INDEPENDENT BANKSHARES INC, 424B4, 1997-01-23

INDEPENDENT BANKSHARES INC
424B4, 1997-01-23
NATIONAL COMMERCIAL BANKS

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<PAGE>

FILED PURSUANT TO RULE 424(b)(4)
REGISTRATION NO. 333-16419

275,000 SHARES

[LOGO]

COMMON STOCK

All 275,000 shares of common stock, par value $.25 per share (the "Common
Stock"), of Independent Bankshares, Inc. (the "Company") offered hereby (the
"Offering") are being sold by the Company. At the request of the Company, the
Underwriter has reserved up to 30,000 shares of Common Stock for sale to certain
persons who have expressed an interest in purchasing shares of Common Stock in
this Offering. The Common Stock is traded on the American Stock Exchange
("AMEX") under the symbol "IBK." See "Market For Common Stock." On January 20,
1997, the last sale price of the Common Stock as reported on AMEX was $15.625.

The Company will use all of the net proceeds of this Offering to fund a
portion of the cost of acquiring Crown Park Bancshares, Inc., a bank holding
company that owns Western National Bank, Lubbock, Texas. See "The Acquisition"
and "Use of Proceeds."

THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT
ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.

SEE "INVESTMENT CONSIDERATIONS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNTS AND PROCEEDS TO
PRICE TO PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................................................ $14.25 $1.00 $13.25
Total(3)................................................. $3,918,750 $259,350 $3,659,400
</TABLE>

(1) For information concerning indemnification of the Underwriter and
underwriting discounts and commissions relating to certain reserved shares,
see "Underwriting." The underwriting discounts and commissioners relating to
the 30,000 reserved shares is $0.50 per share.

(2) Before deducting estimated expenses of $155,000 payable by the Company.

(3) The Underwriter has been granted a 30-day over-allotment option to purchase
up to 41,250 additional shares from the Company. If all such shares are
purchased, the total Price to Public, Underwriting Discount and Commissions
and Proceeds to Company will be $4,506,563, $300,497 and $4,206,066,
respectively. See "Underwriting."

The shares of Common Stock are offered by the Underwriter subject to prior
sale, when, as and if delivered to and accepted by the Underwriter, subject to
its right to reject any order in whole or in part, and subject to certain other
conditions. It is expected that delivery of the Common Stock will be made on or
about January 27, 1997 in Dallas, Texas.

HOEFER & ARNETT

INCORPORATED

The date of this Prospectus is January 21, 1997.

<PAGE>
Map of the State of Texas describing banking locations of the Company before
and after the Acquisition. Before the Acquisition, First State Bank, N.A.,
Abilene had a main office in Abilene, Texas and branch offices in Wylie,
Stamford, Winters and San Angelo, Texas, and First State Bank, N.A., Odessa had
a main office in Odessa, Texas and a branch office in Winwood, Texas. After the
Acquisition, First State Bank, N.A., Abilene will have one branch in Lubbock,
Texas.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THIS PROSPECTUS, UNLESS THE
CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" MEANS INDEPENDENT BANKSHARES,
INC. AND ITS SUBSIDIARIES. UNLESS OTHERWISE INDICATED, THE INFORMATION CONTAINED
IN THIS PROSPECTUS (I) ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT
OPTION AND (II) REFLECTS THE 5% COMMON STOCK DIVIDEND PAID TO SHAREHOLDERS IN
MAY 1993 AND THE 33 1/3% COMMON STOCK DIVIDEND PAID TO SHAREHOLDERS IN MAY 1995.
INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE INFORMATION SET
FORTH UNDER "INVESTMENT CONSIDERATIONS."

THE COMPANY

The Company is a bank holding company headquartered in Abilene, Texas,
located approximately 180 miles west of Dallas. The Company, which is a Texas
corporation, indirectly owns through a Delaware subsidiary corporation 100% of
the stock of First State Bank, National Association, Abilene, Texas ("First
State, N.A., Abilene") and First State Bank, National Association, Odessa, Texas
("First State, N.A., Odessa") (collectively, the "Banks"). The Banks currently
operate full-service banking locations in the Texas cities of Abilene (2
locations), San Angelo, Stamford, Winters and Odessa (2 locations).

The Company's primary activities are to assist the Banks in the management
and coordination of their financial resources and to provide capital, business
development, long range planning and public relations for the Banks. Each of the
Banks 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.
Although each Bank operates under the management of its own officers and
directors, the Banks participate as a group in providing various financial
services and extensions of credit, which increases the ability of each Bank to
provide such services to customers who might otherwise be required to seek
banking services from a larger bank. In connection with its proposed acquisition
(the "Acquisition") of Crown Park Bancshares, Inc. ("Crown Park") and its
subsidiary Western National Bank ("Western National"), the Company has received
the approval of the Office of the Comptroller of the Currency (the
"Comptroller") to merge First State, N.A., Odessa with and into First State,
N.A., Abilene in order to recognize certain cost savings and to utilize the
Banks' capital more effectively than on a stand alone basis. Following the
merger of First State, N.A., Odessa with and into First State, N.A., Abilene,
which was consummated on December 31, 1996, the Company will continue its
decentralized approach to banking with senior management at the main banking
offices in Abilene and Odessa exercising substantial autonomy over credit and
pricing decisions.

Each of the Banks is an established franchise with a significant presence in
its respective service area. First State, N.A., Abilene was chartered in 1982
and was the third largest of four commercial banks headquartered in Abilene,
Texas, in terms of total assets at December 31, 1995, and was the fifth largest
of ten banks in Abilene in terms of total branch assets at that same time. The
branches in Stamford and Winters were the largest bank branches in those cities
in terms of total assets at December 31, 1995. The branch in San Angelo was the
ninth largest of ten banks in terms of total branch assets in that city at
December 31, 1995. First State, N.A., Odessa was chartered in 1983 and was the
third largest of four commercial banks headquartered in Odessa, Texas, in terms
of total assets at December 31, 1995, and was the sixth largest of seven banks
in Odessa in terms of total branch assets at that same date. The Banks operate
as community banks that focus on long-term relationships with customers and
provide individualized, quality service. Reflecting its community banking
heritage, the Company has a stable deposit base from customers located within
its West Texas market area. Its recent financial performance is characterized by
consistent core earnings, an increasingly diversified loan portfolio and strong
asset quality.

At September 30, 1996, the Company had, on a consolidated basis, total
assets of $203,801,000, total deposits of $187,474,000, total loans, net of
unearned income, of $90,115,000 and total stockholders' equity of $14,582,000.
The Company's net income has grown from $224,000 in 1991 to $1,132,000 in 1995.
Net income was $1,046,000 for the nine-month period ended September 30, 1996.
Additionally, since 1991, the Company's total loans have grown at a 12.0%
average annual rate resulting from a combination of internal growth and the
Company's acquisition of community banks.

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<PAGE>
The Company's complete mailing address and telephone number is 547 Chestnut
Street, Abilene Texas 79602, (915) 677-5550.

BUSINESS STRATEGY

The Company's strategic plan contemplates an increase in profitability and
shareholder value through the building of a valuable West Texas banking
franchise consisting of low cost core deposits as a funding base to support
local consumer and commercial lending programs.

The Company's acquisition activity has been designed to augment this
franchise by increasing market share and expanding into contiguous markets
demographically similar to its current service areas. Following the acquisition
of Crown Park and its subsidiary Western National, the Company will have
locations in four of the fastest growing consumer markets in West Texas.
Management believes that it can increase the profitability of the Company
through increased operating efficiencies, an increase in the loan to deposit
ratio and cross-selling a more expansive product line to newly acquired
customers.

The Company's operating strategy is to provide customers with the business
sophistication and breadth of products of a regional financial services company,
while retaining the special attention to personal service and the local appeal
of a community bank. Decentralized decision making authority vested in the
presidents and senior officers of the Banks allows for rapid response time and
flexibility in dealing with customer requests and credit needs. The Company
believes that following the merger of First State, N.A., Odessa with and into
First State, N.A., Abilene, which was consummated on December 31, 1996, the
rapid response time and flexibility in dealing with customer requests and credit
needs will continue through the substantial autonomy of senior management at the
main banking offices in Odessa and Abilene. The participation of the Company's
directors, officers and employees in area civic and service organizations
demonstrates the Company's continuing commitment to the communities it serves.
Management believes that these qualities distinguish the Company from its
competitors and will allow the Company to compete successfully in its market
against larger regional and out-of-state institutions.

THE ACQUISITION

The Company intends to acquire Crown Park and its subsidiary, Western
National. The Company and Crown Park have entered into an Agreement and Plan of
Reorganization dated July 11, 1996 (the "Reorganization Agreement"). Under the
Reorganization Agreement, Crown Park will be merged with and into a subsidiary
of the Company to be formed and Western National will be merged with and into
First State, N.A., Abilene, and the shareholders of Crown Park will receive
merger consideration consisting of cash and/or promissory notes in the amount of
$7,425,000 subject to adjustment as set forth below. The maximum amount of the
merger consideration that the holders of Crown Park common stock may elect to
have paid pursuant to promissory notes is $3,000,000. The Company does not
expect that the holders of Crown Park common stock will elect to receive a
material amount of the merger consideration in promissory notes. The merger
consideration will (i) increase by the amount of interest earned on the merger
consideration from December 1, 1996 through the closing date at a rate equal to
the 26-week United States Treasury Bill rate plus 2%, (ii) decrease by the
amount of $142,779 to be paid to Crown Park's financial advisor, (iii) decrease
by the cost of certain director and officer insurance that the Company may elect
to purchase in the event Western National fails to purchase such insurance, and
(iv) decrease by the amount by which Western National's shareholders' equity, at
the effective time of the merger, is less than $5,400,000 and shall be further
reduced by the amount by which the shareholders' equity of Crown Park at the
effective time is less than $4,000,000, provided that in the event both Western
National and Crown Park's shareholders' equity are below the required amounts,
then the amount by which those equity accounts are below such required amounts
will be deducted only once and further provided that the merger consideration
shall not be reduced in the event that Western National's shareholders' equity
is less than $5,400,000 or Crown Park's shareholders' equity is less than
$4,000,000 for any reason other than the payment of a dividend or distribution.
See "The Acquisition."

4
<PAGE>

Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and commercial
loans. The Company intends to increase the profitability of Western National by
expanding its loan portfolio and deposit base. The Company believes enhanced
marketing efforts, expanded loan and deposit products and increased employee
training and personal attention to customers will fuel this growth. The Company
also believes that savings can be realized in the area of noninterest expenses
through consolidation of operations. See "Business and Properties of the
Company--Business Strategy."

In addition to the immediate increase in asset size and the potential for
improved future profitability, the Acquisition will allow the Company to expand
its market area into what it believes are desirable banking locations. This
expansion will increase the geographic diversity of the Company's loan portfolio
which is expected to decrease the Company's overall lending risks.

The closing of this Offering is contingent upon the simultaneous closing of
the Acquisition, and if for any reason the Acquisition is not completed, this
Offering will not be consummated. There can be no assurance that the Acquisition
will be completed.

THE OFFERING

<TABLE>
<S> <C>
Securities Offered................ 275,000 shares of Common Stock(1)

Common Stock Outstanding
After the Offering.............. 1,379,644 shares are expected to be outstanding after
this Offering. See "Capitalization."(2)

Use of Proceeds................... The Company will use all of the net proceeds from this
Offering to fund a portion of the cost of acquiring
Crown Park.

AMEX Symbol....................... IBK
</TABLE>

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(1) Of such shares, 30,000 have been reserved for sale to certain persons. See
"Underwriting."

(2) Based on the number of shares of Common Stock issued and outstanding at
December 15, 1996, and excludes 262,324 shares of Common Stock reserved for
issuance upon the exercise of certain employee stock options and upon
conversion of the Company's $10.00 Series C Cumulative Convertible Preferred
Stock ("Series C Preferred Stock").

INVESTMENT CONSIDERATIONS

See "Investment Considerations" for a discussion of certain considerations
relevant to an investment in the Common Stock offered hereby.

5
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION

The following table presents summary historical consolidated financial
information and other data of the Company. Such financial information has been
restated to reflect the 5% stock dividend paid to shareholders in May 1993 and
the 33 1/3% stock dividend paid to shareholders in May 1995. The following
summary of historical consolidated financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus and the information contained in
"Management's Discussions and Analysis of Financial Condition and Results of
Operations of the Company." The summary historical consolidated financial data
as of and for the five years in the period ended December 31, 1995, is derived
from the Company's consolidated financial statements which have been audited by
independent public accountants. The summary historical consolidated financial
data as of and for the nine-month periods ended September 30, 1996, and
September 30, 1995, is unaudited. In the opinion of management of the Company,
the information presented reflects all adjustments considered necessary for fair
presentation of the results for such periods.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income........................... $ 10,009 $ 8,831 $ 11,962 $ 10,131 $ 9,221 $ 9,715 $ 11,438
Net interest income............................. 5,287 4,971 6,653 6,679 6,045 5,639 5,188
Income before extraordinary item and cumulative
effect of accounting change................... 1,046 831 1,132 450 1,029 839 224
Extraordinary item.............................. 0 0 0 0 0 192(1) 0
Cumulative effect of accounting change.......... 0 0 0 0 200(2) 0 0
Net income...................................... 1,046 831 1,132 450 1,229 1,031 224
COMMON SHARE DATA:
Earnings per share:
Primary....................................... $ 0.92 $ 0.75 $ 1.02 $ 0.36 $ 1.11 $ 0.91 $ 0.13
Fully diluted................................. 0.77 0.62 0.84 0.33 0.91 0.74 0.13
Cash dividends.................................. 0.13 0.08 0.11 0.07 0.00 0.00 0.00
Dividend payout ratio........................... 13.58% 10.35% 10.34% 15.56% N/A N/A N/A
Book value per share:
Common stock.................................. $ 12.69 $ 12.31 $ 12.50 $ 9.99 $ 9.78 $ 7.35 $ 5.59
Fully diluted................................. 10.73 9.98 10.13 8.22 8.05 6.06 4.75
Period end shares outstanding................... 1,105 1,039 1,050 1,037 1,037 1,026 1,015
Weighted average shares outstanding (in
thousands):
Primary....................................... 1,083 1,045 1,047 1,042 1,041 1,041 1,031
Fully diluted................................. 1,358 1,350 1,352 1,348 1,349 1,349 1,388
BALANCE SHEET DATA:
Assets.......................................... $203,801 $174,065 $180,344 $159,860 $160,712 $160,554 $149,052
Loans, net of unearned income................... 90,115 82,559 81,927 81,306 69,647 52,967 52,545
Deposits........................................ 187,474 158,414 164,704 146,184 147,785 134,679 137,535
Notes payable................................... 578 1,074 849 930 1,194 2,290 2,610
Stockholders' equity............................ 14,582 13,488 13,818 11,073 10,845 8,238 6,380
PERFORMANCE DATA (RETURNS ANNUALIZED FOR INTERIM
PERIODS):
Return on average total assets.................. 0.72% 0.66% 0.67% 0.28% 0.81% 0.72% 0.16%
Return on average stockholders' equity.......... 9.81 9.06 8.99 3.98 12.50 14.39 3.54
Net interest margin(3).......................... 3.97 4.33 4.29 4.62 4.37 4.33 4.03
Ratios to total average deposits of average
loans, net of unearned income(4).............. 47.49 54.27 53.25 50.97 42.56(5) 38.01 42.01
Efficiency ratio(6)............................. 72.55 77.38 76.56 89.97 77.77 78.15 91.29
</TABLE>

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(1) Gain on extinguishment of debt.
(2) Cumulative effect of the change in accounting for income taxes.
(3) Fully taxable-equivalent basis.
(4) Before allowance for possible loan losses.
(5) Includes average balance sheet items of The Winters State Bank, Winters,
Texas ("Winters State") for the period August 31, 1993 (the date of the
acquisition) through December 31, 1993.
(6) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding securities gains and losses.
(7) Balances at December 31, 1992, do not include the assets of Olton State
Bank, Olton, Texas ("Olton State") that were sold on January 1, 1993.
(8) Average loans, net of unearned income, for 1993, 1992 and 1991 include the
average loans, net of unearned income, of Winters State from August 31,
1993, through December 31, 1993, and of Olton State from January 1, 1991
through June 30, 1992.

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<PAGE>
SUMMARY PRO FORMA COMBINED INFORMATION

The following table presents summary pro forma combined financial
information and other data for the Company for the nine months ended September
30, 1996 and as of September 30, 1996, as if consummation of the Acquisition and
this Offering had occurred, in the case of the statements of operations data, as
of January 1, 1995, and in the case of the balance sheet data, as of September
30, 1996. The pro forma combined financial data do not purport to be indicative
of the Company's financial condition and results of operations at any future
date or for any future period. The financial data should be read in conjunction
with the Company's and Crown Park's consolidated financial statements, the notes
thereto, the pro forma combined financial statements of the Company, the notes
thereto and the other financial information, included elsewhere herein. In the
opinion of management of the Company, the data presented reflect all adjustments
considered necessary for a fair presentation of the results for such periods.

<TABLE>
<CAPTION>
PRO FORMA
THE COMPANY CROWN PARK COMBINED
------------- ----------- -------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
Income Statement Data:
Total interest income..................................... $ 10,009 $ 3,330 $ 13,129
Net interest income....................................... 5,287 1,851 7,008
Net income................................................ 1,046 342 1,297
Common Share Data:
Earnings per share:
Primary................................................. $ 0.92 $ 1.80 $ 0.92(1)
Fully diluted........................................... 0.77 N/A 0.79(1)
Adjusted shares outstanding (in thousands):
Primary................................................. 1,083 190 1,358
Fully diluted........................................... 1,358 N/A 1,633
Balance Sheet Data:
Assets.................................................... $ 203,801 $ 57,525 $ 259,218
Loans, net of unearned income............................. 90,115 38,619 128,734
Deposits.................................................. 187,474 50,702 238,176
Notes payable............................................. 578 2,094 1,378
Stockholders' equity...................................... 14,582 4,318 18,086
Capital Ratios:
Total capital to risk-weighted assets..................... 14.66% 9.16% 11.36%
Leverage ratio............................................ 6.68 7.62 5.67
</TABLE>

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(1) Had Crown Park not incurred approximately $80,000 ($53,000 net of tax) of
expenses in the nine-month period ended September 30, 1996, related to the
proposed acquisiton of Crown Park, primary and fully diluted earnings per
share would have been $0.96 and $0.82, respectively.

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<PAGE>
INVESTMENT CONSIDERATIONS

OTHER THAN HISTORICAL AND FACTUAL STATEMENTS, THE MATTERS AND ITEMS
DISCUSSED IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. IN ADDITION TO OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS COULD CONTRIBUTE
TO SUCH DIFFERENCES. PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE
FOLLOWING FACTORS AND CAUTIONARY STATEMENTS IN DETERMINING WHETHER TO PURCHASE
SHARES OF COMMON STOCK IN THIS OFFERING. ALL FACTORS SHOULD BE CONSIDERED IN
CONJUNCTION WITH THE OTHER INFORMATION AND FINANCIAL DATA APPEARING ELSEWHERE IN
THIS PROSPECTUS. SEE "DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS."

POTENTIAL NEGATIVE IMPACT ON EARNINGS FROM INTEGRATION OF THE
ACQUISITION. As a result of the Acquisition, the Company's asset size will
substantially increase. The Company has not recently consummated an acquisition
on the same scale as the Acquisition. The future prospects of the Company will
depend, in significant part, on a number of factors, including, without
limitation, the Company's ability to integrate the Acquisition; its ability to
compete effectively in the Lubbock, Texas market area; its success in retaining
earning assets, including loans, acquired in the Acquisition; its ability to
generate new earning assets; and its ability to attract and retain qualified
management and other appropriate personnel. No assurance can be given with
respect to the Company's ability to accomplish any of the foregoing or that the
Company will be able to achieve results in the future similar to those achieved
in the past or that the Company will be able to manage effectively the growth
resulting from the Acquisition.

In addition, as a result of the Acquisition, the Company's management must
successfully integrate the operations of Western National with those of the
Banks. The operational areas requiring significant integration include the
consolidation of data processing operations among all of the Banks and Western
National, the combination of employee benefit plans, the creation of joint
account and lending products, the development of unified marketing plans and
other related issues. Accomplishment of these goals will require additional
expenditures by the Company that could negatively impact the Company's net
income. Completion of these tasks could divert management's attention from other
important issues. In addition, there can be no assurance that management of the
Company and Crown Park/Western National will be compatible, and the process of
combining the Banks and Western National could cause the interruption of, or the
disruption in, the activities of either or both the Banks' and Western
National's businesses, which could have an adverse effect on their combined
operations. The Company may also incur additional unexpected costs in connection
with integration of the Acquisition that could negatively impact the Company's
net income. See "The Acquisition."

POTENTIAL CREDIT QUALITY ISSUES IN CONNECTION WITH THE ACQUISITION. In
connection with the Acquisition, the Company and its representatives reviewed
the loan portfolio of Western National. The Company's review was made using
criteria, analyses and collateral evaluations that the Company has traditionally
used in the review of its existing business. Nonperforming loans (including
nonaccrual loans, restructured loans and loans 90 days or more past due) at
September 30, 1996 and December 31, 1995, totaled approximately $331,000 and
$525,000, respectively, at Western National. At September 30, 1996, the
Company's allowance for loan losses of $806,000 was 0.89% of total loans, net of
unearned income while on a pro forma basis assuming consummation of the
Acquisition, the Company's allowance for loan losses would have been $1,136,000
or 0.88% of total loans, net of unearned income at September 30, 1996.

ADDITIONAL FINANCING. The Company has in the past expanded through
acquisitions, and has financed its recent acquisitions primarily through
borrowings and, with respect to the Acquisition, through borrowings and an
offering of the Common Stock. There can be no assurance that the Company will
continue to make acquisitions. However, if the Company attempts additional
acquisitions, it is likely to finance the acquisitions through a combination of
borrowings and offerings of its securities. There is no assurance that the
Company will be able to obtain debt financing on terms satisfactory to it or at
all. Furthermore, if the

9
<PAGE>
Company does sell additional securities to raise funds in the future, the terms
and conditions of the issuances may have a dilutive effect or otherwise
adversely impact existing shareholders.

DIVIDEND HISTORY. While the Company has paid cash dividends on the Common
Stock since May 1994, there is no assurance that the Company will continue to
pay dividends in the future. The payment of any cash dividends by the Company in
the future will depend to a large extent on the payment of dividends from the
Banks. The ability of the Banks to pay dividends is dependent upon the Banks'
earnings and financial condition. The payment of cash dividends by the Banks to
Independent Financial Corp., an intermediate holding company for the Banks
("Independent Financial"), by Independent Financial to the Company and by the
Company to its shareholders are all subject to certain statutory and regulatory
restrictions and may be restricted by provisions of future financing
arrangements. Moreover, holders of the Series C Preferred Stock are entitled to
receive dividends before dividends may be paid on the Common Stock. See
"Dividend Policy" and "Regulation and Supervision."

RELIANCE ON KEY PERSONNEL. The Company and the Banks are dependent upon
their executive officers and key employees. Specifically, the Company considers
the services of Bryan W. Stephenson, President and Chief Executive Officer,
Randal N. Crosswhite, Senior Vice President and Chief Financial Officer, and
other senior officers of the Banks to be important to the success of the
Company. The unexpected loss of the services of any of these individuals could
have a detrimental effect on the Company and the Banks.

COMPETITION. There is significant competition among banks and bank holding
companies, many of which have far greater assets and resources than the Company,
in the areas in which the Company operates. The Company also encounters intense
competition in its commercial banking business from savings and loan
associations, credit unions, factors, insurance companies, commercial and
captive finance companies, and certain other types of financial institutions
located in other major metropolitan areas in the United States, many of which
are larger in terms of capital, resources and personnel than the Company.
Additionally, federal legislation regarding interstate branching and banking may
increase competition in the future from large out-of-state banks. See
"Regulation and Supervision--The Banks-- Branching" and "Business and Properties
of the Company--Competition."

REGULATION AND SUPERVISION. The Company and the Banks are subject to
extensive federal and state regulation and supervision, which is intended
primarily for the protection of insured depositors and consumers. In addition,
the Company and the Banks are subject to changes in federal and state law, as
well as changes in regulations, governmental policies and accounting principles.
The effects of any such potential changes cannot be predicted, but could
adversely affect the business and operations of the Company and the Banks. See
"Regulation and Supervision."

REGULATION AND CONTROL. Individuals, alone or acting in concert with
others, seeking to acquire more than 10% of any class of voting securities of
the Company must comply with the Change in Bank Control Act. Entities seeking to
acquire 5% or more of any class of voting securities of, or otherwise to
control, the Company must comply with the Bank Holding Company Act of 1956, as
amended (the "BHCA"). Accordingly, prospective investors need to be aware of and
to comply with these requirements, if applicable, in connection with any
purchase of shares of the Common Stock offered hereby.

GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income and
net income of the Company depend to a substantial extent on "rate
differentials," i.e., the differences between the income the Company receives
from loans, securities and other earning assets, and the interest expense it
pays to obtain deposits and other liabilities. These rates are highly sensitive
to many factors that are beyond the control of the Company, including general
economic conditions, rapid changes in interest rates, decline in real estate
market values and the monetary and fiscal policies of various governmental and
regulatory authorities. For example, in an expanding economy, loan demand
usually increases and the interest rates charged on loans increase. Increases in
the discount rate by the Federal Reserve System usually lead to

10
<PAGE>
rising interest rates, which affect the Company's interest income, interest
expense and investment portfolio. Also, governmental policies such as the
creation of a tax deduction for individual retirement accounts can increase
savings and affect the cost of funds.

TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is listed
for trading on the American Stock Exchange, the trading market in the Company's
Common Stock on such exchange historically has been less active than the average
trading market for companies listed on such exchange. A public trading market
having the desired characteristics of depth, liquidity and orderliness depends
upon the presence in the marketplace of willing buyers and sellers of the Common
Stock at any given time, which presence is dependent upon the individual
decisions of investors and general economic and market conditions over which the
Company has no control. Consequently, although the Company believes that this
Offering will improve the liquidity of the market for the Common Stock, no
assurance can be given that this Offering will increase the volume of trading in
the Common Stock. See "Market for Common Stock."

ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors are classified
into three classes, each of which has a staggered, three-year term. Moreover,
the Restated Articles of Incorporation of the Company require the affirmative
vote of the holders of at least 80% of the voting stock of the Company to
approve any merger or certain other business combinations involving any person
beneficially owning 5% or more of any class of voting stock of the Company. In
addition, the Board of Directors is able to issue various series of the
Company's preferred stock and to determine certain characteristics of such
preferred stock, such as voting rights, without the approval of the holders of
the Common Stock or, in some cases, the holders of the Series C Preferred Stock.
The Articles of Incorporation and Bylaws of the Company also contain certain
procedural restrictions relating to nomination and removal of directors and
amendments to Bylaws. Each of these factors may impede or inhibit an investor
from attempting to acquire control of the Company and may have certain other
anti-takeover effects. See "Description of Capital Stock--Certain Provisions of
the Restated Articles of Incorporation and the Bylaws."

SHARES ELIGIBLE FOR FUTURE SALE. The Company will have approximately
1,379,644 shares of Common Stock outstanding following this Offering (assuming
275,000 shares are issued in this Offering and no exercise of existing employee
stock options to purchase Common Stock, and further assuming that none of the
outstanding shares of Series C Preferred Stock are converted into Common Stock).
The Company's management believes that 455,680 (33.0%) of these shares will be
held by "affiliates" of the Company, including the shares offered for sale in
this Offering which are reserved for sale to certain persons. In addition,
42,359 shares of the Company's outstanding Common Stock are "restricted
securities" and may not be sold unless they are sold pursuant to an exemption
from registration, including the exemption contained in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act"), or are registered
under the Securities Act. Sales of substantial amounts of Common Stock in the
public market pursuant to registration under the Securities Act, Rule 144 or
otherwise, or even the potential for such sales, could adversely affect the
prevailing market prices for the Common Stock and impair the Company's ability
to raise additional capital through the sale of its equity securities. See
"Security Ownership of Management and Certain Beneficial Owners" and "Shares
Eligible for Future Sale."

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") that are based on the current
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. All statements
other than statements of historical facts included in this Prospectus, including
without limitation, statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company" and "Business and Properties of the Company"
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future

11
<PAGE>
operations, are forward-looking statements. When used in this report, the words
"anticipate," "believe," "estimate," "expect" and "intend" and words or phrases
of similar import, as they related to the Company or its subsidiaries or Company
management, are intended to identify forward-looking statements. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the Company's expectations ("cautionary statements") are
disclosed under "Investment Considerations" and elsewhere in this Prospectus,
including, without limitation, in conjunction with the forward-looking
statements included in this Prospectus. 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. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the applicable cautionary statements.

USE OF PROCEEDS

The net proceeds from the sale of the Common Stock offered hereby are
estimated to be approximately $3,504,400 ($4,051,066 if the Underwriter's
over-allotment option is fully exercised) after deducting estimated underwriting
discounts and commissions and offering expenses using an offering price of
$14.25 per share in this Offering. The Company will use all of the net proceeds
from this Offering to fund a portion of the cost of acquiring Crown Park. See
"The Acquisition."

MARKET FOR COMMON STOCK

Since September 12, 1995, the Common Stock has traded on the AMEX under the
symbol "IBK." Prior to September 12, 1995, the Common Stock traded on the Nasdaq
Small-Cap Market.

The following table sets forth, for the periods indicated, the high and low
sales prices for the Common Stock as quoted on the AMEX and Nasdaq Small-Cap
Market and the amount of cash dividends paid per share, adjusted for the 33 1/3%
stock dividend paid to stockholders in May 1995.

<TABLE>
<CAPTION>
CASH
DIVIDENDS
PER
HIGH LOW SHARE
------- ------- -------
<S> <C> <C> <C>
Calendar Year Ended December 31, 1995
First Quarter............................................................ $ 6 $ 5 1/4 $0.0225
Second Quarter........................................................... 7 1/2 5 1/4 0.03
Third Quarter............................................................ 11 1/4 7 1/4 0.03
Fourth Quarter........................................................... 10 7/8 10 1/4 0.03

Calendar Year Ended December 31, 1996
First Quarter............................................................ $10 1/2 $ 9 3/4 $ 0.03
Second Quarter........................................................... 11 9 0.05
Third Quarter............................................................ 12 10 7/8 0.05
Fourth Quarter........................................................... 17 1/2 12 1/8 0.05

Calendar Year Ending December 31, 1997
First Quarter (through January 20)....................................... $16 1/4 $15 5/8 $ 0.05 (1)
</TABLE>

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

(1) This cash dividend is payable February 28, 1997 to shareholders of record on
February 14, 1997.

12
<PAGE>
The Nasdaq Small-Cap Market quotations reflect inter-dealer prices, without
retail mark-up, mark down or commissions and may not necessarily represent
actual transactions.

According to the records of the Company's transfer agent, the Company had
approximately 1,238 holders of record of the Common Stock at December 15, 1996.
The high and low sales price for the Common Stock was $15.625 on January 20,
1997.

DIVIDEND POLICY

THE COMPANY. In May 1994, the Company instituted the payment of a $.03 per
share quarterly cash dividend, which was raised to $0.05 per share in May 1996.
The Board of Directors presently intends to continue the payment of a small cash
dividend on the Common Stock. The continued payment of dividends and the amount
and timing of any future dividend payments, however, will be determined by the
Board of Directors and will depend upon a number of factors, including the
extent of funds legally available therefor, dividend requirements of the Series
C Preferred Stock, and the earnings, business prospects, acquisition
opportunities, cash needs, financial condition, regulatory and capital
requirements of the Company and the Banks and provisions of future loan or
financing agreements, including the Company's proposed loan agreement with BFNBA
which restricts dividends if total debt to BFNBA exceeds $1,200,000. The Company
expects to borrow up to $800,000 from BFNBA to finance a portion of the cost of
acquiring Crown Park, and thus no dividend restriction would be currently in
effect.

The Company's ability to pay cash dividends is restricted by the requirement
that it and the Banks maintain certain levels of capital in accordance with
regulatory guidelines promulgated by, in the case of the Company, the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board") and, in
the case of the Banks, the Comptroller. See "Regulation and Supervision--The
Company--Capital Adequacy Requirements."

Holders of the Series C Preferred Stock are entitled to receive, if, as and
when declared by the Company's Board of Directors, out of funds legally
available therefor, in preference to the holders of Common Stock and any other
stock ranking junior to the Series C Preferred Stock in respect of dividends,
quarterly cumulative cash dividends at the annual rate of $4.20 per share. The
aggregate annual dividend payment on the 13,478 shares of the Series C Preferred
Stock outstanding at December 15, 1996, is approximately $57,000. If earnings
and cash flow from ordinary operations of the Company are not sufficient to
enable it to pay the full amount of the dividend on the Series C Preferred
Stock, the Company may cumulate all or a portion of the annual dividend. The
Company can cause the mandatory conversion of the Series C Preferred Stock into
Common Stock beginning in December 1997. The Series C Preferred Stock is the
Company's only outstanding preferred issue.

The Company may not, among other things, declare or pay any cash dividend in
respect of the Common Stock or any stock junior to the Series C Preferred Stock
with respect to dividends or liquidation rights unless, on the date of payment,
all accumulated dividends in respect of the Series C Preferred Stock are paid or
set aside. Furthermore, the Company may not declare or pay any dividends in
respect of the Common Stock or purchase, redeem or otherwise acquire shares of
Common Stock if, on the record date for such payment, or on the date of such
purchase, redemption or acquisition, such action would cause stockholders'
equity (including mandatorily redeemable preferred stock) of the Company, as
reported in the most recent quarterly or annual financial statements filed by
the Company with the Securities and Exchange Commission, to be less than an
amount equal to the sum of (i) 140% of the number of then outstanding shares of
Series C Preferred Stock multiplied by its liquidation value and (ii) 140% of
the number of then outstanding shares of any stock ranking senior as to
dividends to the Series C Preferred Stock multiplied by the liquidation value of
such senior stock. Dividend payments on any other stock junior to the Series C
Preferred Stock with respect to dividends or liquidation rights would be
similarly limited.

The Federal Reserve Board has a policy prohibiting bank holding companies
from paying dividends on common stock except out of current earnings. The
Federal Reserve Board has asserted that this policy,

13
<PAGE>
originally only applicable to common stock, also limits dividends on preferred
stocks. As expanded, the Federal Reserve Board policy would limit dividends on
the Series C Preferred Stock to an amount equal to current earnings. To date,
the Company's earnings have been sufficient to cover dividends on the Common
Stock and the Series C Preferred Stock.

THE BANKS. The funds used by the Company to meet its operational expenses
and debt service obligations, to maintain the necessary level of capital for
itself and the Banks, and to pay cash dividends on the Common Stock and the
Series C Preferred Stock will be derived primarily from dividends, management
fees and tax liabilities paid to the Company by Independent Financial and to
Independent Financial by the Banks. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity." The ability of the
Banks to pay dividends is restricted by the requirement that the Banks maintain
an adequate level of capital in accordance with regulatory guidelines and by
statute.

The Federal Deposit Insurance Corporation ("FDIC") requires insured banks,
such as the Banks, to maintain certain minimum capital ratios. The FDIC is
permitted to require higher ratios if it believes that the financial condition
and operations of a particular bank mandates such a higher ratio. The
Comptroller has substantially similar requirements. See "Regulation and
Supervision--The Banks--Capital Adequacy Requirements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of the
Company--Capital Resources."

The National Bank Act of 1864, as amended (the "National Bank Act"),
provides that, prior to declaring a dividend, a bank must transfer to its
surplus account an amount equal to or greater than 10% of the net profits earned
by the bank since its last dividend was declared, unless such transfer would
increase the surplus of the bank to an amount greater than the bank's stated
capital. Moreover, the approval of the Comptroller is required for any dividend
to a bank holding company by a national bank if the total of all dividends,
including the proposed dividend, declared by the bank in any calendar year
exceeds the total of its net profits for such year combined with its retained
net profits for the preceding two years, less any required transfers to surplus.
In addition, the prompt corrective provisions of Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and implementing regulations
prohibit a bank from paying a dividend if, following the payment, the bank would
be in any of the three capital categories for undercapitalized institutions. See
"Regulation and Supervision--The Banks--Capital Adequacy Requirements."

THE ACQUISITION

The Company intends to acquire Crown Park and its subsidiary, Western
National. The Company and Crown Park have entered into the Reorganization
Agreement pursuant to which Crown Park will be merged with and into a subsidiary
of the Company to be formed and Western National will be merged with and into
First State, N.A., Abilene, and the shareholders of Crown Park will receive
merger consideration consisting of cash and/or promissory notes in the amount of
$7,425,000 subject to adjustment as set forth below. The maximum amount of the
merger consideration that the holders of Crown Park common stock may elect to
have paid pursuant to promissory notes is $3,000,000. The merger consideration
will (i) increase by the amount of interest earned on the merger consideration
from December 1, 1996 through the closing date at a rate equal to the 26-week
United States Treasury Bill rate plus 2%, (ii) decrease by the amount of
$142,779 to be paid to Crown Park's financial advisor, (iii) decrease by the
cost of certain director and officer insurance that the Company may elect to
purchase in the event Western National fails to purchase such insurance, and
(iv) decrease by the amount by which Western National's shareholders' equity, at
the effective time of the merger, is less than $5,400,000 and shall be further
reduced by the amount by which the shareholders' equity of Crown Park at the
effective time is less than $4,000,000, provided that in the event both Western
National and Crown Park's shareholders' equity are below the required amounts,
then the amount by which those equity accounts are below such required amounts
will be deducted only once and further provided that the merger consideration
shall not be reduced in the

14
<PAGE>
event that Western National's shareholders' equity is less than $5,400,000 or
Crown Park's shareholders' equity is less than $4,000,000 for any reason other
than the payment of a dividend or distribution.

The holders of Crown Park common stock will have the option to elect to
receive (part or all) of their portion of the merger consideration in the form
of promissory notes payable in equal annual principal payments over a period of
five years at a rate of interest equal to the 26-week United States Treasury
Bill rate plus 2%, with such rate adjusted quarterly. The promissory notes will
provide that interest will be paid quarterly and that principal will be paid
annually. If the holders of Crown Park common stock elect to receive a portion
of the merger consideration in the form of promissory notes in excess of
$3,000,000 or if the aggregate amount of debt assumed and incurred by the
Company and its subsidiaries (including the promissory notes to be issued as
part of the merger consideration) exceeds $4,000,000, then the merger
consideration payable in the form of promissory notes will be reduced pro rata.
The Company does not expect that the holders of Crown Park common stock will
elect to receive a material amount of the merger consideration in promissory
notes.

Management of the Company believes that the Acquisition presents an
excellent opportunity for increased earnings. Crown Park, a Texas corporation
located in Lubbock, Texas, engages in no significant activities other than
owning and managing Western National. At September 30, 1996, Crown Park had
total assets of $57,525,000, total loans, net of unearned income, of
$38,619,000, total deposits of $50,702,000, and stockholders' equity of
$4,318,000. Holders of at least two-thirds of the outstanding shares of Crown
Park have executed a voting agreement whereby such shareholders have agreed that
they will vote their Crown Park shares in favor of the Acquisition, and such
shareholders have given an irrevocable proxy naming Bryan Stephenson, President
and Chief Executive Officer of the Company, proxy to vote their shares.

Western National is a community bank that offers interest and
noninterest-bearing depository accounts, and makes consumer and commercial
loans. At September 30, 1996, Western National's loan portfolio consisted
primarily of $17,844,000 of real estate loans (46.6% of the total loan
portfolio), $15,115,000 of loans to individuals (39.5% of the total loan
portfolio), and $4,866,000 of commercial loans (12.7% of the total loan
portfolio). At September 30, 1996, Western National's total nonperforming loans
were $331,000 (0.9% of the total loan portfolio). The allowance for possible
loan losses was $330,000, or 98.7% of total nonperforming loans, and 0.86% of
the total loan portfolio. Real estate and other repossessed assets of Western
National was $310,000 at September 30, 1996. Western National reported net
income after taxes of $710,000 for 1994, $621,000 for 1995 and $457,000 for the
nine-month period ended September 30, 1996. See the consolidated financial
statements of Crown Park included elsewhere in this Prospectus. At October 31,
1996, Western National had 28 full-time equivalent employees, 10 of which were
officers. The Company intends to increase the profitability of Western National
by expanding its loan portfolio and deposit base. The Company believes enhanced
marketing efforts, expanded loan and deposit products and increased employee
training and personal attention to customers will fuel this growth. The Company
also believes that savings can be realized in the area of noninterest expenses
through consolidation of operations. See "Business and Properties of the
Company--Business Strategy."

15
<PAGE>
banking locations. This expansion will increase the geographic diversity of the
Company's loan portfolio which is expected to decrease the Company's overall
lending risks.

The obligations of the parties to complete the Acquisition are subject to
certain conditions, including the conditions that (i) all approvals of any
regulatory authority having jurisdiction have been received and all applicable
statutory waiting periods have expired and (ii) at the closing date, no action
or litigation is pending or threatened that would adversely affect certain
aspects of the Acquisition. In addition, the Company is not obligated to
complete the Acquisition unless certain conditions have been satisfied or waived
by the Company, including that (i) the shareholders of Crown Park shall have
approved the transactions contemplated under the Reorganization Agreement, (ii)
neither Crown Park nor Western National shall have suffered any material adverse
change in their financial condition, assets, properties, liabilities, reserves,
business, or results of operations or prospects, (iii) holders of no more than
10% of the outstanding shares of Crown Park have dissented from the merger of
Crown Park and the Company's subsidiary, and (iv) all accounting and tax
treatment, entries and adjustment for the Acquisition are satisfactory to the
Company. Crown Park is not obligated to complete the transaction if certain
conditions are not met, including the condition that the Company has approved
the merger of Crown Park and the Company's subsidiary. The Company has filed an
application with the Comptroller and has received conditional approval for the
merger.

Certain shareholders of Crown Park have agreed to indemnify the Company from
liabilities arising out of any misrepresentation or act of fraud resulting from
actions or omissions of any of Crown Park, Western National or any of their
respective officers, directors or shareholders taken or not taken prior to the
closing and for certain other matters.

The closing date of the Acquisition will be selected by mutual agreement of
the parties to the Reorganization Agreement following the satisfaction of all
conditions to closing. As of the date of this Prospectus, conditional approval
of the Comptroller has been obtained. The shareholders of Crown Park approved
the merger on December 17, 1996. The closing of this Offering is contingent upon
the simultaneous closing of the Acquisition, and if for any reason the
Acquisition is not completed, this Offering will not be consummated. There can
be no assurance that the foregoing conditions will be satisfied or that the
Acquisition will be completed.

16
<PAGE>
PRO FORMA COMBINED FINANCIAL STATEMENTS

The following pro forma combined financial statements set forth the pro
forma combined balance sheet at September 30, 1996, and pro forma combined
income statements for the nine-month period ended September 30, 1996, and for
the year ended December 31, 1995, for the Company as if the consummation of the
Acquisition and this Offering had occurred, in the case of the statements of
operations data, as of January 1, 1995, and in the case of the balance sheet
data, as of September 30, 1996. The pro forma financial data do not purport to
be indicative of the Company's financial condition and results of operations at
any future date or for any future period. The financial data should be read in
conjunction with the Company's and Crown Park's consolidated financial
statements, the notes thereto and the other financial information, included
elsewhere herein. In the opinion of management of the Company, the data
presented reflect all adjustments considered necessary for a fair presentation
of the results for such periods.

PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1996 (UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------
THE COMPANY CROWN PARK DEBITS CREDITS
------------ ----------- -------------- --------------
<S> <C> <C> <C> <C>
ASSETS
Cash and Due from Banks................................... $ 9,987,000 $ 2,832,000 $ 3,504,000(A) $ 4,304,000(B)
800,000(A)
Federal Funds Sold........................................ 12,100,000 1,375,000 3,121,000(B)
2,094,000(C)
------------ ----------- -------------- --------------
Total Cash and Cash Equivalents......................... 22,087,000 4,207,000 4,304,000 9,519,000
------------ ----------- -------------- --------------
Securities:
Available-for-sale...................................... 33,590,000 6,424,000 10,000(D)
Held-to-maturity........................................ 49,087,000 5,243,000 11,000(E)
------------ ----------- -------------- --------------
Total Securities...................................... 82,677,000 11,667,000 21,000
------------ ----------- -------------- --------------
Loans:
Total Loans............................................. 92,626,000 39,062,000
Unearned Income on Installment Loans.................... 2,511,000 443,000
Allowance for Possible Loan Losses...................... 806,000 330,000
------------ ----------- -------------- --------------
Net Loans............................................. 89,309,000 38,289,000
------------ ----------- -------------- --------------
Premises and Equipment.................................... 4,501,000 2,373,000 431,000(E)
Real Estate and Other Repossessed Assets.................. 218,000 290,000 350,000(E)
Investment in Crown Park Bancshares....................... 0 0 7,425,000(B) 4,308,000(D)
3,117,000(E)
Goodwill.................................................. 974,000 0 2,347,000(E)
Accrued Interest Receivable............................... 1,701,000 491,000
Other Assets.............................................. 2,334,000 208,000
------------ ----------- -------------- --------------
Total Assets........................................ $203,801,000 $57,525,000 $ 14,857,000 $ 16,965,000
------------ ----------- -------------- --------------
------------ ----------- -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $187,474,000 $50,702,000 $ $
Notes Payable............................................. 578,000 2,094,000 2,094,000(C) 800,000(A)
Accrued Interest Payable.................................. 844,000 146,000
Other Liabilities......................................... 323,000 265,000
------------ ----------- -------------- --------------
Total Liabilities................................... 189,219,000 53,207,000 2,094,000 800,000
------------ ----------- -------------- --------------
Stockholders' Equity:
Series C Preferred Stock.................................. 135,000 0
Common Stock.............................................. 276,000 952,000 952,000(D) 69,000(A)
Additional Paid-in Capital................................ 9,890,000 965,000 965,000(D) 3,435,000(A)
Retained Earnings......................................... 4,304,000 2,407,000 2,407,000(D)
Unrealized Loss on Available-for-sale Securities.......... (23,000) (6,000) 6,000(D)
------------ ----------- -------------- --------------
Total Stockholders' Equity.......................... 14,582,000 4,318,000 4,324,000 3,510,000
------------ ----------- -------------- --------------
Total Liabilities and Stockholders' Equity........ $203,801,000 $57,525,000 $ 6,418,000 $ 4,310,000
------------ ----------- -------------- --------------
------------ ----------- -------------- --------------

PRO FORMA
COMBINED
------------
<S> <C>
ASSETS
Cash and Due from Banks................................... $ 12,819,000

Federal Funds Sold........................................ 8,260,000

------------
Total Cash and Cash Equivalents......................... 21,079,000
------------
Securities:
Available-for-sale...................................... 40,004,000
Held-to-maturity........................................ 54,319,000
------------
Total Securities...................................... 94,323,000
------------
Loans:
Total Loans............................................. 131,688,000
Unearned Income on Installment Loans.................... 2,954,000
Allowance for Possible Loan Losses...................... 1,136,000
------------
Net Loans............................................. 127,598,000
------------
Premises and Equipment.................................... 7,305,000
Real Estate and Other Repossessed Assets.................. 858,000
Investment in Crown Park Bancshares....................... 0

Goodwill.................................................. 3,321,000
Accrued Interest Receivable............................... 2,192,000
Other Assets.............................................. 2,542,000
------------
Total Assets........................................ $259,218,000
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $238,176,000
Notes Payable............................................. 1,378,000
Accrued Interest Payable.................................. 990,000
Other Liabilities......................................... 588,000
------------
Total Liabilities................................... 241,132,000
------------
Stockholders' Equity:
Series C Preferred Stock.................................. 135,000
Common Stock.............................................. 345,000
Additional Paid-in Capital................................ 13,325,000
Retained Earnings......................................... 4,304,000
Unrealized Loss on Available-for-sale Securities.......... (23,000)
------------
Total Stockholders' Equity.......................... 18,086,000
------------
Total Liabilities and Stockholders' Equity........ $259,218,000
------------
------------
</TABLE>

17
<PAGE>
- --------------------------

(A) This adjustment represents the sale of $3,504,000 in Common Stock (net) at a
$14.25 per share public offering price and the borrowing of $800,000 and the
injection of $4,200,000 into First State, N.A., Abilene as additional
capital.

(B) This adjustment represents the purchase of 100% of the outstanding shares of
stock of Crown Park for $7,425,000 in cash. Although the Reorganization
Agreement provides that the shareholders of Crown Park may elect to receive
all or a portion of their merger consideration in cash and/or promissory
notes (see "The Acquisition"), subject to a maximum aggregate dollar amount
of promissory notes equal to $3,000,000, the shareholders of Crown Park have
given a nonbinding indication to the Company that they will elect to receive
all but an immaterial amount of the merger consideration in cash.

(C) This adjustment represents the retirement of $1,094,000 in debt owed to
Crown Park's lender which is collateralized by an interest in the Western
National building and the retirement of $1,000,000 in debt owed to existing
shareholders of Crown Park which is collateralized by the stock of Western
National.

(D) This adjustment represents the elimination of the capital of Crown Park
against the investment in that bank holding company by First State, N.A.,
Abilene.

(E) This adjustment represents the purchase price adjustments to mark Crown
Park's assets and liabilities to fair value upon the acquisition and results
in recording of $2,347,000 in goodwill.

18
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------- PRO FORMA
THE COMPANY CROWN PARK DEBITS CREDITS COMBINED
------------ ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans................................ $5,894,000 $2,528,000 $ $ $8,422,000
Interest on Securities.................................... 3,341,000 663,000 4,004,000
Interest on Federal Funds Sold............................ 774,000 139,000 84,000(A) 703,000
126,000(B)
------------ ----------- ----------- ----------- -------------
Total Interest Income................................... 10,009,000 3,330,000 210,000 13,129,000
------------ ----------- ----------- ----------- -------------
Interest Expense:
Interest on Deposits...................................... 4,671,000 1,343,000 6,014,000
Interest on Notes Payable................................. 51,000 136,000 56,000(C) 136,000(D) 107,000
------------ ----------- ----------- ----------- -------------
Total Interest Expense.................................. 4,722,000 1,479,000 56,000 136,000 6,121,000
------------ ----------- ----------- ----------- -------------
Net Interest Income......................................... 5,287,000 1,851,000 266,000 136,000 7,008,000
Provision for Loan Losses................................. 161,000 135,000 296,000
------------ ----------- ----------- ----------- -------------
Net Interest Income After Provision for Loan Losses......... 5,126,000 1,716,000 266,000 136,000 6,712,000
------------ ----------- ----------- ----------- -------------
Noninterest Income:
Service Charges........................................... 929,000 220,000 1,149,000
Other Income.............................................. 215,000 139,000 354,000
------------ ----------- ----------- ----------- -------------
Total Noninterest Income................................ 1,144,000 359,000 1,503,000
------------ ----------- ----------- ----------- -------------
Noninterest Expense:
Salaries and Employee Benefits............................ 2,294,000 719,000 105,000(E) 2,908,000
Net Occupancy Expense..................................... 540,000 110,000 11,000(F) 661,000
Other Expenses............................................ 1,852,000 745,000 117,000(G) 75,000(H) 2,639,000
------------ ----------- ----------- ----------- -------------
Total Noninterest Expenses.............................. 4,686,000 1,574,000 128,000 180,000 6,208,000
------------ ----------- ----------- ----------- -------------
Income Before Federal Income Taxes.......................... 1,584,000 501,000 394,000 316,000 2,007,000
Federal Income Taxes...................................... 538,000 159,000 107,000(I) 94,000(I) 710,000
------------ ----------- ----------- ----------- -------------
Net Income............................................ $1,046,000 $ 342,000 $ 501,000 $ 410,000 $1,297,000
------------ ----------- ----------- ----------- -------------
------------ ----------- ----------- ----------- -------------
Earnings Per Share:
Primary Earnings Per Share:
Net Income Per Share.................................... $ 0.92 $ 0.92(J)
------------ -------------
------------ -------------
Adjusted Shares Outstanding............................. 1,083,000 1,358,000
------------ -------------
------------ -------------
Fully Diluted Earnings Per Share:
Net Income Per Share.................................... $ 0.77 $ 0.79(J)
------------ -------------
------------ -------------
Adjusted Shares Outstanding............................. 1,358,000 1,633,000
------------ -------------
------------ -------------
</TABLE>

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

(A) This adjustment represents interest income on federal funds sold that would
have been lost as a result of the use of funds for the repayment of the
existing $2,094,000 of Crown Park debt at an average federal funds rate of
5.38% for the nine-month period ended September 30, 1996.

(B) This adjustment represents interest income that would have been lost on the
estimated cash payments to be made to the Crown Park shareholders
($7,425,000) in excess of the total net funds raised ($4,304,000) at 5.38%.

(C) This adjustment represents interest that would have been incurred on the
additional $800,000 which will be borrowed by the Company and injected into
First State, N.A., Abilene at prime plus 1% (9.28% for the nine-month period
ended September 30, 1996).

(D) This adjustment represents interest expense that would have been eliminated
when the $1,094,000 owed to Crown Park's lender and the $1,000,000 owed to
existing shareholders of Crown Park (average cost of 8.63% for the
nine-month period ended September 30, 1996).

(E) This adjustment represents savings that would have been achieved by
elimination of duplication of job responsibilities.

(F) This adjustment represents the additional depreciation that would have been
recorded as a result of the write-up of premises and equipment by $431,000
with an estimated remaining useful life of thirty (30) years.

(G) This adjustment represents the amortization of $2,347,000 in goodwill
generated in the transaction over a period of 15 years.

(H) This adjustment represents savings that would have been achieved in the
areas of accounting fees, directors fees, Comptroller assessments, insurance
expense, etc.

(I) This adjustment represents the tax effect of the above adjustments.

(J) Had Crown Park not incurred approximately $80,000 ($53,000 net of tax) of
expenses in the nine-month period ended September 30, 1996, related to the
proposed acquisition of Crown Park, primary and fully diluted earnings per
share would have been $0.96 and $0.82, respectively.

19
<PAGE>
PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------
THE COMPANY CROWN PARK DEBITS CREDITS
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans.......................................... $ 7,726,000 $3,211,000 $ $
Interest on Securities.............................................. 2,389,000 971,000
Interest on Federal Funds Sold...................................... 1,847,000 321,000 124,000(A)
185,000(B)
------------ ----------- ----------- -----------
Total Interest Income............................................. 11,962,000 4,503,000 309,000
------------ ----------- ----------- -----------
Interest Expense:
Interest on Deposits................................................ 5,201,000 1,770,000
Interest on Notes Payable........................................... 108,000 198,000 78,000(C) 198,000(D)
------------ ----------- ----------- -----------
Total Interest Expense............................................ 5,309,000 1,968,000 78,000 198,000
------------ ----------- ----------- -----------
Net Interest Income................................................... 6,653,000 2,535,000 387,000 198,000
Provision for Loan Losses........................................... 206,000 261,000
------------ ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses................... 6,447,000 2,274,000 387,000 198,000
------------ ----------- ----------- -----------
Noninterest Income:
Service Charges..................................................... 1,167,000 304,000
Other Income........................................................ 342,000 245,000
------------ ----------- ----------- -----------
Total Noninterest Income.......................................... 1,509,000 549,000
------------ ----------- ----------- -----------
Noninterest Expense:
Salaries and Employee Benefits...................................... 2,849,000 989,000 140,000(E)
Net Occupancy Expense............................................... 723,000 133,000 13,000(F)
Other Expenses...................................................... 2,670,000 936,000 156,000(G) 100,000(H)
------------ ----------- ----------- -----------
Total Noninterest Expenses........................................ 6,242,000 2,058,000 169,000 240,000
------------ ----------- ----------- -----------
Income Before Federal Income Taxes.................................... 1,714,000 765,000 556,000 438,000
Federal Income Taxes................................................ 582,000 232,000 149,000(I) 136,000(I)
------------ ----------- ----------- -----------
Net Income...................................................... $ 1,132,000 $ 533,000 $ 705,000 $ 574,000
------------ ----------- ----------- -----------
------------ ----------- ----------- -----------
Earnings Per Share:
Primary Earnings Per Share:
Net Income Per Share.............................................. $ 1.02
------------
------------
Adjusted Shares Outstanding....................................... 1,047,000
------------
------------
Fully Diluted Earnings Per Share:
Net Income Per Share.............................................. $ 0.84
------------
------------
Adjusted Shares Outstanding....................................... 1,352,000
------------
------------

PRO FORMA
COMBINED
-----------
<S> <C>
Interest Income:
Interest and Fees on Loans.......................................... $10,937,000
Interest on Securities.............................................. 3,360,000
Interest on Federal Funds Sold...................................... 1,859,000

-----------
Total Interest Income............................................. 16,156,000
-----------
Interest Expense:
Interest on Deposits................................................ 6,971,000
Interest on Notes Payable........................................... 186,000
-----------
Total Interest Expense............................................ 7,157,000
-----------
Net Interest Income................................................... 8,999,000
Provision for Loan Losses........................................... 467,000
-----------
Net Interest Income After Provision for Loan Losses................... 8,532,000
-----------
Noninterest Income:
Service Charges..................................................... 1,471,000
Other Income........................................................ 587,000
-----------
Total Noninterest Income.......................................... 2,058,000
-----------
Noninterest Expense:
Salaries and Employee Benefits...................................... 3,698,000
Net Occupancy Expense............................................... 869,000
Other Expenses...................................................... 3,662,000
-----------
Total Noninterest Expenses........................................ 8,229,000
-----------
Income Before Federal Income Taxes.................................... 2,361,000
Federal Income Taxes................................................ 827,000
-----------
Net Income...................................................... $ 1,534,000
-----------
-----------
Earnings Per Share:
Primary Earnings Per Share:
Net Income Per Share.............................................. $ 1.11
-----------
-----------
Adjusted Shares Outstanding....................................... 1,322,000
-----------
-----------
Fully Diluted Earnings Per Share:
Net Income Per Share.............................................. $ 0.94
-----------
-----------
Adjusted Shares Outstanding....................................... 1,627,000
-----------
-----------
</TABLE>

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

(E) This adjustment represents savings that would have been achieved by
elimination of duplication of job responsibilities.

(F) This adjustment represents the additional depreciation which would have been
recorded as a result of the write-up of premises and equipment by $431,000
with an estimated remaining useful life of thirty (30) years.

(G) This adjustment represents the amortization of $2,347,000 in goodwill
generated in the transaction over a period of 15 years.

(H) This adjustment represents savings that would have been achieved in the
areas of accounting fees, directors fees, Comptroller assessments, insurance
expense, etc.

(I) This adjustment represents the tax effect of the above adjustments.

20
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company (i) as of
September 30, 1996 and (ii) on a pro forma basis as of September 30, 1996, to
give effect to the Acquisition, the borrowing of $800,000 and the sale of
275,000 shares of Common Stock in this Offering and the application of the net
proceeds therefrom as if such transactions had occurred on September 30, 1996,
using a $14.25 per share public offering price in this Offering. See "Use of
Proceeds," "The Acquisition," Pro Forma Consolidated Financial Statements and
notes thereto and the Company's and Crown Park's consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------
ACTUAL PRO FORMA
------------- -------------
<S> <C> <C>
NOTES PAYABLE(1).................................................................... $ 578,000 $ 1,378,000
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $10.00 par value; 5,000,000 shares authorized Series C Preferred
Stock--$42.00 stated value; 50,000 shares designated; 13,478 shares issued at
September 30, 1996................................................................ 135,000 135,000
Common Stock, $.25 par value; 30,000,000 shares authorized; 1,104,644 shares issued
and outstanding at September 30, 1996; 1,379,644 shares pro forma(2).............. 276,000 345,000
Additional paid-in capital.......................................................... 9,890,000 13,325,000
Retained earnings................................................................... 4,304,000 4,304,000
Unrealized loss on available-for-sale securities.................................... (23,000) (23,000)
------------- -------------
Total stockholders' equity........................................................ 14,582,000 18,086,000
------------- -------------
Total capitalization............................................................ $ 15,160,000 $ 19,464,000
------------- -------------
------------- -------------
</TABLE>

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

(1) See Note 3 of the notes to the Company's unaudited nine-month consolidated
financial statements and Note 9 of the notes to the Company's audited
year-end consolidated financial statements included elsewhere herein for
additional information relating to notes payable.

(2) Excludes an aggregate of 262,324 shares of Common Stock that are reserved
for issuance upon exercise of existing employee stock options and upon
conversion of outstanding shares of Series C Preferred Stock.

21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected historical consolidated financial
information and other data of the Company. Such financial information has been
restated to reflect the 5% stock dividend paid to shareholders in May 1993 and
the 33 1/3% stock dividend paid to shareholders in May 1995. The following
selected historical consolidated financial data should be read in conjunction
with the consolidated financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus and the information contained in
"Management's Discussions and Analysis of Financial Condition and Results of
Operations of the Company." The selected historical consolidated financial data
as of and for the five years in the period ended December 31, 1995, are derived
from the Company's consolidated financial statements which have been audited by
independent public accountants. The selected historical consolidated financial
data as of and for the nine-month periods ended September 30, 1996, and
September 30, 1995, is unaudited. In the opinion of management of the Company,
the information presented reflects all adjustments considered necessary for fair
presentation of the results for such periods.

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

(1) Gain on extinguishment of debt.

(2) Cumulative effect of the change in accounting for income taxes.

22
<PAGE>
(3) Fully taxable-equivalent basis.

(4) Before allowance for possible loan losses.

(5) Includes average balance sheet items of Winters State for the period August
31, 1993 (the date of the acquisition) through December 31, 1993.

(6) Calculated as noninterest expense less amortization of intangibles and
expenses related to other real estate owned divided by the sum of net
interest income before provision for loan losses and total noninterest
income excluding escurities gains and losses.

(7) Balances at December 31, 1992, do not include the assets of Olton State that
were sold on January 1, 1993.

(8) Average loans, net of unearned income, for 1993, 1992 and 1991 include the
average loans, net of unearned income, of Winters State from August 31,
1993, through December 31, 1993, and of Olton State from January 1, 1991
through June 30, 1992.

23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF THE COMPANY

GENERAL

The following discussion and analysis presents the more significant factors
affecting the Company's financial condition at September 30, 1996, and at
December 31, 1995 and 1994, and results of operations for the nine-month periods
ended September 30, 1996 and 1995, and for each of the three years in the period
ended December 31, 1995, after accounting for the sale and acquisition of the
subsidiary banks noted below and after giving effect to the quasi-reorganization
of the Company effective December 31, 1989. This discussion and analysis should
be read in conjunction with the Company's consolidated financial statements,
notes thereto and other financial information appearing elsewhere in this
Prospectus.

ACQUISITION ACTIVITIES

Effective May 27, 1996, First State, N.A., Abilene assumed the deposits and
certain other liabilities and purchased the loans and certain other assets of
the San Angelo, Texas branch of Coastal Banc ssb ("Coastal Banc -San Angelo") in
a cash transaction. On the date of the acquisition, Coastal Banc - San Angelo
had approximately $155,000 in loans and $14,895,000 in deposits. This
acquisition was accounted for using the purchase method of accounting, and the
assets and liabilities of this branch were recorded at their estimated fair
value. A total of $743,000 of goodwill was recorded as a result of the
acquisition.

First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National Bank, Winters, Texas ("Peoples National") effective January 1,
1996, in a cash transaction. At that date, Peoples National had total assets of
$5,505,000, total loans, net of unearned income of $2,767,000, total deposits of
$4,958,000 and stockholders' equity of $525,000. This acquisition was accounted
for using the purchase method of accounting, and the assets and liabilities of
Peoples National were recorded at their estimated fair value. A total of
$260,000 of goodwill was recorded as a result of this acquisition. Peoples
National was merged with and into First State, N.A., Abilene.

During the third quarter of 1993, as a result of its purchase of $450,000 of
stock, the Company acquired control and increased its ownership of Winters State
from 28.2% to 94.3%. The acquisition was accounted for under the purchase method
of accounting, and the assets and liabilities of Winters State were recorded at
their estimated fair value. The operations of Winters State from August 31, 1993
through December 31, 1993, are included in the Company's Consolidated Income
Statement for the year ended December 31, 1993. Net interest income of Winters
State for the last four months of 1993 was $233,000. Income before federal
income taxes of Winters State for that same period was $14,000. At August 31,
1993, the date of acquisition, Winters State had $16,316,000 in total assets,
$7,453,000 in total loans, net of unearned income, $15,079,000 in total deposits
and stockholders' equity of $1,142,000.

RESULTS OF OPERATIONS

GENERAL

Net income for the nine-month period ended September 30, 1996, was
$1,046,000 ($0.92 primary earnings per common share) compared to net income of
$831,000 ($0.75 primary earnings per common share) for the nine-month period
ended September 30, 1995. The results of operations for the nine-month period
ended September 30, 1995, included legal and settlement expenses of $135,000
(net of tax expense of $70,000), or $0.13 primary earnings per common share, as
a result of the final settlement of certain litigation.

Net income for the year ended December 31, 1995, amounted to $1,132,000
($1.02 primary earnings per common share) compared to net income of $450,000
($0.36 primary earnings per common share) for the year ended December 31, 1994,
and net income of $1,229,000 ($1.11 primary earnings per common share) for the
year ended December 31, 1993. The results of operations for 1995 included legal
and

24
<PAGE>
settlement expenses of $205,000 ($135,000, net of tax), or $0.13 primary
earnings per common share, incurred as a result of the final settlement of
certain litigation. The results of operations for 1994 were negatively impacted
by the accrual of $594,000 (net of tax expense of $306,000), or $0.57 primary
earnings per common share, for the reimbursement of certain legal fees, expenses
and settlement costs in connection with the same litigation. See "Note 15:
Commitments and Contingent Liabilities" to the Company's audited year-end
consolidated financial statements. The results of operations for 1993 included a
$189,000 (net of tax expense of $97,000) gain, or $0.18 primary earnings per
common share, recognized on the transfer of the deposits, premises and equipment
and certain loans of Olton State on January 1, 1993.

The results for 1993 also included income of $200,000, or $0.19 primary
earnings per common share, from the cumulative effect of a change in accounting
for income taxes as a result of the Company's adoption of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("FAS 109"),
effective January 1, 1993. FAS 109 permits the recognition of deferred tax
assets to a greater extent than previously permitted and requires companies to
adopt the liability method for computing income taxes. In adopting FAS 109, the
Company established a gross deferred tax asset of $3,190,000, a portion of which
related to the Company's federal tax net operating loss carryforwards and
deductible temporary differences arising prior to the Company's
quasi-reorganization as of December 31, 1989. FAS 109 requires that
consideration be given to establishing a valuation allowance against such
deferred tax assets. The Company established a valuation allowance of
$2,290,000, resulting in a net deferred tax asset of $900,000. As a result of
the quasi-reorganization, approximately $700,000 of the cumulative effect of the
change in accounting method was credited directly to additional paid-in capital
and $200,000 was credited to income during 1993 as a cumulative effect of an
accounting change.

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 the
nine-month period ended September 30, 1996, the Company's ROA was 0.72%,
compared to 0.67% for 1995, 0.28% for 1994 and 0.81% for 1993. Excluding the
unusual and extraordinary items noted above, the Company's ROA for the
nine-month period ended September 30, 1996, and for 1995, 1994 and 1993 would
have been 0.72%, 0.75%, 0.65% and 0.55%, respectively.

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 the
nine-month period ended September 30, 1996, the Company's ROE was 9.81%,
compared to 8.99% for 1995, 3.98% for 1994 and 12.50% for 1993. Excluding the
unusual and extraordinary items noted above, the Company's ROE for the
nine-month period ended September 30, 1996, and for 1995, 1994 and 1993 would
have been 9.81%, 10.06%, 9.24% and 8.54%, respectively.

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 for the first nine months of 1996 was $5,287,000, an
increase of $316,000, or 6.4%, from net interest income of $4,971,000 for the
first nine months of 1995. The increase in 1996 was due to the acquisitions of
Peoples National effective January 1, 1996, and Coastal Banc--San Angelo
effective May 27, 1996. The net interest margin on a fully taxable-equivalent
basis was 3.97% for the first nine months of 1996, compared to 4.33% for the
first nine months of 1995. The primary reason for the decreases in the net
interest margin during 1996 is the fact that in the acquisitions of Peoples
National and

25
<PAGE>
Coastal Banc - San Angelo, the Company acquired $19,853,000 in deposits and only
$2,922,000 in loans. As a result, a significant amount of the increased funds
has been invested in investment securities and federal funds sold, which yield a
lower rate of interest than loans and, therefore, have had a negative impact on
the Company's net interest margin.

Net interest income amounted to $6,653,000 for 1995, a decrease of $26,000
or 0.4% from 1994. Net interest income for 1994 was $6,679,000, an increase of
$634,000, or 10.5%, from net interest income of $6,045,000 for 1993. The small
decrease in 1995 was due to an increase in average net earning assets (average
interest-earning assets minus average interest-bearing liabilities), which was
offset by a decrease in the Company's net interest margin. The increase in 1994
was due primarily to a significant increase in the amount of loans outstanding,
which generally earn a higher rate of interest than securities and federal funds
sold. The net interest margin on a fully taxable-equivalent basis was 4.29% for
1995, compared to 4.62% for 1994 and 4.37% for 1993. The decrease in the net
interest margin in 1995 was a result of a decrease of $7,423,000 in average
noninterest-bearing and interest-bearing demand deposits and an increase of
$15,362,000 in average interest-bearing time deposits, combined with a rising
interest rate environment on such time deposits during most of 1995. The
improvement in the net interest margin in 1994 was a result of the same reasons
noted above for the increase in net interest income.

At September 30, 1996, approximately $24,669,000, or 27.4%, of the Company's
total loans, net of unearned income, were loans with floating interest rates.
This amount represented 49.8% of loans, excluding loans to individuals, which
are exclusively fixed rate in nature. Overall average rates paid for various
types of deposits increased in 1995. The average rate paid by the Company for
certificates of deposit and other time deposits of $100,000 or more increased to
5.61% during 1995 from 3.78% in 1994. The average rate paid for certificates of
deposit less than $100,000 also increased from 3.62% in 1994 to 5.41% in 1995.
Average rates paid for various types of deposits, particularly certificates of
deposit, increased in the first nine months of 1996, compared to the first nine
months of 1995. The average rate paid by the Company for certificates of deposit
of $100,000 or more decreased slightly from 5.57% for the first nine months of
1995 to 5.43% for the first nine months of 1996. The average rate paid for
certificates of deposit less than $100,000 increased to 5.39% during the first
nine months of 1996 from 5.32% during the first nine months of 1995. Rates on
other types of deposits, such as savings accounts, money market accounts and NOW
accounts, increased slightly from an average of 2.16% in 1994 to an average of
2.35% in 1995. Rates on other types of deposits, such as interest-bearing
demand, savings and money market deposits, increased slightly from an average of
2.35% during the first nine months of 1995 to an average of 2.38% during the
first nine months of 1996. 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, a rising interest rate environment normally produces a
lower net interest margin than a falling 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 (as indicated above), the Company's net
interest margin does not necessarily decrease in a rising interest rate
environment.

The following tables present the average balance sheets of the Company for
the nine month periods ended September 30, 1996 and 1995, and for each of the
last three fiscal years and indicate 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

26
<PAGE>
the contribution of interest-earning assets and the overall impact of the cost
of funds on net interest income.

<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED SEPTEMBER 30,
--------------------------------------------------------------------------
1996 1995
----------------------------------- -------------------------------------
INTEREST INTEREST
AVERAGE INCOME/ ANNUALIZED AVERAGE INCOME/ ANNUALIZED
BALANCE EXPENSE YIELD/RATE BALANCE EXPENSE YIELD/RATE
--------- --------- ------------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold.......................... $ 19,177 $ 774 5.38% $ 33,936 $ 1,519 5.97%
Securities(1)............................... 74,134 3,341 6.01 36,460 1,520 5.56
Loans, net of unearned income(2)............ 84,212 5,894 9.33 82,737 5,795 9.34
--------- --------- ----- --------- ----------- -----
Total interest-earning assets............. 177,523 10,009 7.52 153,133 8,834 7.69
--------- --------- ----- --------- ----------- -----
Noninterest-earning assets:
Cash and due from banks..................... 7,128 7,031
Premises and equipment, net................. 4,407 4,225
Accrued interest receivable and other
assets.................................... 5,141 3,554
Allowance for possible loan losses.......... (841) (801)
--------- ---------
Total noninterest-earning assets.......... 15,835 14,009
--------- ---------
Total assets.......................... $ 193,358 $ 167,142
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Demand, savings and money market deposits... $ 57,147 $ 1,021 2.38% $ 53,486 $ 944 2.35%
Time deposits............................... 90,108 3,650 5.40 70,104 2,831 5.38
--------- --------- ----- --------- ----------- -----
Total interest-bearing deposits........... 147,255 4,671 4.23 123,590 3,775 4.07
Notes payable............................... 662 51 10.27 1,119 85 10.13
--------- --------- ----- --------- ----------- -----
Total interest-bearing liabilities........ 147,917 4,722 4.26 124,709 3,860 4.13
--------- --------- ----- --------- ----------- -----
Noninterest-bearing liabilities:
Demand deposits............................. 30,086 28,866
Accrued interest payable and other
liabilities............................... 1,131 1,337
--------- ---------
Total noninterest-bearing liabilities..... 31,217 30,203
--------- ---------
Total liabilities....................... 179,134 154,912
Stockholders' equity.......................... 14,224 12,230
--------- ---------
Total liabilities and stockholders'
equity.............................. $ 193,358 $ 167,142
--------- ---------
--------- ---------
Net interest income........................... $ 5,287 $ 4,974
--------- -----------
--------- -----------
Interest rate spread(3)....................... 3.26% 3.56%
----- -----
----- -----
Net interest margin(4)........................ 3.97% 4.33%
----- -----
----- -----
</TABLE>

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

(1) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.

(2) 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.

(3) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.

(4) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning assets.

27
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994
----------------------------------- -----------------------------------
INTEREST INTEREST
AVERAGE INCOME/ AVERAGE INCOME/
BALANCE EXPENSE YIELD/ RATE BALANCE EXPENSE YIELD/ RATE
--------- ----------- ----- --------- ----------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1)
Interest-earning assets:
Federal funds sold............................ $ 31,076 $ 1,847 5.94% $ 15,939 $ 697 4.37%
Securities(2)................................. 41,846 2,391 5.71 53,986 2,521 4.67
Loans, net of unearned income(3).............. 82,302 7,726 9.39 74,727 6,918 9.26
--------- ----------- ----- --------- ----------- -----
Total interest-earning assets............... 155,224 11,964 7.71 144,652 10,136 7.01
--------- ----------- ----- --------- ----------- -----
Noninterest-earning assets:
Cash and due from banks....................... 7,066 8,060
Premises and equipment, net................... 4,211 4,458
Accrued interest receivable and other
assets...................................... 3,817 3,617
Allowance for possible loan losses............ (786) (805)
--------- ---------
Total noninterest-earning assets............ 14,308 15,330
--------- ---------
Total assets.......................... $ 169,532 $ 159,982
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money market deposits..... $ 53,391 $ 1,257 2.35% $ 59,689 $ 1,288 2.16%
Time deposits................................. 72,137 3,944 5.47 56,775 2,076 3.66
--------- ----------- ----- --------- ----------- -----
Total interest-bearing deposits............. 125,528 5,201 4.14 116,464 3,364 2.89
Notes payable................................. 1,069 108 10.10 1,061 88 8.29
--------- ----------- ----- --------- ----------- -----
Total interest-bearing liabilities........ 126,597 5,309 4.19 117,525 3,452 2.94
--------- ----------- ----- --------- ----------- -----
Noninterest-bearing liabilities:
Demand deposits............................... 29,019 30,144
Accrued interest payable and other
liabilities................................. 1,322 1,011
--------- ---------
Total noninterest-bearing liabilities..... 30,341 31,155
--------- ---------
Total liabilities....................... 156,938 148,680
Series A preferred stock........................ 0 0
Stockholders' equity............................ 12,594 11,302
--------- ---------
Total liabilities and stockholders'
equity.............................. $ 169,532 $ 159,982
--------- ---------
--------- ---------
Net interest income............................. $ 6,655 $ 6,684
----------- -----------
----------- -----------
Interest rate spread(4)......................... 3.52% 4.07%
----- -----
----- -----
Net interest margin(5).......................... 4.29% 4.62%
----- -----
----- -----

1993
-----------------------------------
INTEREST
AVERAGE INCOME/
BALANCE EXPENSE YIELD/ RATE
--------- ----------- -----

<S> <C> <C> <C>
ASSETS(1)
Interest-earning assets:
Federal funds sold............................ $ 10,171 $ 300 2.95%
Securities(2)................................. 68,409 3,595 5.26
Loans, net of unearned income(3).............. 59,767 5,333 8.92
--------- ----------- -----
Total interest-earning assets............... 138,347 9,228 6.67
--------- ----------- -----
Noninterest-earning assets:
Cash and due from banks....................... 7,138
Premises and equipment, net................... 4,052
Accrued interest receivable and other
assets...................................... 3,660
Allowance for possible loan losses............ (725)
---------
Total noninterest-earning assets............ 14,125
---------
Total assets.......................... $ 152,472
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY (1)
Interest-bearing liabilities:
Demand, savings and money market deposits..... $ 57,880 $ 1,237 2.14%
Time deposits................................. 54,132 1,835 3.39
--------- ----------- -----
Total interest-bearing deposits............. 112,012 3,072 2.74
Notes payable................................. 1,260 104 8.25
--------- ----------- -----
Total interest-bearing liabilities........ 113,272 3,176 2.80
--------- ----------- -----
Noninterest-bearing liabilities:
Demand deposits............................... 28,416
Accrued interest payable and other
liabilities................................. 942
---------
Total noninterest-bearing liabilities..... 29,358
---------
Total liabilities....................... 142,630
Series A preferred stock........................ 11
Stockholders' equity............................ 9,831
---------
Total liabilities and stockholders'
equity.............................. $ 152,472
---------
---------
Net interest income............................. $ 6,052
-----------
-----------
Interest rate spread(4)......................... 3.87%
-----
-----
Net interest margin(5).......................... 4.37%
-----
-----
</TABLE>

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

(1) The Average Balance and Interest Income/Expense columns include all of the
balance sheet and income statement accounts of Winters State beginning
August 31, 1993 (the date of acquisition of such bank).

(2) Nontaxable interest income on securities was adjusted to a taxable yield
assuming a tax rate of 34%.

(3) 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.

(4) The interest rate spread is the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.

(5) The net interest margin is equal to net interest income, on a fully
taxable-equivalent basis, divided by average interest-earning assets.

28
<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.

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED SEPTEMBER 30,
1996
VS 1995 1995 VS 1994 1994 VS 1993 (1)
--------------------- --------------------- ----------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN: DUE TO CHANGES IN:
--------------------- --------------------- ----------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ----- ------ ------ ----- ------ ------ ----- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold........................................ $ (607) $(138) $ (745) $ 834 $ 316 $1,150 $ 268 $ 129 $ 397
Securities (2)............................................ 1,689 132 1,821 (629) 499 (130) (702) (372) (1,074)
Loans, net of unearned income (3)......................... 105 (6) 99 710 98 808 1,376 209 1,585
------ ----- ------ ------ ----- ------ ------ ----- -------
Total interest income................................. 1,187 (12) 1,175 915 913 1,828 942 (34) 908
------ ----- ------ ------ ----- ------ ------ ----- -------
Interest-bearing liabilities:
Deposits:
Demand, savings and money market deposits............... 65 12 77 (140) 109 (31) 39 12 51
Time deposits........................................... 807 11 818 660 1,208 1,868 92 149 241
------ ----- ------ ------ ----- ------ ------ ----- -------
Total interest-bearing deposits....................... 872 23 895 520 1,317 1,837 131 161 292
Notes payable............................................. (36) 3 (33) 1 19 20 (17) 1 (16)
------ ----- ------ ------ ----- ------ ------ ----- -------
Total interest expense................................ 836 26 862 521 1,336 1,857 114 162 276
------ ----- ------ ------ ----- ------ ------ ----- -------
Increase (decrease) in net interest income.................. $ 351 $ (38) $ 313 $ 394 $(423) $ (29) $ 828 $(196) $ 632
------ ----- ------ ------ ----- ------ ------ ----- -------
------ ----- ------ ------ ----- ------ ------ ----- -------
</TABLE>

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

(1) Income statement items include all of the income statement accounts of
Winters State beginning August 31, 1993 (the date of acquisition of such
bank).

(2) Information with respect to interest income on tax-exempt securities is
provided on a fully taxable-equivalent basis assuming a tax rate of 34%.

(3) Nonaccrual loans have been included in average assets for the purposes of
the computations, thereby reducing yields.

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 Banks; 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 credits; and other judgmental factors. The
provision for loan losses for the nine-month period ended September 30, 1996,
was $161,000 compared to $141,000 for the nine-month period ended September 30,
1995. This represents an increase of $20,000. The increased provision in 1996
was primarily a result of the charge-off of the remaining balance of $100,000 on
a loan collateralized by real estate that had been on nonaccrual for several
years because the borrower was in bankruptcy. Collection of a significant
portion of the loan is now considered to be very unlikely. The provision for
loan losses for the year ended December 31, 1995, was $206,000, compared to
$147,000 for the year ended December 31, 1994, which represents an increase of
$59,000, or 40.1%. The increase in the provision for loan losses during 1995 was
a result of an increase in loan volume as well as increased repossessions and
associated

29
<PAGE>
charge-offs relating to the Company's indirect installment lending program. The
provision for loan losses for the year ended December 31, 1993, was $154,000.
The reduced provisions over the past several years reflect the general
stabilization of the economic conditions in the Company's primary service area.
In addition, the overall quality of the Company's loan portfolio has improved
during that same period of time, necessitating generally lower provisions.

NONINTEREST INCOME

Noninterest income decreased $12,000, or 1.0%, from $1,156,000 for the
nine-month period ended September 30, 1995, to $1,144,000 for the nine-month
period ended September 30, 1996. Noninterest income increased $12,000, or 0.8%,
from $1,497,000 in 1994 to $1,509,000 in 1995. The amount for 1994 decreased
$387,000, or 20.5%, from $1,884,000 in 1993.

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 $48,000, or 5.4%, from $881,000 for the first nine months of 1995 to
$929,000 for the first nine months of 1996. The increase is due to the overall
growth in deposits during the past year, primarily as a result of acquisitions,
and a recent increase in charges on insufficient fund checks. Service charge
income decreased $59,000, or 4.8%, from $1,226,000 in 1994 to $1,167,000 in
1995, primarily due to a reclassification of income received in relation to
printed checks from service charges to other income. This source of income
increased $145,000, or 13.4%, from $1,081,000 in 1993 to $1,226,000 in 1994. The
1994 increase was a result of an increase in the average amount of demand
deposits at the Banks and the fact that the operations of Winters State were
included in the consolidated income statement for all of 1994, but only for the
last four months of 1993.

Trust fees from the operation of the trust department of First State, N.A.,
Odessa decreased $10,000, or 6.5%, from $154,000 for the first nine months of
1995, to $144,000 for the first nine months of 1996 as a result of a one-time
$24,000 fee received for services performed as executor of an estate during
1995, which was partially offset in the 1996 period by increased fees collected
due to an increased amount of assets under management. Trust fees from the
operation of the trust department of First State, N.A., Odessa increased
$32,000, or 18.9%, from $169,000 during 1994 to $201,000 during 1995 and
increased $29,000, or 20.7%, from $140,000 in 1993, to $169,000 in 1994. The
respective increases are due to the same reasons noted above.

As noted above, the Company recorded a gain of $286,000 on the transfer of
the various assets and liabilities of Olton State in January 1993. There were no
sales of securities during 1993 or 1995 and $8,000 of securities were sold
during 1994. There was no gain or loss recorded on the sale in 1994.

Other income is the sum of several small components of other noninterest
income including insurance premiums earned on automobiles financed through the
Company's internal installment loan program, income and other sources of
miscellaneous income. Other income decreased $50,000, or 41.3%, from $121,000
for the first nine months of 1995 to $71,000 for the corresponding period in
1996, primarily due to a $37,000 decrease in insurance premium income as a
result of less dramatic increases in activity in that area and a net loss of
$10,000 on sales of securities during the first nine months of 1996. Other
income increased $39,000, or 38.2%, from $102,000 in 1994 to $141,000 in 1995,
as a result of the reclassification of income relating to printed checks noted
above. This increase was offset somewhat by a reduction in insurance premium
income from the sale of single interest insurance on automobiles securing
indirect installment loans. The reduction in other income in 1994 was primarily
due to the reclassification of certain other charges from other income to
service charges in 1994.

NONINTEREST EXPENSES

Noninterest expenses decreased $43,000, or 0.9%, from $4,729,000 during the
first nine months of 1995 to $4,686,000 during the first nine months of 1996.
Noninterest expenses for the nine-month period ended September 30, 1995, were
higher than normal due to the payment of $205,000 in legal fees and settlement
expenses on the final settlement of certain litigation. Noninterest expenses
decreased

30
<PAGE>
$1,110,000, or 15.1%, from $7,352,000 in 1994 to $6,242,000 in 1995. The amount
for 1994 was up $1,130,000, or 18.2%, from $6,222,000 in 1993. The decrease from
1994 to 1995 and the increase from 1993 to 1994 was primarily due to the accrual
during 1994 of $900,000 for the reimbursement of certain legal fees, expenses
and settlement costs in connection with certain litigation. See "Note 15:
Commitments and Contingent Liabilities" to the Company's audited year-end
consolidated financial statements.

Salaries and employee benefits rose $167,000, or 7.9%, from $2,127,000 for
the nine-month period ended September 30, 1995, to $2,294,000 for the
corresponding period of 1996. The increase was a result of the acquisitions of
Peoples National effective January 1, 1996, and Coastal Banc - San Angelo
effective May 27, 1996, and overall salary increases effective January 1, 1996.
Salaries and employee benefits increased $11,000, or 0.4%, from $2,838,000 in
1994 to $2,849,000 in 1995. Despite overall salary increases effective January
1, 1995, salaries and benefits have been stable due to the economies of scale
achieved as a result of the branching of The First National Bank in Stamford,
Stamford, Texas ("First National"), and Winters State with and into First State,
N.A., Abilene during the fourth quarter of 1994. The amount for 1994 increased
$263,000, or 10.2%, from $2,575,000 in 1993 to $2,838,000 in 1994. Approximately
$195,000, or 74.1%, of the increase in 1994 was due to the fact that a full year
of operations for Winters State is included in the 1994 amount while only four
months of operations for that bank is included in the 1993 amount.

Equipment expense decreased $41,000, or 7.7%, from $533,000 for the first
nine months of 1995 to $492,000 for the first nine months of 1996. This decrease
is a result of a significant amount of furniture, fixtures and equipment at
First State N.A., Odessa that became fully depreciated during the latter part of
1995 and the first quarter of 1996, thereby decreasing depreciation expense
associated with such assets. Equipment expense increased from $641,000 in 1994
to $723,000 in 1995, an increase of $82,000, or 12.8%, and increased $188,000,
or 41.5%, from $453,000 in 1993 to $641,000 in 1994. Equipment leased to enable
the Banks to do their own data processing internally was the primary cause of
the increase. First National was converted to the new data processing system
during the fourth quarter of 1993 and First State, N.A., Abilene and First
State, N.A., Odessa were converted during the first quarter of 1994. The
Company's third-party data processing contracts expired during the first five
months of 1994. In addition, Winters State performed its own data processing
prior to conversion to the new system in February 1995.

Net occupancy expense increased $48,000, or 9.8%, from $492,000 for the
first nine months of 1995 to $540,000 for the first nine months of 1996. The
increase is due primarily to a reduction in rental income received in 1996 as a
result of the loss of two tenants in the building owned by First State, N.A.,
Odessa and the additional occupancy expense of the San Angelo branch of First
State, N.A., Abilene acquired in May 1996. Net occupancy expense decreased
$30,000, or 4.5%, from $673,000 in 1994 to $643,000 in 1995, primarily due to
lower amounts of depreciation expense as a result of certain fixed assets whose
estimated useful lives have expired. Net occupancy expense increased $71,000, or
11.8%, from $602,000 in 1993 to $673,000 in 1994. Approximately two-thirds of
the increase in 1994 was a result of the operations of Winters State being
included for a full year in the Company's 1994 consolidated income statement.

Professional fees, which include legal and accounting fees, decreased
$182,000, or 47.2%, from $386,000 during the first nine months of 1995 to
$204,000 for the corresponding period of 1996. The decrease during 1996 was due
to the settlement of litigation noted above during 1995. Professional fees
decreased $888,000, or 66.2%, from $1,342,000 in 1994 to $454,000 in 1995, and
increased $901,000, or 204.3%, from $441,000 in 1993 to the 1994 amount as a
result of the $900,000 accrual in 1994 noted above.

Stationery, printing and supplies expense increased $21,000, or 11.1%, from
$190,000 for the first nine months of 1995 to $211,000 for the first nine months
of 1996, primarily due to the acquisitions of Peoples National and Coastal Banc
- -San Angelo effective January 1, 1996, and May 27, 1996, respectively.
Stationery, printing and supplies expense increased $45,000, or 19.9%, from
$226,000 in 1994 to $271,000 in 1995 due primarily to an increase in paper
costs. Data processing expense decreased $139,000, or 58.6%, from $237,000 in
1994 to $98,000 in 1995, directly as a result of the conversion to an in-house
data processing system as noted above. The Company expects to continue
significant savings in the future in the area of data processing expense.

31
<PAGE>
FDIC insurance expense decreased $170,000, or 50.6%, from $336,000 in 1994
to $166,000 in 1995 as a result of a reduction by the FDIC of deposit insurance
rates for banks, which became effective June 1, 1995. The deposit insurance rate
that the Banks pay decreased from $0.23 per $100 of deposits to $0.04 per $100
of deposits.

Net costs (revenues) applicable to real estate and other repossessed assets
consists of expenses associated with holding and maintaining 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 revenues of $12,000 for the
first nine months of 1995, compared to net revenues of $16,000 for the first
nine months of 1996. These expenses decreased $3,000, from $4,000 in net
revenues in 1994 to $7,000 net revenues in 1995, as a result of gains on sales
of, and rental income received on, such assets. The amount of the Company's real
estate and other repossessed assets has continued to decline over the past few
years, notwithstanding the bank acquisitions made in 1993 and 1996.

Other noninterest expense includes, among many other items, postage,
advertising, insurance, directors' fees, dues and subscriptions, regulatory
examinations, franchise taxes, travel and entertainment and due from bank
account charges. These expenses decreased $52,000, or 5.1%, from $1,013,000 for
the first nine months of 1995 to $961,000 for the first nine months of 1996.
FDIC insurance premiums decreased $140,000 during the past year, including a net
credit of $7,000 during the third quarter of 1995, as a result of a reduction by
the FDIC of deposit insurance rates for banks. This decrease was partially
offset by an increase in other expenses as a result of the acquisitions of
Peoples National and Coastal Banc--San Angelo. Other noninterest expenses
decreased $18,000, or 1.7%, from $1,063,000 in 1994 to $1,045,000 in 1995. The
decrease was primarily due to savings achieved as a result of the merger of
Winters State and First National into First State, N.A., Abilene in November
1994.

All of the major categories of noninterest expense, with the exception of
accounting fees, data processing expense and net costs applicable to real estate
and other repossessed assets, increased from 1993 to 1994, primarily due to the
inclusion of a full year's results of operations of Winters State in the
Company's 1994 Consolidated Income Statement.

FEDERAL INCOME TAXES

The Company effected a quasi-reorganization as of December 31, 1989. A
quasi-reorganization is an elective accounting procedure under Generally
Accepted Accounting Principles ("GAAP") in which assets and liabilities of the
Company were restated to fair value and the Company's accumulated deficit was
reduced to zero. As a result of this transaction, the Company's net operating
loss carryforwards existing at December 31, 1989, and utilized subsequent to the
quasi-reorganization date will not be credited to future income. For periods
prior to January 1, 1995, the tax effect of the utilization of the Company's net
operating loss carryforwards was credited directly to additional paid-in
capital. For periods subsequent to December 31, 1994, the tax effect of such
utilization has been and will be credited against the Company's gross deferred
tax asset. The Company accrued $538,000 and $426,000 in federal income taxes in
the first nine months of 1996 and 1995, respectively. Of these amounts, $222,000
and $401,000 were offset against the Company's gross deferred tax asset during
the first nine months of 1996 and 1995, respectively. The Company accrued
$582,000, $227,000 and $524,000 in federal income taxes in 1995, 1994 and 1993,
respectively, and all of these amounts but $35,000 in 1995, $5,000 in 1994 and
$31,000 in 1993 were transferred from federal income taxes payable to reduce the
Company's deferred tax asset in 1995 and to increase additional paid-in capital
in 1994 and 1993. Accordingly, the tax effect of utilization of these net
operating losses in 1995, 1994 and 1993 totaled $547,000, $222,000 and $493,000,
respectively. The $35,000, $5,000 and $31,000 not transferred from federal
income taxes payable represents alternative minimum taxes accrued by the Company
for 1995, 1994 and 1993, respectively.

31
<PAGE>
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING FOR INCOME TAXES

Effective January 1, 1993, the Company adopted FAS 109. FAS 109 permits the
recognition of deferred tax assets to a greater extent than previously permitted
and requires companies to adopt the liability method for computing income taxes.
In adopting FAS 109, the Company established a gross deferred tax asset of
$3,190,000, a portion of which relates to the Company's federal tax net
operating loss carryforwards and deductible temporary differences arising prior
to the Company's quasi-reorganization as of December 31, 1989. FAS 109 requires
that consideration be given to establishing a valuation allowance against such
deferred tax assets. The Company established a valuation allowance of
$2,290,000, resulting in a net deferred tax asset of $900,000. As a result of
the quasi-reorganization, approximately $700,000 of the cumulative effect of the
change in accounting method was credited directly to additional paid-in capital
and $200,000 was credited to income during 1993 as a cumulative effect of an
accounting change.

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 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.

INTEREST RATE SENSITIVITY

Interest rate risk arises when an interest-earning asset matures or when
such asset's 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 on which interest rates could change 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 the risk
associated with interest rate changes, but it will not guarantee a stable
interest rate spread since various rates within a particular time frame may
change by differing amounts and in different directions. Management regularly
monitors the interest sensitivity position and considers this position in its
decisions with regards to interest rates and maturities for interest-earning
assets acquired and interest-bearing liabilities accepted.

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 53.2% at the 90-day interval, 48.4% at the 180-day
interval and 42.9% at the 365-day interval at September 30, 1996. Currently, the
Company is in a liability-sensitive position at the three intervals. During a
slowly rising interest rate environment, especially on time deposits, as was the
case during most of the first nine months of 1996, this position normally
produces a lower net interest margin than in a falling interest rate
environment. The Company also had $60,411,000 of interest-bearing demand,
savings and money market deposits at September 30, 1996, that are somewhat less
rate-sensitive. Excluding these deposits, the Company's interest-sensitive ratio
would have been 72.6% at the 365-day interval at September 30, 1996. 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.

32
<PAGE>
The following table shows the interest rate sensitivity position of the
Company at September 30, 1996:

<TABLE>
<CAPTION>
VOLUMES
CUMULATIVE VOLUMES SUBJECT TO SUBJECT TO
REPRICING WITHIN REPRICING
---------------------------------- AFTER 1
90 DAYS 180 DAYS 365 DAYS YEAR TOTAL
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Federal funds sold................................ $ 12,100 $ 12,100 $ 12,100 $ 0 $ 12,100
Securities........................................ 5,914 9,811 17,722 64,955 82,677
Loans, net of unearned income..................... 27,339 29,431 33,677 56,438 90,115
---------- ---------- ---------- ----------- ----------
Total interest-earning assets................... 45,353 51,342 63,499 121,393 184,892
---------- ---------- ---------- ----------- ----------
Interest-bearing liabilities:
Demand, savings and money market
deposits........................................ 60,411 60,411 60,411 0 60,411
Time deposits..................................... 24,525 45,147 87,015 10,563 97,578
Notes payable..................................... 341 454 456 122 578
---------- ---------- ---------- ----------- ----------
Total interest-bearing liabilities.............. 85,277 106,012 147,882 10,685 158,567
Rate-sensitivity gap(1)............................. $ (39,924) $ (54,670) $ (84,383) $ 110,708 $ 26,325
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
Rate-sensitivity ratio(2)........................... 53.2% 48.4% 42.9%
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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

(1) Rate-sensitive interest-earning assets less rate-sensitive interest-bearing
liabilities.

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

ANALYSIS OF FINANCIAL CONDITION

ASSETS

Total assets increased $23,457,000, or 13.0%, from $180,344,000 at December
31, 1995, to $203,801,000 at September 30, 1996, primarily due to the
acquisitions of Peoples National and Coastal Banc--San Angelo, which had
aggregate total assets of approximately $20,400,000 at their respective dates of
acquisition. Total assets increased $20,484,000, or 12.8%, from $159,860,000 at
December 31, 1994, to $180,344,000 at December 31, 1995, primarily due to the
growth in deposits at the Banks in 1995. Total assets of the Company decreased
$852,000, or 0.5%, from $160,712,000 at December 31, 1993, to $159,860,000 at
December 31, 1994. The slight decrease during 1994 was due to a decrease in
deposits at the Company's Stamford and Winters branch locations, which was
partially offset by deposit growth at the Abilene and Odessa locations.

LOAN PORTFOLIO

Total loans, net of unearned income, increased $8,188,000, or 10.0%, from
$81,927,000 at December 31, 1995, to $90,115,000 at September 30, 1996. The
increase during the first nine months of 1996 was partially due to the purchase
of Peoples National effective January 1, 1996, but primarily due to increased
loan activity due to improved economic conditions in the Banks' market areas,
principally Abilene and Odessa. Total loans, net of unearned income, increased
$621,000, or 0.8%, from $81,306,000 at December 31, 1994, to $81,927,000 at
December 31, 1995. The December 31, 1994, amount is an increase of $11,659,000,
or 16.7%, from $69,647,000 at December 31, 1993. The increase during 1995 was a
result of an increase in commercial and industrial loans, which was partially
offset by decreases in loans to individuals and other loans. The increase in
1994 was due to primarily to an increase in loans to individuals, principally in
indirect installment loans.

33
<PAGE>
The Banks primarily make installment loans to individuals and commercial
loans to small to medium-sized businesses and professionals. The Banks offer a
variety of commercial lending products including revolving lines of credit,
letters of credit, working capital loans and loans to finance accounts
receivable, inventory and equipment. Typically, the Banks' 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
accounts receivable, inventory or other business assets.

Due to diminished loan demand in most areas, during the second quarter of
1992, First State, N.A., Odessa instituted an installment loan program whereby
it began to purchase automobile loans from automobile dealerships in the Abilene
and Odessa/Midland, Texas 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 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. During the second quarter of 1993, First
State, N.A., Abilene began a similar indirect installment loan program. During
the third quarter of 1996, the Company instituted this program in the San
Angelo, Texas market. At September 30, 1996 and at December 31, 1995 and 1994,
the Company had approximately $31,790,000, $30,206,000 and $29,402,000, net of
unearned income, respectively, of this type of loan outstanding.

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------------
1996 1995 1994 1993 1992(1) 1991
------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals....................... $ 43,058 $ 39,868 $ 43,113 $ 28,538 $ 17,718 $ 12,729
Real estate loans.......................... 25,798 23,265 22,760 22,658 16,535 16,690
Commercial and industrial loans............ 21,225 19,510 16,702 16,723 16,221 17,533
Other loans................................ 2,545 2,638 2,943 4,322 3,767 5,878
------------- --------- --------- --------- --------- ---------
Total loans.............................. 92,626 85,281 85,518 72,241 54,241 52,830
Less unearned income....................... 2,511 3,354 4,212 2,594 1,274 285
------------- --------- --------- --------- --------- ---------
Loans, net of unearned income.......... $ 90,115 $ 81,927 $ 81,306 $ 69,647 $ 52,967 $ 52,545
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
</TABLE>

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

(1) Balances at December 31, 1992, do not include the loans of Olton State sold
as of January 1, 1993.

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 September 30, 1996, except for those described
above. The Banks had no loans outstanding to foreign countries or borrowers
headquartered in foreign countries at September 30, 1996.

Management of each 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 September 30, 1996. The table also presents

34
<PAGE>
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.

<TABLE>
<CAPTION>
ONE TO TOTAL
ONE YEAR FIVE OVER FIVE CARRYING
AND LESS YEARS YEARS VALUE
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans..................................................... $ 4,658 $ 14,463 $ 6,677 $ 25,798
Commercial and industrial loans....................................... 9,722 6,905 4,598 21,225
Other loans........................................................... 1,084 781 680 2,545
--------- --------- --------- ---------
Total loans......................................................... $ 15,464 $ 22,149 $ 11,955 $ 49,568
--------- --------- --------- ---------
--------- --------- --------- ---------
With fixed interest rates............................................. $ 5,491 $ 14,465 $ 4,943 $ 24,899
With variable interest rates.......................................... 9,973 7,684 7,012 24,669
--------- --------- --------- ---------
Total loans......................................................... $ 15,464 $ 22,149 $ 11,955 $ 49,568
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

NONPERFORMING ASSETS

Nonperforming loans consist of past due, nonaccrual 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 "Real
Estate and Other Repossessed Assets" below.

The following table lists nonaccrual, past due and restructured loans and
real estate and other repossessed assets at September 30, 1996, and at year-end
for each of the past five years.

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -----------------------------------------------------
1996 1995 1994 1993 1992(1) 1991
--------------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans..................................... $ 88 $ 204 $ 48 $ 1,646 $ 773 $ 2,167
Accruing loans contractually past due over 90 days... 194 23 26 293 17 20
Restructured loans................................... 77 65 80 195 295 517
Real estate and other repossessed assets............. 218 337 631 803 849 1,140
----- --------- --------- --------- --------- ---------
Total nonperforming assets......................... $ 577 $ 629 $ 785 $ 2,937 $ 1,934 $ 3,844
----- --------- --------- --------- --------- ---------
----- --------- --------- --------- --------- ---------
</TABLE>

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

(1) Balances at December 31, 1992, do not include the assets of Olton State that
were sold on January 1, 1993.

35
<PAGE>
The gross interest income that would have been recorded in the first nine
months of 1996 and in 1995 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 $15,000 and $13,000, respectively. No interest was actually
recorded (received) on loans that were on nonaccrual during the first nine
months of 1996 or during 1995.

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 is not aware of 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 Banks maintain 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 September 30, 1996, substandard loans totaled $1,751,000, of
which $224,000 were loans designated as nonaccrual or 90 days past due. There
were no loans classified as doubtful or loss at September 30, 1996. At December
31, 1995, substandard loans totaled $1,640,000, of which $227,000 were loans
designated as nonaccrual or 90 days past due, and there were no doubtful or loss
loans.

In addition to the internally classified loans, each Bank also has a "watch
list" of loans that further assists each 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. The
Banks review these loans in assessing the adequacy of the allowance.
Substantially all of the loans on the watch list as of September 30, 1996, and
December 31, 1995, were current and paying in accordance with loan terms. At
September 30, 1996, watch list loans totaled $946,000 (including $703,000 of
loans guaranteed by U.S. governmental agencies). At such date, no watch list
loans were designated as nonaccrual, 90 days past due or restructured. At
September 30, 1996, there were $116,000 in loans designated as 90 days past due
or restructured that were not on the watch list or classified as substandard. At
December 31, 1995, watch list loans totaled $779,000 (including $179,000 of
loans guaranteed by U.S. governmental agencies). At such date, none of the watch
list loans were designated as nonaccrual, past due or restructured loans. At
such date, $70,000 of loans not classified and not on the watch list were
designated as 90 days past due or restructured. See "Nonperforming Assets"
below.

REAL ESTATE AND OTHER REPOSSESSED ASSETS

Real estate and other repossessed assets consist of real property and other
assets unrelated to banking premises or facilities. Income derived from 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 September 30, 1996, real estate and other repossessed assets had an
aggregate book value of $218,000. Real estate and other repossessed assets
decreased $119,000, or 35.3%, during the first nine months of 1996,
notwithstanding the acquisition of Peoples National effective January 1, 1996,
due to the sale of

36
<PAGE>
several parcels of other real estate during that time period. Of the September
30, 1996 balance, $105,000 represents nine repossessed automobiles, $59,000
represents various residential properties and $54,000 represents various
commercial properties. None of the individual parcels of real estate are carried
at more than $36,000. At December 31, 1995, 1994 and 1993, real estate and other
repossessed assets had an aggregate book value of $337,000, $631,000 and
$803,000, respectively. Real estate and other repossessed assets declined
$294,000, or 46.6%, during 1995 to $337,000 at December 31, 1995, primarily as a
result of sales of certain of these assets. The December 31, 1994, balance of
$631,000 represented a decrease of $172,000, or 21.4%, from the December 31,
1993, balance of $803,000.

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 $806,000, or 0.89%
of loans, net of unearned income, at September 30, 1996, compared to $759,000,
or 0.93% of loans, net of unearned income, at December 31, 1995. The Company's
allowance was $759,000, or 0.93% of loans, net of unearned income, at December
31, 1995, compared to $817,000, or 1.00% of loans, net of unearned income, at
December 31, 1994, and $896,000, or 1.29% of loans, net of unearned income, at
December 31, 1993. The reduction in the allowance 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 each 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 $308,000 in loans during
the first nine months of 1996. These charge-offs were concentrated in the
following categories: loans to individuals--$150,000, or 48.7%, real estate
loans--$100,000, or 32.5%, and commercial and industrial loans--$58,000, or
18.8%. Recoveries during the first nine months of 1996 were $45,000 and
consisted primarily of loans to individuals $24,000, or 53.5%, and commercial
and industrial loans--$21,000, or 46.7%. The Company charged off $376,000 in
loans during 1995. Charge-offs for 1995 were concentrated in the following
categories: loans to individuals--$297,000, or 79.0%, and real estate--$72,000,
or 19.1%. Charge-offs on three loans totaled $57,000, or 15.2%, of total
charge-offs. The remainder of loan charge-offs were spread among numerous loans,
and no other charge-off to any one single borrower during 1995 exceeded $8,000.
Recoveries during 1995 were $112,000 and were concentrated in the following
categories: commercial and industrial--$52,000, or 46.4%, and loans to
individuals--$43,000, or 38.4%. Recoveries of $49,000 on six commercial and
industrial loans, $7,000 on one loan to an individual and $15,000 on one other
loan accounted for 63.4% of total recoveries during 1995.

37
<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 nine-month period ended
September 30, 1996, and for the last five years.

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- -----------------------------------------------------
1996 1995 1994 1993(1) 1992(1) 1991(1)
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Analysis of allowance for possible loan
losses:
Balance at beginning of period............. $ 759 $ 817 $ 896 $ 617 $ 669 $ 1,317
Provision for loan losses................ 161 206 147 154 185 139
Acquisition of subsidiary................ 149 0 0 233 0 0
------------- --------- --------- --------- --------- ---------
1,069 1,023 1,043 1,004 854 1,456
------------- --------- --------- --------- --------- ---------
Loans charged off:
Loans to individuals..................... 150 297 150 88 40 94
Real estate loans........................ 100 72 119 68 179 44
Commercial and industrial loans.......... 58 7 32 69 114 800
Other loans.............................. 0 0 77 16 311 28
------------- --------- --------- --------- --------- ---------
Total charge-offs...................... 308 376 378 241 644 966
------------- --------- --------- --------- --------- ---------
Recoveries of loans previously charged off:
Loans to individuals..................... 24 43 45 28 11 25
Real estate loans........................ 0 2 0 4 56 46
Commercial and industrial loans.......... 21 52 48 84 59 90
Other loans.............................. 0 15 59 17 281 18
------------- --------- --------- --------- --------- ---------
Total recoveries....................... 45 112 152 133 407 179
------------- --------- --------- --------- --------- ---------
Net loans charged off................ 263 264 226 108 237 787
------------- --------- --------- --------- --------- ---------
Balance at period end.............. $ 806 $ 759 $ 817 $ 896 $ 617 $ 669
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Average loans outstanding, net of unearned
income................................... $ 84,212 $ 82,302 $ 74,727 $ 59,767 $ 50,507 $ 55,091
------------- --------- --------- --------- --------- ---------
------------- --------- --------- --------- --------- ---------
Ratio of net loan charge-offs to average
loans, net of unearned income (annualized
for 1996)................................ 0.42% 0.32% 0.30% 0.18% 0.47% 1.43%
Ratio of allowance for possible loan losses
to total loans, net of unearned income,
at period end............................ 0.89 0.93 1.00 1.29 1.16 1.27
</TABLE>

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

(1) Average loans, net of unearned income, for 1993, 1992 and 1991 include the
average loans, net of unearned income, of Winters State from August 31,
1993, through December 31, 1993, and of Olton State from January 1, 1991,
through June 30, 1992.

Foreclosures on defaulted loans have resulted in the Company acquiring real
estate and other repossessed assets; however, the amount of real estate and
other repossessed assets being carried on the Company's books is decreasing.
Accordingly, the Company incurs other expenses, specifically net costs
applicable to real estate and other repossessed assets, in maintaining, insuring
and selling such assets. The Banks attempt 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.

38
<PAGE>
As the economies of the Banks' market areas over the past several years have
recovered and stabilized, there has been a steady reduction in total loan losses
and in the amount of the provision necessary to maintain an adequate balance in
the allowance. This reflects not only the loan loss trend, but management's
assessment of the continued reduction of credit risks associated with the loan
portfolio.

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 problem loans. 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 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 allowance are available for charge-offs of all loans.

On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS
114"). In accordance with FAS 114, any change in the present value of such loans
will be recognized as an adjustment to the Company's allowance.

The following table shows the allocations in the allowance and the
respective percentages of each loan category to total loans at September 30,
1996, and at year-end for each of the past five years.

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------- --------------------------------------------------------
1996 1995 1994
---------------------------- -------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS BY LOANS BY LOANS BY
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE LOANS, NET ALLOWANCE LOANS, NET ALLOWANCE LOANS, NET
ALLOCATED TO OF UNEARNED ALLOCATED TO OF UNEARNED ALLOCATED TO OF UNEARNED
CATEGORY INCOME CATEGORY INCOME CATEGORY INCOME
------------- ------------- ------------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals................... $ 314 45.0% $ 136 44.6% $ 207 47.8%
Real estate loans...................... 136 28.6 197 28.4 165 28.0
Commercial and industrial loans........ 104 23.6 96 23.8 122 20.5
Other loans............................ 41 2.8 59 3.2 68 3.7
----- ----- ----- ----------- ----- -----
Total allocated...................... 595 100.0% 488 100.0% 562 100.0%
----- ----------- -----
----- ----------- -----
Unallocated.......................... 211 271 255
----- ----- -----
Total allowance for possible loan
losses........................... $ 806 $ 759 $ 817
----- ----- -----
----- ----- -----
</TABLE>

39
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------------
1993 1992 (1) 1991
---------------------------- -------------------------- ----------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS BY LOANS BY LOANS BY
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE LOANS, NET ALLOWANCE LOANS, NET ALLOWANCE LOANS, NET
ALLOCATED TO OF UNEARNED ALLOCATED TO OF UNEARNED ALLOCATED TO OF UNEARNED
CATEGORY INCOME CATEGORY INCOME CATEGORY INCOME
------------- ------------- ------------- ----------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans to individuals................... $ 178 37.3% $ 101 31.0% $ 18 23.7%
Real estate loans...................... 272 32.5 142 31.2 123 31.8
Commercial and industrial loans........ 212 24.0 142 30.7 170 33.4
Other loans............................ 108 6.2 53 7.1 27 11.1
----- ----- ----- ----------- ----- -----
Total allocated...................... 770 100.0% 438 100.0% 338 100.0%
----- ----------- -----
----- ----------- -----
Unallocated.......................... 126 179 331
----- ----- -----
Total allowance for possible loan
losses........................... $ 896 $ 617 $ 669
----- ----- -----
----- ----- -----
</TABLE>

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

(1) The categories of loans at December 31, 1992, do not include the loans of
Olton State transferred on January 1, 1993.

CASH AND CASH EQUIVALENTS

The amount of cash and cash equivalents decreased $12,672,000, or 36.5%,
from $34,759,000 at December 31, 1995, to $22,087,000 at September 30, 1996, due
to the investment of additional funds in securities at September 30, 1996. At
December 31, 1995, cash and cash equivalents were $34,759,000, a decrease of
$4,005,000, or 10.3%, from the December 31, 1994, balance of $38,764,000, which
represented an increase of $19,496,000, or 101.2%, over the December 31, 1993,
balance of $19,268,000. At December 31, 1995, the Company had $26,200,000 in
federal funds sold, down from $31,200,000 at December 31, 1994, due to an
increased amount of funds being invested in investment securities. Cash and cash
equivalents averaged $26,305,000 and $40,967,000 for the nine-month periods
ended September 30, 1996 and 1995, respectively, and $38,142,000, $23,999,000
and $17,309,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.

SECURITIES

Securities increased $26,770,000, or 47.9%, from $55,907,000 at December 31,
1995, to $82,677,000 at September 30, 1996. The increase in 1996 is primarily
due to the reduction in federal funds sold noted above and the investment in
securities of the net proceeds received from the assumption of the deposits in
the Coastal Banc - San Angelo acquisition. Securities increased $22,602,000, or
67.9%, from $33,305,000 at December 31, 1994, to $55,907,000 at December 31,
1995. The increase in 1995 was due primarily to an increase in deposits, which
were used to purchase investment securities. The December 31, 1994, balance
decreased $31,396,000, or 48.5%, from the December 31, 1993, balance of
$64,701,000. The decline in 1994 was attributed to the fact that the Banks had
collectively increased the amount of loans outstanding and the Company had
decided to invest temporarily in federal funds sold.

The board of directors of each 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 agency's securities with maximum
maturities of 10 years. The weighted average maturity of the Company's
securities portfolio at September 30, 1996, was 2.48 years. The Company's

40
<PAGE>
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 $33,590,000 are classified as available-for-sale and
are carried at fair value at September 30, 1996. Securities totaling $49,087,000
are classified as held-to-maturity and are carried at amortized cost. The
securities portfolio had an average maturity of approximately 1.46 years at
December 31, 1995, compared to approximately 1.02 years at December 31, 1994.
During the first quarter of 1996, the Company sold investments in certain mutual
funds obtained in the acquisition of Peoples National with a book value of
$30,000 because they did not meet the Company's investment criteria. A loss of
$12,000 was recorded on the sale of such investments. During the second quarter
of 1996, the Company sold investments classified as held-to-maturity with a book
value of $1,998,000 approximately 30 days prior to their scheduled maturity and
recorded a $2,000 gain on such sale. During the fourth quarter of 1995, the
Company transferred $160,000 of mortgage-backed securities from held-to-maturity
securities to available-for-sale securities. 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 September
30, 1996, the book value of U.S. Government and other securities so pledged
amounted to $10,314,000, or 12.5% 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:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
SEPTEMBER 30,
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Carrying value:
U.S. Treasury securities......... $ 40,964 49.6% $ 32,295 57.8% $ 31,441 94.4% $ 55,664 86.0%
Obligations of other U.S.
Government agencies and
corporations................... 35,473 42.9 23,009 41.2 1,154 3.5 8,179 12.6
Mortgage-backed securities....... 5,597 6.8 160 0.2 177 0.5 300 0.5
Obligations of states and
political subdivisions......... 200 0.2 0 -- 90 0.3 130 0.2
Other securities................. 443 0.5 443 0.8 443 1.3 428 0.7
--------- --------- --------- --------- --------- --------- --------- ---------
Total securities............... $ 82,677 100.0% $ 55,907 100.0% $ 33,305 100.0% $ 64,701 100.0%
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
Total market value............. $ 82,306 $ 56,130 $ 32,991 $ 64,856
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>

The market 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 September 30,
1996. The yield has been computed by relating the forward income stream on 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%.

41
<PAGE>

<TABLE>
<CAPTION>
ESTIMATED WEIGHTED
TYPE AND MATURITY GROUPING PRINCIPAL CARRYING FAIR AVERAGE
AT SEPTEMBER 30, 1996 AMOUNT VALUE VALUE YIELD
- -------------------------------------------------------------------------------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Within one year............................................................... $ 15,600 $ 15,569 $15,630 5.95%
After one but within five years............................................... 25,500 25,395 25,344 5.81
--------- -------- --------- ---
Total U.S. Treasury securities.............................................. 41,100 40,964 40,974 5.86
--------- -------- --------- ---
Obligations of other U.S. Government agencies and corporations:
Within one year............................................................... 2,000 1,999 2,001 6.00
After one but within five years............................................... 30,500 30,420 30,213 6.44
After five but within ten years............................................... 3,000 3,054 2,976 6.43
--------- -------- --------- ---
Total obligations of U.S. Government agencies and corporations.............. 35,500 35,473 35,190 6.41
--------- -------- --------- ---
Mortgage-backed securities...................................................... 5,469 5,597 5,494 6.12
--------- -------- --------- ---
Obligations of states and political subdivisions:
Within one year............................................................... 0 0 0 --
After one but within five years............................................... 0 0 0 --
After five but within ten years............................................... 200 200 205 8.49
--------- -------- --------- ---
Total obligations of states and political subdivisions...................... 200 200 205 8.49
--------- -------- --------- ---
Other securities:
Within one year............................................................... 5 5 5 5.49
After one but within five years............................................... 0 0 0 --
After five but within ten years............................................... 0 0 0 --
After ten years............................................................... 438 438 438 3.56
--------- -------- --------- ---
Total other securities...................................................... 443 443 443 3.59
--------- -------- --------- ---
Total securities.......................................................... $ 82,712 $ 82,677 $82,306 6.11%
--------- -------- --------- ---
--------- -------- --------- ---
</TABLE>

GOODWILL

Goodwill increased to $974,000 at September 30, 1996, as a result of the
recording of $260,000 in goodwill from the Peoples National acquisition and
$743,000 in goodwill from the Coastal Banc -- San Angelo acquisition. A total of
$29,000 in goodwill amortization expense was recorded during the first nine
months of 1996.

OTHER ASSETS

The most significant component of other assets at September 30, 1996, and
December 31, 1995 and 1994, is a net deferred tax asset of $1,731,000,
$1,937,000 and $956,000, respectively. The balance of other assets decreased
$190,000, or 7.5%, to $2,334,000 at September 30, 1996, from $2,524,000 at
December 31, 1995, primarily as a result of the utilization of $222,000 of the
Company's net operating loss carryforwards. The balance of other assets
increased $1,143,000, or 82.8%, to $2,524,000 at December 31, 1995, from
$1,381,000 at December 31, 1994, as a result of a $1,600,000 decrease in the
Company's valuation allowance on its deferred tax asset, which was partially
offset by a $547,000 decrease in the gross deferred tax asset due to the
utilization of a portion of the Company's net operating loss carryforwards.
Other assets increased $41,000, or 3.1%, in 1994, from the December 31, 1993,
balance of $1,340,000. See "Results of Operations--Cumulative Effect of Change
in Accounting for Income Taxes" above.

42
<PAGE>
DEPOSITS

The Banks' lending and investing activities are funded to a large extent by
core deposits, 48.0% of which are demand, savings and money market deposits at
September 30, 1996. Total deposits increased $22,770,000, or 13.8%, from
$164,704,000 at December 31, 1995, to $187,474,000 at September 30, 1996. The
increase is due primarily to the acquisitions of Peoples National and Coastal
Banc--San Angelo, which had aggregate total deposits of $19,853,000 at their
respective dates of acquisition. Total deposits increased $18,520,000, or 12.7%,
from $146,184,000 at December 31, 1994, to $164,704,000 at December 31, 1995.
The increase is due to an increase in interest-bearing time deposits at the
Banks, primarily as a result of an increase in rates paid on such deposits.
Total deposits at December 31, 1994, were $1,601,000, or 1.1%, lower than the
$147,785,000 balance at December 31, 1993. The decrease was due to a decrease in
deposits at the Company's Stamford and Winters branch locations, which was
partially offset by deposit growth at the Abilene and Odessa locations. The
Banks do not have any brokered deposits.

The following table presents the average amounts of and the average rate
paid on deposits of the Company for the nine-month period ended September 30,
1996, and each of the last three years:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE-MONTH PERIOD ----------------------------------------------------------------------
ENDED SEPTEMBER 30,
1996 1995 1994 1993 (1)
---------------------- ---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE AMOUNT RATE AMOUNT RATE
--------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits.................... $ 30,086 -- % $ 29,019 -- % $ 30,144 -- % $ 28,416 -- %
Interest-bearing demand,
savings and money market
deposits.................... 57,147 2.38 53,391 2.35 59,689 2.16 57,880 2.14
Time deposits of less than
$100,000.................... 62,938 5.39 52,452 5.41 43,158 3.62 41,776 3.39
Time deposits of $100,000 or
more........................ 27,170 5.43 19,685 5.61 13,617 3.78 12,356 3.38
--------- --- --------- --- --------- --- --------- ---
Total deposits.............. $ 177,341 3.51% $ 154,547 3.36% $ 146,608 2.29% $ 140,428 2.19%
--------- --- --------- --- --------- --- --------- ---
--------- --- --------- --- --------- --- --------- ---
</TABLE>

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

(1) The average amounts and average rates paid on deposits for the year ended
December 31, 1993, include the averages of Winters State from August 31 (the
date of acquisition) through December 31, 1993.

The maturity distribution of time deposits of $100,000 or more at September
30, 1996, and December 31, 1995, is presented below:

<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
3 months or less....................................... $ 8,831 $ 9,220
Over 3 through 6 months................................ 10,567 5,983
Over 6 through 12 months............................... 7,731 4,925
Over 12 months......................................... 1,820 3,680
------- -------
Total time deposits of $100,000 or more.............. $ 28,949 $ 23,808
------- -------
------- -------
</TABLE>

The Banks experience some 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 September 30, 1996, deposits of
$100,000 or more represented approximately 14.2% of the Company's total assets.
At December 31, 1995, deposits

43
<PAGE>
of $100,000 or more represented 13.2% of the Company's total assets, compared to
9.1% of the Company's total assets at December 31, 1994.

SELECTED FINANCIAL RATIOS

The following table presents selected financial ratios for the nine-month
periods ended September 30, 1996 and 1995 (annualized), and for each of the last
three fiscal years:

<TABLE>
<CAPTION>
NINE-MONTH PERIOD
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993(1)
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
Net income to:
Average assets................................................... 0.72% 0.66% 0.67% 0.28% 0.81%
Average interest-earning assets.................................. 0.79 0.72 0.73 0.31 0.89
Average stockholders' equity (2)................................. 9.81 9.06 8.99 3.98 12.50
Dividend payout (3) to:
Net income....................................................... 13.58 10.35 10.34 15.56 N/A
Average stockholders' equity..................................... 1.33 0.93 0.93 0.62 N/A
Average stockholders' equity to:
Average total assets (2)......................................... 7.36 7.32 7.43 7.06 6.45
Average loans (4)................................................ 16.89 14.78 15.30 15.12 16.45
Average total deposits........................................... 8.02 8.02 8.15 7.71 7.00
Average interest-earning assets to:
Average total assets............................................. 91.81 91.62 91.56 90.42 90.74
Average total deposits........................................... 100.10 100.44 100.44 98.67 98.52
Average total liabilities........................................ 99.10 98.85 98.91 97.29 97.00
Ratio to total average deposits of:
Average loans (4)................................................ 47.49 54.27 53.25 50.97 42.56
Average noninterest-bearing deposits............................. 16.97 18.93 18.78 20.56 20.24
Average interest-bearing deposits................................ 83.03 81.07 81.22 79.44 79.76
Total interest expense to total interest income.................... 47.18 43.71 44.38 34.07 34.44
</TABLE>

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

(1) Averages and income items for 1993 include average balance sheet and income
statement items of Winters State for the period August 31 (the date of
acquisition) through December 31, 1993.

(2) If the then outstanding Series A Cumulative Convertible Mandatorily
Redeemable Preferred Stock (the "Series A Preferred Stock") had been
included in average stockholders' equity, net income to average
stockholders' equity for the year ended December 31, 1993, would have been
12.49% and average stockholders' equity to average total assets for the year
ended December 31, 1993, would have been 6.46%.

(3) Dividends for Common Stock only.

(4) Net of unearned income and before allowance for possible loan losses.

LIQUIDITY

The Company depends on the Banks 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 from subsidiaries comes from three sources:
(1) dividends resulting from earnings of the Banks, (2) current tax liabilities
generated by the Banks and (3) management and service fees for services
performed for the Banks.

44
<PAGE>
The payment of dividends from the Banks is subject to applicable law and the
scrutiny of regulatory authorities. Dividends paid by the Banks to Independent
Financial during the first nine months of 1996 totaled $600,000. Dividends paid
by Independent Financial to the Company during the first nine months of 1996
were $600,000. At September 30, 1996, there were approximately $1,490,000 in
dividends available for payment to Independent Financial by the Banks without
regulatory approval. Dividends paid by the Banks to Independent Financial in
1995 aggregated $700,000; in turn, Independent Financial paid dividends to the
Company totaling $905,000 during 1995. Dividends paid by the Banks to
Independent Financial and by Independent Financial to the Company totaled
$625,000 and $450,000, respectively, during 1994.

The payment of current tax liabilities generated by the Banks and management
and service fees constituted 47% and 9%, respectively, of the Company's cash
flows during the first nine months of 1996 and 40% and 7%, respectively, of the
Company's cash flow during 1995. Pursuant to a tax-sharing agreement, the Banks
pay to the Company an amount equal to their individual tax liabilities on the
accrual method of federal income tax reporting. The accrual method generates
more timely payments of current tax liabilities by the Banks 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 Banks incur losses, the Company may be
required to refund tax liabilities previously collected. Current tax liabilities
totaling $642,000 were paid by the Banks to the Company during the first nine
months of 1996. Current tax liabilities totaling $930,000 were paid by the Banks
to the Company during 1995, compared to a total of $676,000 in 1994. Of the
amount paid in 1995, $81,000 represented the final settlement of tax liabilities
between the Company and the Banks for the year ended December 31, 1993.

From January 1, 1989 through December 31, 1995, the Company collected
federal income taxes from the Banks 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. As
of 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 effective tax rate of approximately 20%
during the first quarter of 1996. The Company still has net operating
carryforwards available for regular federal income tax purposes.

The Banks pay management fees to the Company for services performed. These
services include, but are not limited to, financial and accounting consultation,
attendance at the Banks' board meetings, audit and loan review services and
related expenses. The Banks paid a total of $125,000 in management fees to the
Company during the first nine months of 1996. The Banks paid a total of $175,000
in management fees to the Company in 1995, compared to $158,000 in 1994. The
Company's fees must be reasonable in relation to the management services
rendered, and each Bank is prohibited from paying management fees to the Company
if the Bank would be undercapitalized after any such distribution or payment.

At September 30, 1996, the Company had a note payable to a financial
institution in Amarillo, Texas (the "Amarillo Bank"). This note (the "Term
Note") had a maturity of April 15, 1996. On April 15, 1996, the Company paid the
Amarillo Bank $100,000 to reduce the outstanding principal balance to $371,000
and the maturity date was extended to April 15, 1999. Equal principal payments
of $31,000, plus accrued interest, were due quarterly on January 15, April 15,
July 15 and October 15. The Term Note bore interest at the Amarillo Bank's
floating base rate plus 1% (9.25% at September 30, 1996) and was collateralized
by 100% of the stock of First State, N.A., Abilene, and First State, N.A.,
Odessa. The loan agreement between the Company and the Amarillo Bank contained
certain covenants that, among other things, restricted the ability of the
Company to incur additional debt, to create liens on its property, to merge or
to consolidate with any other person or entity, to make certain investments, to
purchase or sell assets or to pay cash dividends on the common stock without the
approval of the Amarillo Bank if the indebtedness due to the Amarillo Bank was
$1,000,000 or greater. The loan agreement also required the Company and the
Banks to meet certain financial ratios, all of which were met at September 30,
1996, and December 31, 1995. The remaining principal balance of the Term Note
was paid on October 15, 1996.

45
<PAGE>
In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. The notes
have a face amount of $350,000, but were discounted upon issuance because they
bear interest at a below-market interest rate (6%). The notes are payable in
three equal annual installments plus interest. The first annual principal
installment of $117,000 was made on March 1, 1996. The notes represent a portion
of the final settlement of certain litigation. See "Note 15: Commitments and
Contingent Liabilities" to the Company's audited year end consolidated financial
statements.

At September 30, 1996, First State, N.A., Abilene had a $13,000 note payable
to an individual which matures in March 1999. Principal and interest at 7.5% are
payable monthly. The note is collateralized by a two-story commercial building
in Abilene, Texas.

CAPITAL RESOURCES

At September 30, 1996, stockholders' equity totaled $14,582,000, or 7.2%, of
total assets. At December 31, 1995, stockholders' equity totaled $13,818,000, or
7.7% of total assets, compared to $11,073,000, or 6.9% of total assets, at
December 31, 1994.

Bank regulatory authorities in the United States have issued 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) of at least 8%, of risk-weighted assets. Tier 1 capital includes common
stockholders' equity, qualifying perpetual preferred stock and minority
interests in unconsolidated subsidiaries, reduced by goodwill and net deferred
tax assets in excess of regulatory capital limits. Tier 2 capital may be
comprised of certain other preferred stock, qualifying debt instruments and all
or part of the allowance for possible loan losses.

Banking regulators have also issued leverage ratio requirements. The
leverage ratio requirement is measured as the ratio of Tier 1 capital to
adjusted quarterly average assets. 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 Banks' risk-based capital ratios and leverage ratios to the
minimum regulatory requirements at September 30, 1996, and December 31, 1995.

<TABLE>
<CAPTION>
AT AT PRO FORMA AT
THE COMPANY SEPTEMBER 30, 1996 DECEMBER 31, 1995 SEPTEMBER 30, 1996
- ------------------------------------------------------- ------------------ ----------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Tier 1 capital:
Common stockholders' equity, excluding unrealized
loss on available-for-sale securities.............. $ 14,039 $ 13,060 $ 17,543
Preferred stockholders' equity (1)................... 566 690 566
Goodwill............................................. (974) 0 (3,321)
Net deferred tax asset in excess of regulatory
capital limits (2)................................. (28) (171) (28)
-------- -------- --------
Total Tier 1 capital............................. 13,603 13,579 14,760
-------- -------- --------
Tier 2 capital:
Allowance for possible loan losses (3)............. 806 759 1,136
-------- -------- --------
Total Tier 2 capital............................. 806 759 1,136
-------- -------- --------
Total capital.................................. $ 14,409 $ 14,338 $ 15,896
-------- -------- --------
-------- -------- --------
Risk-weighted assets................................... $ 98,260 $ 89,172 $ 139,914
-------- -------- --------
-------- -------- --------
Adjusted quarterly average assets...................... $ 203,518 $ 177,445 $ 260,188
-------- -------- --------
-------- -------- --------
</TABLE>

46
<PAGE>

<TABLE>
<CAPTION>
ACTUAL RATIOS AT
MINIMUM REGULATORY ------------------------------------- PRO FORMA AT
THE COMPANY REQUIREMENT (4) SEPTEMBER 30, 1996 DECEMBER 31, 1995 SEPTEMBER 30, 1996
- ------------------------------------- ------------------- ------------------ ----------------- ------------------
<S> <C> <C> <C> <C>
Tier 1 capital to risk-weighted
assets ratio........................ 4.00% 13.84% 15.23% 10.55%
Total capital to risk-weighted assets
ratio............................... 8.00 14.66 16.08 11.36
Leverage ratio....................... 3.00 6.68 7.65 5.67

THE BANKS
- -------------------------------------
<S> <C> <C> <C> <C>
Tier 1 capital to risk-weighted
assets ratio........................ 4.00% 12.07 - 13.38% 12.42 - 16.04% 8.91 - 12.07%
Total capital to risk-weighted assets
ratio............................... 8.00 12.85 - 14.25 13.27 - 16.91 10.15 - 12.85
Leverage ratio....................... 3.00 5.63 - 7.25 7.10 - 7.57 4.96 - 7.10
</TABLE>

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

(1) Limited to 25% of total Tier 1 capital, with any remainder qualifying as
Tier 2 capital.

(2) The amount of the net deferred tax asset in excess of the lesser of (i) 10%
of Tier 1 capital or (ii) the amount of the tax benefit from utilization of
net operating loss carryforwards expected to be realized within one year.

(3) Limited to 1.25% of risk-weighted assets.

(4) For top-rated banking organizations.

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,
First State, N.A., Abilene and First State, N.A., Odessa were all "well
capitalized" at September 30, 1996.

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 and the Series C Preferred
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 Banks, 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 and by
the terms of its proposed loan agreement with BFNBA. Holders of the Series C
Preferred Stock are entitled to receive, if, as and when declared by the
Company's Board of Directors, out of funds legally available therefor, quarterly
cumulative cash dividends at the annual rate of 10%. 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. The Federal Reserve Board has asserted that
this policy is also applicable to payment of dividends on preferred stock. Such
an interpretation may limit the ability of the Company to pay dividends on the
Series C Preferred Stock.

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 a 33 1/3%
stock dividend on May 31, 1995. The

47
<PAGE>

Company's Board of Directors increased the Company's quarterly Common Stock cash
dividend to $0.05 per share effective for the cash dividend payable on May 31,
1996. The Company's Board of Directors declared $0.05 per share cash dividends
on July 17, 1996, which was paid on August 30, 1996, to holders of the Common
Stock on August 15, 1996, on October 16, 1996, which was paid on November 29,
1996, to holders of the Common Stock on November 15, 1996 and on January 15,
1997, which will be paid on February 28, 1997 to holders of the Common Stock on
February 14, 1997.

Upon consummation of the sale of shares offered pursuant to this Prospectus,
the Company will use all of the net proceeds to fund a portion of the cost of
acquiring Crown Park. See "Capitalization."

The Company expects to borrow up to $800,000 from BFNBA to finance a portion
of the cost of acquiring Crown Park. The proposed terms provide that this loan
will accrue interest at a floating per annum rate equal to BFNBA's base rate
plus one-half percent, principal and interest will be payable on demand, but if
no demand is made, at maturity and the loan will mature on April 23, 1997. The
loan will be secured by a pledge of all of the stock of Independent Financial
and First State, N.A., Abilene and will have other certain loan provisions,
including limitations on additional debt, purchases and sales of assets, and
acquisitions and mergers, dividend restrictions if total debt to BFNBA exceeds
$1,200,000 and certain financial covenants (minimum capital of $12,500,000 for
the Company and $11,500,000 for First State, N.A., Abilene; minimum capital to
assets ratios for the Company and First State, N.A., Abilene of 6.5% for the
first two years and 7.0% thereafter; nonperforming loans to total loans and
nonperforming assets to total loans ratios for First State, N.A., Abilene of
1.5% and 2.0%, respectively; and minimum net income after tax for First State,
N.A., Abilene of $70,000 quarterly). The loan agreement provides that at
maturity, BFNBA will renew the note into a term note in an amount not to exceed
the outstanding balance. The term note would be payable over seven years in
annual principal installments with interest payable quarterly.

ACCOUNTING MATTERS

In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to continue to use the method of accounting specified in
Opinion 25 must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value method of accounting defined in this
Statement had been applied. This Statement is effective for fiscal years
beginning after December 15, 1995.

In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This Statement provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. This Statement requires that after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This Statement is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996.

Management believes that the adoption of these pronouncements will not have
a material impact on the financial statements of the Company.

48
<PAGE>
BUSINESS AND PROPERTIES OF THE COMPANY

THE COMPANY

The Company is a bank holding company for First State, N.A., Abilene and
First State, N.A., Odessa. First State, N.A., Abilene has two separate branch
office locations in Abilene, Texas, and one each in San Angelo, Stamford and
Winters, Texas. First State, N.A. Odessa has two branches in Odessa, Texas.

The Company's primary activities are to assist the Banks in the management
and coordination of their financial resources and to provide capital, business
development, long range planning and public relations for the Banks. Each of the
Banks 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.
Although each Bank operates under the management of its own directors and
officers, the Banks participate as a group in providing various financial
services and extensions of credit, which increases the ability of each Bank to
provide such services to customers who might otherwise be required to seek
banking services from a larger bank. In connection with the acquisition of Crown
Park and its subsidiary Western National, the Company has received the approval
of the Comptroller to merge First State, N.A., Odessa with and into First State,
N.A., Abilene in order to recognize certain cost savings and to utilize the
Banks' capital more effectively. Following the merger of First State, N.A.,
Odessa with and into First State, N.A., Abilene, which was consummated on
December 31, 1996, the Company will continue its decentralized approach to
banking with senior management at the main banking offices in Abilene and Odessa
exercising substantial autonomy over credit and pricing decisions.

The Company's principal executive offices are located at 547 Chestnut
Street, Abilene, Texas 79602. At September 30, 1996, the Company had, on a
consolidated basis, total assets of $203,801,000, total deposits of
$187,474,000, total loans, net of unearned income, of $90,115,000 and total
stockholders' equity of $14,582,000.

THE BANKS

The Company conducts substantially all of its business through the Banks,
both of which are located in the West Texas area. Each of the Banks is an
established franchise with a significant presence in its respective service
area. First State, N.A., Abilene was chartered in 1982 and was the third largest
of four commercial banks headquartered in Abilene, Texas, in terms of total
assets at December 31, 1995, and was the fifth largest of ten banks in Abilene
in terms of total branch assets at that same time. The branches in Stamford and
Winters were the largest bank branches in those cities in terms of total assets
at December 31, 1995. The branch in San Angelo was the ninth largest of ten
banks in terms of total branch assets in that city at December 31, 1995. First
State, N.A., Odessa was chartered in 1983 and was the third largest of four
commercial banks headquartered in Odessa, Texas, in terms of total assets at
December 31, 1995, and was the sixth largest of seven banks in Odessa in terms
of total branch assets at that same date. The deposits of the Banks are insured
by the FDIC to the maximum extent provided by law.

The following table sets forth certain selected information with respect to
the Banks at September 30, 1996:

<TABLE>
<CAPTION>
TOTAL STOCKHOLDER'S
NAME OF BANK TOTAL ASSETS TOTAL DEPOSITS LOANS(1) EQUITY
- ----------------------------------------- -------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
First State, N.A., Abilene............... $ 137,841,000 $ 128,238,000 $ 52,658,000 $8,689,000
First State, N.A., Odessa................ 64,457,000 59,486,000 37,458,000 4,691,000
</TABLE>

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

(1) Net of unearned income.

Although each Bank operates under the management of its own directors and
officers, the Banks participate as a group in providing various financial
services and extensions of credit, which increases the

49
<PAGE>
ability of each Bank to provide such services to customers who might otherwise
be required to seek banking services from larger banks. The principal services
provided by the Banks are as follows:

COMMERCIAL SERVICES. The Banks provide a full range of banking services for
their 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 Banks also provide a wide range of consumer banking
services, including checking, savings and money market accounts, savings
programs and installment and personal loans. The Banks make automobile and other
installment loans directly to customers, as well as indirectly through
automobile dealers. The Banks make home improvement and real estate loans and
provide safe deposit services. As a result of sharing arrangements with the
Pulse automated teller machine system network, the Banks provide 24-hour routine
banking services through automated teller machines ("ATMs"). The Pulse network
provides ATM accessibility throughout the United States.

TRUST SERVICES. First State, N.A., Odessa provides trust and agency
services to individuals, partnerships and corporations from both its offices in
Odessa and the Company's offices in Abilene. 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.

ACQUISITION ACTIVITIES

SAN ANGELO BRANCH. On May 27, 1996, First State, N.A., Abilene assumed the
deposits and certain other liabilities and purchased the loans and certain other
assets of Coastal Banc - San Angelo in a cash transaction. On the date of the
acquisition, Coastal Banc - San Angelo had approximately $14,895,000 in total
deposits and $155,000 in total loans. The acquisition was accounted for under
the purchase method of accounting, and the assets and liabilities of this branch
were recorded at their estimated fair value. Coastal Banc - San Angelo became a
branch of First State, N.A., Abilene.

PEOPLES NATIONAL. First State, N.A., Abilene completed the acquisition of
Peoples National effective January 1, 1996, and Peoples National became part of
the Winters branch of First State, N.A., Abilene. At December 31, 1995, Peoples
National had total assets of $5,505,000, total loans, net of unearned income, of
$2,767,000, total deposits of $4,958,000 and stockholders' equity of $525,000.
These amounts are not included in the consolidated balance sheet for the Company
at December 31, 1995. The acquisition was accounted for under the purchase
method of accounting, and the assets and liabilities of Peoples National were
recorded at their estimated fair value.

WINTERS STATE. In 1990, the Banks foreclosed on shares of stock of Winters
State that secured a loan and acquired a 28.2% interest in Winters State. During
the third quarter of 1993, the Company acquired this interest from the Banks and
purchased $450,000 of stock in an offering made by Winters State. As a result of
these transactions, the Company acquired control and increased its ownership of
Winters State from 28.2% to 94.3%. The Company's equity in the net book value of
Winters State was $1,077,000 at August 31, 1993, the date of acquisition. The
acquisition was accounted for under the purchase method of accounting and the
assets and liabilities of Winters State were recorded at their estimated fair
value. Subsequent to the date of acquisition, the Company purchased the
remaining minority interests in Winters State, and Winters State became a branch
of First State, N.A., Abilene.

BUSINESS STRATEGY

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<PAGE>
The Company's acquisition activity has been designed to augment this
franchise by increasing market share and expanding into contiguous markets
demographically similar to its current service areas. Following the acquisition
of Crown Park and its subsidiary Western National, the Company will have
locations in four of the fastest growing consumer markets in West Texas.
Management believes that it can increase the profitability of the Company
through increased operating efficiencies, an increase in the loan to deposit
ratio and cross-selling a more expansive product line to newly acquired
customers.

The Company's operating strategy is to provide customers with the business
sophistication and breadth of products of a regional financial services company,
while retaining the special attention to personal service and the local appeal
of a community bank. Decentralized decision making authority vested in the
presidents and senior officers of the Banks allows for rapid response time and
flexibility in dealing with customer requests and credit needs. The Company
believes that following the merger of First State, N.A., Odessa with and into
First State, N.A., Abilene the rapid response time and flexibility in dealing
with customer requests and credit needs will continue through the substantial
autonomy of senior management at the main banking offices in Odessa and Abilene.
The participation of the Company's directors, officers and employees in area
civic and service organizations demonstrates the Company's continuing commitment
to the communities it serves. Management believes that these qualities
distinguish the Company from its competitors and will allow the Company to
compete successfully in its market against larger regional and out-of-state
institutions.

COMPETITION

The activities in which the Company and the Banks engage are highly
competitive. Each activity engaged in and the geographic market served involves
competition with other banks and savings and loan associations as well as with
nonbanking financial institutions and nonfinancial enterprises. In Texas,
savings and loan associations and banks are allowed to establish statewide
branch offices. The Banks actively compete with other banks in their efforts to
obtain deposits and make loans, in the scope and type of services offered, in
interest rates paid on time deposits and charged on loans and in other aspects
of banking. In addition to competing with other commercial banks within and
without their primary service areas, the Banks compete with other financial
institutions engaged in the business of making loans or accepting deposits, such
as savings and loan associations, credit unions, insurance companies, small loan
companies, finance companies, mortgage companies, real estate investment trusts,
factors, certain governmental agencies, credit card organizations and other
enterprises. Additional competition for deposits comes from government and
private issues of debt obligations and other investment alternatives for
depositors such as money market funds. The Banks also compete with suppliers of
equipment in providing equipment financing.

EMPLOYEES

At December 15, 1996, the Company and the Banks had 102 full-time equivalent
employees. Employees are provided with employee benefits, such as an employee
stock ownership/401(k) plan and life, health and long-term disability insurance
plans. The Company considers the relationship of the Banks with their employees
to be excellent.

PROPERTIES

At December 15, 1996, the Company occupied approximately 600 square feet of
space for its corporate offices at 547 Chestnut Street, Abilene, Texas. The
Central Branch of First State, N.A., Abilene

51
<PAGE>
occupies approximately 8,000 square feet at this same facility. The following
table sets forth, at December 15, 1996, certain information with respect to the
banking premises owned or leased by the Company and the Banks. The Company
considers such premises adequate for its needs and the needs of the Banks.

<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE OWNERSHIP AND OCCUPANCY
- -------------------- --------------- -------------------------------------------------------
<S> <C> <C>
Abilene, Texas 8,600 Owned by First State, N.A., Abilene and occupied by the
Main Bank of First State, N.A., Abilene and the
Company

Abilene, Texas 3,500 Owned and occupied by the Wylie Branch of First State,
N.A., Abilene

San Angelo, Texas 6,800(1) Owned, occupied and leased by the San Angelo branch of
First State, N.A., Abilene

Stamford, Texas 14,000 Owned and occupied by the Stamford Branch of First
State, N.A., Abilene

Winters, Texas 9,500 Owned and occupied by the Winters Branch of First
State, N.A., Abilene

Odessa, Texas 62,400(2) Owned, occupied and leased by the Main Bank of First
State, N.A., Odessa

Odessa, Texas 2,400 Leased and occupied by the Winwood Branch of First
State, N.A., Odessa
</TABLE>

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

(1) First State, N.A., Abilene occupies approximately 3,400 square feet, leases
2,400 square feet and is attempting to lease the remaining 1,000 square
feet.

(2) First State, N.A., Odessa occupies approximately 20,400 square feet, leases
23,500 square feet and is attempting to lease the remaining 18,500 square
feet.

The Banks own or lease certain additional tracts of land for parking,
drive-in facilities and for future expansion or construction of new premises.
Aggregate annual rentals of the Company and the Banks for all leased premises
during the year ended December 31, 1995, and the nine-month period ended
September 30, 1996 were $46,000 and $30,000, respectively. These amounts
represent rentals paid for the lease of land by the Wylie Branch of First State,
N.A., Abilene and of banking premises by the Winwood Branch of First State,
N.A., Odessa.

LEGAL PROCEEDINGS

First State, N.A., Abilene f/k/a First State Bank of Wylie, N.A. as
successor in interest of The First State Bank of Abilene, a former bank
subsidiary of the Company ("FSB Abilene") filed a lawsuit on April 22, 1992,
against O. B. Stephens, Jr. (FIRST STATE BANK, N.A. F/K/A FIRST STATE BANK OF
WYLIE, N.A. V. O. B. STEPHENS, JR., Cause No. 42849-A) in State District Court
in Taylor County, Texas, on a promissory note in the approximate principal
amount of $355,960, made by Mr. Stephens. First State, N.A., Abilene sought
actual damages of $310,425 plus interest and attorneys' fees from Mr. Stephens.
Although First State, N.A., Abilene is the current holder of the note, another
bank owns a 45.5% participation interest in the loan and the underlying note. In
connection with this lawsuit, Mr. Stephens has filed a general and specific
denial and has asserted certain affirmative defenses and counterclaims including
misrepresentation, fraud and bad faith. Mr. Stephens' claims, among other
things, that FSB-Abilene agreed to offset the amount owing under the promissory
note with amounts allegedly due him under an offset agreement. Mr. Stephens
seeks actual damages in an amount not less than $1,000,000, punitive damages in
amount not less than three times actual damages, pre-judgment and post-judgment
interest and attorneys fees and costs. First State, N.A., Abilene is vigorously
contesting the affirmative defenses and counterclaims asserted by

52
<PAGE>
Mr. Stephens and considers Mr. Stephens' affirmative defenses and counterclaims
to be without merit. First State, N.A., Abilene has filed a motion for Partial
Summary Judgment with regard to the various affirmative defenses and
counterclaims made by Mr. Stephens. This case was originally set for trial in
February 1996, but has been continued by the court upon a motion by Mr.
Stephens.

In CONNIE POLLARD V. FIRST STATE BANK, N.A., ODESSA, TEXAS (Cause No.
A-100,846) brought in the 70th District Court of Ector County, Texas, the
plaintiff, the former Senior Vice President, Manager of Trust Operations of
First State, N.A., Odessa, alleges, among other things, that she was
discriminated against on the basis of her sex, she was repeatedly passed over
for promotion to the Trust Department Manager, she was paid less than male
employees and that she was constructively discharged. The plaintiff alleges
damages for past and future wages, emotional distress and constructive
discharge, actual damages, exemplary damages, attorneys' fees, reinstatement and
promotion and pre-judgment and post-judgment interest. The Company believes the
plaintiff's claims to be without merit and intends to vigorously defend this
action.

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

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<PAGE>
REGULATION AND SUPERVISION

THE COMPANY

GENERAL

The Company is a multi-bank holding company registered with, and subject to
regulation by, the Federal Reserve Board under the BHCA. Federal law subjects
bank holding companies to particular restrictions on the types of activities in
which they may engage and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and policies.

SCOPE OF PERMISSIBLE ACTIVITIES

The BHCA prohibits a bank holding company, with certain limited exceptions,
from acquiring direct or indirect ownership or control of any voting shares of
any company that is not a bank or from engaging in any activities other than
those of banking. One principal exception to these prohibitions allows the
acquisition of interests in companies whose activities are found by the Federal
Reserve Board, by order or regulation, to be so closely related to banking as to
be a proper incident thereto. Some of the activities that have been determined
by regulation to be closely related to banking are making or servicing loans,
performing certain data processing services, acting as an investment or
financial advisor to certain investment trusts and investment companies and
providing certain securities brokerage services. In approving acquisitions by
the Company of entities engaged in banking-related activities, the Federal
Reserve Board would consider a number of factors, including the expected
benefits to the public, such as greater convenience and increased competition or
gains in efficiency, which would be weighed against the risk of potential
negative effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices. The Federal
Reserve Board may also differentiate between activities commenced DE NOVO and
activities commenced through the acquisition of a going concern. The Company has
no current plans to form or acquire any non-banking subsidiaries.

The Federal Reserve Board has approved applications by bank holding
companies to engage, through nonbank subsidiaries, in certain securities-related
activities (underwriting of municipal revenue bonds, commercial paper,
consumer-receivable-related securities and certain mortgage-backed securities),
provided that the subsidiaries would not be "principally engaged" in such
activities for purposes of Section 20 of the Glass-Steagall Act. In very limited
situations, holding companies may be able to use such subsidiaries to underwrite
and deal in corporate debt and equity securities. Bills from time to time have
been introduced in both the U.S. Senate and House of Representatives that would,
if enacted, remove many of the restraints imposed by the Glass-Steagall Act,
although no comprehensive bill has been enacted to date.

On March 26, 1996 the U.S. Supreme Court ruled that Section 92 of the
National Bank Act preempts state insurance laws which prevent banks from
exercising insurance powers granted under those laws. Section 92 grants national
banks located and doing business in a place with a population not exceeding
5,000 inhabitants the authority to act as insurance agent for any insurance
company authorized to do business in a state where the bank is located. In
response to this decision, on June 20, 1996, the Texas Department of Insurance
("TDI") issued its "Interim Procedures for Banks Selling Insurance" which
contain licensing and consumer protection guidance that apply to banks and
savings associations located in Texas. The TDI has stressed that these are only
interim guidelines intended to be in effect until the Texas Legislature or
Congress resolves some remaining issues which serve as impediments to the
ability of the banks to take full advantage of this activity. In addition, the
Comptroller has issued an advisory letter which provides guidance to national
banks regarding insurance and annuity sales activities.

Bank holding companies are not permitted to engage in unsafe or unsound
banking practices. For example, the Federal Reserve Board's Regulation Y
requires a holding company to give the Federal

54
<PAGE>
Reserve Board prior notice of any redemption or repurchase of its own equity
securities, if the consideration to be paid, together with the consideration
paid for any repurchases or redemptions in the preceding twelve-month period, is
equal to 10% or more of the company's consolidated net worth. The Federal
Reserve Board may oppose the transaction if it would constitute an unsafe or
unsound practice or would violate any law or regulation. Additionally, a holding
company may not impair the financial soundness of a subsidiary bank by causing
it to make funds available to nonbanking subsidiaries or their customers when
such a transaction would not be prudent. The Federal Reserve Board may exercise
several administrative remedies including cease-and-desist powers over parent
holding companies and nonbanking subsidiaries when the actions of such companies
would constitute a serious threat to the safety, soundness or stability of a
subsidiary bank.

The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") expanded the Federal Reserve Board's authority to prohibit activities
of bank holding companies and their nonbanking subsidiaries that represent
unsafe and unsound banking practices or that constitute violations of laws or
regulations. FIRREA authorizes the appropriate banking agency to issue cease and
desist orders that may, among other things, require affirmative action to
correct any harm resulting from a violation or practice, including restitution,
reimbursement, indemnification or guarantee against loss. A financial
institution may also be ordered to restrict its growth, dispose of certain
assets or take other appropriate action as determined by the ordering agency.

FIRREA increased the amount of civil money penalties that the Federal
Reserve Board may assess for certain activities conducted on a knowing and
reckless basis, if those activities cause a substantial loss to a depository
institution. The penalties may reach as much as $1,000,000 per day. FIRREA also
expanded the scope of individuals and entities or "institution-affiliated
parties" against which such penalties may be assessed. In addition, FIRREA
contains a "cross-guarantee" provision that makes commonly controlled insured
depository institutions liable to the FDIC for any losses incurred, or
reasonably anticipated to be incurred, in connection with the failure of an
affiliated insured depository institution. The FDIC must present its claim
within two years of incurring such loss and may require either immediate or
installment payments.

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

The Company is required to file quarterly and annual reports with the
Federal Reserve Bank of Dallas (the "Federal Reserve Bank") and such additional
information as the Federal Reserve Bank may require pursuant to the BHCA. The
Federal Reserve Bank may examine a bank holding company or any of its
subsidiaries and charge the examined institution for the cost of such an
examination. The Company is also subject to reporting and disclosure
requirements under state and federal securities laws.

CAPITAL ADEQUACY REQUIREMENTS

The Federal Reserve Board monitors the capital adequacy of bank holding
companies. The Federal Reserve Board has adopted a system using a combination of
risk-based guidelines and leverage ratios to evaluate the capital adequacy of
bank holding companies. Under the risk-based capital guidelines, each category
of assets is assigned a different risk weight, based generally on the perceived
credit risk of the asset. These risk weights are multiplied by corresponding
asset balances to determine a "risk-weighted" asset base. Certain off-balance
sheet items, which previously were not expressly considered in capital adequacy
computations, are added to the risk-weighted asset base by converting them to a
balance sheet equivalent and assigning to them the appropriate risk weight. In
addition, the guidelines define the capital components. Total capital is defined
as the sum of "Tier 1" and "Tier 2" capital elements, with "Tier 2" being
limited to 100% of "Tier 1." For bank holding companies, "Tier 1" capital
includes, with certain restrictions, common stockholders' equity and qualifying
perpetual noncumulative preferred stock and minority interests in consolidated
subsidiaries. "Tier 2" capital includes, with certain limitations, certain

55
<PAGE>
other preferred stock, as well as qualifying debt instruments and all or part of
the allowance for possible loan losses.

The guidelines require a minimum ratio of qualifying total capital to total
risk-weighted assets of 8.0% (of which at least 4.0% is required to be in the
form of "Tier 1" capital elements). At September 30, 1996, the Company's ratios
of "Tier 1" and total capital to risk-weighted assets were 13.84% and 14.66%,
respectively. At such date, both ratios exceeded regulatory minimums.

In addition to the risk-based capital guidelines, the Federal Reserve Board
and the FDIC have adopted the use of a leverage ratio as an additional tool to
evaluate the capital adequacy of banks and bank holding companies. The leverage
ratio is defined to be a company's "Tier 1" capital divided by its adjusted
quarterly average total assets. The leverage ratio adopted by the federal
banking agencies requires a minimum 3.0% "Tier 1" capital to adjusted quarterly
average total assets ratio for top regulatory-rated banking organizations. All
other institutions are expected to maintain a leverage ratio of 4.0% to 5.0%.
The Company's leverage ratio at September 30, 1996, was 6.68% and exceeded the
regulatory minimum.

A bank holding company that fails to meet the applicable capital standards
will be at a disadvantage. For example, Federal Reserve Board policy discourages
the payment of dividends by a bank holding company from borrowed funds as well
as payments that would adversely affect capital adequacy. Failure to meet the
capital guidelines may result in institution by the Federal Reserve Board of
appropriate supervisory or enforcement actions.

IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES

FDICIA became effective at various times through January 1994. FDICIA
requires bank regulators to take "prompt corrective action" to resolve problems
associated with insured depository institutions. In the event an institution
becomes "undercapitalized," it must submit a capital restoration plan. The
capital restoration plan will not be accepted by applicable regulators unless
each company "having control of" the undercapitalized institution "guarantees"
the subsidiary's compliance with the capital restoration plan until it becomes
"adequately capitalized." The Company has control of the Banks for purposes of
this statute.

Under FDICIA, the aggregate liability of all companies controlling a
particular institution is generally limited to the lesser of 5% of the
institution's assets at the time it became undercapitalized or the amount
necessary to bring the institution into compliance with applicable capital
standards. FDICIA grants greater powers to regulatory authorities in situations
where an institution becomes "significantly" or "critically" undercapitalized or
fails to submit a capital restoration plan. For example, a bank holding company
controlling such an institution may be required to obtain prior Federal Reserve
Board approval of proposed dividends or could be required to consent to a merger
or to divest the troubled institution or other affiliates.

ACQUISITIONS BY BANK HOLDING COMPANIES

Subject to certain exceptions, the BHCA requires every bank holding company
to obtain the prior approval of the Federal Reserve Board before it may acquire
all or substantially all of the assets of any bank, or ownership or control of
any voting shares of any bank, if after such acquisition it would own or
control, directly or indirectly, more than 5% of the voting shares of such bank.
In approving bank acquisitions by bank holding companies, the Federal Reserve
Board is required to consider the financial and managerial resources and future
prospects of the bank holding company and the banks concerned, the convenience
and needs of the communities to be served, and various competitive factors. The
Attorney General of the United States may, within 30 days after approval of an
acquisition by the Federal Reserve Board, bring an action challenging such
acquisition under the federal antitrust laws, in which case the effectiveness of
such approval is stayed pending a final ruling by the courts.

56
<PAGE>
Currently, the Federal Reserve Board will only allow the acquisition by a
bank holding company of an interest in any bank located in another state if the
statutory laws of the state in which the target bank is located expressly
authorize such acquisition. The Texas Banking Act permits, in certain
circumstances, out-of-state bank holding companies to acquire certain existing
banks and bank holding companies in Texas. However, the Riegle-Neal Interstate
Banking and Branching Efficiency Act of 1994 ("Interstate Act"), permits bank
holding companies to acquire banks located in any state without regard to
whether the transaction is prohibited under any state law, except that states
may establish the minimum age of their local banks subject to interstate
acquisition by out-of-state bank holding companies. The minimum age of local
banks subject to interstate acquisition is limited to a maximum of five years.

FDICIA eased restrictions on cross-industry mergers. Members of the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF") are
generally allowed to merge, assume each other's deposits, and transfer assets in
exchange for an assumption of deposit liabilities. A formula applies to treat
insurance assessments relating to acquired deposits as if they were still
insured through the acquired institution's insurance fund. The transaction must
be approved by the appropriate federal banking regulator. In considering such
approval, the regulators take into account applicable capital requirements,
certain interstate banking restrictions and other factors.

The Competitive Equality Banking Act of 1987 ("CEBA") amended the Federal
Deposit Insurance Act and certain other statutes to provide federal regulatory
agencies with expanded authority to deal with troubled institutions. Among other
things, CEBA expanded the ability of out-of-state holding companies to acquire
certain financial institutions that are in danger of closing and permits the
FDIC, in certain circumstances, to establish a "bridge bank" to assume the
deposits or liabilities of one or more closed banks or to perform certain other
functions.

THE BANKS

GENERAL

The Banks are national banking associations organized under the National
Bank Act of 1864, as amended (the "National Bank Act"), and are subject to
regulatory supervision and examination by the Comptroller. Pursuant to such
regulation, the Banks are subject to special restrictions, supervisory
requirements and potential enforcement actions.

PERMISSIBLE ACTIVITIES FOR NATIONAL BANKS

The National Bank Act delineates the rights, privileges and powers of
national banks and defines the activities in which national banks may engage.
National banks are authorized to engage in the following: make, arrange,
purchase or sell loans or extensions of credit secured by liens on interests in
real estate; purchase, hold and convey real estate under certain conditions;
offer certain trust services to the public; deal in investment securities in
certain circumstances; and, more broadly, engage in the "business of banking"
and activities that are "incidental" to banking. Specifically, the following are
a few of the activities deemed incidental to the business of banking: the
borrowing and lending of money; receiving deposits, including deposits of public
funds; holding or selling stock or other property acquired in connection with
security on a loan; discounting and negotiating evidences of debt; acting as
guarantor, if the bank has a "substantial interest in the performance of the
transaction"; issuing letters of credit to or on behalf of its customers;
operating a safe deposit business; providing check guarantee plans; issuing
credit cards; operating a loan production office; selling loans under repurchase
agreements; selling money orders at offices other than bank branches; providing
consulting services to banks; and verifying and collecting checks.

In general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of such depository institutions. Many of the
statutory restrictions limit the participation of national banks in the
securities and insurance product markets. These restrictions do not now affect
the

57
<PAGE>
Banks, because the Banks are not presently involved in the types of transactions
covered by the restrictions.

BRANCHING

National banks may establish a branch anywhere in Texas provided that the
branch is approved in advance by the Comptroller, which considers a number of
factors, including financial history, capital adequacy, earnings prospects,
character of management, needs of the community and consistency with corporate
powers. The Interstate Banking Act, which expands the authority of bank holding
companies and banks to engage in interstate bank acquisitions and interstate
banking, allows each state the option of "opting out" of the interstate
branching (but not banking) provisions. The Texas Legislature opted out of the
interstate branching provisions during its 1995 Session. Interstate banking was
effective on September 29, 1995, and interstate branching would have become
effective in Texas in June of 1997, if Texas had not elected to "opt out." The
Texas Legislature "opt-out" legislation prohibiting interstate branching is
effective until September of 1999.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES

Certain provisions of FDICIA applicable to the Banks enhance safeguards
against insider abuse by recodifying current law restricting transactions among
related parties. One set of restrictions is found in Section 23A of the Federal
Reserve Act, which affects loans to and investments in "affiliates" of the
Banks. The term "affiliates" include the Company and any of its subsidiaries.
Section 23A imposes limits on the amount of such transactions and also requires
certain levels of collateral for such loans. In addition, Section 23A limits the
amount of advances to third parties that are collateralized by the securities or
obligations of the Company or its subsidiaries.

Another set of restrictions is found in Section 23B of the Federal Reserve
Act. Among other things, Section 23B requires that certain transactions between
each Bank and its affiliates must be on terms substantially the same, or at
least as favorable to the subject Bank, as those prevailing at the time for
comparable transactions with or involving other nonaffiliated companies. In the
absence of such comparable transactions, any transaction between a Bank and its
affiliates must be on terms and under circumstances, including credit
underwriting standards and procedures, that in good faith would be offered to or
would apply to nonaffiliated companies. Each Bank is also subject to certain
prohibitions against advertising that suggests that the Bank is responsible for
the obligations of its affiliates.

The restrictions on loans to insiders contained in the Federal Reserve Act
and Regulation O of the Federal Reserve Board now apply to all insured
institutions and their subsidiaries and holding companies. The aggregate amount
of an institution's loans to insiders is limited to the amount of its unimpaired
capital and surplus, unless the FDIC determines that a lesser amount is
appropriate. Each Bank may pay, on behalf of any executive officer or director,
an amount exceeding funds on deposit in that individual's personal account only
if there is a written, preauthorized, interest-bearing extension of credit
specifying a method of repayment and a written preauthorized transfer of funds
from another account of the executive officer or director at that Bank. Insiders
are subject to enforcement actions for knowingly accepting loans in violation of
applicable restrictions.

INTEREST RATE LIMITS AND LENDING REGULATIONS

The Banks are subject to various state and federal statutes relating to the
extension of credit and the making of loans. The maximum legal rate of interest
that the Banks may charge on a loan depends on a variety of factors such as the
type of borrower, purpose of the loan, amount of the loan and date the loan is
made. Texas statutes establish maximum legal rates of interest for various
lending situations.

Loans made by banks located in Texas are subject to numerous other federal
and state laws and regulations, including truth-in-lending statutes, the Texas
Consumer Credit Code, the Equal Credit

58
<PAGE>
Opportunity Act, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act. These laws provide remedies to the borrower and penalties to the
lender for failure of the lender to comply with such laws. The scope and
requirements of these laws and regulations have expanded in recent years, and
claims by borrowers under these laws and regulations may increase.

RESTRICTIONS ON SUBSIDIARY BANK DIVIDENDS

Dividends payable by the Banks to Independent Financial are restricted under
the National Bank Act. The Banks' ability to pay dividends is further restricted
by the requirement that they maintain adequate levels of capital in accordance
with capital adequacy guidelines promulgated from time to time by the
Comptroller. See "Dividend Policy." Moreover, the prompt corrective provisions
of FDICIA and implementing regulations prohibit a bank from paying a dividend
if, following the payment, the bank would be in any of the three capital
categories for undercapitalized institutions. See "Capital Adequacy
Requirements" below.

EXAMINATIONS

The Comptroller periodically examines and evaluates national banks. Based
upon such evaluations, the Comptroller may revalue certain assets of an
institution and require that it establish specific reserves to compensate for
the difference between the regulatory-determined value and the book value of
such assets. The Comptroller is authorized to assess the institution an annual
fee based upon deposits for, among other things, the costs of conducting the
examinations.

CAPITAL ADEQUACY REQUIREMENTS

FDICIA, among other things, substantially revised existing statutory capital
standards, restricted certain powers of state banks, gave regulators the
authority to limit officer and director compensation and required holding
companies to guarantee the capital compliance of their banks in certain
instances. Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" with respect to banks that do not meet minimum
capital requirements. FDICIA established five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized," as defined by regulations adopted by the
Federal Reserve Board, the FDIC and the other federal depository institution
regulatory agencies. A depository institution is well capitalized if it
significantly exceeds the minimum level required by regulation for each relevant
capital measure, adequately capitalized if it meets such measure,
undercapitalized if it fails to meet any such measure, significantly
undercapitalized if it is significantly below such measure and critically
undercapitalized if it fails to meet any critical capital level set forth in the
regulations. The critical capital level must be a level of tangible equity
capital equal to the greater of 2% of total tangible assets or 65% of the
minimum leverage ratio to be prescribed by regulation. An institution may be
deemed to be in a capitalization category that is lower than is indicated by its
actual capital position if it receives an unsatisfactory examination rating. At
September 30, 1996, each of the Banks was well capitalized.

Banks with capital ratios below the required minimum are subject to certain
administrative actions, including the termination of deposit insurance upon
notice and hearing, or a temporary suspension of insurance without a hearing in
the event the institution has no tangible capital.

CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES

FDICIA requires the federal banking regulators to take "prompt corrective
action" with respect to capital-deficient institutions with the overall goal to
reduce losses to the depository insurance fund. In addition to requiring the
submission of a capital restoration plan (as discussed above), FDICIA contains
broad restrictions on certain activities of undercapitalized institutions
involving asset growth, acquisitions, branch establishment and expansion into
new lines of business. With certain exceptions, an insured

59
<PAGE>
depository institution is prohibited from making capital distributions,
including dividends, and is prohibited from paying management fees to control
persons if the institution would be undercapitalized after any such distribution
or payment.

As an institution's capital decreases, the FDIC's powers and scrutiny become
greater. A significantly under-capitalized institution is subject to mandated
capital raising activities, restrictions on interest rates paid and transactions
with affiliates, removal of management, and other restrictions. Under proposed
regulations, an institution will be considered critically undercapitalized if
its tangible equity to assets ratio falls below 2%. The FDIC has only very
limited discretion in dealing with a critically undercapitalized institution and
is virtually required to appoint a receiver or conservator.

REAL ESTATE LENDING EVALUATIONS AND APPRAISAL REQUIREMENTS

The FDIC is required by the Federal Deposit Insurance Act to assess all
banks in order to adequately fund the BIF so as to resolve any insured
institution that is declared insolvent by its primary regulator. FDICIA required
the federal banking regulators to adopt uniform standards for evaluations by the
regulators of loans collateralized by real estate or made to finance
improvements to real estate. In formulating the standards, the banking agencies
were required to take into consideration the risk posed to the insurance funds
by real estate loans, the need for safe and sound operation of insured
depository institutions and the availability of credit. FDICIA also prohibits
the regulators from adversely evaluating a real estate loan or investment solely
on the grounds that the investment involves commercial, residential or
industrial property, unless the safety and soundness of an institution may be
affected.

The federal agencies adopted a number of regulatory standards with regard to
real estate lending. These standards require banking institutions to establish
and maintain written internal real estate lending policies. These policies must
not only be consistent with safe and sound banking practices, but must also be
appropriate to the size of the institution and the nature and scope of its
operations. The policies must establish loan portfolio diversification
standards, prudent underwriting standards, including clear and measurable
loan-to-value limits (although such limits should not exceed specific
supervisory limits), loan administration procedures and comprehensive
documentation, approval and reporting requirements to ensure compliance with
these policies. Additionally, the institution's policies must be reviewed and
approved by that institution's Board of Directors on at least an annual basis
and such policies must be continually monitored by the institutions to ensure
compatibility with current market conditions. In addition, banks are required to
secure appraisals for real estate-collateralized loans with a transaction value
of $250,000 or more.

DEPOSIT INSURANCE ASSESSMENTS

The FDIC is required by the Federal Deposit Insurance Act to assess all
banks in order to adequately fund the BIF so as to resolve any insured
institution that is declared insolvent by its primary regulator. FDICIA required
the FDIC to establish a risk-based deposit insurance premium schedule. The
risk-based assessment system is used to calculate a depository institution's
semi-annual deposit insurance assessment based upon the designated reserve ratio
for the deposit insurance fund and the probability and extent to which the
deposit insurance fund will incur a loss with respect to this institution. In
addition, the FDIC can impose special assessments to cover the cost of
borrowings from the U.S. Treasury, the Federal Financing Bank and BIF member
banks.

On September 15, 1992, the FDIC issued a rule revising its assessment
regulations from the existing flat-rate system for deposit insurance assessments
(or "premiums") to a new, risk-based assessment system. This system became
effective for the assessment period beginning January 1, 1993. Under this
system, each depository institution will be placed in one of nine assessment
categories based on certain capital and supervisory measures. Institutions
assigned to higher-risk categories--that is, institutions that pose a greater
risk of loss to their respective deposit insurance funds--pay assessments at
higher rates than would

60
<PAGE>
institutions that pose a lower risk. The Banks were assessed a weighted average
premium of $0.1073 per $100 of deposits for the year ended December 31, 1995.

On August 8, 1995, the FDIC amended its regulations to change the range of
deposit insurance assessments charged to members of the BIF from the
then-prevailing range of .23% to .31% of deposits, to a range of 0.4% to .31% of
deposits. On November 14, 1995, the FDIC further reduced the deposit insurance
assessments for BIF-member institutions, such that the range of BIF assessments
is currently between 0% and .27% of deposits. BIF-member institutions which
qualify for the 0% assessment category will, however, still have to pay the
$1,000 minimum semi-annual assessment required by federal statute.

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

On September 30, 1996, President Clinton signed into law an act that
contained a comprehensive approach to recapitalizing the SAIF and to assure the
payment of the Financing Corporation's ("FICO") bond obligations. Under this new
act, banks insured under the BIF are required to pay a portion of the interest
due on bonds that were issued by FICO to help shore up the ailing Federal
Savings and Loan Insurance Corporation ("FSLIC") in 1987. The amount of FICO
debt service to be paid by all BIF-insured institutions is currently estimated
to be approximately $320,343,000 per year, or $0.128 per $100 of deposits from
1997 until the year 2000, when the obligation of BIF-insured institutions
increases to approximately $598,500,000 or $0.240 per $100 of deposits per year
through the year 2019.

COMMUNITY REINVESTMENT ACT

The Community Reinvestment Act of 1977 ("CRA") and the regulations issued by
the Comptroller to implement that law are intended to encourage banks to help
meet the credit needs of their service area, including low and moderate income
neighborhoods, consistent with the safe and sound operations of the banks. These
regulations also provide for regulatory assessment of a bank's record in meeting
the needs of its service area when considering applications to establish
branches, merger applications and applications to acquire the assets and assume
the liabilities of another bank. FIRREA requires federal banking agencies to
make public a rating of a bank's performance under the CRA. In the case of a
bank holding company, the CRA performance record of the banks involved in the
transaction are reviewed in connection with the filing of an application to
acquire ownership or control of shares or assets of a bank or to merge with any
other bank holding company. An unsatisfactory record can substantially delay or
block the transaction. The bank regulatory agencies in 1995 adopted final
regulations implementing the CRA. These regulations affect extensive changes to
the existing procedures for determining compliance with the CRA and the full
effect of these new regulations cannot be determined at this time.

CHANGING REGULATORY STRUCTURE

Other legislative and regulatory proposals regarding changes in banking, and
regulations of banks, thrifts and other financial institutions, are being
considered by the executive branch of the federal government, Congress and
various state governments, including Texas. Certain of these proposals, if
adopted, could significantly change the regulation of banks and the financial
services industry. The Company cannot predict accurately whether any of these
proposals will be adopted or, if adopted, how these proposals will affect the
Company or the Banks.

61
<PAGE>
EXPANDING ENFORCEMENT AUTHORITY

One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the activities
of banks and their holding companies. In addition, the Federal Reserve Board and
FDIC are possessed of extensive authority to police unsafe or unsound practices
and violations of applicable laws and regulations by depository institutions and
other holding companies. For example, the FDIC may terminate the deposit
insurance of any institution that it determines has engaged in an unsafe or
unsound practice. The regulatory agencies can also assess civil money penalties,
issue cease and desist or removal orders, seek injunctions and publicly disclose
such actions. FDICIA, FIRREA and other laws have expanded the agencies'
authority in recent years, and the agencies have not yet fully tested the limits
of their powers.

EFFECT ON ECONOMIC ENVIRONMENT

The policies of regulatory authorities, including the monetary policy of the
Federal Reserve Board, have a significant effect on the operating results of
bank holding companies and their subsidiaries. Among the means available to the
Federal Reserve Board to affect the money supply are open market operations in
U.S. Government securities, control of borrowings at the "discount window,"
changes in the discount rate on member bank borrowings, changes in reserve
requirements against member bank deposits and against certain borrowings by
banks and their affiliates and the placing of limits on interest rates that
member banks may pay on time and savings deposits. These means are used in
varying combinations to influence overall growth and distribution of bank loans,
investments and deposits, and their use may affect interest rates charged on
loans or paid for deposits. Federal Reserve Board monetary policies have
materially affected the operating results of commercial banks in the past and
are expected to continue to do so in the future. The Company cannot predict the
nature of future monetary policies and the effect of such policies on the
business and earnings of the Company and the Banks.

62
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information regarding the directors
and executive officers of the Company and the Banks as of the date hereof:

<TABLE>
<CAPTION>
YEAR FIRST
BECAME A
DIRECTOR OF THE
NAME AND AGE COMPANY PRINCIPAL OCCUPATION DURING LAST FIVE YEARS
- ------------------------------------ --------------- ---------------------------------------------------
<S> <C> <C>
Scott L. Taliaferro (74) 1980 Chairman of the Board of the Company and President
of Texas Drilling Co. (oil and gas drilling)

Bryan W. Stephenson (46) 1989 President and Chief Executive Officer of the
Company

Randal N. Crosswhite (43) 1995 Senior Vice President, Chief Financial Officer and
Corporate Secretary of the Company

Jim Fitzhugh (47) N/A President of First State, N.A., Abilene

Mike Jarrett (47) N/A President of First State, N.A., Odessa

Lee Caldwell (62) 1985 Attorney at Law

Mrs. Wm. R. (Amber) Cree (66) 1982 Entrepreneur

Louis S. Gee (74) 1981 Chairman of the Board and Chief Executive Officer
of Tippett & Gee, Inc. (mechanical engineering)

Marshal M. Kellar (64) 1981 A principal of West Texas Wholesale Supply Company
(hardware)

Tommy McAlister (48) 1985 President of McAlister, Inc. (investments)

James D. Webster, M.D. (56) 1988 Physician

C.G. Whitten (71) 1980 Senior Vice President, General Counsel and
Corporate Secretary of Pittencrieff
Communications, Inc. (telecommunications)

John A. Wright (77) 1980 Bank Consultant
</TABLE>

In addition, Messrs. Stephenson and Crosswhite serve as directors of each of
the Banks, Mr. Fitzhugh serves as a director of First State, N.A., Abilene and
Mr. Jarrett serves as a director of First State, N.A., Odessa.

BOARD OF DIRECTORS; ELECTION OF OFFICERS

The Company has a classified Board of Directors currently comprised of
eleven members (exclusive of advisory directors), with directors serving
staggered three-year terms. One class is elected at each annual meeting of the
Company's shareholders. The terms of Messrs. Caldwell, Crosswhite, Gee and
Kellar expire in 1997; the terms of Messrs. Stephenson, Taliaferro and Whitten
expire in 1998; and the terms of Madame Cree and Messrs. McAlister, Webster and
Wright expire in 1999.

All directors hold office until their successors are duly elected and
qualified. Any vacancy occurring in the Board of Directors may be filled by the
affirmative vote of a majority of the remaining directors though less than a
quorum except that any vacancy on the Board of Directors resulting from the
removal of a director by the shareholders shall be filled only by the
shareholders entitled to vote at an annual or special

63
<PAGE>
meeting called for that purpose. A director elected to fill a vacancy shall be
elected for the unexpired term of his predecessor in office. Any directorship to
be filled by reason of an increase in the number of directors shall be filled by
election at an annual meeting or at a special meeting of the shareholders
entitled to vote called for that purpose.

The Bylaws of the Company provide for advisory directors. The following
individuals currently serve as advisory directors of the Company: Arlas Cavett,
L. H. Mosley and J. E. Smith.

Executive officers of the Company are elected by the Board of Directors at
its annual meeting and hold office until the next annual meeting of the Board of
Directors or until their respective successors are duly elected and have
qualified. The Presidents of the Banks are elected by the board of directors of
the respective Banks at their annual meetings and hold office until the next
annual meeting of such board of directors or until their respective successors
are duly elected and have qualified.

COMPENSATION OF DIRECTORS

In 1995, each non-employee director and advisory director was paid $150 for
each regular and special directors' meeting of the Company attended and $50 for
each meeting of the Executive Committee and Audit Committee attended. The Board
of Directors has set director and committee fees for 1996 at $150 per meeting of
the Board and $50 per meeting of the Executive Committee and the Audit
Committee.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors conducts its business through meetings of the Board
of Directors and through its committees. In accordance with the Bylaws of the
Company, the Board of Directors has established an Executive Committee, an Audit
Committee and an Employee Stock Ownership/401(k) Plan Committee. Louis S. Gee,
Bryan W. Stephenson, Scott L. Taliaferro, C.G. Whitten and John A. Wright are
members of the Executive Committee. Lee Caldwell, Marshal M. Kellar, Tommy
McAlister and James D. Webster, M.D. are the members of the Audit Committee.
Mrs. Wm. R. (Amber) Cree and Scott L. Taliaferro are members of the Employee
Stock Ownership/401(k) Plan Committee.

EXECUTIVE COMPENSATION

The following table sets forth certain information regarding compensation
paid during each of the Company's last three fiscal years to the Company's Chief
Executive Officer and the other executive officers of the Company (including
those who are employed by the Company's direct and indirect subsidiaries) whose
cash compensation exceeded $100,000 during the fiscal year ended December 31,
1996 (the "named executive officer").

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION OTHER ANNUAL ---------------------
----------------------- COMPENSATION SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS ($) ($) (1) OPTIONS
- --------------------------------------------- ----------- ---------- ----------- ------------- ---------------------
<S> <C> <C> <C> <C> <C>
Bryan W. Stephenson.......................... 1996 $ 135,000 $ 20,000 $ 6,600 0
PRESIDENT, CHIEF EXECUTIVE OFFICER 1995 126,000 20,000 6,500 0
AND DIRECTOR 1994 120,000 20,000 10,200 0

Mike Jarrett................................. 1996 92,500 5,000 3,300 0
PRESIDENT OF FIRST STATE, N.A., 1995 85,000 5,000 3,300 0
ODESSA 1994 80,000 5,000 3,000 0
</TABLE>

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

(1) Directors fees paid by the Banks.

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<PAGE>
STOCK OPTION GRANTS IN FISCAL 1996

No stock options were granted to the Chief Executive Officer or the named
executive officer during fiscal 1996. The Company has never granted stock
appreciation rights.

AGGREGATE STOCK OPTION EXERCISES IN FISCAL 1996 AND FISCAL YEAR END OPTION
VALUES

The following table provides information related to stock options exercised
by the Chief Executive Officer and the named executive officer during fiscal
1996 and the number and value of stock options held at fiscal year end.
<TABLE>
<CAPTION>
VALUE(2) OF
UNEXERCISED
IN-THE-MONEY
NUMBER OF SECURITIES UNDERLYING OPTIONS
UNEXERCISED OPTIONS AT YEAR-END AT YEAR END
SHARES ACQUIRED VALUE (#) ($)
UPON OPTION REALIZED ($) ---------------------------------- -----------
NAME EXERCISE (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE
- ---------------------------------- ------------------- ------------- ------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
Bryan W. Stephenson............... 0 $ 0 9,333 0 $ 85,000

Mike Jarrett...................... 0 0 2,000 0 18,000

NAME UNEXERCISABLE
- ---------------------------------- -----------------
<S> <C>
Bryan W. Stephenson............... $ 0
Mike Jarrett...................... 0
</TABLE>

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

(1) Market value of the underlying securities at exercise date, minus the
exercise price.

(2) Market value of the underlying securities at December 31, 1996, minus the
exercise price.

65
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

The following table and notes thereto set forth certain information as of
December 15, 1996, and as adjusted to reflect the Acquisition and the sale of
the Common Stock offered by this Prospectus with respect to the shares of Common
Stock beneficially owned by (i) each person known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each director and
advisory director and (iii) all current directors and executive officers of the
Company as a group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES EXPECTED TO BE
OWNED BEFORE THE BENEFICIALLY OWNED AFTER
OFFERING (1) THE OFFERING (1)
------------------------ ------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT (2) NUMBER PERCENT (3)
- ------------------------------------------------------------ --------- ------------- --------- -------------

<S> <C> <C> <C> <C>
5% STOCKHOLDERS
- ------------------------------------------------------------
Independent Bankshares, Inc................................. 112,472 10.18% 127,472 9.24%
Employee Stock Ownership/401(k) Plan
P.O. Box 3296
Abilene, Texas 79604

Scott L. Taliaferro, Jr..................................... 86,651(4) 7.84 86,651(4) 6.13
P.O. Box 240
Abilene, Texas 79604

Bryan W. Stephenson......................................... 79,462(5) 7.08 88,462(5) 6.33
547 Chestnut
Abilene, Texas 79602

John A. Wright.............................................. 71,480(6) 6.30 73,140(6) 5.19
1102 Sayles Boulevard
Abilene, Texas 79605

Scott L. Taliaferro......................................... 59,969(7) 5.28 63,969(7) 4.53
P.O. Box 240
Abilene, Texas 79604

DIRECTORS AND EXECUTIVE OFFICERS
- ------------------------------------------------------------
Lee Caldwell................................................ 13,165(8) 1.18% 14,165(8) 1.02%
Arlas Cavett*............................................... 24,594(9) 2.21 24,594(9) 1.77
Mrs. Wm. R. (Amber) Cree.................................... 2,622 0.24 3,622 0.26
Randal N. Crosswhite........................................ 19,487 10) 1.76 19,687 10) 1.42
Louis S. Gee................................................ 36,026 11) 3.23 36,026 11) 2.59
Marshal M. Kellar........................................... 1,545 12) 0.14 1,545 12) 0.11
Tommy McAlister............................................. 3,288 13) 0.30 4,288 13) 0.31
L.H. Mosley*................................................ 44,032 14) 3.98 44,032 14) 3.19
J.E. Smith*................................................. 2,394 15) 0.22 3,302 15) 0.24
Bryan W. Stephenson......................................... 79,462(5) 7.08 88,462(5) 6.33
Scott L. Taliaferro......................................... 59,969(7) 5.28 63,969(7) 4.53
James D. Webster, M.D....................................... 708 0.06 708 0.05
C.G. Whitten................................................ 4,739 16) 0.43 5,239 16) 0.38
John A. Wright.............................................. 71,480(6) 6.30 73,140(6) 5.19
All executive officers and directors as a group (16
individuals, including the executive officers and
directors listed above)................................... 376,506 17) 30.96% 411,956 17) 27.63%
</TABLE>

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

* Advisory Director.

(1) Beneficial ownership as reported in the above table has been determined in
accordance with Rule 13d-3 under the Exchange Act. Unless as otherwise
indicated, all shares are owned directly, and each person has sole voting
and investment power with respect to the shares reported.

66
<PAGE>
(2) The percentage of Common Stock indicated is based on 1,104,644 shares of
Common Stock issued and outstanding at December 15, 1996.

(3) The percentage of Common Stock indicated is based on 1,379,644 shares of
Common Stock issued and outstanding upon consummation of the offering made
hereby.

(4) Includes 53,281 shares held by Farmers and Merchants Company, Abilene,
Texas, as trustee for Mr. Taliaferro. Also includes 33,074 shares that could
be acquired within 60 days through the conversion of Series C Preferred
Stock, which is held by Farmers and Merchants Company, Abilene, Texas, as
trustee for Mr. Taliaferro.

(5) Includes 4,716 shares owned by Mr. Stephenson's wife and minor children and
7,644 shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock owned by Mr. Stephenson's wife. Also includes Mr.
Stephenson's beneficial ownership of 8,787 shares held by the Company's
Employee Stock Ownership/401(k) Plan. Also includes 9,333 shares that Mr.
Stephenson has the right to acquire within 60 days pursuant to the exercise
of stock options. The shares expected to be beneficially owned after the
Offering includes 8,000 shares that are expected to be acquired by Mr.
Stephenson's wife in the Offering.

(6) Includes 30,649 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.

(7) Includes 992 shares owned by Mr. Taliaferro's wife. Also includes 31,935
shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock.

(8) Includes 7,350 shares that could be acquired within 60 days through the
conversion of the Company's Series C Preferred Stock.

(9) Includes 14,365 shares owned by Cavett & Frost, a general partnership in
which Mr. Cavett is a 50% partner, and 777 shares owned by Cavett, Inc. Mr.
Cavett is President and a 50% shareholder of Cavett, Inc. Also includes
8,268 shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock owned by Cavett & Frost.

(10) Includes Mr. Crosswhite's beneficial ownership of 8,292 shares held by the
Company's Employee Stock Ownership/401(k) Plan. Also includes 3,333 shares
that Mr. Crosswhite has the right to acquire within 60 days pursuant to the
exercise of stock options.

(11) Includes 11,574 shares owned by Tippett & Gee, Inc. Mr. Gee is the Chairman
of the Board and majority shareholder of Tippett & Gee, Inc. Also includes
9,187 shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock.

(12) Includes 1,545 shares owned by M & G Kellar Investment Limited Partnership,
a partnership in which Mr. Kellar is a general partner.

(13) Includes 2,588 shares owned by McAlister Oil Co., Inc. Mr. McAlister is
President and sole shareholder of McAlister Oil Co., Inc. Also includes 551
shares that could be acquired within 60 days through the conversion of
Series C Preferred Stock owned by McAlister Oil Co., Inc. The shares
expected to be beneficially owned after the Offering includes 1,000 shares
that are expected to be acquired by McAlister Oil Co., Inc. in the Offering.

(14) Includes 367 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.

(15) Includes 732 shares owned by Mr. Smith's wife. The shares expected to be
beneficially owned after the Offering includes 668 shares that are expected
to be acquired by Mr. Smith's wife in the Offering.

(16) Includes 735 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock.

(17) Includes 96,686 shares that could be acquired within 60 days through the
conversion of Series C Preferred Stock. Also includes such executive
officers' beneficial ownership of 25,973 shares held by the Company's
Employee Stock Ownership/401(k) Plan. Also includes 14,666 shares that such
executive officers have the right to acquire within 60 days pursuant to the
exercise of stock options.

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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Banks had, during the period from January 1, 1995, to December 15, 1996,
and expect to have in the future, loan transactions with officers and directors
of the Company and the Banks and their respective associates, which includes any
immediate family member or any corporation or firm of which such person is an
executive officer or partner or is, directly or indirectly, the beneficial owner
of 10% or more of any class of equity securities or any trusts of which such
person serves as trustee or in which he or she has a substantial beneficial
interest. These loan transactions have been made in the ordinary course of such
Banks' business and have been and will continue to be on substantially the same
terms, including interest rates, collateral and repayment, as those prevailing
at the time for comparable transactions with unaffiliated persons and did not
involve more than the normal risk of collectibility or present other unfavorable
features. All loans made to officers, directors and nominees for director of the
Company and their respective associates are believed to be in compliance with
the Financial Institutions Regulatory and Interest Rate Control Act of 1978.

During the fiscal years ended December 31, 1996, 1995 and 1994, the Company
and its subsidiaries paid approximately $28,000, $19,000 and $55,000 to the law
firm of Whitten & Young, P.C., for legal services. C. G. Whitten, a director, is
Of Counsel to such law firm.

In 1985, a former subsidiary bank of the Company foreclosed on the stock of
Texas Bank & Trust Company, Sweetwater, Texas ("TB&T-Sweetwater"), which became
a repossessed asset of the former subsidiary. TB&T-Sweetwater subsequently
failed, resulting in a legal action being brought in federal court against the
thirteen TB&T-Sweetwater directors, including John A. Wright, a director of the
Company, by the FDIC. In September 1993, nine former directors of
TB&T-Sweetwater (the "Outside Directors") settled with the FDIC for an aggregate
of $60,000. All former directors of TB&T-Sweetwater requested that the Company
reimburse them for their expenses and settlement costs incurred by them in their
defense of the FDIC litigation. This request was based on their interpretation
of certain indemnification provisions contained in the Company's Articles of
Incorporation.

In January 1994, the Company filed a declaratory judgment action in state
district court to petition the court to rule on certain matters that would have
precluded indemnification. Certain of the individuals, including Mr. Wright,
filed counterclaims against the Company asserting their right to be indemnified.
A hearing occurred in July 1994, and the court issued an order in September
1994, denying the Company's petition and upholding the directors' counterclaims.
In December 1994, a settlement was entered into between the FDIC, one Outside
Director and the three management directors of TB&T-Sweetwater (the "Inside
Directors") with the Inside Directors, including Mr. Wright, paying the FDIC a
total of $450,000. As a result of the two settlements and indemnification
requests, the Outside Directors claimed indemnification in the amount of
approximately $467,000 and the Inside Directors claimed indemnification in the
amount of approximately $900,000. Of this latter amount, Mr. Wright claimed
approximately $340,000 in indemnification expense. In March 1995, the Company
agreed to settle the indemnification requests of the Inside Directors for
$450,000 in cash and by delivery of three promissory notes in the aggregate
principal amount of $350,000. These notes are payable in three equal annual
installments beginning March 1, 1996, and bear interest at 6% per annum. In
connection with this settlement, Mr. Wright received $150,000 cash and a
promissory note in the original principal amount of $152,250. The first
principal payment of $50,750, plus accrued interest of $9,135, was paid to Mr.
Wright on March 1, 1996.

During 1989, the Company advanced $77,000 to twenty-two former directors of
a former subsidiary bank (six of whom are also current directors of the Company)
for payment of reasonable legal fees and expenses in connection with their
defense of an action brought by two plaintiffs who purchased debentures
previously sold by the bank. In addition, in 1991 the Company accrued $214,000
to provide reimbursement to the former directors for the payment of legal fees
and expenses incurred in connection with this lawsuit. The Company reimbursed
$200,000 to such former directors during the year ended December 31, 1993.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

COMMON STOCK

The Company is authorized to issue 30,000,000 shares of Common Stock of
which 1,104,644 shares were issued and outstanding at December 15, 1996.

Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors from funds legally available therefor. Each
share of Common Stock entitles the holder thereof to one vote upon matters voted
upon by the shareholders. Cumulative voting for the election of directors is not
permitted, which means that the holders of a majority of shares voting for the
election of directors can elect all members of each class of the Board. Except
as otherwise required by applicable Texas law and under the Fair Price provision
described below, a two-thirds vote is sufficient for any action that requires
the vote or concurrence of shareholders, except that a plurality vote is
sufficient to elect directors.

The holders of Common Stock do not have any preemptive, subscription,
redemption or conversion rights or privileges. Upon liquidation or dissolution
of the Company, the holders of Common Stock are entitled to share ratably in the
net assets of the Company remaining after payment of liabilities and liquidation
preferences of any outstanding shares of preferred stock. All shares of Common
Stock now outstanding are fully paid and non-assessable. Each share of Common
Stock has the same rights, privileges and preferences as every other share.

POTENTIAL LIMITS OR QUALIFICATIONS FROM PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of preferred stock, par
value $10.00 per share (the "Preferred Stock"), which the Board of Directors may
designate and issue from time to time in one or more series. With respect to
each series of the Preferred Stock, the Board of Directors is authorized to fix
and determine by the resolution or resolutions providing for the issuance of the
series the number of shares to constitute the series and the designation of the
series and any one or more of the following rights and preferences: (i) the rate
of dividend; (ii) the price at and terms and conditions on which shares may be
redeemed; (iii) the amount payable for shares in the event of involuntary or
voluntary liquidation; (iv) sinking funds provisions (if any) for the redemption
or repurchase of the shares; (v) the terms and conditions on which shares may be
converted, if the shares of any series are issued with the privilege of
conversion; and (vi) voting rights (including the number of votes per share, the
matters on which the shares can vote and the contingencies that make voting
rights effective). The shares of each series of the Preferred Stock may vary
from the shares of any other series of Preferred Stock in any or all of the
foregoing respects.

Pursuant to action of the Board, up to 50,000 shares of Series C Preferred
Stock have been designated as a single series of preferred stock, and 13,478
shares of Series C Preferred Stock were issued and outstanding at December 15,
1996. Holders of Series C Preferred Stock are entitled to receive, if, as and
when declared by the Board of Directors, out of funds legally available
therefore, in preference to the holders of Common Stock and of any other stock
ranking junior to the Series C Preferred Stock in respect of dividends, annual
cumulative cash dividends at the per share rate of $4.20 payable quarterly, in
arrears. The Company may not (i) declare or pay any dividend in respect of the
Common Stock or any stock junior to the Series C Preferred Stock with respect to
dividend and liquidation rights unless, on the date of payment, all accumulated
dividends in respect of the Series C Preferred Stock are paid or (ii) purchase,
redeem or otherwise acquire, or set aside monies or create a sinking fund for
the purchase, redemption or acquisition of, Common Stock or any such junior
preferred stock generally if the Company has failed to declare and pay (or set
aside monies for the payment of) dividends in respect of the Series C Preferred
Stock. Furthermore, the Company may not declare or pay any dividend in respect
of the Common Stock or purchase or otherwise acquire shares of Common Stock if,
on the record date for such payment, or the date of such purchase or
acquisition, such action would cause stockholders' equity of the Company, as
reported in the most recent quarterly or annual financial statements filed by
the Company with the

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Securities and Exchange Commission, to be less than an amount equal to the sum
of (i) 140% of the product of the number of then outstanding shares of Series C
Preferred Stock multiplied by $42.00 and (ii) 140% of the product of the number
of then outstanding shares of stock senior to the Series C Preferred Stock with
respect to dividends multiplied by the liquidation amount thereof.

Whenever dividends on the Series C Preferred Stock, or any other class or
series of stock of the Company ranking PARI PASSU with the Series C Preferred
Stock as to dividends, have not been paid in an aggregate amount equal to at
least three quarterly dividends (regardless of whether consecutive), the holders
of Series C Preferred Stock shall be entitled to vote on all corporate matters
on the basis of 105 votes for each share of Series C Preferred Stock held of
record. Such voting rights will terminate when all such dividends accrued and in
default have been paid in full or set aside for payment. Without the affirmative
vote or consent of the holders of at least two-thirds of the total number of
shares of Series C Preferred Stock of the Company at the time outstanding,
voting as a class, the Company may not (i) amend, alter or repeal any of the
rights, preferences or powers of the holders of the Series C Preferred Stock so
as to affect adversely any such rights, preferences or powers or (ii) authorize,
issue or increase the authorized amount of any class or series of stock ranking
senior to, or PARI PASSU with, the Series C Preferred Stock as to dividends or
upon liquidation, dissolution or winding up of the Company. The Texas Business
Corporation Act provides that the holders of the outstanding shares of a class
shall be entitled to vote as a class upon a proposed amendment, and the holders
of the outstanding shares of a series shall be entitled to vote as a class upon
a proposed amendment, whether or not entitled to vote thereon by the provisions
of the articles of incorporation if the amendment would: (i) increase or
decrease the aggregate number of authorized shares of such class or series; (ii)
increase or decrease the par value of the shares of such class, including
changing shares having a par value into shares without par value; (iii) effect
an exchange, reclassification or cancellation of all or part of the shares of
such class or series; (iv) effect an exchange, or create a right of exchange, of
all or any part of the shares of another class into the shares of such class or
series; (v) change the designations, preferences, limitations or relative rights
of the shares of such class or series; (vi) changes the shares of such class or
series into the same or different number of shares, either with or without par
value, of the same class or series or another class or series; (vii) create a
new class or series of shares having rights and preferences equal, prior or
superior to the shares of such class or series, or increase the rights and
preferences of any class or series having rights and preferences equal, prior or
superior to the shares of such class or series, or increase the rights and
preferences of any class or series having rights or preferences later or
inferior to the series of such class or series in a manner as to become equal,
prior, or superior to the shares of such class or series; (viii) divide the
shares of such class into series and fix and determine the designation of such
series and the variations in the relative rights and preferences between the
shares of such series; (ix) limit or deny the existing preemptive rights of the
shares of such class or series; or (x) cancel or otherwise effect the dividends
on the shares of such class or series which had accrued but had not been
declared.

As of December 15, 1996, each share of Series C Preferred Stock was
convertible into Common Stock at a conversion rate of 18.375 shares of Common
Stock per share of Series C Preferred Stock. No fractional shares will be issued
upon conversion and cash will be paid in lieu thereof. The conversion rate is
subject to adjustment in certain events. Beginning December 12, 1997, or on any
anniversary thereafter, the Company may redeem all or any part of the
outstanding Series C Preferred Stock by paying a redemption price per share of
$42.00 in cash plus, in each case, accumulated and unpaid dividends to the
redemption date. In certain cases, the Company may elect to pay all or a portion
of the redemption price in shares of its Common Stock.

In the event of any liquidation of the Company, after payment or provision
for payment of the debts and other liabilities of the Company, the holders of
Series C Preferred Stock will be entitled to receive, out of the remaining net
assets of the Company available for distribution to shareholders, the amount of
$42.00 per share, plus an amount equal to the amount of all dividends accrued
and unpaid on each such share

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(regardless of whether declared) to the date fixed for distribution, before any
distribution is made to holders of the Common Stock or any other stock that
ranks junior to the Series C Preferred Stock.

CERTAIN PROVISIONS OF THE RESTATED ARTICLES OF INCORPORATION AND THE BYLAWS

Certain provisions in the Restated Articles of Incorporation (the
"Articles") and Restated Bylaws ("Bylaws") could make more difficult the
acquisition of the Company by means of a tender offer, a proxy contest or
otherwise. These provisions are expected to discourage certain types of coercive
takeover practices and inadequate takeover bids and to encourage persons seeking
to acquire control of the Company to first negotiate with the Company. The
Company believes that the benefits of increased protection of the Company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure the Company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiations of such proposals could result in an improvement of their terms.

RESTATED ARTICLES OF INCORPORATION

CLASSIFIED BOARD OF DIRECTORS. The Articles provide that the Board of
Directors is divided into three classes of directors, with the term of each
class expiring in a different year. The Bylaws provide that the number of
directors will be fixed from time to time exclusively by the Board of Directors
but shall consist of not more than 30 nor less than 7 directors. A majority of
the Board of Directors then in office has the sole authority to fill any
vacancies on the Board of Directors, except that any vacancy in the Board of
Directors resulting from the removal of a director by the shareholders shall be
filled only by the shareholders entitled to vote at the annual meeting or a
special meeting called for that purpose.

PREFERRED STOCK. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of the Company or may
materially affect the rights evidenced by, or amounts payable with respect to,
the shares of Common Stock. The voting and conversion rights of any class or
series of preferred stock issued by the Company could adversely affect, among
other things, the voting rights of existing shareholders.

FAIR PRICE PROVISION. The Company's Articles contain a Fair Price provision
that, among other things, requires the approval by the holders of 80% of the
voting power of the then outstanding shares of capital stock of the Company
entitled to vote generally in the election of directors (the "Voting Stock") as
a condition for mergers and certain other business combinations (collectively,
"Business Combinations"), which term also includes with respect to the Company
or its subsidiaries, the sale or disposition of assets, the issuance or transfer
of stock or other securities, any plan or liquidation or dissolution, any
reclassification of securities, or recapitalization, merger or consolidation
that increases the proportionate shares of outstanding stock) involving the
Company and any person or group holding 5% or more of such voting power (an
"Interested Shareholder") unless the transaction is either approved by a
majority of the members of the Board of Directors who are unaffiliated with the
Interested Shareholder and who were directors before the Interested Shareholder
became an Interested Shareholder (the "Disinterested Directors") or certain
minimum price and procedural requirements are met. The 80% vote requirement is
in addition to, and not in lieu of, the vote of any other class of voting
securities that may be entitled to vote on Business Combinations, such as
outstanding issues of preferred stock.

The Company believes that the Fair Price provision helps assure that all of
the holders of the Company's Voting Stock will be treated similarly if a
Business Combination is effected. Further, the Fair Price provision does not
limit the ability of a third party who owns, or can obtain the affirmative votes
of, at least 80% of the voting power of the Voting Stock to effect a Business
Combination involving the Company in which the equity interest of the minority
stockholders is eliminated. The Fair Price provision, however,

71
<PAGE>
makes it more difficult to accomplish certain transactions that are opposed by
the incumbent Board and that may be beneficial to shareholders.

AMENDMENT TO BYLAWS. In addition to being altered, amended or repealed by
the Board of Directors, the Articles provide that the Company's Bylaws may be
altered, amended or repealed at any meeting of the shareholders, at which a
quorum is present, by the affirmative vote of the holders of two-thirds of the
Common Stock of the Company present, in person or by proxy, at such meeting,
provided that notice of the proposed alteration, amendment or repeal is
contained in the notice of the meeting sent to shareholders. This provision
makes it more difficult for a shareholder controlling a majority of the shares
of the Common Stock to avoid the requirements of the Bylaws by simply repealing
them.

BYLAWS

CONDUCT OF MEETINGS. The Bylaws provide that the Chairman of any meeting of
shareholders may prescribe rules that will govern the orderly conduct of such
meeting. The Chairman's determination and interpretations of the rules will be
in his reasonable discretion and will be final, unless the Company's Articles or
Bylaws, resolution of the Board, or applicable law establishes rules governing a
particular matter, in which case such provision will be dispositive, or in the
event that a majority of the shareholders present in person at the meeting
request that there be a shareholder vote on the Chairman's ruling, then the
Chairman's ruling may be overruled by the affirmative vote of the holders of
two-thirds of the issued and outstanding capital stock of the Company entitled
to vote on such matters at the meeting and present at the meeting in person or
by proxy.

By virtue of such two-thirds vote requirement, this provision gives
authority to the Chairman to prescribe rules that may be opposed by a majority
of the holders of capital stock present at the meeting.

NOMINATIONS OF DIRECTORS. The Bylaws also provide that nominations for the
election of directors may be made by the Board or by any shareholder entitled to
vote for the election of directors, pursuant to procedures that require advance
notice in writing of shareholder nominations for directors. Shareholders
intending to nominate director candidates for election must deliver written
notice to the Secretary of the Company at least 30 days, but not more than 50
days, prior to the shareholders' meeting called for the election of directors.
The notice must set forth certain information concerning the nominee, including
his or her name, address, description of qualifications, the number of shares of
stock he or she beneficially owns and a covenant to provide such other
information as the Company may reasonably request. The Chairman of the meeting
may refuse to acknowledge the nomination of any person not made in compliance
with such procedure.

This requirement affords the Board of Directors the opportunity to consider
the qualifications of the proposed nominee(s) and, to the extent deemed
necessary or desirable by the Board of Directors, to inform shareholders about
such qualifications. Although this Bylaw provision does not give the Board of
Directors the power to approve or disapprove shareholder nominations for
election of directors, it may have the effect of precluding a contest for the
election of directors if the procedures established by it are not followed and
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors, without regard to whether this might be
harmful or beneficial to the Company and its shareholders.

REMOVAL OF DIRECTORS. The Bylaws further provide that any director may be
removed from the Board of Directors at any time, but only for cause, at any
special or annual meeting of the shareholders. "Cause" is defined to mean
conviction of a felony, an adjudication of negligence or misconduct, inability
or incapacity to perform the material duties required of a director or failure
to attend at least six consecutive or 50% of the regular or special meetings of
the Board of Directors during any one calendar year. By virtue of the defined
criteria of cause, this amendment may have the effect of making it more
difficult and time consuming to remove management.

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<PAGE>
AMENDMENT OF BYLAWS. In addition, the Bylaws provide that, in addition to
being repealed or changed by the Board of Directors, the Bylaws may be repealed
or changed by the affirmative vote of the holders of two-thirds of the stock of
the Company entitled to vote and present at any meeting of shareholders. The
requirement of an increased shareholder vote essentially parallels the
requirement in the Company's Articles of Incorporation.

LIMITATIONS ON LIABILITY

As authorized by Article 1301-7.06 of the Texas Miscellaneous Corporation
Laws Act (the "TMCLA"), the Company's Articles of Incorporation provide that to
the fullest extent, now or hereafter permitted by Texas law, the Company's
directors will have no personal liability to the Company or its shareholders for
monetary damages for breach or alleged breach of the directors' duty of care.
This provision in the Articles of Incorporation will not eliminate directors'
liability resulting from suits by third parties, and does not affect the Company
or its shareholders' ability to obtain equitable remedies such as an injunction
or a rescission of an agreement or transaction deemed improper. Furthermore,
each director will continue to be subject to liability for (1) a breach of a
director's duty of loyalty to the Company or its shareholders, (2) an act or
omission not in good faith or that involves intentional misconduct or a knowing
violation of the law, (3) a transaction from which a director received an
improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office, (4) an act or omission for which the
liability of a director is expressly provided for by statute, or (5) an act
related to an unlawful share repurchase or payment of a dividend.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
1,379,644 shares of Common Stock (assuming 275,000 shares are issued and no
exercise of existing employee stock options to purchase Common Stock, and
further assuming that none of the outstanding shares of Series C Preferred Stock
are converted into Common Stock). Of these shares, 923,964 shares will be freely
tradeable without restriction or registration under the Securities Act. The
Company's management believes that 455,680 (33.0%) of the outstanding shares
will be held by "affiliates" of the Company, including the shares offered for
sale in this Offering which are reserved for certain persons. Of the affiliate
owned shares, 42,359 are "restricted securities" as defined in Rule 144 under
the Securities Act, and may be sold only pursuant to Rule 144 or another
exemption from registration under the Securities Act.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of the average weekly trading volume during the four calendar
weeks preceding such sale or 1% of the then outstanding shares of Common Stock.
A person who is deemed not to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned such shares
for at least three years, would be entitled to sell such shares under Rule 144
without regard to the volume limitations described above. Sales pursuant to Rule
144 are also subject to certain requirements relating to the manner of sale,
notice and availability of public information about the Company.

In addition, at December 15, 1996, employee stock options exercisable for
14,666 shares of Common Stock were outstanding. Shares of Common Stock issued
upon exercise of these options would also be restricted securities. Also, at
December 15, 1996, 247,658 shares of Common Stock were subject to issuance upon
the conversion of the Company's outstanding shares of Series C Preferred Stock.

For information regarding the agreements of the directors and officers of
the Company not to sell their shares of Common Stock for a certain period, see
"Underwriting."

No prediction can be made regarding the effect, if any, that eventual market
sales of Restricted Shares will have on the market price of the Common Stock
prevailing from time to time. There is a possibility that

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<PAGE>
substantial amounts of Restricted Shares may be resold in the public market and
that such shares may adversely effect the prevailing market price of the Common
Stock and could impair the Company's ability to raise additional capital through
the sale of its equity securities.

TRANSFER AGENT

The Transfer Agent and Registrar for the Company's Common Stock is First
State Bank, N.A., Odessa, Texas.

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement between
the Company and the Underwriter, the Underwriter has agreed to purchase from the
Company, and the Company has agreed to sell to the Underwriter, 275,000 shares
of Common Stock.

The Underwriting Agreement provides that the obligations of the Underwriter
thereunder are subject to the satisfaction of certain conditions precedent. The
Underwriter is committed to purchase and pay for all 275,000 shares of Common
Stock if any are purchased. The Company has been advised that the Underwriter
proposes to offer the shares of Common Stock directly to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain securities dealers at such price less a concession not in excess of
$0.50 per share. After commencement of this Offering, the offering price and
concession and discounts may be changed by the Underwriter.

The Underwriter has informed the Company that it does not expect sales to
any accounts over which it exercises discretionary authority to exceed 10% of
the total number of shares of Common Stock offered hereby.

At the request of the Company, the Underwriter has reserved up to
approximately 30,000 shares (the "Reserved Shares") of Common Stock for sale to
certain persons who have expressed an interest in purchasing shares of Common
Stock in this Offering. The Reserved Shares will be sold to such persons through
brokerage accounts opened specifically for such purpose through the Underwriter.
The price for such Reserved Shares will be the initial public offering price
less $0.50 per share. The number of shares available to the general public will
be reduced to the extent such persons purchase the Reserved Shares. Any Reserved
Shares that are not so purchased by such persons at the initial closing of this
Offering will be sold by the Underwriter to the general public on the same terms
as the other shares of Common Stock offered hereby.

The Underwriter has obtained an option from the Company exercisable for a
period of 30 days following the offering date, under which the Underwriter may
purchase up to 15% of the total number of shares of Common Stock offered at the
same price per share which the Company will receive for the shares offered
herein. The Underwriter may exercise such option only once to cover
over-allotments.

The Company and its executive officers and directors, as well as certain of
the Company's 5% shareholders, have agreed not to offer, sell, contract or
otherwise dispose of any Common Stock for at least 120 days after this Offering,
without the written consent of the Underwriter.

The Company and the Underwriter have agreed to indemnify, or to contribute
to payments made by, each other against certain civil liabilities, including
certain civil liabilities under the Securities Act.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Arter & Hadden, Dallas, Texas. Joseph A. Hoffman, a partner of Arter
& Hadden, beneficially owns 7,399 shares of Common Stock. Certain matters
relating to the offering made hereby will be passed upon for the Underwriter by
Bracewell & Patterson, L.L.P., Houston, Texas.

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<PAGE>
EXPERTS

The consolidated balance sheets as of December 31, 1995 and 1994, and the
consolidated income statements, statements of changes in stockholders' equity,
and cash flows for the years ended December 31, 1995 and 1994, included in this
Prospectus, have been included herein in reliance on the report of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of that firm as
experts in accounting and auditing.

The consolidated income statement and statements of changes in stockholders'
equity and cash flows of the Company for the year ended December 31, 1993,
included in this Prospectus, have been included herein in reliance on the report
of Ernst & Young, L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.

The audited financial statements of Crown Park included in this Prospectus
have been audited by Elaine McNair, Inc., independent accountants, for the
period set forth in their report thereupon appearing elsewhere herein and are
included in reliance upon such report given upon authority of such firm as
experts in accounting and auditing.

AVAILABLE INFORMATION

The Company has filed with the Commission a registration statement on Form
S-1 (as amended and together with all exhibits and schedules thereto, the
"Registration Statement") under the Securities Act with respect to the shares of
Common Stock offered by this Prospectus. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement. For further information
with respect to the Company and the Common Stock offered, reference is made to
the Registration Statement. Statements contained in this Prospectus concerning
the provisions of any contract, agreement or other document are not necessarily
complete. With respect to each contract, agreement or other document filed as an
exhibit to the Registration Statement, reference is made to the exhibit for the
complete contents of the exhibit, and each statement concerning its provisions
is qualified in its entirety by such reference.

The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and at the following regional offices of the Commission: Chicago Regional
Office, Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
New York, New York 10048. Copies of such material may also be obtained by mail
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In addition, such
materials filed electronically by the Company with the Commission are available
at the Commissions' World Wide Web site at http://www.sec.gov. The Common Stock
is quoted on the AMEX, and reports and other information concerning the Company
may be inspected and copied at the offices of AMEX at 86 Trinity Place, New
York, New York 10006.

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<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT BANKSHARES, INC.

Consolidated Balance Sheets at September 30, 1996 and December 31, 1995
(unaudited)............................................................. F-2
Consolidated Income Statements for the Nine-month Periods ended September
30, 1996 and 1995 (unaudited)........................................... F-3
Consolidated Statements of Cash Flows for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited)................................. F-4
Notes to Consolidated Financial Statements (unaudited).................... F-5
Reports of Independent Accountants........................................ F-8
Consolidated Balance Sheets at December 31, 1995 and 1994................. F-10
Consolidated Income Statements for the Years ended December 31, 1995, 1994
and 1993................................................................ F-11
Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1995, 1994 and 1993.................................. F-13
Consolidated Statements of Cash Flows for the Years ended December 31,
1995, 1994
and 1993................................................................ F-14
Notes to Consolidated Financial Statements................................ F-15

CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

Consolidated Balance Sheet at September 30, 1996 and December 31, 1995
(unaudited)............................................................. F-37
Consolidated Statements of Earnings for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited)................................. F-38
Consolidated Statements of Cash Flows for the Nine-month Periods ended
September 30, 1996 and 1995 (unaudited)................................. F-39
Notes to Consolidated Financial Statements (unaudited).................... F-40
Independent Auditor's Report.............................................. F-41
Consolidated Balance Sheets at December 31, 1995 and 1994................. F-42
Consolidated Statements of Earnings for the Years ended December 31, 1995,
1994 and 1993........................................................... F-43
Consolidated Statements of Changes in Stockholders' Equity for the Years
ended December 31, 1995, 1994 and 1993.................................. F-44
Consolidated Statements of Cash Flows for the Years ended December 31,
1995, 1994 and 1993..................................................... F-45
Notes to Consolidated Financial Statements................................ F-46
</TABLE>

F-1
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents:
Cash and Due from Banks........................................................ $ 9,987,000 $ 8,559,000
Federal Funds Sold............................................................. 12,100,000 26,200,000
-------------- --------------
Total Cash and Cash Equivalents............................................ 22,087,000 34,759,000
-------------- --------------
Securities:
Available-for-sale............................................................. 33,590,000 16,746,000
Held-to-maturity--Market Value of $48,716,000 at September 30, 1996, and
$39,384,000 at December 31, 1995............................................. 49,087,000 39,161,000
-------------- --------------
Total Securities........................................................... 82,677,000 55,907,000
-------------- --------------
Loans:
Total Loans.................................................................... 92,626,000 85,281,000
Less:
Unearned Income on Installment Loans......................................... 2,511,000 3,354,000
Allowance for Possible Loan Losses........................................... 806,000 759,000
-------------- --------------
Net Loans.................................................................. 89,309,000 81,168,000
-------------- --------------
Premises and Equipment........................................................... 4,501,000 4,155,000
Real Estate and Other Repossessed Assets......................................... 218,000 337,000
Accrued Interest Receivable...................................................... 1,701,000 1,494,000
Goodwill......................................................................... 974,000 0
Other Assets..................................................................... 2,334,000 2,524,000
-------------- --------------
Total Assets........................................................... $ 203,801,000 $ 180,344,000
-------------- --------------
-------------- --------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Noninterest-bearing Demand Deposits............................................ $ 29,485,000 $ 33,267,000
Interest-bearing Demand Deposits............................................... 60,411,000 52,430,000
Interest-bearing Time Deposits................................................. 97,578,000 79,007,000
-------------- --------------
Total Deposits............................................................. 187,474,000 164,704,000
Notes Payable.................................................................... 578,000 849,000
Accrued Interest Payable......................................................... 844,000 882,000
Other Liabilities................................................................ 323,000 91,000
-------------- --------------
Total Liabilities........................................................ 189,219,000 166,526,000
-------------- --------------
Stockholders' Equity:
Series C Preferred Stock......................................................... 135,000 164,000
Common Stock..................................................................... 276,000 263,000
Additional Paid-in Capital....................................................... 9,890,000 9,875,000
Retained Earnings................................................................ 4,304,000 3,448,000
Unrealized Gain (Loss) on Available-for-sale Securities.......................... (23,000) 68,000
-------------- --------------
Total Stockholders' Equity............................................... 14,582,000 13,818,000
-------------- --------------
Total Liabilities and Stockholders' Equity............................. $ 203,801,000 $ 180,344,000
-------------- --------------
-------------- --------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-2
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED INCOME STATEMENTS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTH PERIODS
ENDED SEPTEMBER 30,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
Interest Income:
Interest and Fees on Loans......................................................... $ 5,894,000 $ 5,795,000
Interest on Securities............................................................. 3,341,000 1,517,000
Interest on Federal Funds Sold..................................................... 774,000 1,519,000
------------- ------------
Total Interest Income............................................................ 10,009,000 8,831,000
------------- ------------
Interest Expense:
Interest on Deposits............................................................... 4,671,000 3,775,000
Interest on Notes Payable.......................................................... 51,000 85,000
------------- ------------
Total Interest Expense........................................................... 4,722,000 3,860,000
------------- ------------
Net Interest Income............................................................ 5,287,000 4,971,000
Provision for Loan Losses.......................................................... 161,000 141,000
------------- ------------
Net Interest Income After Provision for Loan Losses.............................. 5,126,000 4,830,000
------------- ------------

Noninterest Income:
Service Charges.................................................................... 929,000 881,000
Trust Fees......................................................................... 144,000 154,000
Other Income....................................................................... 71,000 121,000
------------- ------------
Total Noninterest Income......................................................... 1,144,000 1,156,000
------------- ------------
Noninterest Expenses:
Salaries and Employee Benefits..................................................... 2,294,000 2,127,000
Net Occupancy Expense.............................................................. 540,000 492,000
Equipment Expense.................................................................. 492,000 533,000
Stationery, Printing and Supplies Expense.......................................... 211,000 190,000
Professional Fees.................................................................. 204,000 386,000
Net Revenues Applicable to Real Estate and Other Repossessed Assets................ (16,000) (12,000)
Other Expenses..................................................................... 961,000 1,013,000
------------- ------------
Total Noninterest Expenses....................................................... 4,686,000 4,729,000
------------- ------------
Income Before Federal Income Taxes............................................. 1,584,000 1,257,000
Federal Income Taxes............................................................... 538,000 426,000
------------- ------------
Net Income................................................................... $ 1,046,000 $ 831,000
------------- ------------
------------- ------------
Preferred Stock Dividends............................................................ $ 48,000 $ 52,000
------------- ------------
------------- ------------
Net Income Available to Common Stockholders.......................................... $ 998,000 $ 779,000
------------- ------------
------------- ------------
Primary Earnings per Common Share Available to Common Stockholders................... $ 0.92 $ 0.75
------------- ------------
------------- ------------
Fully Diluted Earnings Per Common Share Available to Common Stockholders............. $ 0.77 $ 0.62
------------- ------------
------------- ------------
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-3
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)

<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income........................................................................ $ 1,046,000 $ 831,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Deferred Federal Income Tax Expense............................................... 222,000 401,000
Depreciation and Amortization..................................................... 299,000 290,000
Provision for Loan Losses......................................................... 161,000 141,000
Gain on Sales of Investment Securities............................................ (10,000) --
Gain on Sales of Premises and Equipment........................................... -- (3,000)
Gain on Sales of Real Estate and Other Repossessed Assets......................... (42,000) (39,000)
Writedown of Real Estate and Other Repossessed Assets............................. 19,000 24,000
Increase in Accrued Interest Receivable........................................... (207,000) (336,000)
Increase in Goodwill.............................................................. (1,003,000) --
Decrease in Other Assets.......................................................... 190,000 265,000
Increase (Decrease) in Accrued Interest Payable................................... (38,000) 366,000
Increase (Decrease) in Other Liabilities.......................................... 232,000 (626,000)
------------- -------------
Net Cash Provided by Operating Activities....................................... 869,000 1,314,000
------------- -------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities......................... 3,572,000 11,937,000
Proceeds from Maturities of Held-to-maturity Securities........................... 16,741,000 5,653,000
Proceeds from Sale of Available-for-sale Securities............................... 30,000 --
Proceeds from Sale of Held-to-maturity Securities................................. 2,000,000 --
Purchases of Available-for-sale Securities........................................ (20,594,000) (16,000,000)
Purchases of Held-to-maturity Securities.......................................... (28,664,000) (27,000,000)
Net Increase in Loans............................................................. (10,289,000) (2,423,000)
Additions to Premises and Equipment............................................... (709,000) (134,000)
Proceeds from Sales of Premises and Equipment..................................... 94,000 3,000
Proceeds from Sales of Real Estate and Other Repossessed Assets................... 655,000 625,000
Cash and Cash Equivalents Held by Peoples National Bank, Winters, Texas, on
January 1, 1996 (Date of Acquisition)........................................... 1,265,000 --
Cash and Cash Equivalents Held by Coastal Banc ssb, San Angelo, Texas, on May 27,
1996 (Date of Acquisition)...................................................... 54,000 --
------------- -------------
Net Cash Used in Investing Activities........................................... (35,845,000) (27,339,000)
------------- -------------
Cash Flows from Financing Activities:
Increase in Deposits.............................................................. 22,770,000 12,230,000
Proceeds from Notes Payable....................................................... -- 275,000
Repayment of Notes Payable........................................................ (276,000) (458,000)
Payment of Cash Dividends......................................................... (190,000) (138,000)
Payment for Fractional Shares in Stock Dividend................................... -- (3,000)
------------- -------------
Net Cash Provided by Financing Activities....................................... 22,304,000 11,906,000
------------- -------------
Net Decrease in Cash and Cash Equivalents........................................... (12,672,000) (14,119,000)
Cash and Cash Equivalents at Beginning of Period.................................... 34,759,000 38,764,000
------------- -------------
Cash and Cash Equivalents at End of Period.......................................... $ 22,087,000 $ 24,645,000
------------- -------------
------------- -------------
Cash Paid During the Period for:
Interest.......................................................................... $ 4,760,000 $ 3,494,000
Federal Income Taxes.............................................................. 298,000 15,000
Noncash Investing Activities:
Additions to Real Estate and Other Repossessed Assets Through Foreclosures........ $ 619,000 $ 734,000
Sales of Real Estate and Other Repossessed Assets Financed with Loans............. 107,000 183,000
Transfer of Real Estate and Other Repossessed Assets to Loans..................... -- 125,000
Increase (Decrease) in Unrealized Gain/Loss on Available-for-sale Securities, Net
of Tax.......................................................................... (91,000) 125,000
</TABLE>

See Accompanying Notes to Consolidated Financial Statements.

F-4
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For information with regard to significant accounting policies, reference is
made to Notes to Consolidated Financial Statements included elsewhere in this
prospectus.

The accompanying financial statements reflect all adjustments that are, in
the opinion of management of the Company, necessary to present a fair statement
of the results for the interim periods presented, and all adjustments are of a
normal recurring nature.

(2) QUASI-REORGANIZATION

In connection with the restructuring of its indebtedness to a financial
institution in Dallas, Texas, the Company effected a quasi-reorganization as of
December 31, 1989. A quasi-reorganization is an elective accounting procedure
under Generally Accepted Accounting Principles ("GAAP") in which assets and
liabilities of the Company were restated to fair value and the Company's
accumulated deficit was reduced to zero. Under GAAP, utilization of any of the
Company's net operating loss carryforwards subsequent to the
quasi-reorganization date will not be credited to future income. For periods
subsequent to December 31, 1994, the tax effect of the utilization of the
Company's net operating loss carryforwards has been and will be credited against
the Company's gross deferred tax asset. The reduction in the Company's deferred
tax asset during the first nine months of 1996 and 1995 totaled approximately
$222,000 and $401,000, respectively.

(3) NOTES PAYABLE

The Company had a note payable to a financial institution in Amarillo, Texas
(the "Amarillo Bank"). This note (the "Term Note") had a maturity of April 15,
1996. On April 15, 1996, the Company paid the Amarillo Bank $100,000 to reduce
the outstanding principal balance to $371,000 and the maturity date was extended
to April 15, 1999. Equal principal payments of $31,000, plus accrued interest,
were due quarterly on January 15, April 15, July 15 and October 15. The Term
Note bore interest at the Amarillo Bank's floating base rate plus 1% (9.25% at
September 30, 1996) and was collateralized by 100% of the stock of First State
Bank, N.A., Abilene, Texas ("First State, N.A., Abilene") and First State Bank,
N.A., Odessa, Texas ("First State, N.A., Odessa") (collectively, the "Banks").
The loan agreement between the Company and the Amarillo Bank contained certain
covenants that, among other things, restricted the ability of the Company to
incur additional debt, to create liens on its property, to merge or to
consolidate with any other person or entity, to make certain investments, to
purchase or sell assets or to pay cash dividends on the common stock without the
approval of the Amarillo Bank if the indebtedness due to the Amarillo Bank was
$1,000,000 or greater. The loan agreement also required the Company and the
Banks to meet certain financial ratios, all of which were met at September 30,
1996, and December 31, 1995. On October 15, 1996, the Company paid off the
remaining principal balance of the Term Note.

In addition, at September 30, 1996, the Company had notes payable to one
current and two former directors of the Company aggregating $226,000. These
notes had an original face amount of $350,000 but were discounted upon issuance
because they bear interest at a below-market interest rate (6%). The notes are
payable in three equal annual installments, plus accrued interest. The first
annual installment of $117,000 was made on March 1, 1996. The notes represent a
portion of the final settlement of certain litigation.

F-5
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(4) FEDERAL INCOME TAXES

In February 1992, the FASB issued Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which required companies to adopt the liability method for
computing income taxes no later than 1993. In applying the new method in 1993,
the Company established a gross deferred tax asset of $3,190,000, a portion of
which relates to federal tax net operating loss carryforwards and deductible
temporary differences arising prior to the company's quasi-reorganization as of
December 31, 1989. FAS 109 requires that consideration be given to establishing
a valuation allowance against such deferred tax assets. Initially, the Company
established a valuation allowance of $2,290,000, resulting in a net deferred tax
asset of $900,000. As a result of the acquisition of Winters State Bank,
Winters, Texas ("Winters State"), the Company increased its gross deferred tax
asset and the related valuation allowance by approximately $972,000 during 1993.
This gross deferred tax asset arose mainly due to net operating loss
carryforwards and other future deductible temporary differences. The Company
reduced the valuation allowance during 1995 by $1,600,000 and transferred such
amount to additional paid-in-capital due to the Company's belief, based on the
Company's recent earnings history, that it is more likely than not that
sufficient pre-tax income will be generated in the foreseeable future to realize
its net deferred tax asset. Additionally, during 1995, the Company reduced its
gross deferred tax asset and related valuation allowance by $708,000 as a result
of the write-off of a portion of the deferred tax asset related to the Winters
State net operating loss carryforwards that will not be utilized.

(5) EARNINGS PER SHARE

Primary earnings per common share is computed by dividing net income
available to common stockholders by the weighted average number of shares and
share equivalents outstanding during the period. Because the Company's
outstanding Series C Preferred Stock is cumulative, the dividends allocable to
such Series C Preferred Stock reduces income available to common stockholders in
the earnings per share calculations. The Series C Preferred Stock issued in
December 1990 was determined not to be a common stock equivalent and, therefore,
is not used to calculate primary earnings per common share. In computing fully
diluted earnings per common share for the nine-month periods ended September 30,
1996 and 1995, the conversion of the Series C Preferred Stock was assumed, as
the effect is dilutive. The weighted average common shares outstanding used in
computing primary earnings per common share for the first nine months of 1996
and 1995 was 1,083,000 and 1,045,000 shares, respectively. The weighted average
common shares outstanding used in computing fully diluted earnings per common
share for the first nine months of 1996 and 1995 was 1,358,000 and 1,350,000
shares, respectively.

(6) ACQUISITIONS

First State, N.A., Abilene acquired 100% of the outstanding shares of
Peoples National Bank, Winters, Texas ("Peoples National") effective January 1,
1996, in a cash transaction. At that date, Peoples National had total assets of
$5,505,000, total loans, net of unearned income of $2,767,000, total deposits of
$4,958,000 and stockholders' equity of $525,000. This acquisition was accounted
for using the purchase method of accounting. A total of $260,000 of goodwill was
recorded as a result of this acquisition. Peoples National was merged with and
into First State, N.A., Abilene.

First State, N.A., Abilene also acquired the San Angelo, Texas branch of
Coastal Banc ssb effective May 27, 1996, in a cash transaction. First State,
N.A., Abilene purchased $155,000 in loans and assumed $14,895,000 in deposits in
the transaction. This acquisition was accounted for using the purchase method of
accounting. A total of $743,000 of goodwill was recorded as a result of the
acquisition.

F-6
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(6) ACQUISITIONS (CONTINUED)
The goodwill that resulted from the above-noted acquisitions is being
amortized on a straight-line basis over a 15-year period. 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.

(7) PENDING ACQUISITION

On July 11, 1996, the Company and First State, N.A., Abilene entered into a
definitive agreement to acquire Crown Park Bancshares, Inc. ("Crown Park") for
approximately $7,425,000 and to merge Crown Park's subsidiary bank, Western
National Bank, Lubbock, Texas ("Western National"), with and into First State,
N.A., Abilene. At September 30, 1996, Western National had total assets of
$56,598,000, total loans, net of unearned income, of $38,619,000, total deposits
of $50,802,000, and stockholders' equity of $5,385,000.

Consummation of the acquisition is subject to various regulatory approvals
and other conditions. The Company has filed an application with the Office of
the Comptroller of the Currency (the "Comptroller") for approval of the merger.
If the approvals for the acquisition are received and the conditions for the
acquisition satisfied, the acquisition would probably be consummated during the
first quarter of 1997, at which time Western National would become a branch of
First State, N.A., Abilene.

Additionally, in connection with the acquisition and to recognize certain
cost savings and to utilize the Banks' capital more effectively than on a
stand-alone basis, effective December 31, 1996, the Company has merged First
State, N.A., Odessa with and into First State, N.A. Abilene.

(8) SUBSEQUENT EVENTS

On January 2, 1997, the Company filed with the Securities and Exchange
Commission Amendment No. 1 to its Registration Statement on Form S-1, File No.
333-16419 relating to an offering of 275,000 shares of common stock to be sold
by the Company.

Upon consummation of this offering, the Company intends to use approximately
$3,400,000 of the net proceeds to fund a portion of the cost of acquiring Crown
Park, and the balance, if any, for working capital and general corporate
purposes.

The Company expects to borrow up to $800,000 from Boatmen's First National
Bank of Amarillo ("BFNBA") to finance a portion of the cost of acquiring Crown
Park. The proposed terms provide that this loan will accrue interest at a
floating per annum rate equal to BFNBA's base rate plus one-half percent,
principal and interest will be payable on demand, but if no demand is made, at
maturity and the loan will mature on April 23, 1997. The loan will be secured by
a pledge of all of the stock of Independent Financial Corp. and First State,
N.A., Abilene and will have certain loan provisions, including limitations on
additional debt, purchases and sales of assets, and acquisitions and mergers,
dividend restrictions if total debt to BFNBA exceeds $1,200,000 and certain
financial covenants (minimum capital of $12,500,000 for the Company and
$11,500,000 for First State, N.A., Abilene; minimum capital to assets ratios for
the Company and First State, N.A., Abilene of 6.5% for the first two years and
7.0% thereafter; nonperforming loans to total loans and nonperforming assets to
total loans ratios for First State, N.A., Abilene of 1.5% and 2.0%,
respectively; and minimum net income after tax for First State, N.A., Abilene of
$70,000 quarterly). The loan agreement provides that at maturity, BFNBA will
renew the note into a term note in an amount not to exceed the outstanding
balance. The term note would be payable over seven years in annual principal
installments with interest payable quarterly.

F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

Board of Directors and Shareholders

Independent Bankshares, Inc.

Abilene, Texas

We have audited the accompanying consolidated balance sheets of Independent
Bankshares, Inc. as of December 31, 1995 and 1994, and the related consolidated
income statements, statements of stockholders' equity and cash flows for the
years ended December 31, 1995 and 1994. These financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of Independent Bankshares, Inc. for the year ended December 31, 1993,
were audited by other auditors, whose report, dated January 31, 1994, expressed
an unqualified opinion on those statements.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Independent
Bankshares, Inc. as of December 31, 1995 and 1994, and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.

/s/ COOPERS & LYBRAND L.L.P

Fort Worth, Texas

February 5, 1996

F-8
<PAGE>
[LETTERHEAD]

Board of Directors and Shareholders

Independent Bankshares, Inc.

We have audited the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of Independent Bankshares, Inc. (the
Company) for the year ended December 31, 1993. 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 audit.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations and cash flows
of Independent Bankshares, Inc. for the year ended December 31, 1993, in
conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, in 1993 the
Company changed its method of accounting for income taxes and changed its method
of accounting for certain investments in debt and equity securities.

/s/ ERNST & YOUNG LLP

January 31, 1994

F-9
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
ASSETS

ASSETS:
Cash and Cash Equivalents:
Cash and Due from Banks............................................................. $ 8,559,000 $ 7,564,000
Federal Funds Sold.................................................................. 26,200,000 31,200,000
----------- -----------
Total Cash and Cash Equivalents................................................. 34,759,000 38,764,000
----------- -----------
Securities (Note 5):
Available-for-sale.................................................................. 16,746,000 17,078,000
Held-to-maturity--Market Value of $39,384,000 for 1995 and $15,913,000 for 1994..... 39,161,000 16,227,000
----------- -----------
Total Securities................................................................ 55,907,000 33,305,000
----------- -----------
Loans (Note 6):
Total Loans......................................................................... 85,281,000 85,518,000
Less:
Unearned Income on Installment Loans.............................................. 3,354,000 4,212,000
Allowance for Possible Loan Losses................................................ 759,000 817,000
----------- -----------
Net Loans....................................................................... 81,168,000 80,489,000
----------- -----------
Premises and Equipment (Note 7)....................................................... 4,155,000 4,345,000
Real Estate and Other Repossessed Assets.............................................. 337,000 631,000
Accrued Interest Receivable........................................................... 1,494,000 945,000
Other Assets.......................................................................... 2,524,000 1,381,000
----------- -----------
Total Assets................................................................ $180,344,000 $159,860,000
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 8):
Noninterest-bearing Demand Deposits................................................. $33,267,000 $30,210,000
Interest-bearing Demand Deposits.................................................... 52,430,000 56,520,000
Interest-bearing Time Deposits...................................................... 79,007,000 59,454,000
----------- -----------
Total Deposits.................................................................. 164,704,000 146,184,000
Notes Payable (Note 9)................................................................ 849,000 930,000
Accrued Interest Payable.............................................................. 882,000 408,000
Other Liabilities..................................................................... 91,000 1,265,000
----------- -----------
Total Liabilities............................................................. 166,526,000 148,787,000
----------- -----------
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; 16,436 and
16,668 Shares Issued at December 31, 1995 and 1994, Respectively.................. 164,000 167,000
Common Stock--Par Value $0.25; 30,000,000 Shares Authorized; 1,050,292 and 778,081
Shares Issued at December 31, 1995 and 1994, Respectively........................... 263,000 195,000
Additional Paid-in Capital............................................................ 9,875,000 8,241,000
Retained Earnings..................................................................... 3,448,000 2,570,000
Unrealized Gain (Loss) on Available-for-sale Securities (Note 5)...................... 68,000 (100,000)
----------- -----------
Total Stockholders' Equity.................................................... 13,818,000 11,073,000
----------- -----------
Total Liabilities and Stockholders' Equity.................................. $180,344,000 $159,860,000
----------- -----------
----------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-10
<PAGE>
INDEPENDENT BANKSHARES, INC.

CONSOLIDATED INCOME STATEMENTS

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Interest Income:
Interest and Fees on Loans (Note 6)................................ $ 7,726,000 $ 6,918,000 $ 5,333,000
Interest on Securities............................................. 2,389,000 2,516,000 3,588,000
Interest on Federal Funds Sold..................................... 1,847,000 697,000 300,000
------------- ------------- ------------
Total Interest Income............................................ 11,962,000 10,131,000 9,221,000
------------- ------------- ------------
Interest Expense:
Interest on Deposits............................................... 5,201,000 3,364,000 3,072,000
Interest on Notes Payable (Note 9)................................. 108,000 88,000 104,000
------------- ------------- ------------
Total Interest Expense........................................... 5,309,000 3,452,000 3,176,000
------------- ------------- ------------
Net Interest Income.................................................. 6,653,000 6,679,000 6,045,000
Provision for Loan Losses (Note 6)................................. 206,000 147,000 154,000
------------- ------------- ------------
Net Interest Income After Provision for Loan Losses.................. 6,447,000 6,532,000 5,891,000
------------- ------------- ------------
Noninterest Income:
Service Charges.................................................... 1,167,000 1,226,000 1,081,000
Trust Fees......................................................... 201,000 169,000 140,000
Gain on Sale of Subsidiary (Note 3)................................ -- -- 286,000
Other Income....................................................... 141,000 102,000 377,000
------------- ------------- ------------
Total Noninterest Income......................................... 1,509,000 1,497,000 1,884,000
------------- ------------- ------------
Noninterest Expenses:
Salaries and Employee Benefits..................................... 2,849,000 2,838,000 2,575,000
Equipment Expense.................................................. 723,000 641,000 453,000
Net Occupancy Expense.............................................. 643,000 673,000 602,000
Legal Fees and Expense (Note 15)................................... 344,000 1,207,000 288,000
Stationery, Printing and Supplies Expense.......................... 271,000 226,000 223,000
FDIC Insurance Expense............................................. 166,000 336,000 325,000
Accounting Fees.................................................... 110,000 135,000 153,000
Data Processing Expense............................................ 98,000 237,000 516,000
Net Costs (Revenues) Applicable to Real Estate and Other
Repossessed Assets............................................... (7,000) (4,000) 56,000
Other Expenses..................................................... 1,045,000 1,063,000 1,031,000
------------- ------------- ------------
Total Noninterest Expenses....................................... 6,242,000 7,352,000 6,222,000
------------- ------------- ------------
Income Before Federal Income Taxes and Cumulative Effect of
Accounting Change.................................................. 1,714,000 677,000 1,553,000
Federal Income Taxes (Notes 2 and 10)............................ 582,000 227,000 524,000
------------- ------------- ------------
Income Before Cumulative Effect of Accounting Change................. 1,132,000 450,000 1,029,000
Cumulative Effect of Change in Accounting for Income Taxes......... -- -- 200,000
------------- ------------- ------------
Net Income........................................................... $ 1,132,000 $ 450,000 $ 1,229,000
------------- ------------- ------------
------------- ------------- ------------
Preferred Stock Dividends (Note 11).................................. $ 70,000 $ 70,000 $ 75,000
------------- ------------- ------------
------------- ------------- ------------
Net Income Available to Common Stockholders (Note 12)................ $ 1,062,000 $ 380,000 $ 1,154,000
------------- ------------- ------------
------------- ------------- ------------

SEE ACCOMPANYING NOTES.
</TABLE>

F-11
<PAGE>
INDEPENDENT BANKSHARES, INC.

CONSOLIDATED INCOME STATEMENTS (CONTINUED)

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- ------------
Primary Earnings Per Common Share Available to Common Stockholders
(Note 12):
<S> <C> <C> <C>
Income Before Cumulative Effect of Accounting Change............... $ 1.02 $ 0.36 $ 0.92
Cumulative Effect of Accounting Change............................. 0.00 0.00 0.19
------------- ------------- ------------
Net Income......................................................... $ 1.02 $ 0.36 $ 1.11
------------- ------------- ------------
------------- ------------- ------------
Fully Diluted Earnings Per Common Share Available to Common
Stockholders (Note 12):
Income Before Cumulative Effect of Accounting Change............... $ 0.84 $ 0.33 $ 0.76
Cumulative Effect of Accounting Change 0.00 0.00 0.15
------------- ------------- ------------
Net Income......................................................... $ 0.84 $ 0.33 $ 0.91
------------- ------------- ------------
------------- ------------- ------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-12
<PAGE>
INDEPENDENT BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
SERIES C ON
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE-
-------------------- -------------------- PAID-IN RETAINED FOR-SALE
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SECURITIES
--------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances--January 1, 1993............. 16,668 $ 167,000 732,955 $ 183,000 $ 6,500,000 $ 1,388,000 $ --
Net Income.......................... 1,229,000
Utilization of Net Operating Loss
Carryforward (Note 2)............. 493,000
Cumulative Effect of Accounting
Change............................ 700,000
Gain on Repurchase of Series A
Preferred Stock (Note 11)......... 47,000
Cash Dividends...................... (75,000)
5% Stock Dividend (Note 11)......... 36,415 9,000 270,000 (282,000)
Exercise of Stock Options (Note
11)............................... 8,390 3,000 7,000
Unrealized Gain on Available-for-
sale Securities, Net of Tax (Note
5)................................ 206,000
--------- --------- --------- --------- ----------- ----------- -----------
Balances--December 31, 1993........... 16,668 167,000 777,760 195,000 8,017,000 2,260,000 206,000
Net Income.......................... 450,000
Utilization of Net Operating Loss
Carryforward (Note 2)............. 222,000
Cash Dividends...................... (140,000)
Exercise of Stock Options (Note
11)............................... 321 2,000
Adjustment to Unrealized Gain (Loss)
on Available-for-sale Securities,
Net of Tax (Note 5)............... (306,000)
--------- --------- --------- --------- ----------- ----------- -----------
Balances--December 31, 1994........... 16,668 167,000 778,081 195,000 8,241,000 2,570,000 (100,000)
Net Income.......................... 1,132,000
Reduction of Deferred Tax Asset
Valuation Allowance............... 1,600,000
Cash Dividends...................... (187,000)
33 1/3% Stock Dividend (Note 11).... 259,371 65,000 (67,000)
Exercise of Stock Options (Note
11)............................... 9,037 2,000 32,000
Conversion of Series C Preferred
Stock (Note 11)................... (232) (3,000) 3,803 1,000 2,000
Adjustment to Unrealized Gain (Loss)
on Available-for-sale Securities,
Net of Tax (Note 5)............... 168,000
--------- --------- --------- --------- ----------- ----------- -----------
Balances--December 31, 1995........... 16,436 $ 164,000 1,050,292 $ 263,000 $ 9,875,000 $ 3,448,000 $ 68,000
--------- --------- --------- --------- ----------- ----------- -----------
--------- --------- --------- --------- ----------- ----------- -----------
</TABLE>

SEE ACCOMPANYING NOTES.

F-13
<PAGE>
INDEPENDENT BANKSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income.......................................................... $ 1,132,000 $ 450,000 $ 1,229,000
Adjustments to Reconcile Net Income to Net Cash Provided by Operating
Activities:
Cumulative Effect of Change in Accounting for Income Taxes.......... -- -- (200,000)
Deferred Federal Income Tax Expense................................. 547,000 222,000 493,000
Depreciation and Amortization....................................... 367,000 397,000 424,000
Provision for Loan Losses........................................... 206,000 147,000 154,000
Gain on Sale of Premises and Equipment.............................. (4,000) -- --
Losses (Gains) on Sales of Real Estate and Other Repossessed
Assets............................................................ (45,000) 52,000 (16,000)
Gain on Sale of Subsidiary.......................................... -- -- (286,000)
Writedown of Real Estate and Other Repossessed Assets............... 32,000 27,000 81,000
Decrease (Increase) in Accrued Interest Receivable.................. (549,000) 376,000 422,000
Decrease (Increase) in Other Assets................................. (176,000) (41,000) (133,000)
Increase (Decrease) in Accrued Interest Payable..................... 474,000 115,000 (40,000)
Increase (Decrease) in Other Liabilities............................ (840,000) 670,000 4,000
------------- ------------ -------------
Net Cash Provided by Operating Activities....................... 1,144,000 2,415,000 2,132,000
------------- ------------ -------------
Cash Flows from Investing Activities:
Proceeds from Maturities of Available-for-sale Securities........... 21,828,000 34,436,000 --
Proceeds from Maturities of Held-to-maturity Securities............. 12,930,000 19,428,000 46,696,000
Proceeds from Sales of Available-for-sale Securities................ -- 8,000 --
Purchases of Available-for-sale Securities.......................... (21,242,000) (12,873,000) --
Purchases of Held-to-maturity Securities............................ (35,864,000) (9,909,000) (37,173,000)
Net Increase in Loans............................................... (1,603,000) (12,361,000) (9,489,000)
Proceeds from Sales of Premises and Equipment....................... 4,000 -- --
Additions to Premises and Equipment................................. (177,000) (214,000) (706,000)
Proceeds from Sales of Real Estate and Other Repossessed Assets..... 1,025,000 569,000 729,000
Cash Consideration Paid for Net Liabilities of Olton State
Transferred on January 1, 1993.................................... -- -- (14,002,000)
Cash and Cash Equivalents Held by Winters State on August 31,
1993.............................................................. -- -- 2,853,000
------------- ------------ -------------
Net Cash Provided by (Used in) Investing Activities............. (23,099,000) 19,084,000 (11,092,000)
------------- ------------ -------------
Cash Flows from Financing Activities:
Increase (Decrease) in Deposits..................................... 18,520,000 (1,601,000) (1,973,000)
Proceeds from Notes Payable......................................... 275,000 -- 450,000
Repayment of Notes Payable.......................................... (690,000) (264,000) (1,546,000)
Net Proceeds from Issuance of Equity Securities..................... 34,000 2,000 10,000
Payment of Cash Dividends........................................... (187,000) (140,000) (75,000)
Cash Paid for Fractional Shares in Stock Dividend................... (2,000) -- (3,000)
Repurchase of Series A Preferred Stock.............................. -- -- (173,000)
------------- ------------ -------------
Net Cash Provided by (Used In) Financing Activities............. 17,950,000 (2,003,000) (3,310,000)
------------- ------------ -------------
Net Increase (Decrease) in Cash and Cash Equivalents.................. (4,005,000) 19,496,000 (12,270,000)
Cash and Cash Equivalents at Beginning of Year........................ 38,764,000 19,268,000 31,538,000
------------- ------------ -------------
Cash and Cash Equivalents at End of Year............................ $ 34,759,000 $ 38,764,000 $ 19,268,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>

SEE ACCOMPANYING NOTES.

F-14
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1995, 1994 AND 1993

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF FINANCIAL STATEMENTS

The accounting and reporting policies of Independent Bankshares, Inc. (the
"Company") conform with generally accepted accounting principles followed by the
banking industry.

PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of the Company
and its wholly-owned subsidiary, Independent Financial Corp. ("Independent
Financial") which, in turn, owns 100% of First State Bank, National Association,
Abilene, Texas ("First State, N.A., Abilene") and First State Bank, National
Association, Odessa, Texas ("First State, N.A., Odessa") (collectively, the
"Banks"). First State, N.A., Abilene has two branches in Abilene and one each in
Stamford, Texas, and Winters, Texas. First State, N.A., Odessa, has two branches
in Odessa. All significant intercompany accounts and transactions have been
eliminated upon consolidation.

Effective November 1, 1994, two of the Company's then existing subsidiary
banks, The Winters State Bank, Winters, Texas ("Winters State"), and The First
National Bank in Stamford, Stamford, Texas ("First National"), were merged with
and into First State, N.A., Abilene. As a result of the merger, the offices of
these two banks became branches of First State, N.A., Abilene. All references to
Winters State and First National in the Company's Consolidated Financial
Statements are to these banks prior to the merger.

The Consolidated Income Statements include the detail income and expense
accounts of Winters State from August 31, 1993 (the date of acquisition),
through December 31, 1995. The transfer of certain assets and liabilities of
Olton State Bank, Olton, Texas ("Olton State"), a former subsidiary bank of the
Company, was completed on January 1, 1993. See "Note 3: Sale of Subsidiary
Bank."

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 amortized historical cost. Securities to be held
for indefinite periods of time are classified as available-for-sale and carried
at fair value.

In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("FAS 115"). As permitted under FAS 115, the Company elected to
adopt the provisions of the new standard as of December 31, 1993. The effect at
December 31, 1993, of adopting FAS 115 was an increase in stockholders' equity
of $206,000 (net of $105,000 in deferred income taxes) to reflect the net
unrealized holding gain on available-for-sale securities. The effect for the
year ended December 31, 1994, was a decrease in stockholders' equity of $306,000
(net of $154,000 in deferred income tax benefit) to reflect the net unrealized
holding loss on available-for-sale securities at that date. The effect for the
year ended December 31, 1995, was an increase

F-15
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
in stockholders' equity of $168,000 (net of $86,000 in deferred income taxes) to
reflect the net unrealized holding gain on available-for-sale securities at that
date.

LOANS

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

In June 1993, the FASB issued Statement No. 114, "Accounting by Creditors
for Impairment of a Loan" ("FAS 114"). FAS 114 requires that impaired loans
(including certain nonaccrual loans and troubled debt restructurings) be
measured at the present value of expected cash flows discounted at the loan's
effective interest rate, or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The Company adopted FAS 114 on January 1, 1995.

At December 31, 1995, the Company had a total of $100,000 in impaired loans.
There was a related allowance for possible loan losses of $25,000 recorded for
such loans. Impaired loans are normally placed on nonaccrual status and, as a
result, interest income is recorded only as cash is received. The average
balance of impaired loans during the year ended December 31, 1995, was
approximately $125,000. There was no interest income recognized on such loans
during the year ended December 31, 1995.

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.

FEDERAL INCOME TAXES

F-16
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
differences arising prior to the Company's quasi-reorganization as of December
31, 1989. FAS 109 requires that consideration be given to establishing a
valuation allowance against such deferred tax assets. The Company established a
valuation allowance of $2,290,000, resulting in a net deferred tax asset of
$900,000. As a result of the quasi-reorganization, approximately $700,000 of the
cumulative effect of the change in accounting method was credited directly to
additional paid-in capital and $200,000 was credited to income during 1993 as a
cumulative effect of an accounting change. As a result of the acquisition of
Winters State, the Company increased its gross deferred tax asset and the
related valuation allowance by approximately $972,000 during 1993. This gross
deferred tax asset arose mainly due to net operating loss carryforwards and
other future deductible temporary differences. As a result of the utilization of
a portion of its net operating loss carryforwards, the Company reduced its gross
deferred tax asset and the related valuation allowance by $222,000 and $493,000
during the years ended December 31, 1994 and 1993, respectively. During 1995,
the Company reduced its gross deferred tax asset by $547,000 as of a result of
the utilization of a portion of its net operating loss carryforwards. The
Company also reduced the valuation allowance during 1995 by $1,600,000 and
transferred such amount to additional paid-in-capital due to the Company's
belief, based on the Company's recent earnings history, that it is more likely
than not that sufficient pre-tax income will be generated in the foreseeable
future to realize its net deferred tax asset. Additionally, the Company reduced
its gross deferred tax asset and related valuation allowance by $708,000 as a
result of the write-off of a portion of the deferred tax asset related to the
Winters State net operating loss carryforwards which will not be utilized. The
Company may reduce or increase its valuation allowance depending on changes in
the expectation of future earnings and other circumstances.

REAL ESTATE AND OTHER REPOSSESSED ASSETS

Real estate and other repossessed assets consist principally of real estate
properties 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.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

F-17
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES

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

RECLASSIFICATIONS

Certain 1994 and 1993 amounts have been reclassified to conform with the
consolidated financial presentation adopted in 1995 and 1994, respectively.

NOTE 2: QUASI-REORGANIZATION

In connection with the restructuring of its indebtedness to a financial
institution in Dallas, Texas (the "Dallas Bank"), the Company effected a
quasi-reorganization as of December 31, 1989. A quasi-reorganization is an
elective accounting procedure under Generally Accepted Accounting Principles
("GAAP") in which assets and liabilities of the Company were restated to fair
value and the Company's accumulated deficit was reduced to zero. Under GAAP,
utilization of any of the Company's net operating loss carryforwards subsequent
to the quasi-reorganization date will not be credited to future income. For
periods prior to January 1, 1995, the tax effect of the utilization of the
Company's net operating loss carryforwards was credited directly to additional
paid-in capital. For periods subsequent to December 31, 1994, the effect of such
utilization has been and will be credited against the Company's gross deferred
tax asset. The tax effect of utilization of these net operating losses in 1995,
1994 and 1993 totaled $547,000, $222,000 and $493,000, respectively.

NOTE 3: SALE OF SUBSIDIARY BANK

The Company entered into a letter of intent to transfer the deposits,
premises and equipment and certain loans of Olton State during the second
quarter of 1992. The various regulatory approvals necessary to complete the
transfer were received during the third and fourth quarters of 1992. The
transfer of the various assets and liabilities of Olton State was completed on
January 1, 1993, and the Company recognized a gain of $286,000, which is
included in noninterest income for the year ended December 31, 1993.

In connection with and immediately prior to the transfer of certain assets
and liabilities of Olton State, that bank was merged with and into First
National, on January 1, 1993, in a transaction accounted for in a manner similar
to a pooling of interests. As a result of the merger, the additional paid-in
capital of First National was increased by the amount of the net equity of Olton
State, or $1,854,000. Subsequent to the merger, First National received
regulatory approval to reduce its additional paid-in capital by $1,500,000
through a capital distribution to the Company and a total of $1,487,000 of the
distribution was used by the Company to make principal reductions on its note
payable to a financial institution in Amarillo, Texas (the "Amarillo Bank"),
during March and April of 1993.

F-18
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 4: ACQUISITION OF SUBSIDIARY BANK

In the second quarter of 1990, the Banks foreclosed on the stock of Winters
State that collateralized a loan and, as a result, the Banks became beneficial
owners of an aggregate of 28.2% of the outstanding stock of Winters State.
During the third quarter of 1993, the Company acquired the aggregate 28.2%
interest in Winters State from the Banks and agreed with Winters State to
purchase the Company's pro rata share of a $450,000 new stock offering conducted
by Winters State or to purchase the entire offering if none of the other Winters
State stockholders elected to participate in the offering. None of the other
stockholders elected to participate in the offering, and, upon regulatory
approval, the Company purchased the entire offering for cash consideration of
$450,000. As a result of its purchase in the offering, the Company acquired
control and increased its ownership of Winters State from 28.2% to 94.3%. The
Company's equity in the net book value of Winters State was $1,077,000 at August
31, 1993, the date of acquisition. The acquisition was accounted for under the
purchase method of accounting and the assets and liabilities of Winters State
were recorded at their estimated fair value. At August 31, 1993, Winters State
had $16,316,000 in total assets, $7,453,000 in total loans, net of unearned
income, $15,079,000 in total deposits and stockholders' equity of $1,142,000.

In December 1993, the Company purchased an additional interest in Winters
State from one of the remaining minority stockholders. The purchase increased
the Company's ownership of Winters State to 94.9%. On October 31, 1994, the
Company purchased the remaining minority interest in Winters State.

To fund the original stock purchase the Company obtained a $450,000 loan
from the Amarillo Bank, which was paid off during 1995.

The operations of Winters State from August 31, 1993, through December 31,
1993, are included in the Consolidated Income Statement for the year ended
December 31, 1993. Net interest income of Winters State for the last four months
of 1993 was $233,000. Income before federal income taxes of Winters State for
that same period was $14,000.

F-19
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 5: SECURITIES

The amortized cost and estimated fair value of available-for-sale securities
at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- --------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................... $ 16,042,000 $ 101,000 $ 0 $ 16,143,000
Mortgage-backed securities....................... 158,000 2,000 0 160,000
Other securities................................. 443,000 0 0 443,000
--
------------- ----------- -------------
Total available-for-sale securities............ $ 16,643,000 $ 103,000 $ 0 $ 16,746,000
--
--
------------- ----------- -------------
------------- ----------- -------------
</TABLE>

<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities........................ $ 15,905,000 $ 6,000 $ (162,000) $ 15,749,000
Obligations of U.S. Government agencies and
corporations.................................. 879,000 7,000 0 886,000
Other securities................................ 443,000 0 0 443,000
------------- ----------- ----------- -------------
Total available-for-sale securities........... $ 17,227,000 $ 13,000 $ (162,000) $ 17,078,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>

The amortized cost and estimated fair value of held-to-maturity securities
at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................... $ 16,152,000 $ 98,000 $ (5,000) $ 16,245,000
Obligations of U.S. Government agencies and
corporations................................... 23,009,000 130,000 0 23,139,000
------------- ----------- ----------- -------------
Total held-to-maturity securities.............. $ 39,161,000 $ 228,000 $ (5,000) $ 39,384,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>

<TABLE>
<CAPTION>
1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities........................ $ 15,692,000 $ 2,000 $ (322,000) $ 15,372,000
Obligations of U.S. Government agencies and
corporations.................................. 268,000 2,000 0 270,000
Mortgage-backed securities...................... 177,000 2,000 0 179,000
Obligations of states and political
subdivisions.................................. 90,000 2,000 0 92,000
------------- ----------- ----------- -------------
Total held-to-maturity securities............. $ 16,227,000 $ 8,000 $ (322,000) $ 15,913,000
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>

F-20
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 5: SECURITIES (CONTINUED)
The amortized cost and estimated fair value of securities at December 31,
1995, 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.

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
AVAILABLE-FOR-SALE SECURITIES COST FAIR VALUE
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 8,046,000 $ 8,073,000
Due after one year through five years.......................... 8,001,000 8,075,000
Due after ten years 438,000 438,000
------------- -------------
16,485,000 16,586,000
Mortgage-backed securities..................................... 158,000 160,000
------------- -------------
Total available-for-sale securities.......................... $ 16,643,000 $ 16,746,000
------------- -------------
------------- -------------
</TABLE>

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
HELD-TO-MATURITY SECURITIES COST FAIR VALUE
- --------------------------------------------------------------- ------------- -------------
<S> <C> <C>
Due in one year or less........................................ $ 8,240,000 $ 8,247,000
Due after one year through five years.......................... 30,921,000 31,137,000
------------- -------------
Total held-to-maturity securities............................ $ 39,161,000 $ 39,384,000
------------- -------------
------------- -------------
</TABLE>

At December 31, 1995, securities with an amortized cost and estimated fair
value of $6,423,000 and $6,482,000, respectively, were pledged as collateral for
public and trust fund deposits and for other purposes required or permitted by
law. At December 31, 1994, the amortized cost and estimated fair value of
pledged securities were $5,332,000 and $5,219,000, respectively.

During 1995, a transfer was made from held-to-maturity securities to
available-for-sale securities in accordance with the Financial Accounting
Standards Board's "Special Report, A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." The amortized
cost of the securities transferred totaled $158,000 and the unrealized gain of
$2,000 was included as a separate component of stockholders' equity.

NOTE 6: LOANS

The composition of loans at December 31, 1995 and 1994, was as follows:

<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Loans to Individuals........................................... $ 39,868,000 $ 43,113,000
Real estate loans.............................................. 23,265,000 22,760,000
Commercial and industrial loans................................ 19,510,000 16,702,000
Other loans.................................................... 2,638,000 2,943,000
------------- -------------
Total loans.................................................. 85,281,000 85,518,000
Less unearned income........................................... 3,354,000 4,212,000
------------- -------------
Total loans, net of unearned income.......................... $ 81,927,000 $ 81,306,000
------------- -------------
------------- -------------
</TABLE>

F-21
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 6: LOANS (CONTINUED)
An analysis of nonperforming assets at December 31, 1995, 1994 and 1993, is
as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ------------
<S> <C> <C> <C>
Nonaccrual loans....................................... $ 204,000 $ 48,000 $ 1,646,000
Accruing loans past due over ninety days............... 23,000 26,000 293,000
Restructured loans..................................... 65,000 80,000 195,000
Real estate and other repossessed assets............... 337,000 631,000 803,000
---------- ---------- ------------
Total nonperforming assets........................... $ 629,000 $ 785,000 $ 2,937,000
---------- ---------- ------------
---------- ---------- ------------
</TABLE>

The amount of interest income that would have been recorded on nonaccrual
loans for the years ended December 31, 1995, 1994 and 1993, based on the loans'
original terms was $14,000, $26,000 and $117,000, respectively. No interest was
collected on such loans and recorded as income during 1995. A total of $38,000
and $70,000 in interest on nonaccrual loans was actually collected and recorded
as income during the years ended December 31, 1994 and 1993, respectively.

Real estate and other repossessed assets at December 31, 1994, included
$125,000 of assets classified as in-substance repossessions.

A summary of the transactions in the allowance for possible loan losses for
the years ended December 31, 1995, 1994 and 1993, is as follows:

<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 817,000 $ 896,000 $ 617,000
Provision for loan losses.............................. 206,000 147,000 154,000
Loans charged off...................................... (376,000) (378,000) (241,000)
Recoveries of loans charged off........................ 112,000 152,000 133,000
Acquisition of subsidiary.............................. -- -- 233,000
----------- ----------- -----------
Balance at end of year............................... $ 759,000 $ 817,000 $ 896,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

NOTE 7: PREMISES AND EQUIPMENT

The following is a summary of premises and equipment at December 31, 1995
and 1994:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Land.............................................................. $ 707,000 $ 707,000
Buildings and improvements........................................ 4,100,000 4,092,000
Furniture and equipment........................................... 1,285,000 1,332,000
------------ ------------
6,092,000 6,131,000
Less accumulated depreciation..................................... 1,937,000 1,786,000
------------ ------------
Net premises and equipment...................................... $ 4,155,000 $ 4,345,000
------------ ------------
------------ ------------
</TABLE>

NOTE 8: DEPOSITS

At December 31, 1995 and 1994, interest-bearing time deposits of $100,000 or
more were $23,808,000 and $14,588,000, respectively.

F-22
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 9: NOTES PAYABLE

The Company had two notes payable to the Amarillo Bank during 1995. The term
note (the "Term Note") had an outstanding principal balance of $498,000 at
December 31, 1995. The Term Note has a maturity of April 15, 1996, and equal
principal payments based on a seven-year amortization, plus accrued interest,
are due quarterly on January 15, April 15, July 15 and October 15. The Term Note
bears interest at the Amarillo Bank's floating base rate plus 1% (9.5% at
December 31, 1995). The Term Note is collateralized by 100% of the stock of
First State, N.A., Abilene, and First State, N.A., Odessa. The second note, the
proceeds from which were used for the acquisition of Winters State (the
"Acquisition Note"), had an original principal balance of $450,000 and matured
on August 30, 1994. The Company paid the Amarillo Bank $150,000 to reduce the
outstanding balance of the Acquisition Note to $300,000 and the maturity date
was extended to August 30, 1997. The Acquisition Note was paid off during the
fourth quarter of 1995. The loan agreement between the Company and the Amarillo
Bank contains certain covenants that, among other things, restrict the ability
of the Company to incur additional debt, to create liens on its property, to
merge or to consolidate with any other person or entity, to make certain
investments, to purchase or sell assets or to pay cash dividends on the common
stock without the approval of the Amarillo Bank if the indebtedness due to the
Amarillo Bank is $1,000,000 or greater. The loan agreement also requires the
Company and the Banks to meet certain financial ratios, all of which were met at
December 31, 1995 and 1994.

In addition, at December 31, 1995, the Company had notes payable to one
current and two former directors of the Company aggregating $334,000. The notes
have a face amount of $350,000 but were discounted upon issuance because they
bear interest at a below-market interest rate (6%). The notes are payable in
three equal annual installments, plus accrued interest, beginning March 1, 1996.
The notes represent a portion of the final settlement of certain litigation. See
"Note 15: Commitments and Contingent Liabilities."

First State, N.A., Abilene has a $17,000 note payable to an individual which
matures in March 1999. Principal and interest at 7.5% are payable monthly. The
note is collateralized by a two-story commercial building in Abilene, Texas.

NOTE 10: FEDERAL INCOME TAXES

Effective January 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method as required by FAS
109. As permitted under FAS 109, prior years' financial statements have not been
restated. 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.

F-23
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 10: FEDERAL INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $ 1,655,000 $ 2,584,000
Allowance for possible loan losses............................. 225,000 220,000
Tax credit carryforwards....................................... 142,000 0
Director indemnification....................................... 119,000 306,000
Real estate and other repossessed assets....................... 82,000 252,000
Unrealized loss on available-for-sale securities............... 0 49,000
Depreciation and amortization.................................. 0 3,000
Other, net..................................................... 8,000 89,000
------------ -------------
Total gross deferred tax assets.............................. 2,231,000 3,503,000
Less valuation allowance for deferred tax assets............. (227,000) (2,547,000)
------------ -------------
Net deferred tax assets.................................... 2,004,000 956,000
------------ -------------
Deferred tax liabilities:
Unrealized gain on available-for-sale securities............... (37,000) 0
Depreciation and amortization.................................. (30,000) 0
------------ -------------
Total gross deferred tax liabilities......................... (67,000) 0
------------ -------------
Net deferred tax asset..................................... $ 1,937,000 $ 956,000
------------ -------------
------------ -------------
</TABLE>

At December 31, 1995, the Company had available net operating loss
carryforwards and tax credit carryforwards to reduce future federal income
taxes. These carryforwards expire approximately as follows:

<TABLE>
<CAPTION>
NET
OPERATING
LOSSES TAX CREDITS
------------ -----------
<S> <C> <C>
1996-2000.......................................................... $ 0 $ 39,000
2001-2005.......................................................... 1,490,000 0
2006-2010.......................................................... 165,000 0
No expiration...................................................... 0 103,000
------------ -----------
Total carryforwards.............................................. $ 1,655,000 $ 142,000
------------ -----------
------------ -----------
</TABLE>

Included in the $1,655,000 of net operating loss carryforwards is
approximately $447,000 acquired as part of the Winters State acquisition. For
federal income tax purposes, due to certain change of ownership requirements of
the Internal Revenue Code, utilization of the Winters State net operating loss
carryforwards is limited to approximately $40,000 per year. If the full amount
of that limitation 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 2008.

F-24
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 10: FEDERAL INCOME TAXES (CONTINUED)
The comprehensive provisions for federal income taxes for the years ended
December 31, 1995, 1994 and 1993, consist of the following:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
Current tax provision................................... $ 35,000 $ 5,000 $ 31,000
Deferred tax provision.................................. 547,000 222,000 493,000
---------- ----------- ----------
Provision for tax expense charged to results of
operations............................................ 582,000 227,000 524,000
Tax on unrealized gain(loss) on available-for-sale
securities............................................ 86,000 (154,000) 105,000
---------- ----------- ----------
Comprehensive provision for federal income taxes........ $ 668,000 $ 73,000 $ 629,000
---------- ----------- ----------
---------- ----------- ----------
</TABLE>

NOTE 11: STOCKHOLDERS' EQUITY

In December 1992, the Company's board of directors approved the granting of
nonqualified stock options for certain officers of the Company under which an
original aggregate of 14,000 shares of Common Stock, adjusted for the 5% stock
dividend paid to stockholders in May 1993 and the 33 1/3% stock dividend paid to
stockholders in May 1995, could be issued. These options were exercisable at any
time during the period January 1, 1993, to December 31, 1995, at a price of
$3.75 per share, adjusted for the 5% stock dividend paid to stockholders in May
1993 and the 33 1/3% stock dividend paid to stockholders in May 1995. During the
years ended December 31, 1993, 1994 and 1995, after adjustments for the two
stock dividends noted above, options for 771, 428 and 9,037 shares,
respectively, were exercised and options for 1,471, 1,261 and 1,032 shares,
respectively, expired.

In December 1993, the Company's board of directors approved the granting of
nonqualified stock options to certain executive officers of the Company under
which an original aggregate of 14,667 shares of Common Stock, adjusted for the
33 1/3% stock dividend paid to stockholders in May 1995, may be issued. Options
are exercisable at any time during the period January 1, 1994, to December 31,
1997, at a price of $6.75 per share, adjusted for the 33 1/3% stock dividend
paid to stockholders in May 1995. No options were exercised or expired during
the years ended December 31, 1994 and 1995.

At December 31, 1992, the Company had 2,200 shares of its Series A
Cumulative Convertible Mandatorily Redeemable Preferred Stock (the "Series A
Preferred Stock") outstanding. The Series A Preferred Stock had a face value of
$220,000, was cumulative, paid quarterly dividends at the annual rate of $10.00
per share, was senior to the Company's Common Stock and the Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") with respect to
dividends and liquidation rights, was convertible into Common Stock at a price
of $6.00 per share and had certain voting rights. On January 20, 1993, the
Company repurchased the outstanding 2,200 shares of Series A Preferred Stock
($220,000 face value) for $173,000. The $47,000 was credited directly to
additional paid-in capital.

The Company's Series C Preferred Stock is cumulative, pays quarterly
dividends at the annual rate of $4.20 per share, is senior to the Common Stock
with respect to dividends and liquidation rights, is convertible into Common
Stock at a price of $2.29 per share, adjusted for the 5% stock dividend paid to
stockholders in May 1993 and the 33 1/3% stock dividend paid to stockholders in
May 1995, and has certain voting rights if dividends are in arrears for three
quarters. A total of 232 shares of the Series C Preferred

F-25
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 11: STOCKHOLDERS' EQUITY (CONTINUED)
Stock were converted into a total of 4,263 shares of Common Stock, adjusted for
the 33 1/3% stock dividend paid to stockholders in May 1995, during 1995. The
Series C Preferred Stock is redeemable in cash and/or Common Stock at the
Company's option beginning December 12, 1997, at $42.00 per share.

An additional 36,415 shares of Common Stock were issued as a result of the
5% stock dividend paid to stockholders in May 1993. The stock dividend was
accounted for by a $9,000 transfer from retained earnings to common stock,
representing the above number of shares at a par value of $0.25 per share. An
additional 259,371 shares of Common Stock were issued as a result of the 33 1/3%
stock dividend paid to stockholders in May 1995. The stock dividend was
accounted for by a $65,000 transfer from retained earnings to common stock,
representing the above number of shares at a par value of $0.25 per share.

The following is a summary at December 31, 1995, of the number of shares of
Common Stock reserved for issuance upon exercise or conversion and the related
exercise or conversion price per share, adjusted for the 5% stock dividend paid
to stockholders in May 1993 and the 33 1/3% stock dividend paid to stockholders
in May 1995:

<TABLE>
<CAPTION>
SHARES EXERCISE OR
RESERVED CONVERSION
FOR PRICE
ISSUANCE PER SHARE
----------- -------------
<S> <C> <C>
Unexercised stock options granted to certain executive officers
of the Company................................................. 14,667 $ 6.75
Series C Preferred Stock......................................... 302,011 2.29
----------- -------------
Total shares reserved for issuance and related exercise or
conversion price per share................................... 316,678 $ 2.29-$6.75
----------- -------------
----------- -------------
</TABLE>

F-26
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 12: EARNINGS PER SHARE

Primary earnings per common share is computed by dividing net income
available to common stockholders by the weighted average number of shares and
share equivalents outstanding during the period. Because the Company's
outstanding preferred stock is cumulative, the dividends allocable to such
preferred stock reduces income available to common stockholders in the earnings
per share calculations. The Series A Preferred Stock and Series C Preferred
Stock issued in December 1990 were determined not to be common stock equivalents
and, therefore, are not used to calculate primary earnings per common share. In
computing fully diluted earnings per common share for the years ended December
31, 1995, 1994 and 1993, the conversion of the preferred stock was assumed, as
the effect is dilutive. As noted above, the outstanding Series A Preferred Stock
was repurchased and retired by the Company in January 1993. The following table
presents information necessary to calculate earnings per share for the years
ended December 31, 1995, 1994 and 1993 (adjusted for the 5% stock dividend paid
to stockholders in May 1993 and the 33 1/3% stock dividend paid to stockholders
in May 1995):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
PRIMARY EARNINGS PER COMMON SHARE

Shares Outstanding:
Weighted average shares outstanding............................ 1,039 1,037 1,036
Share equivalents.............................................. 8 5 5
--------- --------- ---------
Adjusted shares outstanding.................................. 1,047 1,042 1,041
--------- --------- ---------
--------- --------- ---------
Net Income:
Net income..................................................... $ 1,132 $ 450 $ 1,229
Less-preferred stock dividends................................. 70 70 75
--------- --------- ---------
Net income available to common stockholders.................. $ 1,062 $ 380 $ 1,154
--------- --------- ---------
--------- --------- ---------
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER COMMON SHARE

Shares Outstanding:
Weighted average shares outstanding............................ 1,039 1,037 1,036
Share equivalents.............................................. 8 5 5
Conversion of Series A Preferred Stock......................... 0 0 2
Conversion of Series C Preferred Stock......................... 305 306 306
--------- --------- ---------
Adjusted shares outstanding.................................. 1,352 1,348 1,349
--------- --------- ---------
--------- --------- ---------
Net Income................................................... $ 1,132 $ 450 $ 1,229
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-27
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 13: BENEFIT PLANS

The Company has an employee stock ownership/401(k) plan (the "Plan") that
covers most of its officers and employees. The 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. Contributions made to
the employee stock ownership portion of the Plan by the Company were $72,000,
$62,000 and $66,000 for the years ended December 31, 1995, 1994 and 1993,
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 have been made by the Company to match
contributions made by plan participants to the 401(k) portion of the Plan. The
amount of all such contributions is at the discretion of the Company's board of
directors. Employee contributions are invested in various equity, debt and money
market investments, including Common Stock of the Company. At December 31, 1995,
55,338 shares of Common Stock and 2,918 shares of Series C Preferred Stock of
the Company were held by the Plan.

NOTE 14: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has loans, deposits and
other transactions with its senior officers and directors and businesses with
which such persons are associated. It is the Company's policy that all such
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 $1,053,000, $1,587,000 and
$1,290,000 at December 31, 1995, 1994 and 1993, respectively. Additions and
reductions on such loans were $1,254,000 and $1,788,000, respectively, for the
year ended December 31, 1995.

The Company and its subsidiaries paid $19,000, $55,000 and $110,000 in fees
to a director-related company for services rendered on various legal matters
during 1995, 1994 and 1993, respectively.

During the year ended December 31, 1995, the Company reimbursed $800,000
($450,000 in cash and $350,000 in notes payable) to three former directors (one
of whom is also a current director of the Company) of a bank which was a
repossessed asset of a former subsidiary bank for payment of reasonable legal
fees and expenses in connection with their defense of an action brought by the
Federal Deposit Insurance Corporation (the "FDIC"). See "Note 15: Commitments
and Contingent Liabilities."

During the year ended December 31, 1993, the Company reimbursed $200,000 to
twenty-two former directors of a former subsidiary bank (six of whom are also
current directors of the Company) for payment of reasonable legal fees and
expenses in connection with their defense of an action brought by two plaintiffs
who purchased debentures previously sold by the former subsidiary bank. The
Company had accrued and expensed such reimbursement during the year ended
December 31, 1991.

NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES

F-28
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 15: COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
$60,000. All former directors of TB&T-Sweetwater requested that the Company
reimburse them for their expenses and settlement costs incurred by them in their
defense of the FDIC litigation. This request was based on their interpretation
of certain indemnification provisions contained in the Company's Articles of
Incorporation.

In December 1994, a settlement was entered into between the FDIC, one
Outside Director and the three management directors of TB&T-Sweetwater, who were
also management directors of the Company (the "Inside Directors"), with the
Inside Directors paying the FDIC a total of $450,000. As a result of the two
settlements and indemnification requests, the Outside Directors claimed
indemnification in the amount of approximately $467,000 and the Inside Directors
claimed indemnification in the amount of approximately $900,000. In 1994, the
Company accrued $900,000 for the potential reimbursement of the $1,367,000 in
claims.

On March 7, 1995, the Company agreed to settle the indemnification requests
of the Inside Directors for $450,000 in cash and by delivery of three promissory
notes in the aggregate principal amount of $350,000. These notes are payable in
three equal annual installments beginning March 1, 1996, and bear interest at 6%
per annum. As a result of the below-market interest rate, the notes were
originally discounted to an aggregate of $323,000. In April and May 1995, the
Company consummated this settlement with the Inside Directors by paying them an
aggregate of $450,000 and delivering such promissory notes to them. In May and
June 1995, the Company settled with the Outside Directors by paying them a
aggregate of $252,000 in cash.

The Company is involved in various other 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.

The Banks lease certain of their premises and equipment under noncancellable
operating leases. Rental expense under such operating leases was approximately
$290,000, $235,000 and $142,000 in 1995, 1994 and 1993, respectively.

The minimum payments due under these leases at December 31, 1995, are as
follows:

<TABLE>
<S> <C>
1996...................................................... $ 298,000
1997...................................................... 232,000
1998...................................................... 87,000
1999...................................................... 39,000
2000...................................................... 39,000
2001-2003................................................. 61,000
---------
Total................................................. $ 756,000
---------
---------
</TABLE>

F-29
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 16: FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and fair values of financial assets and financial
liabilities at December 31, 1995 and 1994, were as follows:

<TABLE>
<CAPTION>
1995 1994
---------------------------- ----------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and due from banks........................... $ 8,559,000 $ 8,559,000 $ 7,564,000 $ 7,564,000
Federal funds sold................................ 26,200,000 26,200,000 31,200,000 31,200,000
Available-for-sale securities..................... 16,746,000 16,746,000 17,078,000 17,078,000
Held-to-maturity securities....................... 39,161,000 39,384,000 16,227,000 15,913,000
Loans, net of unearned income..................... 81,927,000 83,857,000 81,306,000 80,761,000
Accrued interest receivable....................... 1,494,000 1,494,000 945,000 945,000

FINANCIAL LIABILITIES
Noninterest-bearing demand deposits............... $ 33,267,000 $ 33,267,000 $ 30,210,000 $ 30,210,000
Interest-bearing demand deposits.................. 52,430,000 52,430,000 56,520,000 56,520,000
Interest-bearing time deposits.................... 79,007,000 79,475,000 59,454,000 59,473,000
Notes payable..................................... 849,000 849,000 930,000 930,000
Accrued interest payable.......................... 882,000 882,000 408,000 408,000
</TABLE>

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.

The carrying amounts for cash and due from banks, federal funds sold,
accrued interest receivable, notes payable and accrued interest 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 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

F-30
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 17: FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (CONTINUED)
commitments to extend credit, standby letters of credit and financial
guarantees. 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,
standby letters of credit and financial guarantees 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
$6,162,000 and $4,715,000 and outstanding standby letters of credit and
financial guarantees of approximately $178,000 and $152,000 at December 31, 1995
and 1994, respectively.

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 letters of credit and financial guarantees 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
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, standby letters of credit and financial guarantees that were
outstanding at December 31, 1995.

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

At December 31, 1995, retained earnings of subsidiaries included
approximately $1,208,000 that was available for payment of dividends to the
Company without prior approval of regulatory authorities.

F-31
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

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, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS:

Cash............................................................................... $ 191,000 $ 241,000
Investment in subsidiaries......................................................... 12,908,000 12,065,000
Premises and equipment............................................................. 4,000 6,000
Other assets....................................................................... 1,577,000 427,000
------------- -------------
Total assets................................................................... $ 14,680,000 $ 12,739,000
------------- -------------
------------- -------------

LIABILITIES:

Notes payable...................................................................... $ 832,000 $ 909,000
Accrued interest payable and other liabilities..................................... 30,000 757,000
------------- -------------
Total liabilities.............................................................. 862,000 1,666,000
Stockholders' equity............................................................... 13,818,000 11,073,000
------------- -------------
Total liabilities and stockholders' equity..................................... $ 14,680,000 $ 12,739,000
------------- -------------
------------- -------------
</TABLE>

F-32
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 19: PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
INDEPENDENT BANKSHARES, INC.
CONDENSED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries (see Note 18)............................. $ 905,000 $ 450,000 $ 510,000
Management fees from subsidiaries..................................... 177,000 158,000 164,000
Interest from subsidiaries............................................ 2,000 2,000 2,000
Other income.......................................................... -- -- 77,000
------------ ------------ ------------
Total income........................................................ 1,084,000 610,000 753,000
------------ ------------ ------------
Expenses:
Interest.............................................................. 107,000 86,000 102,000
Other expenses........................................................ 756,000 1,381,000 524,000
------------ ------------ ------------
Total expenses...................................................... 863,000 1,467,000 626,000
------------ ------------ ------------
Income (loss) before federal income taxes, equity in undistributed
earnings of subsidiaries, and cumulative effect of accounting
change................................................................ 221,000 (857,000) 127,000
Federal income tax benefit............................................ (236,000) (490,000) (76,000)
------------ ------------ ------------
Income (loss) before equity in undistributed earnings of subsidiaries
and cumulative effect of accounting change............................ 457,000 (367,000) 51,000
Equity in undistributed earnings of subsidiaries...................... 675,000 817,000 978,000
------------ ------------ ------------
Income before cumulative effect of accounting change.................... 1,132,000 450,000 1,029,000
Cumulative effect of change in accounting for income taxes............ -- -- 200,000
------------ ------------ ------------
Net income.............................................................. $ 1,132,000 $ 450,000 $ 1,229,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-33
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 19: PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
INDEPENDENT BANKSHARES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................ $ 1,132,000 $ 450,000 $ 1,229,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of change in accounting for income taxes............ -- -- (200,000)
Deferred federal income tax expense................................... 547,000 222,000 493,000
Depreciation and amortization......................................... 2,000 1,000 2,000
Equity in undistributed earnings of subsidiaries...................... (675,000) (817,000) (978,000)
Gain on sale of subsidiary............................................ -- -- (75,000)
Decrease (increase) in other assets................................... (97,000) 4,000 25,000
Increase (decrease) in accrued interest payable and other
liabilities......................................................... (390,000) 681,000 (134,000)
------------ ------------ ------------
Net cash provided by operating activities........................... 519,000 541,000 362,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of premises and equipment.......................... -- -- 1,000
Proceeds from sale of subsidiary...................................... -- -- 75,000
Acquisition of subsidiary............................................. -- -- (650,000)
Capital distribution from subsidiary.................................. -- -- 1,500,000
------------ ------------ ------------
Net cash provided by investing activities........................... -- -- 926,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from notes payable........................................... 275,000 -- 450,000
Repayment of notes payable............................................ (687,000) (261,000) (1,542,000)
Net proceeds from issuance of equity securities....................... 34,000 2,000 10,000
Cash paid for fractional shares in stock dividend..................... (4,000) -- (4,000)
Repurchase of Series A Preferred Stock................................ -- -- (173,000)
Payment of cash dividends............................................. (187,000) (140,000) (75,000)
------------ ------------ ------------
Net cash used in financing activities............................... (569,000) (399,000) (1,334,000)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents.................... (50,000) 142,000 (46,000)
Cash and cash equivalents at beginning of year.......................... 241,000 99,000 145,000
------------ ------------ ------------
Cash and cash equivalents at end of year.............................. $ 191,000 $ 241,000 $ 99,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

F-34
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

NOTE 20: SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for the years ended December 31, 1995,
1994 and 1993, is as follows:

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid during the year for:
Interest.............................................................. $ 4,835,000 $ 3,337,000 $ 3,215,000
Federal income taxes.................................................. 15,000 17,000 38,000
Noncash investing activities:
Additions to real estate and other repossessed assets during the year
through foreclosures................................................ 1,039,000 424,000 457,000
Sales of real estate and other repossessed assets financed with
loans............................................................... 196,000 335,000 202,000
Transfer of real estate and other repossessed assets to loans......... 125,000 -- --
Increase (decrease) in unrealized gain/loss on available-for-sale
securities, net of tax.............................................. 168,000 (306,000) 206,000
Other liabilities replaced with notes payable......................... 334,000 -- --
</TABLE>

NOTE 21: SUBSEQUENT EVENT

First State, N.A., Abilene completed the acquisition of Peoples National
Bank in Winters, Texas ("Peoples National") effective January 1, 1996. At
December 31, 1995, Peoples National had total assets of $5,505,000, total loans,
net of unearned income, of $2,767,000, total deposits of $4,958,000 and
stockholders' equity of $525,000. These amounts are not included in the
Consolidated Balance Sheet for the Company at December 31, 1995.

F-35
<PAGE>
INDEPENDENT BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1995, 1994 AND 1993

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.

<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C> <C> <C>
Interest income................................................ $ 2,811 $ 2,971 $ 3,049 $ 3,131 $ 11,962
Interest expense............................................... 1,128 1,331 1,401 1,449 5,309
Net interest income............................................ 1,683 1,640 1,648 1,682 6,653
Provision for loan losses...................................... 42 30 69 65 206
Income before federal income taxes............................. 502 277 479 456 1,714
Net income..................................................... 332 182 317 301 1,132
Primary earnings per common share available to common
stockholders:
Income before federal income taxes........................... $ 0.46 $ 0.25 $ 0.44 $ 0.42 $ 1.57
Net income................................................... 0.30 0.16 0.29 0.27 1.02
Fully diluted earnings per common share available to common
stockholders:
Income before federal income taxes........................... $ 0.37 $ 0.20 $ 0.36 $ 0.34 $ 1.27
Net income................................................... 0.25 0.14 0.23 0.22 0.84
</TABLE>

<TABLE>
<CAPTION>
1994
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
----------- ----------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C> <C> <C>
Interest income................................................ $ 2,471 $ 2,491 $ 2,506 $ 2,663 $ 10,131
Interest expense............................................... 791 821 875 965 3,452
Net interest income............................................ 1,680 1,670 1,631 1,698 6,679
Provision for loan losses...................................... 21 31 40 55 147
Income (loss) before federal income taxes...................... 324 397 119 (163) 677
Net income (loss).............................................. 215 262 79 (106) 450
Primary earnings per common share available to common
stockholders:
Income (loss) before federal income taxes.................... $ 0.29 $ 0.36 $ 0.10 $ (0.17) $ 0.58
Net income (loss)............................................ 0.19 0.23 0.06 (0.12) 0.36
Fully diluted earnings per common share available to common
stockholders:
Income (loss) before federal income taxes.................... $ 0.24 $ 0.29 $ 0.09 $ (0.12) $ 0.50
Net income (loss)............................................ 0.16 0.19 0.06 (0.12) 0.33
</TABLE>

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.

F-36
<PAGE>
CROWN PARK BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 1996 AND DECEMBER 31, 1995

(UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER DECEMBER 31,
30, 1996 1995
------------ ------------
<S> <C> <C>
ASSETS

Cash and due from banks........................... $ 2,832,000 $ 2,693,000
Federal funds sold................................ 1,375,000 7,275,000
Investment securities............................. 0
Securities held to maturity, fair value of
$6,413,000 at September 30, 1996, and
$9,974,000 at December 31, 1995............... 6,424,000 9,968,000
Securities available for sale, at fair value.... 5,243,000 4,325,000
Loans, net........................................ 38,289,000 32,515,000
Accrued interest receivable....................... 491,000 508,000
Bank premises and equipment, net.................. 2,373,000 2,358,000
Other real estate owned........................... 290,000 335,000
Other assets...................................... 208,000 208,000
------------ ------------
TOTAL ASSETS...................................... $ 57,525,000 $ 60,185,000
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Noninterest bearing demand deposits............. $ 9,194,000 $ 11,045,000
Interest bearing deposits....................... 41,508,000 42,721,000
------------ ------------
Total deposits................................ 50,702,000 53,766,000
Accounts payable and accrued liabilities........ 244,000 210,000
Notes payable................................... 2,094,000 2,111,000
Deferred federal income tax..................... 167,000 83,000
------------ ------------
Total liabilities............................. 53,207,000 56,170,000
------------ ------------

STOCKHOLDERS' EQUITY
Common stock.................................... 952,000 952,000
Capital surplus................................. 965,000 965,000
Retained earnings............................... 2,407,000 2,073,000
Unrealized gain (loss) on investment securities
available for sale, net of applicable deferred
federal income taxes.......................... (6,000) 25,000
------------ ------------
Total stockholders' equity.................... 4,318,000 4,015,000
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 57,525,000 $ 60,185,000
------------ ------------
------------ ------------
</TABLE>

F-37
<PAGE>
CROWN PARK BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF EARNINGS

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995

(UNAUDITED)

<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
SEPTEMBER 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans...................... $ 2,528,000 $ 2,396,000
Interest on investment securities............... 613,000 639,000
Interest on federal funds sold.................. 139,000 211,000
------------ ------------
Total interest income......................... 3,280,000 3,246,000
------------ ------------

INTEREST EXPENSE
Interest on deposits............................ 1,343,000 1,287,000
Interest on long-term debt...................... 136,000 149,000
------------ ------------
Total interest expense........................ 1,479,000 1,436,000
------------ ------------
NET INTEREST INCOME............................. 1,801,000 1,810,000
Provision for loan losses......................... 135,000 202,000
------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES........................................ 1,666,000 1,608,000
------------ ------------
OTHER INCOME
Service charges................................. 220,000 248,000
Other operating income.......................... 139,000 175,000
------------ ------------
Total other income............................ 359,000 423,000
------------ ------------
OTHER EXPENSE
Salaries and benefits........................... 719,000 741,000
Net occupancy expense of bank premises.......... 110,000 100,000
Equipment expense............................... 101,000 99,000
FDIC assessments................................ 2,000 65,000
Other operating expenses........................ 592,000 455,000
------------ ------------
Total other expense........................... 1,524,000 1,460,000
------------ ------------
EARNINGS BEFORE INCOME TAXES................ 501,000 571,000
Provision for income taxes........................ 159,000 187,000
------------ ------------
NET EARNINGS................................ $ 342,000 $ 384,000
------------ ------------
------------ ------------
</TABLE>

F-38
<PAGE>
CROWN PARK BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1995

(UNAUDITED)

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................................... $ 342,000 $ 384,000
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation.................................. 107,000 114,000
Provision for losses on loans................. 135,000 202,000
Writedown of other real estate owned.......... 8,000 0
Amortization of investment securities, net of
accretion................................... 41,000 95,000
Loss on sale of investment securities......... 2,000 0
Increase in accounts payable and accrued
liabilities................................. 34,000 22,000
(Increase) decrease in accrued interest
receivable.................................. 17,000 (103,000)
Increase in other assets...................... 0 (6,000)
------------ ------------
Net cash provided by operating activities......... 686,000 708,000
------------ ------------

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank premises and equipment...... (142,000) (12,000)
Proceeds from sale of bank premises and
equipment..................................... 20,000 0
Purchases of securities held to maturity........ (500,000) (680,000)
Proceeds from maturities of securities held to
maturity...................................... 3,108,000 500,000
Proceeds from sales of securities held to
maturity...................................... 998,000 0
Purchases of securities available for sale...... (3,523,000) (2,081,000)
Proceeds from maturities of securities available
for sale...................................... 2,453,000 3,300,000
Net change in loans to customers................ (5,788,000) (2,324,000)
Net change in federal funds sold................ 5,900,000 1,325,000
Proceeds from sale of other real estate owned... 8,000 0
------------ ------------
Net cash provided by investing activities....... 2,534,000 28,000
------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits........................ (3,064,000) (686,000)
Payment of notes payable........................ (17,000) (18,000)
------------ ------------
Net cash used by financing activities........... (3,081,000) (704,000)
------------ ------------
NET INCREASE IN CASH AND DUE FROM BANKS........... 139,000 32,000
Cash and due from banks at beginning of
period........................................ 2,693,000 2,702,000
------------ ------------
CASH AND DUE FROM BANKS AT END OF PERIOD.......... $ 2,832,000 $ 2,734,000
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................... $ 1,495,000 $ 1,378,000
Income taxes paid............................... 128,000 220,000
Increase (decrease) in unrealized gain (loss) on
securities available for sale................. (31,000) 89,000
</TABLE>

F-39
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

For information with regard to significant accounting policies, reference is
made to Notes to Consolidated Financial Statements included in the Company's
Consolidated Financial Statements together with Independent Auditor's Report for
the year ended December 31, 1995.

NOTE 2: LOANS

The Company's total loans, net of unearned income, increased from
$33,032,000 at December 31, 1995, to $38,619,000 at September 30, 1996. The
increase is primarily due to the increased activity in the area of indirect
installment loans, collateralized principally by automobiles.

NOTE 3: PENDING SALE

On July 11, 1996, the stockholders of the Company entered into a definitive
agreement to sell a super majority of the shares of the Company to Independent
Bankshares, Inc. An application was filed with the appropriate regulatory
authorities for approval of the transaction and such approval, conditioned on
Independent Bankshares, Inc. injecting additional capital into the combined bank
after the effect of the transaction, has been received. If such condition is
satisfied, it is anticipated that the transaction will be consummated during the
first quarter of 1997.

NOTE 4: EXPENSES RELATED TO ACQUISITION

The Company incurred approximately $80,000 ($53,000 net of tax) of expenses
in the nine-month period ended September 30, 1996 related to the proposed
acquisition of the Company.

F-40
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors of
Crown Park Bancshares, Inc. and Subsidiary
Lubbock, Texas

We have audited the accompanying consolidated balance sheets of Crown Park
Bancshares, Inc. and Subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for the years ended December 31, 1995, 1994 and 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crown Park
Bancshares, Inc. and Subsidiary at December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years ended December 31, 1995,
1994 and 1993, in conformity with generally accepted accounting principles.

/s/ Elaine McNair, Inc.

September 20, 1996

F-41
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994

<TABLE>
<CAPTION>
1995 1994
------------- -------------

<S> <C> <C>
ASSETS

Cash and due from banks............................................................ $ 2,692,737 $ 2,701,755
Interest bearing deposits in financial institutions................................ -- 100,000
Federal funds sold................................................................. 7,275,000 5,550,000
Investment securities
Securities held to maturity, fair value of $9,974,106 in 1995 and $8,707,903 in
1994........................................................................... 9,967,964 9,041,386
Securities available for sale, at fair value..................................... 4,325,046 7,375,266
Loans, net......................................................................... 32,514,676 29,658,348
Accrued interest receivable........................................................ 508,476 445,885
Bank premises and equipment, net................................................... 2,358,113 2,497,864
Other real estate owned............................................................ 334,722 334,722
Other assets....................................................................... 207,938 122,629
------------- -------------
TOTAL ASSETS....................................................................... $ 60,184,672 $ 57,827,855
------------- -------------
------------- -------------

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Noninterest bearing demand deposits.............................................. $ 11,044,966 $ 11,717,355
Interest bearing deposits........................................................ 42,721,261 40,249,921
------------- -------------
Total deposits............................................................... 53,766,227 51,967,276
Accounts payable and accrued liabilities......................................... 209,637 173,449
Notes payable.................................................................... 2,110,763 2,235,231
Deferred federal income tax...................................................... 82,902 63,733
------------- -------------
Total liabilities............................................................ 56,169,529 54,439,689
STOCKHOLDERS' EQUITY
Common stock, $5 par value, 1,000,000 shares authorized, 190,372 shares issued
and outstanding................................................................ 951,860 951,860
Capital surplus.................................................................. 965,196 965,196
Retained earnings................................................................ 2,073,451 1,540,505
Unrealized gain (loss) on investment securities available for sale, net of
applicable deferred federal income taxes....................................... 24,636 (69,395)
------------- -------------
Total stockholders' equity................................................... 4,015,143 3,388,166
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................................... $ 60,184,672 $ 57,827,855
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-42
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans............................................ $ 3,210,829 $ 3,090,371 $ 2,881,882
Interest on investment securities..................................... 971,106 1,045,190 1,088,255
Interest on federal funds sold and deposits in banks.................. 321,141 226,989 140,078
------------ ------------ ------------
Total interest income............................................... 4,503,076 4,362,550 4,110,215
INTEREST EXPENSE
Interest on deposits.................................................. 1,769,856 1,407,836 1,322,525
Interest on short-term borrowings..................................... -- 312 968
Interest on long-term debt............................................ 198,128 194,199 200,092
------------ ------------ ------------
Total interest expense.............................................. 1,967,984 1,602,347 1,523,585
NET INTEREST INCOME..................................................... 2,535,092 2,760,203 2,586,630
Provision for loan losses............................................. 261,383 394,056 515,176
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES..................... 2,273,709 2,366,147 2,071,454
OTHER INCOME
Service charges....................................................... 304,314 429,795 475,405
Other operating income................................................ 245,270 196,349 251,780
------------ ------------ ------------
Total other income.................................................. 549,584 626,144 727,185
OTHER EXPENSE
Salaries and benefits................................................. 989,506 914,827 850,854
Net occupancy expense of bank premise................................. 132,988 141,599 143,451
Equipment expense..................................................... 132,812 144,006 139,599
FDIC assessments...................................................... 69,757 118,377 113,932
Other operating expenses.............................................. 733,255 863,287 795,079
------------ ------------ ------------
Total other expense................................................. 2,058,318 2,182,096 2,042,915
------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES............................................ 764,975 810,195 755,724
Provision for income taxes............................................ 232,029 252,016 256,946
------------ ------------ ------------
NET EARNINGS............................................................ $ 532,946 $ 558,179 $ 498,778
------------ ------------ ------------
------------ ------------ ------------
NET EARNINGS PER SHARE.................................................. $ 2.80 $ 2.93 $ 2.62
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-43
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
ON
COMMON STOCK SECURITIES TOTAL
-------------------- CAPITAL RETAINED TREASURY AVAILABLE STOCKHOLDERS'
SHARES AMOUNT SURPLUS EARNINGS STOCK FOR SALE EQUITY
--------- --------- --------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1992............. 190,372 $ 951,860 $ 965,196 $ 483,548 $ (24,046) $ -- $2,376,558
Sale of treasury stock................. -- -- -- -- 16,500 -- 16,500
Net earnings........................... -- -- -- 498,778 -- -- 498,778
--------- --------- --------- --------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1993............. 190,372 951,860 965,196 982,326 (7,546) -- 2,891,836
Initial unrealized gain on securities
available for sale................... -- -- -- -- -- 82,326 82,326
Sale of treasury stock................. -- -- -- -- 7,546 -- 7,546
Net earnings........................... -- -- -- 558,179 -- -- 558,179
Change in unrealized gain on securities
available for sale................... -- -- -- -- -- (151,721) (151,721)
--------- --------- --------- --------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1994............. 190,372 951,860 965,196 1,540,505 -- (69,395) 3,388,166
Net earnings........................... -- -- -- 532,946 -- -- 532,946
Change in unrealized loss on securities
available for sale................... -- -- -- -- -- 94,031 94,031
--------- --------- --------- --------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1995............. 190,372 $ 951,860 $ 965,196 $2,073,451 $ -- $ 24,636 $4,015,143
--------- --------- --------- --------- ----------- ------------ ------------
--------- --------- --------- --------- ----------- ------------ ------------
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-44
<PAGE>
CROWN PARK BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings.................................... $ 532,946 $ 558,179 $ 498,778
Adjustments to reconcile net earnings to net
cash provided by operating activities
Depreciation.................................. 154,734 161,437 321,847
Provision for losses on loans................. 261,383 394,056 515,176
Amortization of investment securities, net of
accretion................................... 104,647 84,166 158,805
Deferred (benefit) provision for income
taxes....................................... (29,271) 5,954 12,752
Increase (decrease) in accounts payable and
accrued liabilities......................... 3,208 (21,232) (76,750)
Increase in accrued interest receivable....... (55,322) (9,424) 39,040
Changes in operating assets and liabilities
(Increase) decrease in other assets......... (96,746) 109,545 (941,687)
Increase in other liabilities............... 69,528 82,341 (111,322)
------------ ------------ ------------
Net cash provided by operating activities..... 945,107 1,365,022 416,639
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of bank premises and equipment...... (11,719) (152,367) (29,704)
Purchases of securities held to maturity........ (1,399,987) (3,143,979) (3,675,719)
Proceeds from maturities of securities held to
maturity...................................... 500,000 528,343 3,500,000
Purchases of securities available for sale...... (2,255,539) (2,003,611) --
Proceeds from maturities of securities available
for sale...................................... 5,520,600 3,872,497 --
Net change in loans to customers................ (3,117,720) 375,671 12,182
Net change in federal funds sold................ (1,725,000) 2,050,000 (2,125,000)
Purchase of Federal Reserve Bank stock.......... -- -- (3,450)
Purchase of Federal Home Loan Bank stock........ (176,400) -- --
------------ ------------ ------------
Net cash provided (used) by investing
activities.................................. (2,665,765) 1,526,554 (2,321,691)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits............. 1,836,108 (2,535,221) 1,945,691
Sale of treasury stock.......................... -- 7,546 16,500
Payment of notes payable........................ (124,468) (142,123) (108,605)
------------ ------------ ------------
Net cash provided (used) by financing
activities.................................. 1,711,640 (2,669,798) 1,853,586
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND DUE FROM
BANKS........................................... (9,018) 221,778 (51,466)
Cash and due from banks at beginning of year.... 2,701,755 2,479,977 2,531,443
------------ ------------ ------------
CASH AND DUE FROM BANKS AT END OF YEAR............ $ 2,692,737 $ 2,701,755 $ 2,479,977
------------ ------------ ------------
------------ ------------ ------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................... $ 1,925,669 $ 1,561,650 1,533,893
Income taxes paid............................... 283,000 332,000 266,500
Increase (decrease) in unrealized gain (loss) on
securities available for sale................. 142,472 (105,219) --
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.

F-45
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Crown Park Bancshares, Inc. (a Texas Corporation) is a single-bank holding
company, which owns all of the capital stock of Western National Bank (the
"Bank"). The Bank's primary source of revenue is providing loans and banking
services to consumers and commercial customers in Lubbock, Texas and the
surrounding area.

The accounting and reporting policies of the Crown Park Bancshares, Inc.,
and subsidiary (the "Company") conform with generally accepted accounting
principles and to general practices of the banking industry. Policies and
practices which significantly affect the determination of financial position,
results of operations and cash flows are summarized as follows:

CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary, which owns all of the Company's premises. All
significant intercompany transactions and balances have been eliminated in
consolidation.

ESTIMATES

INVESTMENT SECURITIES

Securities classified as held to maturity are recorded at cost, adjusted for
amortization of premiums and accretion of discounts. Securities classified as
available for sale are recorded at fair value, with unrealized gains and losses,
net of applicable deferred income taxes, reported as a separate component of
stockholders' equity. Securities classified as trading are recorded at fair
value, with unrealized gains and losses included in earnings. The Company had no
trading securities as of December 31, 1995 and 1994. Gains and losses resulting
from the sale of securities are determined by the specific identification
method.

LOANS AND ALLOWANCES FOR LOAN LOSSES

Loans are stated at the amount of unpaid principal, reduced by unearned
income and an allowance for loan losses. Unearned interest on installment loans
is recognized in income over the term of the loans in decreasing amounts using a
method that approximates the interest method. Interest on other loans is
calculated by using the simple interest method on daily balances of the
principal amounts outstanding.

The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance when
management believes the collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible based upon
management's review and evaluation of the loan portfolio. The factors considered
in the evaluation of the loans include general economic conditions, the
financial condition of the borrower, the value and liquidity of collateral,
delinquency, prior loan loss

F-46
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
experience, and the results of periodic review of the portfolio. Accrual of
interest is discontinued on a loan when management believes, after considering
economic and business conditions and collection efforts, that the borrower's
financial condition is such that collection of interest is doubtful.

BANK PREMISES AND EQUIPMENT

Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on a straight-line basis over
the estimated useful lives of the related assets.

OTHER REAL ESTATE OWNED

Real estate properties acquired through or in lieu of loan foreclosure are
initially recorded at fair value at the date of foreclosure. Costs relating to
development and improvement of property are capitalized, whereas costs relating
to holding property or incurred in foreclosure proceedings are expensed.

Valuations are periodically performed by management and an allowance for
losses is established by means of a charge to operations if the carrying value
of a property exceeds its fair value less estimated costs to sell.

FEDERAL INCOME TAXES

The Company and its subsidiary bank file a consolidated federal income tax
return. The subsidiary provides for taxes on a separate basis and remits to the
Company amounts determined to be currently payable. Federal income tax expense
differs from the amount expected by applying federal statutory rates primarily
due to tax exempt income on securities. Deferred federal income tax assets and
liabilities are recognized to reflect the tax effect of the differences in the
tax and financial reporting basis of assets and liabilities. General business
credits are recognized as a reduction of current income taxes in the year the
credits are utilized.

CASH EQUIVALENTS

The Company defines cash equivalents for the purposes of reporting cash
flows as cash and due from banks.

ACCOUNTING STANDARD NOT YET ADOPTED

In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. This statement requires that "long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable." This statement applies to
fiscal years beginning after December 15, 1995, and is not expected to have a
material effect on the accompanying financial statements.

NOTE 2: INVESTMENT SECURITIES

The Bank is required to maintain a reserve balance with the Federal Reserve
Bank. The reserve requirement as of December 31, 1995 and 1994 totaled
approximately $240,000 and $301,000, respectively.

F-47
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2: INVESTMENT SECURITIES (CONTINUED)
The amortized cost, estimated market values, and gross unrealized gains and
losses of the Company's investment securities as of December 31, 1995 and 1994,
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------
AMORTIZED GROSS GROSS AGGREGATE
COST UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. Treasury securities............... $ 8,408,477 $ 26,186 $ 25,006 $ 8,409,657
U.S. Government agencies............... 1,500,000 4,922 -- 1,504,922
Mortgage-backed securities............. 59,487 40 -- 59,527
------------ ----------- ----------- ------------
Total................................ $ 9,967,964 $ 31,148 $ 25,006 $ 9,974,106
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Securities available for sale
U.S. Treasury securities............... $ 1,496,864 $ 3,526 $ -- $ 1,500,390
U.S. Government agencies............... 1,488,052 20,151 -- 1,508,203
Mortgage-backed securities............. 896,069 13,576 -- 909,645
------------ ----------- ----------- ------------
Total debt securities................ 3,880,985 37,253 -- 3,918,238
Equity securities.................... 406,808 -- -- 406,808
------------ ----------- ----------- ------------
Total................................ $ 4,287,793 $ 37,253 $ -- $ 4,325,046
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------
AMORTIZED GROSS GROSS AGGREGATE
COST UNREALIZED UNREALIZED FAIR
BASIS GAINS LOSSES VALUE
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Securities held to maturity
U.S. Treasury securities............... $ 8,480,175 $ -- $ 326,197 $ 8,153,978
U.S. Government agencies............... 501,013 -- 7,731 493,282
Mortgage-backed securities............. 60,198 445 -- 60,643
------------ ----------- ----------- ------------
Total................................ $ 9,041,386 $ 445 $ 333,928 $ 8,707,903
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
Securities available for sale
U.S. Treasury securities............... $ 6,787,007 $ 290 $ 81,008 $ 6,706,289
Mortgage-backed securities............. 474,241 -- 24,501 449,740
------------ ----------- ----------- ------------
Total debt securities................ 7,261,248 290 105,509 7,156,029
Equity securities.................... 219,237 -- -- 219,237
------------ ----------- ----------- ------------
Total................................ $ 7,480,485 $ 290 $ 105,509 $ 7,375,266
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>

F-48
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2: INVESTMENT SECURITIES (CONTINUED)
The amortized cost and estimated market value of debt securities at December
31, 1995, by contractual and expected maturity, are shown below:

<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST FAIR
BASIS VALUE
------------ ------------
<S> <C> <C>
Securities held to maturity
Due within one year............................................. $ 5,382,641 $ 5,379,032
Due after one year through five years........................... 4,525,836 4,535,547
------------ ------------
9,908,477 9,914,579
Mortgage-backed securities...................................... 59,487 59,527
------------ ------------
Total......................................................... $ 9,967,964 $ 9,974,106
------------ ------------
------------ ------------
Securities available for sale
Due within one year............................................. $ 1,497,442 $ 1,500,967
Due after one year through five years........................... 1,488,052 1,508,204
------------ ------------
2,985,494 3,009,171
Mortgage-backed securities...................................... 895,491 909,067
------------ ------------
Total......................................................... $ 3,880,985 $ 3,918,238
------------ ------------
------------ ------------
</TABLE>

Investment securities carried at approximately $1,366,000, and $1,025,000 at
December 31, 1995 and 1994, respectively, were pledged as collateral for public
or trust fund deposits and for other purposes required or permitted by law.
During 1995 and 1994, there were no sales of investment securities.

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES

The loan portfolio consisted of the following classes at December 31:

<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Commercial.................................................... $ 20,688,427 $ 19,966,043
Commercial real estate........................................ 3,538,709 2,558,814
Mortgage...................................................... 5,733,030 4,760,209
Installment................................................... 3,516,909 3,414,866
-------------- --------------
33,477,075 30,699,932
Unearned interest............................................. (444,726) (401,584)
Allowance for loan losses..................................... (517,673) (640,000)
-------------- --------------
Total loans, net............................................ $ 32,514,676 $ 29,658,348
-------------- --------------
-------------- --------------
</TABLE>

The Company adopted SFAS 114, "Accounting by Creditors for Impairment of a
Loan," and SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," as of January 1, 1995. SFAS No. 114
requires that certain impaired loans be measured based on the present value of
expected future cash flows discounted at the loan's original effective interest
rate. As a practical expedient, impairment may be measured based on the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. When the measure of the impaired loan is less than the
recorded investment in the loan, the impairment is recorded through a valuation
allowance. On collateral

F-49
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
dependent loans, the Company has adopted a policy which requires measurement of
an impaired loan based on the fair value of the collateral. Other loan
impairments will be measured based on the present value of expected future cash
flows or the loan's observable market price.

The Company had previously measured the allowance for credit losses using
methods similar to those prescribed in SFAS No. 114. As a result of adopting
these statements, no additional allowance for loan losses was required as of
January 1, 1995. At December 31, 1995, all significant impaired loans have been
determined to be collateral dependent and have been measured utilizing the fair
value of the collateral.

As of December 31, 1995, the Company's recorded investment in impaired loans
and the related valuation allowance calculated under SFAS No. 114 are as
follows:

<TABLE>
<CAPTION>
RECORDED VALUATION
INVESTMENT ALLOWANCE
----------- -----------
<S> <C> <C>
Impaired loans--
Valuation allowance required..................................... $ 103,977 $ 87,977
No valuation allowance required.................................. -- --
----------- -----------
Total impaired loans......................................... $ 103,977 $ 87,977
----------- -----------
----------- -----------
</TABLE>

This valuation allowance is included in the allowance for loan losses on the
balance sheet.

The average recorded investment in impaired loans for the year ended
December 31, 1995, was $51,989. The Company had $574,700 in nonperforming assets
at December 31, 1995, of which $103,977 represented recorded investments in
impaired loans.

Interest payments received on impaired loans are recorded as interest income
unless collections of the remaining recorded investment is doubtful at which
time payments received are recorded as reductions of principal. The Company
recognized interest income on impaired loans of $3,119 during the year ended
December 31, 1995, of which $1,200 represented cash interest payments received
and recorded as interest income. Interest on impaired loans has been recognized
on a full accrual basis in the period ended December 31, 1995.

Loans on which the accrual of interest has been discontinued totaled
$296,000 and 115,000 on December 31, 1994 and 1993, respectively. If interest on
loans in nonaccrual status during the year ended December 31, 1994 and 1993 had
been accrued, such income would have approximated $20,500 and $8,000,
respectively. Interest income on nonaccrual loans is recorded only when amounts
received reduce the principal amount of the nonaccrual loan to a realizable
level. No interest income on nonaccrual loans was received and recorded in the
year ended December 31, 1994.

The allowance for loan losses as of December 31, 1995, is presented below.
Management has evaluated the adequacy of the allowance for loan losses by
estimating the probable losses in various categories of the loan portfolio which
are identified below:

<TABLE>
<S> <C>
Allowance for loan losses provided for:
Loans specifically evaluated as impaired...................... $ 103,977
Unidentified impaired loans................................... 413,696
---------
Total allowance for loan losses............................... $ 517,673
---------
---------
</TABLE>

F-50
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The allowance for loan losses is maintained at a level considered adequate
to provide for estimated probable incurred losses resulting from loans. The
allowance is reviewed periodically, and as losses are incurred and the amounts
become estimable, they are charged to operations in the periods that they become
known.

The activity in the allowance for loan losses was as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of year........................... $ 640,000 $ 505,000 $ 602,000
Provision for loan losses.......................... 261,383 390,000 510,000
Writedowns......................................... (432,254) (356,406) (692,424)
Recoveries......................................... 48,544 101,406 85,424
----------- ----------- -----------
Balance at end of period............................... $ 517,673 $ 640,000 $ 505,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

Loan maturities and rate sensitivity of the loan portfolio at December 31,
1995, excluding loans on nonaccrual, are as follows:

<TABLE>
<CAPTION>
(THOUSANDS)
-----------
<S> <C>
Fixed rate loans with a remaining maturity of:
Three months or less......................................................... $ 8,875
Over three months through twelve months...................................... 3,111
Over one year through five years............................................. 6,427
-----------
Total fixed rate loans................................................... $ 18,413
-----------
-----------
Variable rate loans with a repricing frequency of:
Quarterly or more frequently............................................... $ 14,966
-----------
-----------
</TABLE>

NOTE 4: BANK PREMISES AND EQUIPMENT

Bank premises and equipment are summarized as follows:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Land.............................................................. $ 805,500 $ 805,500
Office building................................................... 1,804,028 1,804,028
Furniture and fixtures............................................ 179,376 179,216
Bank equipment and machines....................................... 541,434 530,594
Computer software................................................. 115,334 114,614
Automobiles....................................................... 48,292 48,292
------------ ------------
3,493,964 3,482,244
Accumulated depreciation.......................................... (1,135,851) (984,380)
Total......................................................... $ 2,358,113 $ 2,497,864
------------ ------------
------------ ------------
</TABLE>

Depreciation expense totaled $154,734, $161,437 and $157,546 in 1995, 1994
and 1993, respectively, and is included as a component of occupancy and
equipment expense in the consolidated statements.

F-51
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5: DEPOSITS

Deposit account balances at December 31, 1995 and 1994, are summarized as
follows:

<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Noninterest bearing deposits................................... $ 11,044,966 $ 11,717,355
Super Now accounts............................................. 4,709,608 4,630,348
Savings and money market accounts.............................. 15,928,952 18,870,517
Time, $100,000 and over........................................ 6,026,706 4,826,544
Other time..................................................... 16,055,995 11,922,512
------------- -------------
Total...................................................... $ 53,766,227 $ 51,967,276
------------- -------------
------------- -------------
</TABLE>

Included in interest bearing deposits are certificates of deposit of
$100,000 or greater. The remaining maturities of these certificates at December
31, 1995 and 1994, are as follows:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Three months or less.............................................. $ 1,354,706 $ 1,782,544
Over three months through twelve months........................... 3,459,000 2,844,000
Over one year through five years.................................. 1,213,000 200,000
------------ ------------
Total......................................................... $ 6,026,706 $ 4,826,544
------------ ------------
------------ ------------
</TABLE>

Interest expense on deposits of $100,000 or greater totaled $277,807,
$186,391 and $154,861 for the years ended December 31, 1995, 1994 and 1993,
respectively.

NOTE 6: NOTE PAYABLE

Crown Park Bancshares, Inc. had notes payable to eight individuals which
total $1,000,000 and $1,100,000 as of December 31, 1995 and 1994, respectively.
Interest accrues at the rate of one-half percent over the New York prime rate.
The interest rate at December 31, 1995 was 9%. Annual principal payments
aggregating $100,000 will be paid on the notes beginning December, 1993 and
continuing through 1997, at which time a final payment of the unpaid principal
will be due. Security for the notes is 200,000 shares of Western National Bank
stock. Four of the individuals holding the above notes are officers, directors,
or employees of the Bank.

Crown Park Bancshares, Inc. had a note payable dated May 1, 1994 to Plains
National Bank of Lubbock in the original principal amount of $1,151,000, with
interest accruing at the rate of 8.5%. Monthly principal and interest payments
of $9,350 began June 1, 1994. The principal balances at December 31, 1995 and
1994, respectively, were $1,110,763 and $1,135,231. The note calls for payment
in full of the outstanding principal and interest on May 1, 1997. This note is
secured by a condominium office building.

NOTE 7: FEDERAL INCOME TAXES

Deferred federal income taxes are provided for temporary differences in the
financial statement basis and tax basis of certain assets and liabilities.
Primarily, differences exist in investment securities, property and equipment
and accrued income and expense. The realization of deferred tax assets is
dependent on the Company having future taxable income. Management has determined
that it is more likely than not

F-52
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7: FEDERAL INCOME TAXES (CONTINUED)
that the Company will have future taxable income; thus, the deferred tax assets
have not been reduced by a valuation allowance. The provision for income taxes
consists of the following:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current provision........................................ $ 261,300 $ 246,062 $ 244,194
Deferred provision (benefit)............................. (29,271) 5,954 12,752
---------- ---------- ----------
Total................................................ $ 232,029 $ 252,016 $ 256,946
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

NOTE 8: INCENTIVE STOCK OPTION PLAN

Crown Park Bancshares, Inc. established a stock option plan March, 1987
which allows for the granting of options to officers and key employees of the
Bank to purchase shares of the holding company at the fair market value on the
date of grant. A total of 25,000 shares have been reserved for issuance under
this plan. No options had been granted as of December 31, 1995.

NOTE 9: RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has loans, deposits and other
transactions with its officers, directors and businesses with which such persons
are associated. It is the Bank's policy that all such transactions are entered
into on substantially the same terms as those prevailing at the time for
comparable transactions with others. The Bank had loans to officers and
directors of $2,577,000 and $3,438,000 at December 31, 1995 and 1994,
respectively.

NOTE 10: REGULATORY MATTERS

The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency (the OCC). Under such restrictions, the
Bank may not, without the prior approval of the OCC, declare dividends in excess
of the sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years.

NOTE 11: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

The amount of collateral obtained by the Bank upon extension of credit is
based on management's credit evaluation of the counterparty. Collateral held
varies but may include real estate, accounts receivable, inventory, equipment
and income producing properties.

Most of the Bank's business activity is with customers located in Lubbock
and surrounding Counties. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the local economic sector.

F-53
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11: SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK (CONTINUED)
In the normal course of business, the Bank carries certain assets with other
financial institutions which are subject to credit risk by the amount such
assets exceed federal deposit insurance limits. The Bank periodically evaluates
its financial institution relationships to limit exposure to this credit risk.

NOTE 12: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the balance sheet.

The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments less the liquidation of collateral securing such investments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.

At December 31, 1995, financial instruments whose contract amount represent
credit risk are as follows:

<TABLE>
<S> <C>
Commitments to extend credit.................................... $2,852,000
Standby letters of credit....................................... 35,000
</TABLE>

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds various types of
collateral on standby letters of credit, including equipment and certificates of
deposit. The extent of the collateral held for those commitments at December 31,
1995, varies from none to 100 percent of the outstanding letter of credit.

NOTE 13: FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

In 1995, the Company adopted Statement of Financial Accounting Standards No.
107, "Disclosures about Fair Value of Financial Instruments", which requires all
entities to disclose the estimated fair value of its financial instrument assets
and liabilities. For the Company, as for most financial institutions,
approximately 91% of its assets and 96% of its liabilities are considered
financial instruments as defined in Statement No. 107. Many of the Company's
financial instruments, however, lack an available trading market as
characterized by a willing buyer and willing seller engaging in an exchange
transaction. It is also the Company's general practice and intent to hold its
financial instruments to maturity and not to engage in trading or sales
activities. Therefore, significant estimations and present value calculations
were used by the Company for the purpose of this disclosure.

Estimated fair values have been determined by the Company using the best
available data, as generally provided in the Company's regulatory reports, and
an estimation methodology suitable for each category of financial instruments.
For those loans and deposits with floating interest rates, it is presumed that
estimated fair values generally approximate the recorded book balances.

F-54
<PAGE>
CROWN PARK BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13: FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Financial instruments actively traded in a secondary market have been valued
using quoted available market prices. The estimation methodologies used, the
estimated fair values and recorded book balances at December 31, 1995, were as
follows:

<TABLE>
<CAPTION>
RECORDED ESTIMATED
BALANCE FAIR VALUE
------------- -------------
<S> <C> <C>
Cash and due from banks........................................ $ 2,692,737 $ 2,692,737
Federal funds sold............................................. 7,275,000 7,275,000
Investment securities.......................................... 14,293,010 14,299,152
</TABLE>

Financial instruments with stated maturities have been valued using a
present value discounted cash flow with a discount rate approximating current
market for similar assets and liabilities. Financial instrument assets with
variable rates and financial instrument liabilities with no stated maturities
have an estimated fair value equal to both the amount payable on demand and the
recorded book balance.

<TABLE>
<CAPTION>
RECORDED ESTIMATED
BALANCE FAIR VALUE
------------- -------------
<S> <C> <C>
Deposits with stated maturities................................ $ 22,082,701 $ 22,154,635
Deposits with no stated maturities............................. 31,683,526 31,683,526
Net loans...................................................... 32,514,676 32,558,775
</TABLE>

Changes in assumptions or estimation methodologies may have a significant
effect on these estimated fair values.

The Company's remaining assets and liabilities which are not considered
financial instruments have not been valued differently than has been customary
with historical cost accounting. No disclosure of the relationship value of the
Company's deposits is required by Statement No. 107 nor has the Company
estimated its value. There is no significant difference between the notional
amount and the estimated fair value of off-balance sheet unfunded loan
commitments which total $2,852,000 and $3,684,000 at December 31, 1995 and 1994,
respectively, and are generally priced at market at the time of funding. Letters
of credit discussed in Note 12 have an estimated fair value based on fees
currently charged for similar agreements. At December 31, 1995 and 1994, fees
related to the unexpired term of the letters of credit are not significant.

Management is concerned that reasonable comparability between financial
institutions may not be likely due to the wide range of permitted valuation
techniques and numerous estimates which must be made given the absence of active
secondary markets for many of the financial instruments. This lack of uniform
valuation methodologies also introduces a greater degree of subjectivity to
these estimated fair values.

NOTE 14: SUBSEQUENT EVENT

In July, 1996 the stockholders of the Company entered into a definitive
agreement to sell a super majority of the shares of the Company to Independent
Bankshares, Inc. The agreement is subject to certain restrictive provisions and
approval of appropriate regulatory authorities. The sale is expected to occur in
early 1997. It is anticipated that the Company will merge with a wholly-owned
subsidiary of Independent Bankshares, Inc. upon consummation of the transaction.

F-55
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY UNDERWRITER OR ANY
OTHER PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE
SOLICITATION OF ANY OFFER TO PURCHASE, ANY SECURITY OTHER THAN THE SHARES OF
COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER OR
SOLICITATION IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................. 3
Investment Considerations...................... 9
Disclosure Regarding Forward-Looking
Statements................................... 11
Use of Proceeds................................ 12
Market for Common Stock........................ 12
Dividend Policy................................ 13
The Acquisition................................ 14
Pro Forma Combined Financial Statements........ 17
Capitalization................................. 21
Selected Consolidated Financial Data........... 22
Management's Discussion and Analysis of
Financial Condition and Results of Operations
of the Company............................... 23
Business and Properties of the Company......... 49
Regulation and Supervision..................... 54
Management..................................... 63
Security Ownership of Management and Certain
Beneficial Owners............................ 66
Certain Relationships and Related
Transactions................................. 68
Description of Capital Stock................... 69
Shares Eligible for Future Sale................ 73
Underwriting................................... 74
Legal Matters.................................. 74
Experts........................................ 75
Available Information.......................... 75
Index to Financial Statements.................. F-1
</TABLE>

275,000 SHARES

[LOGO]

COMMON STOCK
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PROSPECTUS

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

HOEFER & ARNETT
INCORPORATED

JANUARY 21, 1997

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