDEPENDENT BANKSHARES, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998



|                                                                                                                                                                        | 1999                                                            | 1998                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------- | --------------------------------------------------------------
|Assets:
Cash
Loans
Investment in subsidiaries
Other assets                                                                                                              | $     372,000
0
37,389,0001,076,000                             | $    550,000
65,000
36,314,0001,033,000                       
|Total assets                                                                                                                                                            | $  38,837,000
==========                                        | $37,962,000
=========                                         
|Liabilities:
Accrued interest payable and other liabilities
  Total liabilities
Subordinated debentures
Stockholders' equity
Total liabilities and stockholders' equity | $     79,00079,000
13,402,00025,356,000$  38,837,000
========== | $     55,00055,000
13,402,00024,505,000$ 37,962,000
==========



INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 1999                                                                                                                         | 1998                                                                                                                                     | 1997                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
|Income:
  Dividends from subsidiaries (see Note 18)
  Management fees from subsidiaries
  Interest on loan to the ESOP/401(k) Plan
  Interest from subsidiaries
  Other income
    Total income
Expenses:
  Interest
  Other expenses
    Total expenses
      Income before federal income taxes and equity in
        undistributed earnings of subsidiaries
  Federal income tax benefit
Income before equity in undistributed
    earnings of subsidiaries
  Equity in undistributed earnings of subsidiaries
Net income | $1,709,000
144,000
20,000
8,00001,881,0001,139,000629,000
  1,768,000
113,000(762,000)
875,0001,577,000
$2,452,000
========= | $5,259,000
145,000
23,000
6,00011,000
   5,444,000321,000680,000
   1,001,0004,443,000(93,000)
4,536,000(2,348,000)
$2,188,000
========= | $900,000
150,000
18,000
1,0000
 1,069,00033,00570,000
    603,000466,000(276,000)
742,0001,368,000
$2,110,000
========

-24-

<PAGE>

INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 and 1997

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                                                                                                                                                                  |                                                                                                                                                                                                                     |                                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 1999                                                                                                                                                             | 1998                                                                                                                                                                                                                | 1997                                                                                                                                                                                                   
|Cash flows from operating activities:
   Net income
Adjustments to reconcile net income to net cash
  provided by operating activities:
   Deferred federal income tax expense 
   Depreciation and amortization
   Equity in undistributed earnings of subsidiaries
   Increase in other assets
   Increase (decrease) in accrued interest payable
    and other liabilities
     Net cash provided by operating activities
Cash flows from investing activities:
   Loans made to employee stock ownership plan
   Proceeds from repayments of loans made to 
    employee stock ownership plan
   Purchase of subsidiary bank
   Capital contributions made to subsidiaries
     Net cash provided by (used in) investing activities
Cash flows from financing activities:
   Proceeds from notes payable
   Repayment of notes payable
   Proceeds from issuance of subordinated debentures
   Net proceeds from issuance of equity securities
   Cash paid for fractional shares in stock dividend
   Payment of cash dividends
   Purchase of treasury stock
    Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year | $2,452,000
260,000
0
(1,577,000)
(303,000)49,000
    881,000
0
65,000
00
     65,0000
0
0
0
0
(455,000)(669,000)(1,124,000)
(178,000)550,000
$  372,000
======== | $2,188,000
488,000
2,000
2,348,000
(398,000)76,000
 4,704,000(95,000)
54,000
(19,025,000)(402,000)(19,468,000)
4,300,000
(4,350,000)
13,402,000
2,067,000
0
(431,000)0
14,988,000224,000326,000
$  550,000
======== | $2,110,000
772,000
1,000
(1,368,000)
(197,000)(231,000)
 1,087,000(239,000)
46,000
0(4,200,000)(4,393,000)
800,000
(983,000)
0
4,077,000
(5,000)
(405,000)0
3,484,000178,000148,000
$  326,000
========

NOTE 20:  SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the years ended December 31, 1999, 1998 and 1997, is as follows:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 1999                                                    | 1998                                                                  | 1997                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------------------------------------
|Cash paid during the year for:
  Interest
  Federal income taxes
Noncash investing activities:
  Additions to other real estate and other repossessed assets
   during the year through foreclosures
  Sales of other real estate and other repossessed assets
    financed with loans
Increase (decrease) in unrealized gain (loss) on
    available-for-sale securities, net of tax
Details of acquisitions:
  Cash paid in acquisitions
  Cash and cash equivalents held by companies acquired
    at dates of acquisition | $9,987,000
1,000,000
$857,000
0
$(504,000)
$         00 | $9,368,000
630,000
$1,433,000
167,000
$130,000
$19,025,000(8,892,000) | $8,663,000
670,000
$1,283,000
93,000
$     6,000
$7,510,000(6,274,000)
|Net cash paid in acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | $          0
========                                   | $10,133,000
=========                                                 | $1,236,000
========                                                   

-25-

<PAGE>

NOTE 21:  SUBSEQUENT EVENT

On March 1, 2000, the Company executed a definitive agreement (the "Agreement") with State National Bancshares, Inc. ("State National") for State National, to acquire all of the Company's outstanding
Common Stock for cash of approximately $45,473,000, or approximately $20.00 per share. The aggregate purchase price will increase if the closing of the transaction does not occur on or before the 160th day following the execution date of the Agreement. The Agreement additionally calls for State National to assume the Company's obligations on $13,000,000 of outstanding Trust Preferred Securities. State National is a privately held bank
holding company headquartered in Lubbock, Texas. The transaction is subject to various closing conditions, including the receipt of all necessary approvals and the ability of State National to raise the necessary funds to complete the transaction. If all
the conditions to the transaction are satisfied in the normal course, the transaction is expected to be completed before the end of the third quarter of 2000.

-26-

<PAGE>

QUARTERLY DATA (UNAUDITED)

The following table presents the unaudited results of operations for the past two years by quarter. See "Note 12: Earnings Per Share" in the Company's Consolidated Financial Statements.

|                                                                                                                                                                                                                                                                     | 1999
----------------------------------------------------------------------------------
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                     | FirstQuarter                                                                           
|                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                     | (In thousands, except per share amounts)                                               
|Interest income
Interest expense
Net interest income
Provision for loan losses
Income before federal income taxes
Net income
Basic earnings per common share
  available to common stockholders
Diluted earnings per common share
  available to common stockholders | $   6,056
2,543
3,513
105
925
629
$    0.28
0.27                                       
|                                                                                                                                                                                                                                                                     | 1998
----------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                     | FirstQuarter                                                                           
|                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                     | (In thousands, except per share amounts)                                               
|Interest income
Interest expense
Net interest income
Provision for loan losses
Income before federal income taxes
Net income
Basic earnings per common share
  available to common stockholders
Diluted earnings per common share
  available to common stockholders | $4,575
2,153
2,422
175
723
455
$0.23
0.22                                              

The above unaudited financial information reflects all adjustments that are, in the opinion of management, necessary to present a fair statement of the results of operations for the interim
periods presented.

-27-

<PAGE>

SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following table presents selected consolidated financial information for the last five years. Such financial information has been restated to reflect the 4-for-3 stock split, effected in the form of
a 33a
% stock dividend, paid to stockholders in May 1995 and the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to stockholders in May 1997. See "Note 1: Summary of Significant Accounting Policies-Principles of Consolidation," "Note 2:
Bank Acquisitions," Note 12: Earnings Per Share" and the Other Notes in the Company's Consolidated Financial Statements for an explanation of changes in financial statement items.

|                                                                                                                      | 1999                                     | 1998                              | 1997                               | 1996                               | 1995                              
|--------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------- | ---------------------------------- | ---------------------------------- | ----------------------------------
|                                                                                                                      | (In thousands, except per share amounts)
|Balance sheet information:
  Assets
  Loans, net of unearned income
  Deposits
  Notes payable
  Stockholders' equity | $358,262
186,626
318,299
0
25,356        | $370,178
184,560
330,804
1
24,505 | $264,574
140,853
242,801
57
20,527 | $205,698
92,017
189,575
240
14,937 | $180,344
81,927
164,704
849
13,818
|                                                                                                                      |                                          |                                   |                                    |                                    |                                   
|Income statement information:
  Total interest income
  Net interest income
     Net income                           | $24,206
14,308
2,452                     | $20,434
11,158
2,188              | $18,324
9,665
2,110                | $13,556
7,115
1,422                | $11,962
6,653
1,132               
|                                                                                                                      |                                          |                                   |                                    |                                    |                                   
|Basic earnings per common share
  available to common stockholders                                                    | $1.12                                    | $1.07                             | $1.12                              | $1.00                              | $0.82                             
|                                                                                                                      |                                          |                                   |                                    |                                    |                                   
|Diluted earnings per common share
  available to common stockholders                                                  | $1.08                                    | $1.02                             | $1.03                              | $0.84                              | $0.67                             
|                                                                                                                      |                                          |                                   |                                    |                                    |                                   
|Cash dividends per common share                                                                                       | $0.20                                    | $0.20                             | $0.19                              | $0.14                              | $0.09                             
|                                                                                                                      |                                          |                                   |                                    |                                    |                                   
|Weighted average common shares 
  outstanding:
   Basic
   Diluted                                                    | 2,178
2,275                              | 2,031
2,151                       | 1,842
2,048                        | 1,355
1,698                        | 1,299
1,689                       

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<PAGE>

MARKET INFORMATION

The Company's Common Stock trades on the American Stock Exchange (the "AMEX") under the symbol "IBK." Independent Capital's Trust Preferred Securities trade on the AMEX under the symbol "IBK.Pr." The
following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock and Trust Preferred Securities as quoted on the AMEX and the amount of cash dividends and distributions paid per share.

|                                                                                       | Common Stock            | Trust Preferred Securities
|-------------------------------------------------------------------------------------- | ----------------------- | --------------------------
|                                                                                       | High                    | Low                       
|                                                                                      
|                                                                                      
|Year Ended December 31, 1998First Quarter
Second Quarter
Third Quarter
Fourth Quarter  | $195/819 
  159/16117/8 | $153/4143/811   
101/4    
|                                                                                       |                         |                           
|Year Ended December 31, 1999
First Quarter
Second Quarter
Third Quarter
Fourth Quarter | $121/811 
  123/8157/8  | $103/8103/16103/8103/4    
|                                                                                       |                         |                           
|Year Ending December 31, 2000First Quarter (through March 15)                          | $211/8                  | $127/8                    

_____________

|(1)
(2) | This cash dividend was paid February 29, 2000, to shareholders of record on February 15, 2000.
This distribution is scheduled to be paid on March 31, 2000, to security holders of record on such date.
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

At March 15, 2000, there were approximately 1,683 stockholders who were individual participants in security position listings.

-29-







MANAGEMENT'S DISCUSSION AND ANALYSIS of
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements - Cautionary Statements

This report contains certain forward-looking statements and information relating to Independent Bankshares, Inc. (the "Company") and its subsidiaries that are based on the beliefs of
the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, a
s
its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions related to
certain factors including, without limitation, competitive factors, general economic conditions, customer relations, the interest rate environment, governmental regulation and supervision, nonperforming asset levels, loan concentrations, changes in
industry
other factors described herein. 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.

The Company

The Company is a bank holding company headquartered in Abilene, Texas. The Company owns all of the common securities of Independent Capital Trust ("Independent Capital") and indirectly
owns through a Delaware subsidiary, Independent Financial Corp. ("Independent Financial"), all of the stock of First State Bank, National Association, Abilene, Texas (the "Bank"). The Bank currently operates full-service banking locations in the Texas citi
le (2 locations), Lubbock, Odessa (4 locations), San Angelo, Stamford and Winters.

General

The following discussion and analysis presents the more significant factors affecting the Company's financial condition at December 31, 1999 and 1998, and results of operations for
each of the three years in the period ended December 31, 1999, after accounting for the acquisition of the subsidiary banks noted below. This discussion and analysis should be read in conjunction with the Company's Consolidated Financial Statements, notes
ther
tion appearing elsewhere in this annual report. All references herein to the number of shares of the Company's common stock (the "Common Stock"), per share amounts and market prices of the Common Stock have been restated for the 5 for 4 stock split,
effected in the form of a 25% stock dividend, paid to the Company's shareholders in May 1997.

Bank Acquisitions

Azle Bancorp and Azle State. The Company completed the acquisition of Azle Bancorp and its subsidiary bank, Azle State Bank, Azle, Texas ("Azle State"), effective September 22,
1998, for an aggregate cash consideration of $19,025,000. To obtain funding for the acquisition, the Company sold an aggregate of 230,000 shares of Common Stock at a price of $11.50 per share, and Independent Capital, a Delaware business trust formed by
the
 8.5% Cumulative Trust Preferred Securities (the "Trust Preferred Securities") at $10.00 per preferred security (having a liquidation value of $13,000,000) in an underwritten offering (collectively, the "1998 Offering"). The proceeds from the sale of the
Trust Preferred Securities were used by Independent Capital to purchase an equivalent amount of Subordinated Debentures ("Subordinated Debentures") of the Company. The Company also borrowed $4,300,000 from a financial institution in Fort Worth, Texas (the
"
portion of the cost of acquiring Azle Bancorp. The borrowings from the Fort Worth Bank were paid off on September 30, 1998, from the proceeds of a cash dividend paid to the Company by Azle State. At the date of acquisition, Azle Bancorp had total assets
of $93,158,000, total loans, net of unearned income, of $45,163,000, total deposits of $80,955,000 and stockholders' equity of $9,872,000. This acquisition was accounted for using the purchase method of accounting.  A total of $8,014,000 of intangible
assets
deposit intangible and $5,119,000 of goodwill, was recorded as a result of this acquisition. The core deposit

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<PAGE>

intangible is being amortized over a period of 12 years and the goodwill is being amortized over a period of 25 years.

Crown Park and Western National. The Company completed the acquisition of Crown Park Bancshares, Inc. ("Crown Park") and its wholly owned subsidiary bank, Western National Bank,
Lubbock, Texas ("Western National"), effective January 28, 1997, for an aggregate cash consideration of $7,510,000. On the acquisition date, Crown Park was merged with and into a wholly owned subsidiary of the Company and Western National was merged with
and i
 for the acquisition, the Company sold an aggregate of 395,312 shares of Common Stock in an underwritten offering at a price of $11.40 per share (the "1997 Offering"). The 1997 Offering included the sale of 51,562 shares covered by the underwriter's
over-allotment option. The above number of shares and price per share have been adjusted for the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to the Company's shareholders in May 1997. The Company borrowed $800,000 from a
financial ins
e "Amarillo Bank") to finance a portion of the cost of acquiring Crown Park. The $800,000 of borrowings was reduced to $400,000 with the proceeds of the sale of the over-allotment shares. The borrowing was paid off on December 31, 1997. At the date of
acquisition, Crown Park had total assets of $60,420,000, total loans, net of unearned income, of $41,688,000, total deposits of $53,604,000 and stockholders' equity of $4,238,000. This acquisition was accounted for using the purchase method of accounting.
A to
as recorded as a result of this acquisition. This goodwill is being amortized over a period of 15 years.

The results of operations of Azle State and Western National are included in the Company's results of operations from their respective dates of purchase. The assets and liabilities of Azle
State and Western National were recorded at their estimated fair value.

Results of Operations

General

Net income for the year ended December 31, 1999, amounted to $2,452,000 ($1.08 diluted earnings per common share) compared to net income of $2,188,000 ($1.02 diluted earnings per
common share) for the year ended December 31, 1998, and compared to net income of $2,110,000 ($1.03 diluted earnings per common share) for the year ended December 31, 1997. The results of operations for 1998 were negatively impacted by $125,000
($83,000, ne
ettlement of certain potential litigation. Net income and earnings per share increased in 1999 primarily due to the acquisition of Azle State, an increase in the Company's net interest margin and a reduction in the amount of provision for loan losses
recorded during 1999 compared to 1998.

Two industry measures of the performance by a banking institution are its return on average assets and return on average stockholders' equity. Return on average assets ("ROA") measures net
income in relation to average total assets and indicates a company's ability to employ its resources profitably. During 1999, the Company's ROA was 0.68%, compared to 0.75% for 1998 and compared to 0.82% for 1997. Excluding the nonrecurring item noted
above, the Company's ROA for 1998 would have been 0.77%.

Return on average stockholders' equity ("ROE") is determined by dividing net income by average stockholders' equity and indicates how effectively a company can generate net income on the
capital invested by its stockholders. During 1999, the Company's ROE was 9.87%, compared to 9.89% for 1998 and 10.95% for 1997. Excluding the nonrecurring item noted above, the Company's ROE for 1998 would have been 10.27%.

Net Interest Income

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

Net interest income amounted to $14,308,000 for 1999, an increase of $3,150,000, or 28.2%, from 1998. Net interest income for 1998 was $11,158,000, an increase of $1,493,000, or 15.4%,
from 1997. The increases in 1999 and

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<PAGE>

1998 were primarily due to the acquisition of Azle State in September 1998. The net interest margin on a fully taxable-equivalent basis was 4.57% for 1999, compared to 4.30% for 1998 and 4.13% for 1997. The primary reasons for the
increase in net interest margin during 1999 and 1998 were the acquisition of Azle State, a continuing decrease in the Company's overall costs of funds and a shift within the Company's loan portfolio to more commercial and real estate loans and away from
lower-yielding indirect installment loans.

At December 31, 1999, approximately $59,680,000, or 32.0%, of the Company's total loans, net of unearned income, were loans with floating interest rates. Approximately 41.6% of loans,
excluding loans to individuals, were loans with floating interest rates. The overall average rate paid for interest-bearing deposits decreased by 49 basis points in 1999. The average rate paid by the Company for certificates of deposit and other time
deposits of $100,000 or more decreased to 4.95% during 1999 from 5.35% in 1998. The average rate paid for certificates of deposit less than $100,000 decreased from 5.31% in 1998 to 4.81% in 1999. Rates on other types of deposits, such as savings accounts,
money market accounts and NOW accounts, decreased from an average of 2.55% in 1998 to an average of 2.10% in 1999. Given the fact that the Company's interest-bearing liabilities are subject to repricing faster than its interest-earning assets in the very
short term, an overall falling interest rate environment would normally produce a higher net interest margin than a rising interest rate environment. As noted under "Analysis of Financial Condition - Interest Rate Sensitivity" below, because the Company's
interest-bearing demand, savings and money market deposits are somewhat less rate-sensitive, the Company's net interest margin does not necessarily increase significantly in an overall falling interest rate environment.

The following table presents the average balance sheets of the Company for each of the last three fiscal years and indicates the interest earned or paid on each major category of
interest-earning assets and interest-bearing liabilities on a fully taxable-equivalent basis, and the average rates earned or paid on each major category. This analysis details the contribution of interest-earning assets and the overall impact of the cost
of funds on net interest income.

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<PAGE>





|                                                                                                                                                                                                                                                                                                                                                                    |                                                                    | Year Ended December 31,                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | --------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                    | 1999               
---------------------------------------------- | 1998(1)          
--------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                    | AverageBalance                                                     | Interest
Income/Expense                                       
|                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                                                   
|ASSETS                                                                                                                                                                                                                                                                                                                                                              | (Dollars in thousands)                                            
|Interest-earning assets:
  Loans, net of unearned income (2)
  Securities (3)
  Federal funds sold
Total interest-earning assets                                                                                                                                                                                                                                    | $184,471
106,78226,826
318,079                                     | $17,027
6,0741,332
24,433                                     
|Noninterest-earning assets:
  Cash and due from banks
  Intangible assets
  Premises and equipment, net
  Accrued interest receivable
    and other assets
  Allowance for possible loan losses
      Total noninterest-earning assets                                                                                                                              | 19,539
10,480
10,034
6,099(1,787)44,365                            |                                                               
|Total assets                                                                                                                                                                                                                                                                                                                                                        | $362,444
=======                                                   |                                                               
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                                                                                                                                |                                                                    |                                                               
|Interest-bearing liabilities:
  Demand, savings and money
    market deposits
  Time depositsTotal interest-bearing deposits
  Notes payable                                                                                                                                                                                                                        | $106,485157,994264,4790                                            | $2,2317,6679,8980                                             
|Total interest-bearing liabilities                                                                                                                                                                                                                                                                                                                                  | 264,479                                                            | 9,898                                                         
|Noninterest-bearing liabilities:
  Demand deposits
  Accrued interest payable and
     other liabilities
      Total noninterest-bearing 
         liabilities
        Total liabilities
Guaranteed preferred beneficial
  interests in the Company's
  subordinated debentures
Stockholders' equity
         Total liabilities and
           stockholders' equity | 58,0412,070
60,111324,590
13,00024,854$362,444
======              |                                                               
|Net interest income                                                                                                                                                                                                                                                                                                                                                 |                                                                    | 14,535=====                                                   
|Interest rate spread (4)                                                                                                                                                                                                                                                                                                                                            |                                                                    |                                                               
|Net interest margin (5)                                                                                                                                                                                                                                                                                                                                             |                                                                    |                                                               

______________________________

|(1)
(2)
(3)
(4)
(5) | The Average Balance and Interest Income/Expense columns include the balance sheet and income statement accounts of Western National and Azle State from January 28, 1997 and September 22, 1998 (the respective dates of acquisition of such
banks), through December 31, 1999.
Nonaccrual loans are included in the Average Balance columns and income recognized on these loans, if any, is included in the Interest Income/Expense columns. Interest income on loans includes fees on loans, which are not material in amount.
Nontaxable interest income on securities was adjusted to a taxable yield assuming a tax rate of 34%.
The interest rate spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
The net interest margin is equal to net interest income, on a fully taxable-equivalent basis, divided by average interest-earning assets.
|------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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<PAGE>



The following table presents the changes in the components of net interest income and identifies the part of each change due to differences in the average volume of interest-earning assets
and interest-bearing liabilities and the part of each change due to the average rate on those assets and liabilities. The changes in interest due to both volume and rate in the table have been allocated to volume or rate change in proportion to the
absolute amounts of the change in each.



|                                                                                                                                                                                                                         | 1999 vs 1998(1)
-----------------------------------------------------                        | 1998 vs 1997(1)
--------------------------------------------                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------
|                                                                                                                                                                                                                         | Increase (Decrease) Due To
Changes In:
----------------------------------------------------- | Increase (Decrease) Due To
Changes In:
--------------------------------------------
|                                                                                                                                                                                                                        
|                                                                                                                                                                                                                         | Volume
------------------                                                                    | Rate
----------------------                                                        
|                                                                                                                                                                                                                         | (In thousands)                                                                              
|Interest-earning assets:
    Loans, net of unearned income
   Securities (2)
   Federal funds sold
      Total interest income                                                                                           | $2,894
2,047(414) 
  4,527                                                                   | $   (17)
(471)(313)
  (601)                                                        
|Interest-bearing liabilities:
    Deposits:
     Demand, savings and money
      market deposits
     Time deposits
    Total deposits
   Notes payable
        Total interest expense
  Increase in net interest income | 5071,3481,855(8)
1,847$2,680
=====                                                           | (483)(742)(1,225)0
(1,225)
$  624=====                                             



______________________________

|(1)
(2) | Income statement items include the income statement accounts of Western National and Azle State beginning January 28, 1997 and September 22, 1998 (the respective dates of acquisition of such banks), through December 31, 1999.
Information with respect to interest income on tax-exempt securities is provided on a fully taxable-equivalent basis assuming a tax rate of 34%.
|------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for Loan Losses

The amount of the provision for loan losses is based on periodic (not less than quarterly) evaluations of the loan portfolio, especially nonperforming and other potential problem
loans. During these evaluations, consideration is given to such factors as: management's evaluation of specific loans; the level and composition of nonperforming loans; historical loss experience; results of examinations by regulatory agencies; an
internal asset review process conducted by the Company that is independent of the management of the Bank; expectations of future economic conditions and their impact on particular industries and individual borrowers; the market value of collateral; the
strength of available guarantees; concentrations of credit; and other judgmental factors. The provision for loan losses for the year ended December 31, 1999, was $445,000, compared to $570,000 for the previous year. The provision in 1999 represented a
decrease of $125,000, or 21.9%, from the 1998 provision. The lower provision in 1999 is due to decreased charge-offs during 1999, primarily in the indirect installment loan portfolio. The provision in 1998 represented an increase of $320,000, or 12.8%,
from the 1997 provision due to increased charge-offs in the indirect installment loan portfolio noted above.

Noninterest Income

Noninterest income increased $476,000, or 17.1%, from $2,791,000 in 1998 to $3,267,000 in 1999. The amount for 1998 increased $882,000, or 46.2%, from $1,909,000 in 1997.

Service charges on deposit accounts and charges for other types of services are the major source of noninterest income to the Company. This source of income increased $615,000, or 27.6%,
from $2,227,000 for 1998 to $2,842,000



-34-

<PAGE>

for 1999. Approximately two-thirds of the increase was attributable to the acquisition of Azle State. Service charge income increased $622,000, or 38.8%, from $1,605,000 for 1997 to $2,227,000 for 1998. Approximately one-third of the
increase was due to the acquisition of Azle State in September 1998. The remainder of the increase was due to service charges on the accounts of seven (7) large grocery stores, which began in October 1997, and an increase in rates on selected service
charges during the first quarter of 1998.

Trust fees from trust operations increased $9,000, or 4.5%, from $199,000 in 1998 to $208,000 in 1999. Trust fees also increased $4,000, or 2.1%, from $195,000 during 1997 to $199,000
during 1998. The increases in 1999 and 1998 are due to an overall increase in the value of assets under management of the trust department.

There were no sales of securities during 1999 or 1998. Securities with a carrying value of $193,000 were sold during 1997. There was no gain or loss recorded on such sale. The securities
portfolio had a weighted average maturity of approximately 2.37 years at December 31, 1999, compared to approximately 2.36 years at December 31, 1998.

Other income is the sum of several components of noninterest income including check printing income, commissions earned on the sale of mutual funds and annuities, bankcard royalty income,
insurance premiums earned on automobiles financed through the Company's indirect installment loan program and other sources of miscellaneous income. Other income decreased $148,000, or 40.5%, from $365,000 in 1998 to $217,000 in 1999 due to a significant
decrease in insurance premiums received during 1999 on automobiles financed through the Company's indirect installment lending program. This decrease was partially offset by an increase due to the acquisition of Azle State. Other income increased
$256,000, or 234.9%, from $109,000 in 1997 to $365,000 for 1998, due to the acquisition of Azle State in September 1998, a significant increase in insurance premiums received during the first half of 1998, a significant increase in commissions earned from
investment services, which the Company began promoting during the second quarter of 1997 and an increase in check printing income.

Noninterest Expenses

Noninterest expenses increased $3,506,000, or 35.1%, from $9,998,000 in 1998 to $13,504,000 in 1999. Approximately 85% of the increase was attributable to the acquisition of Azle State
and the payment of distributions on the Company's Trust Preferred Securities that were sold in the 1998 Offering. Noninterest expenses increased $1,761,000, or 21.4%, from $8,237,000 in 1997 to $9,998,000 in 1998. Approximately two-thirds of the increase
was due to the acquisition of Azle State.

Salaries and benefits rose $1,294,000, or 27.2%, from $4,752,000 in 1998 to $6,046,000 in 1999. Approximately 80% of the increase was a result of the acquisition of Azle State in September
1998. Salaries and employee benefits increased $782,000, or 19.7%, from $3,970,000 in 1997 to $4,752,000 in 1998. Approximately 61% of the increase was a result of the acquisition of Azle State. An additional 23% of the increase was due to the opening of
three supermarket branch locations, two in October 1997 and one in May 1998.

Net occupancy expense increased $334,000, or 30.4%, from $1,099,000 in 1998 to $1,433,000 in 1999. Approximately 82% of the increase was due to the acquisition of Azle State. Net occupancy
expense increased $242,000, or 28.2%, from $857,000 in 1997 to $1,099,000 in 1998. Approximately 37% of the increase was due to the acquisition of Azle State. An additional 42% of the increase was due to the opening of the three supermarket branch locations
 .

Distributions on guaranteed preferred beneficial interests in the Company's Subordinated Debentures increased $801,000, or 263.5%, from $304,000 for 1998 to $1,105,000 for 1999.
Independent Capital issued $13,000,000 of Trust Preferred Securities in the 1998 Offering, on which distributions are payable quarterly at the rate of 8.5%.

Equipment expense increased $216,000, or 24.4%, from $887,000 in 1998, to $1,103,000 in 1999. Approximately 57% of this increase was the result of the Azle State acquisition. In addition,
the Bank entered into a lease for new data processing related equipment for Azle State when it became a branch of the Bank in March 1999. This higher level of lease expense accounted for the remainder of the increase. Equipment expense increased $53,000,
or 6.4%, from $834,000 in 1997 to $887,000 for 1998. The relatively small increase was due to the expiration of operating leases on certain data processing equipment during the first half of 1998.  The equipment was purchased at



-35-

<PAGE>

the end of the leases.  The depreciation expense on this equipment and other replacement equipment purchased later in 1998 was less than the lease expense previously recorded.  The reduction in these expenses helped offset additional
equipment expense incurred as a result of the acquisition of Azle State and the opening of the three supermarket branches.

Amortization of intangible assets increased $334,000 or 98.5%, from $339,000 for 1998 to $673,000 for 1999 and increased $121,000, or 55.5%, from $218,000 for 1997 to $339,000 for 1998 as
a result of the amortization of the core deposit intangible and goodwill incurred in conjunction with the acquisition of Azle State.

Stationery, printing and supplies expense increased $132,000, or 29.9%, from $442,000 for 1998 to $574,000 for 1999. Approximately 70% of the increase was due to the Azle State
acquisition. Stationery, printing and supplies expense increased $23,000, or 5.5%, from $419,000 for 1997 to $442,000 for 1998, primarily due to the acquisition of Azle State and the opening of the three supermarket bank branches.

Professional fees, which include legal and accounting fees, increased $131,000, or 43.0%, from $305,000 during 1998 to $436,000 during 1999. Approximately 45% of the increase was due to
the Azle State acquisition. In addition, during 1999, the Company was involved in more extended litigation which caused such expenses to increase. Professional fees decreased $28,000, or 8.4%, from $333,000 during 1997 to $305,000 for 1998. The decrease
was a result of increased legal fees incurred immediately after the 1997 acquisition related to Western National and legal fees incurred during the first quarter of 1997 to settle litigation, which resulted in a recovery of approximately $108,000 of a
previously charged off loan.

Net costs applicable to other real estate and other repossessed assets consist of expenses associated with holding and maintaining various repossessed assets, the net gain or loss on the
sales of such assets, the write-down of the carrying value of the assets and any rental income on such assets that is credited as a reduction in such expenses. The Company recorded net costs of $91,000 in 1999 compared to net costs of $106,000 in 1998, a
decrease of $15,000, or 14.2%.  The decrease in net costs during 1999 was due to a decrease in the number of repossessed automobiles during 1999 as a result of a reduction in the number of outstanding indirect installment loans secured by automobiles. Net
costs for the Company were $106,000 in 1998 compared to $23,000 in 1997 primarily as a result of a significant decrease in net gains on sales and rental income received on such assets from 1997 to 1998.

Other noninterest expense includes, among many other items, postage, due from bank account charges, data processing, advertising, travel and entertainment, armored car and courier fees,
insurance, regulatory examinations, directors' fees, dues and subscriptions, franchise taxes, merger and acquisition expenses and Federal Deposit Insurance Corporation ("FDIC") insurance. These expenses increased $279,000, or 15.8%, from $1,764,000 during
1998 to $2,043,000 during 1999. Virtually all of the increase was due to the acquisition of Azle State in September 1998. These expenses increased $181,000, or 11.4%, from $1,583,000 for 1997 to $1,764,000 for 1998. Approximately 71% of the increase in
1998 was due to the acquisition of Azle State.

Federal Income Taxes

Due to the fact that the Company effected a quasi-reorganization as of December 31, 1989, utilization of any of the Company's net operating loss carryforwards subsequent to that date
were not credited to income. For periods subsequent to December 31, 1994, the tax effect of such utilization was credited against the Company's gross deferred tax asset. The Company provided for $1,174,000, $1,193,000 and $977,000 in federal income taxes
in 1999, 1998 and 1997, respectively. The 1999, 1998 and 1997 amounts were lowered by $35,000, $35,000 and $112,000, respectfully, as a result of a reduction made in the Company's deferred tax asset valuation allowance relating to Peoples National Bank,
Winters, Texas ("Peoples National"), and Winters State Bank, Winters, Texas ("Winters State Bank"), based on the Company's trend of positive operating results.

Impact of Inflation

The effects of inflation on the local economy and on the Company's operating results have been relatively modest for the past several years. Because substantially all of the Company's
assets and liabilities are monetary in nature, such as cash, securities, loans and deposits, their values are less sensitive to the effects of inflation than to changing interest rates, which do not necessarily change in accordance with inflation rates.
The Company attempts to



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<PAGE>

control the impact of interest rate fluctuations by managing the relationship between its interest rate sensitive assets and liabilities. See "Analysis of Financial Condition - Interest Rate Sensitivity" below.

Quantitative and Qualitative Disclosures about Market Risk

The business of the Company and the composition of its consolidated balance sheet consists of investments in interest-earning assets (primarily loans and investment securities) which
are primarily funded by interest-bearing liabilities (deposits).  Such financial instruments have varying levels of sensitivity to changes in market interest rates resulting in the market risk.

Interest Rate Risk Measurement

Interest rate risk arises when an interest-earning asset matures or when its rate of interest changes in a time frame different from that of the supporting interest-bearing liability.
The Company seeks to minimize the difference between the amount of interest-earning assets and the amount of interest-bearing liabilities that could change interest rates in the same time frame in an attempt to reduce the risk of significant adverse
effects on the Company's net interest income caused by interest rate changes.  The Company does not attempt to match each interest-earning asset with a specific interest-bearing liability.  Instead, as shown in the table below, it aggregates all of its
interest-earning assets and interest-bearing liabilities to determine the difference between the two in specific time frames.  This difference is known as the rate-sensitivity gap.  A positive gap indicates that more interest-earning assets than
interest-bearing liabilities mature in a time frame, and a negative gap indicates the opposite.  Maintaining a balanced position will reduce risk associated with interest rate changes, but it will not guarantee a stable interest rate spread because the
various rates within a time frame may change by differing amounts and occasionally change in different directions.  Management regularly monitors the interest sensitivity position and considers this position in its decisions in regard to interest rates
and maturities for interest-earning assets acquired and interest-bearing liabilities accepted.

In adjusting the Company's asset/liability position, management attempts to manage the Company's interest rate risk while enhancing net interest margins.  The rates, terms and interest
rate indices of the Company's interest-earning assets result primarily from the Company's strategy of investing in loans and securities, which permit the Company to limit its exposure to interest rate risk, together with credit risk, while at the same
time achieving a positive interest rate spread from the difference between the income earned on interest-earning assets and the cost of interest-bearing liabilities.

The Company's objective is to maintain a ratio of interest-sensitive assets to interest-sensitive liabilities that is as balanced as possible. The following tables show that ratio to be
58.2% at the 90-day interval, 56.1% at the 180-day interval and 55.7% at the 365-day interval at December 31, 1999. Currently, the Company is in a liability-sensitive position at the three intervals. During an overall falling interest rate environment,
this position would normally produce a higher net interest margin than in a rising interest rate environment; however, because the Company had $102,573,000 of interest-bearing demand, savings and money market deposits at December 31, 1999, that are
somewhat less rate-sensitive, the Company's net interest margin does not necessarily increase significantly in an overall declining interest rate environment. Excluding these types of deposits, the Company's interest-sensitive assets to interest sensitive
liabilities ratio at the 365-day interval would have been 96.1% at December 31, 1999. The interest sensitivity position is presented as of a point in time and can be modified to some extent by management as changing conditions dictate.

-37-

<PAGE>



The following table shows the interest rate sensitivity position of the Company at December 31, 1999:



|                                                                                                                                                                                  | 90 Days                                             | Cumulative VolumesSubject to Repricing Within
180 Days         365 Days | Volumes
Subject to
Repricing
After1 Year                    | Total                             
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------- | ----------------------------------
|                                                                                                                                                                                  | (Dollars in thousands)                             
|Interest-earning assets:
Federal funds sold
Securities
Loans, net of unearned income
    Total interest-earning assets                                                            | $  15,775
8,40470,137
   94,316                     | $   15,775
16,75279,312
 111,839                                        | $   15,775
33,60486,243
  135,622                           | $0
75,299100,383
   175,682       
|Interest-bearing liabilities:
Demand, savings and money market
  deposits
Time deposits
    Total interest-bearing liabilities
Rate-sensitivity gap(1)
Rate-sensitivity ratio (2) | 102,57359,613162,186$(67,870)
=======
58.2%
======= | 102,57396,631
 199,204$(87,365)
=======
56.1%
=======                   | 102,573141,073
   243,646$(108,024)
========
55.7%
======== | 017,212
    17,212$158,470
=======

______________________________

|(1)
(2) | Rate-sensitive interest-earning assets less rate-sensitive interest-bearing liabilities.
Rate-sensitive interest-earning assets divided by rate-sensitive interest-bearing liabilities.
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Net Economic Value

The interest rate risk ("IRR") component is a dollar amount that is deducted from total capital for the purpose of calculating an institution's risk-based capital requirement and is
measured in terms of the sensitivity of its net economic value ("NEV") to changes in interest rates.  An institution's NEV is calculated as the net discounted cash flows from assets, liabilities and off-balance sheet contracts.  As an institution's IRR
component is measured as the change in the ratio of NEV to the net present value of total assets as a result of a hypothetical 200 basis point change in market interest rates.  A resulting decline in this ratio of more than 2% of the estimated present
value of an institution's total assets prior to the hypothetical 200 basis point change will require the institution to deduct from its regulatory capital 50% of that excess decline.  Based on quarterly calculations, the Bank experienced no such decline.

Although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates.  Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates.  Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term basis and over the life of the loan.  Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed
in calculating the table.  Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase. The Company considers all of these factors in monitoring its exposure to interest rate risk.

The repricing of certain categories of assets and liabilities are subject to competitive and other pressures beyond the Company's control.  As a result, certain assets and liabilities
indicated as maturing or otherwise repricing within a stated period may in fact mature or reprice at different times and at different volumes.

The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. Except for the effects of prepayments and scheduled
principal amortization on mortgage

-38-

<PAGE>

related assets, the table presents principal cash flows and related weighted average interest rates by the contractual terms to maturity. Nonaccrual loans are included in the loan totals. All investments are classified as other than
trading.



|                                                                                        | Year Ending December 31
------------------------------------------------------------------------ |               |               |              
|--------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------- | ------------- | -------------
|                                                                                        | 2000                                                                                             | 2001          | 2002          | 2003         
|                                                                                        | (Dollars in thousands)                                                                          
|Fixed Rate Loans:
  Maturities
  Average interest rate                                  | $44,871
9.48%                                                                                    | $32,123
9.65% | $17,064
9.13% | $9,795
8.82% 
|Adjustable Rate Loans:
  Maturities
  Average interest rate                             | 34,992
9.60%                                                                                     | 5,845
9.47%   | 4,862
9.56%   | 3,938
9.44%  
|Investments and Other
  Interest-earning Assets:
   Maturities
   Average interest rate | 47,793
5.35%                                                                                     | 35,581
5.47%  | 19,027
5.71%  | 11,168
5.73% 
|Total Interest-earning 
  Assets:
   Maturities
   Average interest rate                | $127,656
7.97%                                                                                   | $73,549
7.61% | $40,953
7.59% | $24,901
7.53%
|Savings Deposits:
  Maturities
  Average interest rate                                  | $0
--%                                                                                           | $0
--%        | $0
--%        | $0
--%       
|NOW Deposits:
  Maturities
  Average interest rate                                      | 0
--%                                                                                            | 0
--%         | 0
--%         | 0
--%        
|Money Market Deposits:
  Maturities
  Average interest rate                             | 0
--%                                                                                            | 0
--%         | 0
--%         | 0
--%        
|Certificates of Deposit:
  Maturities
  Average interest rate                           | 141,073
4.96%                                                                                    | 11,720
5.27%  | 2,556
5.21%   | 2,107
5.47%  
|Total Interest-bearing
  Liabilities:
   Maturities
   Average interest rate            | 141,073
4.96%                                                                                    | $11,720
5.27% | $2,556
5.21%  | $2,107
5.47% 



The Company assumes that 100% of savings, NOW and money market deposits at December 31, 1999, are core deposits and are, therefore, expected to roll off after five years. No roll-off is
applied to certificates of deposit. Fixed maturity deposits reprice at maturity.

Analysis of Financial Condition

Assets

Total assets decreased $11,916,000, or 3.2%, from $370,178,000 at December 31, 1998, to $358,262,000 at December 31, 1999, due primarily to a decrease in interest-bearing demand and
time deposits at most of the Bank's larger branches. Total assets increased $105,604,000, or 39.9%, from $264,574,000 at year-end 1997 to $370,178,000 at December 31, 1998, due to the acquisition of Azle Bancorp, which had total assets of $93,158,000 at
September 22, 1998, the date of acquisition.



-39-

<PAGE>

Cash and Cash Equivalents

At December 31, 1999, the Company had $38,760,000 in cash and cash equivalents, down 25,977,000, or 40.1%, from $64,737,000 at December 31, 1998, due to an increased amount of funds
being invested temporarily in federal funds sold at December 31, 1998. During 1998, cash and cash equivalents increased $25,319,000, or 64.2%, from the December 31, 1997, balance of $39,418,000 as a result of the reason noted above and the acquisition of
Azle State, which had $8,892,000 in cash and cash equivalents at the date of acquisition. Cash and cash equivalents averaged $46,365,000, $49,621,000 and $27,520,000 for the years ended December 31, 1999, 1998 and 1997, respectively.

Securities

Securities increased $13,695,000, or 14.4%, from $95,208,000 at December 31, 1998, to $108,903,000 at December 31, 1999. The increase in 1999 was due to more of the Company's available
funds being invested temporarily in federal funds sold at December 31, 1998, as noted above.

The board of directors of the Bank reviews all securities transactions monthly and the securities portfolio periodically. The Company's current investment policy provides for the purchase
of U.S. Treasury securities and federal agency securities having maturities of five years or less and for the purchase of state, county and municipal agencies' securities with maximum maturities of 10 years. The Company's policy is to maintain a
securities portfolio with a mixture of securities classified as held-to-maturity and available-for-sale with staggered maturities to meet its overall liquidity needs. Municipal securities must be rated A or better. Certain school district issues, however,
are acceptable with a Baa rating. Securities totaling $48,387,000 are classified as available-for-sale and are carried at fair value at December 31, 1999. Securities totaling $60,516,000 are classified as held-to-maturity and are carried at amortized
cost. The securities portfolio had an average remaining maturity of approximately 2.37 years at December 31, 1999, compared to approximately 2.36 years at December 31, 1998. The decision to sell securities classified as available-for-sale
is based upon management's assessment of changes in economic or financial market conditions.

Certain of the Company's securities are pledged to secure public and trust fund deposits and for other purposes required or permitted by law. At December 31, 1999, the carrying value of
U.S. Government and other securities so pledged amounted to $21,638,000, or 19.9% of the total securities portfolio.

The following table summarizes the amounts and the distribution of the Company's investment securities held at the dates indicated:



|                                                                                                                                                                                                                | December 31,
-----------------------------------------------------------------------------------------
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                | 1999
-------------------------                                                                        
|                                                                                                                                                                                                                | Amount                                                                                                
|                                                                                                                                                                                                                | (Dollars in thousands)                                                                                
|Carrying value:
  Obligations of U.S. Government
   agencies and corporations
  U.S. Treasury securities
  Obligations of states and
    political subdivisions
  Mortgage-backed securities
  Other securities | $75,016
15,982
9,103
7,783
1,109                                                                      
|Total securities                                                                                                                                                                                                | $108,903
=======                                                                                      
|Total fair value                                                                                                                                                                                                | $107,608
=======                                                                                      



The fair value of held-to-maturity securities is usually different from the reported carrying value of such securities due to interest rate fluctuations that cause market valuations to
change.

The following table provides the maturity distribution and weighted average interest rates of the Company's total securities portfolio at December 31, 1999. The yield has been computed by
relating the forward income stream on



-40-

<PAGE>

the securities, plus or minus the anticipated amortization of premium or accretion of discount, to the book value of the securities. The book value of available-for-sale securities is their fair value. The book value of held-to-maturity
securities is their cost, adjusted for previous amortization or accretion. The restatement of the yields on tax-exempt securities to a fully taxable-equivalent basis has been computed assuming a tax rate of 34%.



|Type and Maturity Grouping at December 31 1999                                                                                                                                                                                      | PrincipalAmount        | CarryingValue                | Estimated
FairValue          | Weighted
AverageYield       
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ---------------------------- | ---------------------------- | ----------------------------
|                                                                                                                                                                                                                                    | (Dollars in thousands)
|Obligations of U.S. Government
  agencies and corporations:
    Within one year
    After one but within five years
     Total obligations of U.S. government
       agencies and corporations                                      |                        | $  23,00052,245
   75,245    | $  22,94152,075
   75,016    | $  22,88051,122
   74,002   
|U.S. Treasury securities:
   Within one year
   After one but within five years
    Total U.S. Treasury securities                                                                                                                  |                        | 9,0007,000
  16,000          | 8,9916,991
   15,982         | 8,9926,990
  15,982         
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|Obligations of states and political subdivisions:
   Within one year
    After one but within five years
    After five but within ten years
    After ten years
     Total obligations of states and
       political subdivisions |                        | 0
2,530
3,1652,950
    8,645 | 0
2,684
3,2993,120
    9,103 | 0
2,595
3,2343,069
    8,898
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|Mortgage-backed securities                                                                                                                                                                                                          |                        | 7,742                        | 7,783                        | 7,707                       
|Other securities:
  Within one year
  After one but within five years
  After five but within ten years
  After ten years
   Total other securities                                                                                 |                        | 0
0
01,0191,019              | 0
0
01,0191,019              | 0
0
01,0191,019             
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|                                                                                                                                                                                                                                   
|Total securities                                                                                                                                                                                                                    |                        | $108,651
=======             | $108,903
=======             | $107,608
=======            



Loan Portfolio

Total loans, net of unearned income, increased $2,066,000, or 1.1%, from $184,560,000 at December 31, 1998, to $186,626,000 at December 31, 1999. The small increase during 1999
was a result of continued net payoffs of the Company's indirect installment loans which was offset by increases in real estate, commercial and other loans.

The Bank primarily makes installment loans to individuals and commercial loans to small to medium-sized businesses and professionals. The Bank offers a variety of commercial lending
products including revolving lines of credit, letters of credit, working capital loans, loans to finance accounts receivable, inventory and equipment and various types of agriculture loans. Typically, the Bank's commercial loans have floating rates of
interest, are for varying terms (generally not exceeding five years), are personally guaranteed by the borrower and are collateralized by real estate, accounts receivable, inventory or other business assets.

Due to the diminished loan demand during the early 1990's, the Bank instituted an installment loan program whereby it began to purchase automobile loans from automobile dealerships in its
market areas. Under this program, an automobile dealership will agree to make a loan to a prospective customer to finance the purchase of a new or used



-41-

<PAGE>

automobile. The different financial institutions that have a pre-established relationship with the particular dealership review the transaction, including the credit history of the prospective borrower, and decide if they would agree to
purchase the loan from the dealership and, if so, at what rate of interest. The dealership selects the financial institution to which it decides to sell the loan. The financial institution purchasing the loan has a direct loan to the borrower
collateralized by the automobile, and the dealership realizes a profit based on the difference between the interest rate quoted to the buyer by the dealership and the interest rate at which the loan is purchased by the financial institution. At December
31, 1999 and 1998, the Company had approximately $14,004,000 and $29,890,000 net of unearned income, respectively, of this type of loan outstanding. The decrease is due to management's decision to shift the loan portfolio toward more commercial and real
estate loans and less toward indirect installment loans.

The following table presents the Company's loan balances at the dates indicated separated by loan type:



|                                                                                                       | December 31,
-------------------------------------------------------------------------------------------
|------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------
|                                                                                                       | 1999                                                                                                    
|                                                                                                       | (In thousands)                                                                                          
|Real estate loans
Commercial loans
Loans to individuals
Other loans
  Total loans
Less unearned income | $  72,268
55,270
46,74812,857187,143517                                                                 
|Loans, net of unearned income                                                                          | $186,626
=======                                                                                        



Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities that would cause them to be similarly impacted by
economic or other conditions. The Company had no concentrations of loans at December 31, 1999, except for those described above. The Bank had no loans outstanding to foreign countries or borrowers headquartered in foreign countries at December 31, 1999.

Management of the Bank may renew loans at maturity when requested by a customer whose financial strength appears to support such renewal or when such renewal appears to be in the Company's
best interest. The Company requires payment of accrued interest in such instances and may adjust the rate of interest, require a principal reduction or modify other terms of the loan at the time of renewal.

The following table presents the distribution of the maturity of the Company's loans and the interest rate sensitivity of those loans, excluding loans to individuals, at December 31, 1999.
The table also presents the portion of loans that have fixed interest rates or interest rates that fluctuate over the life of the loans in accordance with changes in the interest rate environment as represented by the prime rate.



|                                                                     | One Yearand Less                | One to
FiveYears                | Over
FiveYears                 | Total
CarryingValue            
|-------------------------------------------------------------------- | ------------------------------- | ------------------------------- | ------------------------------ | -------------------------------
|                                                                     | (In thousands)                 
|Real estate loans
Commercial loans
Other loans                       | $  12,406
31,9599,996           | $  45,477
20,8912,250           | $  14,385
2,420611             | $   72,268
55,27012,857        
|Total loans                                                          | $  54,361
=======               | $  68,618
=======               | $  17,416
=======              | $ 140,395
========             
|With fixed interest rates
With variable interest rates
  Total loans | $  20,13134,230$  54,361======= | $  49,26419,354$  68,618======= | $  12,4115,005$  17,416======= | $  81,80658,589$ 140,395=======



-42-

<PAGE>

Nonperforming Assets

Nonperforming loans consist of nonaccrual, past due and restructured loans. A past due loan is an accruing loan that is contractually past due 90 days or more as to principal or
interest payments. Loans on which management does not expect to collect interest in the normal course of business are placed on nonaccrual or are restructured. When a loan is placed on nonaccrual, any interest previously accrued but not yet collected is
reversed against current income unless, in the opinion of management, the outstanding interest remains collectible. Thereafter, interest is included in income only to the extent of cash received. A loan is restored to accrual status when all interest and
principal payments are current and the borrower has demonstrated to management the ability to make payments of principal and interest as scheduled.

A "troubled debt restructuring" is a restructured loan upon which interest accrues at a below market rate or upon which certain principal has been forgiven so as to aid the borrower in the
final repayment of the loan, with any interest previously accrued, but not yet collected, being reversed against current income. Interest is accrued based upon the new loan terms.

Nonperforming loans are fully or substantially collateralized by assets, with any excess of loan balances over collateral values allocated in the allowance. Assets acquired through
foreclosure are carried at the lower of cost or estimated fair value, net of estimated costs of disposal, if any. See "Other Real Estate and Other Repossessed Assets" below.

The following table lists nonaccrual, past due and restructured loans and other real estate and other repossessed assets at year-end for each of the past five years.



|                                                                                                                                        | December 31,
----------------------------------------------------------------------------
|--------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------
|                                                                                                                                        | 1999                                                                                     
|                                                                                                                                        | (In thousands)                                                                           
|Nonaccrual loans
Accruing loans contractually past due over
  90 days
Restructured loans
Other real estate and other repossessed assets | $   236
203
186272                                                                       
|Total nonperforming assets                                                                                                              | $   897
======                                                                           



The gross interest income that would have been recorded in 1999 on the Company's nonaccrual loans if such loans had been current, in accordance with the original terms thereof and had been
outstanding throughout the period or, if shorter, since origination, was approximately $23,000. A total of $2,000 in interest on nonaccrual loans was actually recorded (received) during 1999.

A potential problem loan is defined as a loan where information about possible credit problems of the borrower is known, causing management to have serious doubts as to the ability of the
borrower to comply with the present loan repayment terms and which may result in the inclusion of such loan in one of the nonperforming asset categories. The Company does not believe it has any potential problem loans other than these reported in the
above table.

The Company follows a loan review program to evaluate the credit risk in its loan portfolio. Through the loan review process, the Bank maintains an internally classified loan list that,
along with the list of nonperforming loans discussed below, helps management assess the overall quality of the loan portfolio and the adequacy of the allowance. Loans classified as "substandard" are those loans with clear and defined weaknesses such as
highly leveraged positions, unfavorable financial ratios, uncertain repayment sources or poor financial condition, which may jeopardize recoverability of the loan. Loans classified as "doubtful" are those loans that have characteristics similar to
substandard loans, but also have an increased risk that a loss may occur or at least a portion of the loan may require a charge-off if liquidated at present. Although loans classified as substandard do not duplicate loans classified as doubtful, both
substandard and doubtful loans may include some loans that are past due at least 90 days, are on nonaccrual status or have been restructured. Loans classified as "loss" are those loans that are in the process of being charged off. At



-43-

<PAGE>

December 31, 1999, substandard loans totaled $1,765,000, of which $513,000 were loans designated as nonaccrual, 90 days past due or restructured and one $4,000 loan was designated as loss. The loss loan was 90 days past due.

In addition to the internally classified loans, the Bank also has a "watch list" of loans that further assists the Bank in monitoring its loan portfolio. A loan is included on the watch
list if it demonstrates one or more deficiencies requiring attention in the near term or if the loan's ratios have weakened to a point where more frequent monitoring is warranted. These loans do not have all the characteristics of a classified loan
(substandard, doubtful or loss), but do have weakened elements as compared with those of a satisfactory credit. Management of the Bank reviews these loans to assist in assessing the adequacy of the allowance. Substantially all of the loans on the watch
list at December 31, 1999, were current and paying in accordance with loan terms. At December 31, 1999, watch list loans totaled $1,193,000 (including $766,000 of loans guaranteed by U.S. governmental agencies). At such date, $18,000 of loans on the watch
list were designated as 90 days past due. In addition, at December 31, 1999, $90,000 of unclassified loans were designated as nonaccrual, 90 days past due or restructured loans.

Other Real Estate and Other Repossessed Assets

Other real estate and other repossessed assets consist of real property and other assets unrelated to banking premises or facilities. Income derived from other real estate and other
repossessed assets, if any, is generally less than that which would have been earned as interest at the original contract rates on the related loans. At December 31, 1999 and 1998, other real estate and other repossessed assets had an aggregate book value
of $272,000 and $630,000, respectively. Other real estate and other repossessed assets decreased $358,000, or 56.8%, during 1999. The reduction was primarily due to a decrease in the number of repossessed automobiles held by the Company at December 31,
1999. The December 31, 1999, balance of $272,000 included fourteen repossessed automobiles ($90,000), three commercial properties ($178,000) and one residential property ($4,000). Of the December 31, 1998, balance, $416,000 represented fifty repossessed
automobiles, $169,000 represented three commercial properties and $45,000 represented two residential properties.

Allowance for Possible Loan Losses

Implicit in the Company's lending activities is the fact that loan losses will be experienced and that the risk of loss will vary with the type of loan being made and the
creditworthiness of the borrower over the term of the loan. To reflect the currently perceived risk of loss associated with the Company's loan portfolio, additions are made to the Company's allowance for possible loan losses (the "allowance"). The
allowance is created by direct charges against income (the "provision" for loan losses), and the allowance is available to absorb possible loan losses. See "Results of Operations - Provision for Loan Losses" above.

The amount of the allowance equals the cumulative total of the provisions made from time to time, reduced by loan charge-offs and increased by recoveries of loans previously charged off.
The Company's allowance was $1,833,000, or 0.98% of loans, net of unearned income, at December 31, 1999, compared to $1,842,000, or 1.00% of loans, net of unearned income, at December 31, 1998, and $1,173,000, or 0.83% of loans, net of unearned income, at
December 31, 1997. The small decrease in the balance of the allowance from December 31, 1998, to December 31, 1999, and the reduction in the ratio of the allowance to total loans, net of unearned income during the past several years, is primarily due to
the improvement in the overall credit quality of the Company's loan portfolio.

Credit and loan decisions are made by management and the board of directors of the Bank in conformity with loan policies established by the board of directors of the Company. The Company's
practice is to charge off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower's failure to meet repayment terms, the borrower's deteriorating or deteriorated financial condition, the depreciation
of the underlying collateral, the loan's classification as a loss by regulatory examiners or for other reasons. The Company charged off $697,000 in loans during 1999. Charge-offs for 1999 were concentrated in the following categories: loans to individuals
$586,000, or 84.1%, and commercial loans $106,000, or 15.2%. A charge-off on one commercial loan was $60,000, or 8.6%, of total charge-offs. All but $51,000 of the remaining $637,000 in charge-offs were installment loans, of which $398,000 represented
indirect loans secured by automobiles. Recoveries during 1999 were $243,000 and were concentrated in the following categories: loans to individuals-$118,000, or 48.6%, real estate loans $104,000, or 42.8%, and commercial loans $20,000, or 8.2%. Recoveries
of $97,000 on two real estate loans accounted for 39.9% of total recoveries during 1999.

-44-

<PAGE>



The following table presents the provisions, loans charged off and recoveries of loans previously charged off, the amount of the allowance, average loans outstanding and certain pertinent
ratios for the last five years.



|                                                                                                                                                                                         | 1997(2)                     | 1996(3)                     | 1995                        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | --------------------------- | ----------------------------
|                                                                                                                                                                                         | (Dollars in thousands)     
|Analysis of allowance for possible loan losses:
Balance at January 1
    Provision for loan losses
    Acquisition of subsidiary                                                         | $  1,842
4450
   2,287      | $  1,173
570726
2,469       | $   793
250
 395
  1,438    
|Loans charged off:
    Real estate loans
    Commercial loans
    Loans to individuals
    Other loans
     Total charge-offs                                                            | 5
106
5860
    697          | 40
18
6710
   729           | 6
107
5711
   581           
|Recoveries of loans previously charged off:
    Real estate loans
    Commercial loans
    Loans to individuals
    Other loans
      Total recoveries                                   | 104
20
1181
   243          | 16
41
450
     102          | 35
220
601
   316           
|Net loans charged off                                                                                                                                                                    | 454                         | 627                         | 265                         
|Balance at December 31                                                                                                                                                                   | $  1,833
======             | $  1,842
=======            | $  1,173
======             
|Average loans outstanding,
  net of unearned income
Ratio of net loan charge-offs to average loans,
   net of unearned income
  to total loans, net of unearned income, at
  December 31 | $184,471
======
0.25%
0.98% | $153,188
======
0.41%
1.00% | $132,891
=======
0.20%
0.83%

______________________________

|(1)
(2)
(3) | Average loans, net of unearned income, for 1998 include the average loans, net of unearned income, of Azle State from September 22 through December 31, 1998.
Average loans, net of unearned income, for 1997 include the average loans, net of unearned income, of Western National from January 28 through December 31, 1997.
Average loans, net of unearned income, for 1996 include the average loans, net of unearned income, of Peoples National from January 1 through December 31, 1996, and of Coastal Banc - San Angelo from May 27 through December 31, 1996.
|----------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Foreclosures on defaulted loans result in the Company acquiring other real estate and other repossessed assets. Accordingly, the Company incurs other expenses, specifically net costs
applicable to other real estate and other repossessed assets, in maintaining, insuring and selling such assets. The Bank attempts to convert nonperforming loans into interest-earning assets, although usually at a lower dollar amount than the face value of
such loans, either through liquidation of the collateral securing the loan or through intensified collection efforts.

As the economies of the Company's market areas recovered and stabilized during the early 1990's, there was a steady reduction in the amount of the provision, as a percentage of average
loans outstanding, necessary to maintain an adequate balance in the allowance. The amount of the provision was fairly stable during the mid-1990's. This reflected management's assessment of the continued reduction of credit risks associated with the loan
portfolio. The Company increased the provision in 1998, however, due to the higher amount of net charge-offs in the Company's indirect installment loan portfolio, which declined significantly during the last two years.

-45-

<PAGE>

The amount of the allowance is established by management based upon estimated risks inherent in the existing loan portfolio. Management reviews the loan portfolio on a continuing basis to
evaluate potential problems. This review encompasses management's estimate of current economic conditions and the potential impact on various industries, prior loan loss experience and financial conditions of individual borrowers. Loans that have been
specifically identified as problem or nonperforming loans are reviewed on at least a quarterly basis, and management critically evaluates the prospect of the ultimate losses arising from such loans, based on the borrower's financial condition and the
value of available collateral. When a risk can be specifically quantified for a loan, that amount is specifically allocated in the allowance. In addition, the Company allocates the allowance based upon the historical loan loss experience of the different
types of loans. Despite such allocation, both the allocated and unallocated portions of the allowance are available for charge-offs of all loans.

The following table shows the allocations in the allowance and the respective percentages of each loan category to total loans at year-end for each of the past five years.



|                                                                                                                                                     | December 31,
----------------------------------------------------------------------------------------------------------------------------------
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                     | 1999
-------------------------------------------------                                                                                         
|                                                                                                                                                     | Amount of
Allowance
Allocated
to
Category
--------------------                                                                                 
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                    
|                                                                                                                                                     | (Dollars in thousands)                                                                                                                         
|Real estate loans
Commercial loans
Loans to individuals
Other loans
  Total allocated
  Unallocated
   Total allowance for possible
     loan losses | $    198
254
672371,161672
$  1,833                                                                                                            



|                                                                                                                                     | December 31,
-------------------------------------------------------------------------------------------------------------------
|------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------
|1996
-------------------------------------------------------------                                                                   | 1995
-------------------------------------------------                                                                          
|Amount of
Allowance
Allocated
to
Category
-----------------------                                                                    | Percent of
Loans by
Category to
Loans, Net
of Unearned
Income
--------------------------------                                  
|
|
|
|
|
|                                                                                                                                     | (Dollars in thousands)                                                                                                          
|Real estate loans
Commercial loans
Loans to individuals
Other loans
  Total allocated
  Unallocated
    Total allowance for possible | $    128
97
32343591202$    793
=======                                                                                         

Intangible Assets

Intangible assets decreased $673,000, or 6.2%, from $10,831,000 at December 31, 1998, to $10,158,000 at December 31, 1999, due to $673,000 in amortization expense during 1999.

Premises and Equipment

Premises and equipment decreased $478,000, or 4.6%, from $10,294,000 at December 31, 1998, to $9,816,000 at December 31, 1999. The decrease was due to depreciation expense of $751,000
that was recorded during 1999. This decrease was partially offset by purchases of small amounts of equipment during the year.

-46-

<PAGE>

Accrued Interest Receivable

Accrued interest receivable consists of interest that has accrued on securities and loans, but is not yet payable under the terms of the related agreements. The balance of accrued
interest receivable increased $284,000, or 8.7%, from $3,254,000 at December 31, 1998, to $3,538,000 at December 31, 1999. The increase during 1999 was primarily a result of the increase in commercial and real estate loans and securities, and a decrease
in federal funds sold, on which interest is collected daily. Of the total balance at December 31, 1999, $2,058,000, or 58.2%, was interest accrued on loans and $1,480,000, or 41.8%, was interest accrued on securities.

Other Assets

The most significant component of other assets is a net deferred tax asset of $508,000 at both December 31, 1999 and 1998. The balance of other assets decreased $484,000, or 19.3%, to
$2,022,000 at December 31, 1999, from $2,506,000 at December 31, 1998 due to a decrease in the Company's net deferred tax asset due principally to the utilization of the remainder of the Company's tax credit carryforwards.

Deposits

The Bank's lending and investing activities are funded almost entirely by core deposits, 50.3% of which are demand, savings and money market deposits at December 31, 1999. Total
deposits decreased $12,505,000, or 3.8%, from $330,804,000 at December 31, 1998, to $318,299,000 at December 31, 1999. The decrease is due primarily to a decrease in interest-bearing demand deposits at the Bank's larger branches. The Bank does not have
any brokered deposits.

The following table presents the average amounts of and the average rate paid on deposits of the Company for each of the last three years:

|                                                                                                                                                                           | Year Ended December 31,
------------------------------------------------------------------------------------------------
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------
|1999
------------------------                                                                                                                                              | 1998(1)
------------------------------                                                                                  
|Average
Amount
----------                                                                                                                                                  | Average
Rate
----------                                                                                                 
|
|                                                                                                                                                                           | (Dollars in thousands)                                                                                                  
|Noninterest-bearing
  demand deposits
Interest-bearing demand, savings and money market deposits
Time deposits of less
  than $100,000
Time deposits of $100,000
  or more | $ 58,041
106,485
109,14048,854                                                                                          
|Total deposits                                                                                                                                                             | $322,520
=======                                                                                                        

______________________

|(1)
(2) | The average amounts and average rates paid on deposits for the year ended December 31, 1998, include the averages of Azle State from September 22 through December 31, 1998.
The average amounts and average rates paid on deposits for the year ended December 31, 1997, include the averages of Western National from January 28 through December 31, 1997.
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       

-47-

<PAGE>



The maturity distribution of time deposits of $100,000 or more at December 31, 1999, is presented below:





|                                                                                 | December 31, 1999                                
|-------------------------------------------------------------------------------- | -------------------------------------------------
|                                                                                 | (In thousands)                                   
|3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months | $18,743       
12,516        
17,826        4,147
|Total time deposits of $100,000 or more                                          | 53,232        
=======                           



The Bank experiences relatively limited reliance on time deposits of $100,000 or more. Time deposits of $100,000 or more are a more volatile and costly source of funds than other deposits
and are most likely to affect the Company's future earnings because of interest rate sensitivity. At December 31, 1999, time deposits of $100,000 or more represented 14.9% of the Company's total assets, compared to 13.4% of the Company's total assets at
December 31, 1998.

Accrued Interest Payable

Accrued interest payable consists of interest that has accrued on deposits, but is not yet payable under the terms of the related agreements. The balance of accrued interest payable
decreased $89,000, or 7.7%, from $1,163,000 at December 31, 1998, to $1,074,000 at December 31, 1999. The decrease was due to a decrease in overall lower interest rates that were being paid on deposits during 1999 compared to rates that were paid during
1998.

Notes Payable

The Company's notes payable decreased from $1,000 at December 31, 1998, to $0 at December 31, 1999, a result of the payoff of the one remaining note payable.

Other Liabilities

The most significant components of other liabilities are amounts accrued for various types of expenses. The balance of other liabilities decreased $172,000, or 24.4%, from $705,000 at
December 31, 1998, to $533,000 at December 31, 1999, due to a decrease in federal income taxes payable at December 31, 1999.

-48-

<PAGE>



Selected Financial Ratios

The following table presents selected financial ratios for each of the last three fiscal years:



|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Year Ended December 31,
--------------------------------------------------                                            
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 1999
-------------                                                                                                    
|Net income to:
  Average assets
  Average interest-earning assets
  Average stockholders' equity
Dividend payout (3) to:
  Net income
  Average stockholders' equity
Average stockholders' equity to:
  Average total assets
  Average loans (4)
  Average total deposits
Average interest-earning assets to:
  Average total assets
  Average total deposits
  Average total liabilities
Ratio to total average deposits of:
  Average loans (4)
  Average noninterest-bearing deposits
  Average interest-bearing deposits
Total interest expense to total interest income
Efficiency ratio (5) | 0.68%
0.77  
9.87  
17.82  
1.76  
6.86  
13.47  
7.71  
87.76  
98.62  
97.99  
57.20  
18.00  
82.00  
40.89  
66.20

_________________________

(1)     Average balance sheet and income statement items for 1998 include the averages for Azle State from 
          September 22 through December 31, 1998.
(2)     Average balance sheet and income statement items for 1997 include the averages for Western National from
          January 28 through December 31, 1997.
(3)     Dividends for Common Stock only.
(4)     Before allowance for possible loan losses.
(5)     Calculated noninterest expense less distributions on guaranteed preferred beneficial interests in the Company's 
          subordinated debentures, amortization of intangibles and expenses related to other real estate and other
          repossessed assets divided by the sum of net interest income before provision for loan losses and total 
          noninterest income, excluding securities gains and losses.

Liquidity

The Bank

Liquidity with respect to a financial institution is the ability to meet its short-term needs for cash without suffering an unfavorable impact on its on-going operations. The need for
the Bank to maintain funds on hand arises principally from maturities of short-term borrowings, deposit withdrawals, customers' borrowing needs and the maintenance of reserve requirements. Liquidity with respect to a financial institution can be met from
either assets or liabilities. On the asset side, the primary sources of liquidity are cash and due from banks, federal funds sold, maturities of securities and scheduled repayments and maturities of loans. The Bank maintains adequate levels of cash and
near-cash investments to meet their day-to-day needs. Cash and due from banks averaged $19,539,000 and $15,149,000 during the years ended December 31, 1999 and 1998, respectively. These amounts comprised 5.4% and 5.2% of average total assets during the
years ended December 31, 1999 and 1998, respectively. The average level of securities and federal funds sold was $133,608,000 and $107,835,000 during the years ended December 31, 1999 and 1998, respectively. The increases from 1998 to 1999 were primarily
due to the acquisition of Azle State on September 22, 1998.

-49-

<PAGE>

The Bank sold no securities during the years ended December 31, 1999, or 1998. The Bank sold securities classified as available-for-sale with a book value of $193,000 during the year ended
December 31, 1997. At December 31, 1999, $31,932,000, or 31.6%, of the Company's securities portfolio, excluding mortgage-backed securities, matured within one year and $61,750,000, or 61.1%, excluding mortgage-backed securities, matured after one but
within five years. The Bank's commercial lending activities are concentrated in loans with maturities of less than five years and with both fixed and adjustable interest rates, while its installment lending activities are concentrated in loans with
maturities of three to five years and with primarily fixed interest rates. The Bank's experience, however, has been that these installment loans are paid off in an average of approximately thirty months. At December 31, 1999, approximately $86,243,000, or
46.2%, of the Company's loans, net of unearned income, matured within one year and/or had adjustable interest rates. Approximately $78,720,000, or 56.1%, of the Company's loans (excluding loans to individuals) matured within one year and/or had adjustable
interest rates. See "Analysis of Financial Condition - Loan Portfolio" above.

On the liability side, the principal sources of liquidity are deposits, borrowed funds and the accessibility to money and capital markets. Customer deposits are by far the largest source
of funds. During the years ended December 31, 1999 and 1998, the Company's average deposits were $322,520,000, or 89.0% of average total assets, and $265,959,000, or 90.6% of average total assets, respectively. The Company attracts its deposits primarily
from individuals and businesses located within the market areas served by the Bank. See "Analysis of Financial Condition - Deposits" above.

The level of nonperforming assets has squeezed interest margins and has resulted in noninterest expenses from net operating costs and write-downs associated with nonperforming assets,
although the ratio of such nonperforming assets to total assets has generally been decreasing over the past several years. To improve liquidity, the Bank has implemented various cost-cutting and revenue-generating measures and extended efforts to reduce
nonperforming assets.

The Company

The Company depends on the Bank for liquidity in the form of cash flow, primarily to meet debt service and dividend requirements and to cover other operating expenses. This cash flow
comes from three sources: (1) dividends resulting from earnings of the Bank, (2) current tax liabilities generated by the Bank and (3) management and service fees for services performed for the Bank.

The payment of dividends from the Bank is subject to applicable law and the scrutiny of regulatory authorities. Dividends paid by the Bank to Independent Financial in 1999 aggregated
$1,675,000; in turn, Independent Financial and Independent Capital paid dividends to the Company totaling $1,709,000 during 1999. Dividends paid by the Bank to Independent Financial during 1998 aggregated $5,250,000; in turn, Independent Financial and
Independent Capital paid dividends to the Company totaling $5,259,000. Dividends paid during 1998 include a $4,500,000 dividend paid by Azle State after the acquisition of such bank. Proceeds from this dividend were used to pay off the borrowings from the
Fort Worth Bank. At December 31, 1999, there were approximately $5,071,000 in dividends available for payment to Independent Financial by the Bank without prior regulatory approval.

The payment of current tax liabilities generated by the Bank and management and service fees constituted approximately 49.1% and 3.7%, respectively, of the Company's total cash flow during
1999. Pursuant to a tax-sharing agreement, the Bank pays to the Company an amount equal to its individual tax liability on the accrual method of federal income tax reporting. The accrual method generates more timely payments of current tax liabilities by
the Bank to the Company, increasing the regularity of cash flow and shifting the time value of such funds to the Company. In the event that the Bank incurs losses, the Company may be required to refund tax liabilities previously collected. Current tax
liabilities totaling $1,912,000 were paid by the Bank to the Company during 1999, compared to a total of $1,480,000 in 1998.

From January 1, 1989, through December 31, 1995, the Company collected federal income taxes from its subsidiaries based on an effective tax rate of approximately 34% and paid
taxes to the federal government at the rate of approximately 2% as a result of the utilization of the Company's net operating loss carryforwards for both regular tax and alternative minimum tax purposes. At December 31, 1995, the Company's net
operating loss carryforwards for alternative tax purposes had been fully utilized. As a result, the Company began paying federal income taxes at the

-50-

<PAGE>

effective tax rate of approximately 20% during the first quarter of 1996. The net operating carryforwards available for regular federal income tax purposes were fully utilized by the fourth quarter of 1997. The Company's alternative
minimum tax credit carryforwards were fully utilized at December 31, 1999.

The Bank pays management fees to the Company for services performed. These services include, but are not limited to, financial and accounting consultation, attendance at the Bank's board
meetings, audit and loan review services and related expenses. The Bank paid a total of $143,000 in management fees to the Company in 1999, compared to $147,000 in 1998. The Company's fees must be reasonable in relation to the management services
rendered, and the Bank is prohibited from paying management fees to the Company if the Bank would be undercapitalized after any such distribution or payment.

The Company has a revolving line of credit with the Fort Worth Bank.  Proceeds of $4,300,000 under the $6,500,000 line of credit were used to fund the purchase of Azle Bancorp on September
22, 1998.  These borrowings were paid off on September 30, 1998, from the proceeds of a $4,500,000 dividend that was paid to the Company by Azle State.  The amount available under the line of credit was reduced to $1,500,000 on January 5, 1999, and
further to $1,000,000 on October 5, 1999.  The line of credit matures on October 1, 2000, bears interest at the floating prime interest rate of the Fort Worth Bank and is collateralized by 100% of the stock of Independent Financial and the Bank. There was
no balance outstanding under the line of credit at December 31, 1999.

At December 31, 1998, the Bank had a $1,000 note payable to an individual which matured and was paid off in March 1999. Principal, plus interest at 7.5%, was payable monthly. The note was
collateralized by a two-story commercial building in Abilene, Texas.

Capital Resources

At December 31, 1999, stockholders' equity totaled $25,356,000, or 7.1% of total assets, compared to $24,505,000, or 6.6% of total assets, at December 31, 1998.

Bank regulatory authorities in the United States have risk-based capital standards by which all bank holding companies and banks are evaluated in terms of capital adequacy. These
guidelines relate a banking company's capital to the risk profile of its assets. The risk-based capital standards require all banks to have Tier 1 capital of at least 4%, and total capital (Tier 1 and Tier 2 capital) of at least 8%, of risk-weighted
assets, and to be designated as well-capitalized, the banking company must have Tier 1 and total capital ratios of 6% and 10%, respectively. For the Company, Tier 1 capital includes common stockholders' equity and qualifying guaranteed preferred
beneficial interests in the Company's subordinated debentures, reduced by intangible assets. Tier 2 capital for the Company is comprised of the remainder of guaranteed preferred beneficial interests in the Company's subordinated debentures not qualifying
as Tier 1 capital and all of the allowance for possible loan losses.



-51-

<PAGE>



Banking regulators also have leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted quarterly average assets. The leverage ratio
standards require all banking companies to have a minimum leverage ratio of 4%, and to be designated as well-capitalized, the banking company must have a leverage ratio of at least 5%. The following table provides a calculation of the Company's risk-based
capital and leverage ratios and a comparison of the Company's and the Bank's risk-based capital ratios and leverage ratios to the minimum regulatory and well-capitalized minimum requirements at December 31, 1999:



|The Company                                                                                                                                                                                                                                                        | December 31, 1999
-------------------------
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------
|                                                                                                                                                                                                                                                                   | (In thousands)                             
|Tier 1 capital:
  Common stockholders' equity, excluding unrealized
    loss on available-for-sale securities
  Qualifying guaranteed preferred beneficial interests
    in the Company's Subordinated Debentures (1)
  Intangible assets
    Total Tier 1 capital | $  25,699     
8,565     (10,158)    24,106
|Tier 2 capital:
  Guaranteed preferred beneficial interests in the Company's Subordinated Debentures (1)
  Allowance for possible loan losses (2)
     Total Tier 2 capital                                                                                        | 4,435     1,833     6,268                  
|Total capital                                                                                                                                                                                                                                                      | $  30,374     
=======                     
|Risk-weighted assets                                                                                                                                                                                                                                               | $199,565     
=======                      
|Adjusted quarterly average assets                                                                                                                                                                                                                                  | $353,065     
=======                      

_______________________________

|(1)
(2) | Limited to 25% of total Tier 1 capital, with any remainder qualifying as Tier 2 capital.
Limited to 1.25% of risk-weighted assets.
|------- | ----------------------------------------------------------------------------------------------------------------------------------





The minimum regulatory capital ratios, minimum capital ratios for well capitalized holding companies and the Company's actual capital amounts and ratios at December 31, 1999 and 1998, were
as follows:



|                                                      | December 31,
---------------------------------- | Minimum
Capital
Ratios
------------- | Well
Capitalized
Ratios
--------------------
|----------------------------------------------------- | ----------------------------------------------- | ------------------------------------ | --------------------------------------------
|                                                     
|                                                     
|                                                      | 1999
--------------                             | 1998
----------------                |                                             
|                                                      | (Dollars in thousands)                         
|Tier 1 capital                                        | $24,106                                         | $21,344                              |                                             
|Total capital                                         | 30,374                                          | 28,356                               |                                             
|Risk-weighted assets                                  | 199,565                                         | 205,971                              |                                             
|Adjusted quarterly average assets                     | 353,065                                         | 357,815                              |                                             
|Capital ratios:                                       |                                                 |                                      |                                             
|Tier 1 capital to risk-weighted assets                | 12.08%                                          | 10.36%                               | 4.00%                                       
|                                                      |                                                 |                                      |                                             
|Total capital to risk-weighted assets                 | 15.22                                           | 13.77                                | 8.00                                        
|Tier 1 capital to adjusted quarterly average
  assets | 6.83                                            | 5.97                                 | 4.00                                        

-52-

<PAGE>

The minimum regulatory capital ratios, minimum capital ratios for well capitalized banks and the Bank's actual capital ratios at December 31, 1999, were as follows:



|                                                      | Regulatory MinimumRatio for Banks
---------------------------- | Minimum Ratio for
Well Capitalized Banks
---------------------------- | Actual Ratios at
December 31, 1999
-------------------------
|----------------------------------------------------- | -------------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------------
|Tier 1 capital to risk-weighted assets                | 4.00%                                                          | 6.00%                                                                 | 13.66%                                                      
|Total capital to risk-weighted assets                 | 8.00                                                           | 10.00                                                                 | 14.58                                                       
|Tier 1 capital to adjusted quarterly
  average assets | 4.00                                                           | 5.00                                                                  | 7.70                                                        



The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to revise its risk-based capital standards to ensure that those standards
take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities, as well as reflect the actual performance and expected risk of loss on multi-family mortgages. The law also requires each federal
banking agency to specify the levels at which an insured institution would be considered "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized."  Under the FDIC's regulations,
the Company and the Bank were "well capitalized" at December 31, 1999.

The Company's ability to generate capital internally through retention of earnings and access to capital markets is essential for satisfying the capital guidelines for bank holding
companies as prescribed by the Federal Reserve Board.

The payment of dividends on the Common Stock is determined by the Company's board of directors in light of circumstances and conditions then existing, including the earnings of the Company
and the Bank, funding requirements and financial condition, applicable loan covenants and applicable laws and regulations. The Company's ability to pay cash dividends is restricted by the requirement that it maintain a certain level of capital as
discussed above in accordance with regulatory guidelines. The Federal Reserve Board has promulgated a policy prohibiting bank holding companies from paying dividends on common stock unless such bank holding company can pay such dividends from current
earnings.

At December 31, 1999, retained earnings of the Bank included approximately $5,071,000 that was available for payment of dividends to the Company without prior approval of regulatory
authorities.

The Company began paying quarterly cash dividends of $0.03 per share on its Common Stock during the second quarter of 1994. The Company also paid 4-for-3 stock split, effected in the form
of a 33a
% stock dividend, on May 31, 1995. The Company's Board of Directors increased the Company's quarterly Common Stock cash dividend to $0.05 per share during the second quarter of 1996. In addition, the Company paid a 5-for-4 stock split, effected in
the form of a 25% stock dividend, on May 30, 1997. The Company's Board of Directors increased the Company's quarterly Common Stock dividend to $0.06 per share during the first quarter of 2000.

In connection with the Company's acquisition of Crown Park, the Company sold an aggregate of 395,312 shares of Common Stock in the 1997 Offering at a price of $11.40 per share. This amount
included 51,562 shares covered by the underwriters' over-allotment option. The Company received net proceeds of approximately $3,978,000 from the 1997 Offering.

In connection with the Company's acquisition of Azle Bancorp, the Company sold an aggregate of 230,000 shares of Common Stock and 1,300,000 Trust Preferred Securities in the 1998 Offering
at a price of $11.50 and $10.00 per share or security, respectively.  The Company received net proceeds of approximately $14,547,000 from the 1998 Offering.

During the year ended December 31, 1999, all of the 5,066 remaining shares of the Company's outstanding Series C Convertible Preferred Stock were converted into 116,351 shares of Common
Stock.

-53-

<PAGE>

Year 2000 Disclosure Update

The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a four digit year is commonly referred to as
the Year 2000 Compliance issue.

The Company identified all significant applications that required modification to ensure Year 2000 Compliance.  Internal and external resources were used to make the required modifications
and test Year 2000 Compliance. The testing process of all significant mission-critical applications was completed and all such hardware and software tested was found to be Year 2000 compliant.

The Company developed a contingency plan and a business resumption plan to address issues that might not have been corrected in a timely manner by implementation of the Company's own Year
2000 Compliance plan and to address the possibilities that third party vendor or supplier systems might not have been Year 2000 compliant.  The Company prepared alternate strategies where necessary if significant exposures were identified.

Company personnel were at various Bank locations on the night of December 31, 1999, and during the day on January 1, 2000, and were prepared to address any potential Year 2000 Compliance
issues. No significant Year 2000 Compliance issues arose,  nor have any arisen subsequent to January 1, 2000.

The total cost to the Company of Year 2000 Compliance activities was not material to the Company's financial position or results of operations in any given year.

Potential Sale of the Company

On March 1, 2000, the Company executed a definitive agreement (the "Agreement") with State National Bancshares, Inc. ("State National") for State National, to acquire all of the
Company's outstanding Common Stock for cash of approximately $45,473,000, or approximately $20.00 per share. The aggregate purchase price will increase if the closing of the transaction does not occur on or before the 160th day following the execution date of the Agreement. The Agreement additionally calls for State National to assume the Company's obligations on $13,000,000 of outstanding Trust Preferred Securities. State National is a privately held bank
holding company headquartered in Lubbock, Texas. The transaction is subject to various closing conditions, including the receipt of all necessary approvals and the ability of State National to raise the necessary funds to complete the transaction. If all
the conditions to the transaction are satisfied in the normal course, the transaction is expected to be completed before the end of the third quarter of 2000.

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<PAGE>