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

Diversifying Within Our Markets

[Independent Bankshares logo]

Independent Bankshares, Inc.

1999 Annual Report

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[Illustration of Texas with an inset showing different Texas cities in the West and North Central Regions]
[Independent Bankshares, Inc. Logo]
First State Bank, N.A.
B a n k i n g    L o c a t i o n s    i n    W e s t    T e x a s
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[Photograph: Magnifying glass placed on one hundred dollar bill, enclosed in a square]

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

Financial Highlights
     1999     THIS YEAR'S
          MONETARY REPORT

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President's Letter

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

[PHOTOGRAPH OF BRYAN STEPHENSON AND RANDAL CROSSWHITE]

BRYAN STEPHENSON

RANDAL CROSSWHITE

[two columns]

[column 1]

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

[PHOTOGRAPH OF JIM FITZHUGH AND STEVE STRAIN]

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

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

[column 2]

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

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

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

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

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[two columns]

[column 1, top half of page]

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

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

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

[column 2, top half of page]

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

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

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

Sincerely,

/s/ Bryan Stephenson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

/s/ PricewaterhouseCoopers LLP

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

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

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

     The principal services provided by the Bank are as follows:

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

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

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

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

     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.

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

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

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

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

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

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

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

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

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

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

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

Use of Estimates

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

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

     The Company completed the acquisition of Crown Park Bancshares, Inc. ("Crown Park") and its wholly owned subsidiary bank, Western National Bank, Lubbock, Texas ("Western National"), effective January 28, 1997, for an aggregate cash consideration of $7,510,000. On the acquisition date, Crown Park was merged with and into a wholly owned subsidiary of the Company and Western National was merged with and into the Bank. To obtain funding for the acquisition, the Company sold an aggregate of 395,312 shares of Common Stock in an underwritten offering at a price of$11,40 per share (the "1997 Offering"). The 1997 Offering included the sale of 51,562 shares covered by the underwriter's over-allotment option. The above number of shares and price per share have been adjusted for the 5-for-4 stock split, effected in the form of a 25% stock dividend, paid to the Company's shareholders in May 1997. The Company borrowed $800,000 from a financial institution in Amarillo, Texas (the "Amarillo Bank") to finance a portion of the cost of acquiring Crown Park. The $800,000 of borrowings was reduced to $400,000 with the proceeds of the sale of the over-allotment shares. The borrowing was paid off on December 31, 1997. At the date of acquisition, Crown Park had total assets of $60,420,000, total loans, net of unearned income, of $41,688,000, total deposits of $53,604,000 and stockholders' equity of $4,238,000. This acquisition was accounted for using the purchase method of accounting. A total of $2,486,000 of goodwill was recorded as a result of this acquisition. Such goodwill is being amortized over a period of 15 years.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     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.

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

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

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

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

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

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

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

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

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

     The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause the initiation of certain mandatory, and possibly additional discretionary, actions by the regulatory authorities that, if undertaken, could have a direct material effect on the Company's and the Bank's respective financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's respective assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's respective capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

     Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier 1 capital and total capital (Tier 1

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

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

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

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

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

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

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

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

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

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

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     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.

     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.

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

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

_____________

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

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        This report contains certain forward-looking statements and information relating to Independent Bankshares, Inc. (the "Company") and its subsidiaries that are based on the beliefs of the Company's management as well as assumptions made by and information currently available to the Company's management. When used in this report, the words "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to certain risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, customer relations, the interest rate environment, governmental regulation and supervision, nonperforming asset levels, loan concentrations, changes in industry practices, one time events and other factors described herein. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not intend to update these forward-looking statements.

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

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

        Azle Bancorp and Azle State. The Company completed the acquisition of Azle Bancorp and its subsidiary bank, Azle State Bank, Azle, Texas ("Azle State"), effective September 22, 1998, for an aggregate cash consideration of $19,025,000. To obtain funding for the acquisition, the Company sold an aggregate of 230,000 shares of Common Stock at a price of $11.50 per share, and Independent Capital, a Delaware business trust formed by the Company, sold 1,300,000 of its 8.5% Cumulative Trust Preferred Securities (the "Trust Preferred Securities") at $10.00 per preferred security (having a liquidation value of $13,000,000) in an underwritten offering (collectively, the "1998 Offering"). The proceeds from the sale of the Trust Preferred Securities were used by Independent Capital to purchase an equivalent amount of Subordinated Debentures ("Subordinated Debentures") of the Company. The Company also borrowed $4,300,000 from a financial institution in Fort Worth, Texas (the "Fort Worth Bank") to finance a portion of the cost of acquiring Azle Bancorp. The borrowings from the Fort Worth Bank were paid off on September 30, 1998, from the proceeds of a cash dividend paid to the Company by Azle State. At the date of acquisition, Azle Bancorp had total assets of $93,158,000, total loans, net of unearned income, of $45,163,000, total deposits of $80,955,000 and stockholders' equity of $9,872,000. This acquisition was accounted for using the purchase method of accounting. A total of $8,014,000 of intangible assets, including $2,895,000 of core deposit intangible and $5,119,000 of goodwill, was recorded as a result of this acquisition. The core deposit

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

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

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

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

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

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

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

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

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

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

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

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______________________________

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        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.

______________________________

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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%.

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

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

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

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

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