GUARANTY BANCSHARES INC /TX/ - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-23113

GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
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TEXAS 75-1656431
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)

100 WEST ARKANSAS 75455
MOUNT PLEASANT, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(903) 572-9881
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common Stock, par value
$1.00 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].

Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

As of February 16, 2000, the number of outstanding shares of Common Stock
was 3,250,016. As of such date, the aggregate market value of the shares of
Common Stock held by non-affiliates, based on the closing price of the Common
Stock on the Nasdaq National Market System on such date, was approximately $32.9
million.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Company's Proxy Statement relating to the 2000 Annual Meeting of
Shareholders, which will be filed within 120 days after December 31, 1999, are
incorporated by reference into Part III, Items 10-13 of this Form 10-K.

GUARANTY BANCSHARES, INC.
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FINANCIAL INFORMATION
1999 ANNUAL REPORT ON FORM 10-K

PART I

Item 1. Business ......................................................... -3-
Item 2. Properties ....................................................... -14-
Item 3. Legal Proceedings ................................................ -14-
Item 4. Submission Of Matters to Vote Of Security Holders ................ -14-

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PART II

Item 5. Market for Registrant's Common Equity
and Related Shareholder Matters .................................. -15-
Item 6. Selected Consolidated Annual Financial Data ...................... -16-
Item 7. Management's Discussion and Analysis ............................. -18-
Item 7A. Quantitative and Qualitative Disclosures ........................ -38-
Item 8. Financial Statements and Supplementary Data ...................... -39-
Item 9. Changes and Disagreements with Accountants ....................... -39-

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PART III

Item 10. Directors and Executive Officers ................................ -39-
Item 11. Executive Compensation .......................................... -39-
Item 12. Security Ownership .............................................. -39-
Item 13. Related Transactions ............................................ -39-

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PART IV

Item 14. Exhibits, Financial Statement Schedules ......................... -39-
Independent Auditor's Report ............................................. -F-2-
Consolidated Balance Sheets .............................................. -F-3-
Consolidated Statements of Earnings ...................................... -F-4-
Consolidated Statements of Shareholder's Equity .......................... -F-5-
Consolidated Statements of Cash Flows .................................... -F-6-
Notes to Consolidated Financial Statements ............................... -F-7-

PART I

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD LOOKING INFORMATION

Statements and financial discussion and analysis contained in this Annual
Report on Form 10-K that are not historical facts are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements describe the Company's future
plans, strategies and expectations, are based on assumptions and involve a
number of risks and uncertainties, many of which are beyond the Company's
control. The important factors that could cause actual results to differ
materially from the forward-looking statements include, without limitation:

o changes in interest rates and market prices, which could reduce the
Company's net interest margins, asset valuations and expense
expectations;

o changes in the levels of loan prepayments and the resulting effects
on the value of the Company's loan portfolio;

o changes in local economic and business conditions which adversely
affect the Company's customers and their ability to transact
profitable business with the Company, including the ability of its
borrowers to repay their loans according to their terms or a change
in the value of the related collateral;

o increased competition for deposits and loans adversely affecting
rates and terms;

o the timing, impact and other uncertainties of the Company's
potential future acquisitions, including the Company's ability to
identify suitable future acquisition candidates, the success or
failure in the integration of their operations, and the Company's
ability to enter new markets successfully and capitalize on growth
opportunities;

o increased credit risk in the Company's assets and increased
operating risk caused by a material change in commercial, consumer
and/or real estate loans as a percentage of the total loan
portfolio;

o the failure of assumptions underlying the establishment of and
provisions made to the allowance for loan losses;

o changes in the availability of funds resulting in increased costs or
reduced liquidity;

o changes in the Company's ability to pay dividends on its Common
Stock;

o increased asset levels and changes in the composition of assets and
the resulting impact on the Company's capital levels and regulatory
capital ratios;

o the Company's ability to acquire, operate and maintain cost
effective and efficient systems without incurring unexpectedly
difficult or expensive but necessary technological changes
(including changes to address Year 2000 data systems issues);

o the loss of senior management or operating personnel and the
potential inability to hire qualified personnel at reasonable
compensation levels;

o the effects of the Internal Revenue Service's examination regarding
the Company's leveraged leasing transactions; and

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o changes in statutes and government regulations or their
interpretations applicable to bank holding companies and the
Company's present and future banking and other subsidiaries,
including changes in tax requirements and tax rates.

o All written or oral forward-looking statements attributable to the
Company are expressly qualified in their entirety by these
cautionary statements.

ITEM 1. BUSINESS

GENERAL

Guaranty Bancshares, Inc. (the "Company") was incorporated as a business
corporation under the laws of the State of Texas in 1980 to serve as a holding
company for Guaranty Bank (the "Bank"), which was chartered in 1913, and for
Talco State Bank, which was chartered in 1912 and merged into the Bank in 1997.
The Company's headquarters are located at 100 West Arkansas, Mount Pleasant,
Texas 75455, and its telephone number is (903) 572-9881.

The Company has grown through a combination of internal growth, the
acquisition of community banks and the opening of new community banking offices.
In 1992, the Company established its Deport, Texas location by acquiring certain
assets and liabilities of the First National Bank of Deport (the "Deport Bank").
The Deport Bank also had a branch in Paris, Texas, which the Company acquired.
To enhance its expansion into the Paris community, the Company constructed a new
facility to serve as its Paris location. In 1993, the Company purchased a
commercial bank in Bogata, Texas and in 1996 opened a second retail-service
banking facility in Mount Pleasant. In 1997, the Company merged Talco State Bank
into the Bank and opened a full-service location in Texarkana. Texarkana is the
center of a trade area encompassing approximately 123,000 people. Management of
the Company believes that this trade area provides opportunity for strong
continued growth in loans and deposits. Texas Highway 59 (scheduled to become
Interstate 69), which serves as the primary "NAFTA Highway" linking the interior
United States and Mexico, is a main artery to Texarkana. The increased traffic
along this NAFTA Highway is expected to enhance economic activity in this area
and create more opportunities for growth. In 1998, the Company completed a new
facility in Texarkana to enhance its expansion in the Texarkana market. In 1999,
the Company opened a full-service location in Pittsburg, Texas, a community of
approximately 4,500 people located 12 miles from Mount Pleasant. Also in 1999,
the Company acquired the First American Financial Corporation, ("First
American"), with locations in Sulphur Springs and Commerce, Texas. The Company
also acquired First American's wholly owned mortgage company. The operations of
the mortgage subsidiary are being continued by the Company under the name
Guaranty Mortgage Company.

The Company has developed a community-banking network, with most of its
offices located in separate communities. Lending and investment activities are
funded from a strong core deposit base consisting of more than 36,000 deposit
accounts. Each of the Company's offices has the authority and flexibility to
make pricing decisions within overall ranges developed by the Company as a form
of quality control. Management of the Company believes that its responsiveness
to local customers and ability to adjust deposit rates and price loans at each
location gives it a distinct competitive advantage. Employees are committed to
personal service and developing long-term customer relationships, and adequate
staffing is provided at each location to ensure that customer's needs are well
addressed. The Company provides economic incentives to its officers to develop
additional business for the Company and to cross-sell additional products and
services to existing customers.

The Company continues to look for additional expansion opportunities,
either through acquisitions of existing financial institutions or by
establishing de novo offices. The Company intends to consider various strategic
acquisitions of banks, banking assets or financial service entities related to
banking in those areas that management believes would complement and help grow
the Company's existing business. The Company is particularly optimistic about
the growth potential in the Texarkana, Sulphur Springs, Paris, and Mount
Pleasant market areas.

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The Bank owns interests in four entities which complement the Company's
business: (i) Guaranty Leasing Company ("Guaranty Leasing"), which finances
equipment leases and has engaged in certain transactions which have resulted in
the recognition of federal income tax losses deductible by the Company, (ii)
Guaranty Mortgage Company ("Guaranty Mortgage"), which purpose is to facilitate
long-term fixed rate secondary market financing for Guaranty Bank customers,
(iii) BSC Securities, L.C. ("BSC"), which provides brokerage services and (iv)
Independent Bank Services, L.C. ("IBS"), which performs compliance, loan review,
internal audit and electronic data processing audit functions.

BUSINESS

The Company's guiding strategy is to increase shareholder value by
providing customers with individualized, responsive, quality service and to
augment its existing market share. The Company's main objective is to increase
loans and deposits through additional expansion opportunities in Northeast
Texas, while stressing efficiency and maximizing profitability. In furtherance
of this objective, the Company has employed the following operating strategies:

FOCUS ON COMMUNITY BANKING. The Company has developed a reputation of
being a premier provider of financial services to small and medium-sized
businesses, professionals and individuals in Northeast Texas. Management
believes the Company's reputation for providing personal, professional and
dependable service is well established in communities located in this area. Each
of the Company's full-service branch locations is administered by a local
President with knowledge of the community and lending expertise in the specific
industries found in the community, whether it is agriculture, manufacturing and
commerce or professional services. Decisions regarding loans are made at each
location in a timely manner. Indicative of the Company's community banking
expertise, the Small Business Administration honored the Company as the top
rated small business lender in the State of Texas in 1994, 1995, 1996 and 1997
even though the Company did not participate in the Small Business Administration
guaranteed loan program.

CONTINUE STRONG CORE GROWTH. In recent years, the Company has increased
its market share in each of the communities in which it maintains a full-service
banking facility. In its principal location of Mount Pleasant, the Company has
increased its market share of financial institution deposits from 45.8% in 1998
to 47.8% in 1999. Deposits at the Paris location grew 8.9% in 1998 and 27.9% in
1999. Deposits at the Texarkana location, which opened in August of 1997, grew
135.7% in 1998, and 95.9% in 1999 as the Company gained market share in Bowie
County. Deposits at the Sulphur Springs location represent an approximate market
share of 13.7%. The Company is well known in its geographic area as a result of
its longevity and reputation for service. The Company intends to grow by
continuing to seek strategic acquisitions and branching opportunities.

ENHANCE TECHNOLOGY. The Company has embraced technological change as a way
to remain competitive, manage operational costs associated with growth and offer
superior products to its customers. Recent technological implementations include
check imaging, credit file imaging, optical report archival and an automated
voice response system. Currently, the Company is evaluating several additional
enhancements that will improve its ability to deliver information internally to
improve productivity and externally to provide convenience and timeliness to its
growing customer base. Such enhancements include high-speed wireless
communications between all locations combining data and voice traffic, and an
end-user Internet banking web site providing current account information,
electronic bill and note payment, on-line account reconciliation and internal
transfers. The Company has made significant investments in technology, and has
become a technological leader in its market.

OFFER COMPETITIVE PRODUCTS. The Company recognizes its competition is not
solely banks, but brokerage houses, insurance companies, credit unions and
various other competitors, and that in order to thrive it must be competitive in
the products that it offers. The Company offers a full range of commercial loan
products, including

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term loans, lines of credit, fixed asset loans and working capital loans. The
Company also offers consumers a full range of personal loan products including
automobile loans, home improvement loans, consumer loans and mortgage loans. The
Company also has a wide variety of deposit products, including a Premier money
market account that pays a rate competitive with most brokerage investment
accounts and has been very attractive to customers. This product, coupled with
certificates of deposit, NOW accounts, savings accounts, free checking, debit
cards and overdraft protection, gives the customer a full compliment of deposit
products at competitive rates.

EXPAND REVENUE SOURCES. In order to provide service to its customers and
to augment revenues, the Company offers brokerage and trust services. BSC is a
full-service brokerage company that offers a complete array of investment
options including stocks, bonds, mutual funds, financial and retirement
planning, tax advantaged investments and asset allocations. BSC offers
securities through Southwest Securities, a Texas based independent clearing
firm. BSC is licensed and regulated through the National Association of
Securities Dealers, the Securities and Exchange Commission and various state and
federal banking authorities. The Company's Trust Department offers complete
trust services, including estate administration, custody, trust and asset
management services. Management believes that an aging affluent population will
foster an increase in the need for professional estate administration services.
The maturing of the baby boomer generation is creating a market for asset
management services. The Trust Department is in a unique position since there is
little competition for trust services in the Company's markets. Because of the
Company's strong presence in its markets, management believes that banking
relationships can be leveraged into growth for the Trust Department. Growth in
trust assets and corresponding management fees will result from expanding estate
administration, traditional trust services, asset management services and
custodial services in the Company's markets. The Company expects growth in this
department and anticipates that resulting fees will provide a stable stream of
income.

IMPROVE OPERATING EFFICIENCIES. In order to control overhead expenses, the
Company seeks to provide a full range of services as effectively as possible.
Through BSC, the Company is able to provide its customers with full brokerage
services without having to carry the entire cost itself due to a shared cost
agreement with other banks. Similarly, the Company enjoys the compliance, loan
review, internal audit and electronic data processing audit functions provided
by IBS on a shared cost basis with a group of other banks participating in this
arrangement. The Company has spent the last eight years and considerable revenue
expanding its market and improving the delivery of its financial products, which
has resulted in a higher than desired efficiency ratio. Beginning with the
acquisition of the Deport Bank in 1992, the Company has added eight locations.
As a result, it has taken longer for the Company to achieve the desired
economies of scale, but with its growth rate, those economies are beginning to
be realized and the efficiency ratio is expected to show declining trends in the
future. The Company has the support staff and related fixed asset investments to
accommodate additional growth and enjoy additional economies of scale.

RECENT ACQUISITION

On September 1, 1999, the Company acquired First American Financial
Corporation ("First American") and its wholly owned subsidiaries, First American
Bank, N.A. and First American Mortgage Company, for aggregate consideration of
351,736 shares of Company Common Stock and $3.34 million in cash. First American
Bank, N.A. had locations in Sulphur Springs and Commerce, Texas, which are now
operated as branches of the Bank. The operations of First American Mortgage
Company are being continued under the name Guaranty Mortgage Company. At
September 1, 1999, First American had total assets of $63.7 million, consisting
primarily of $37.3 million in loans and $20.5 million in investment securities,
and total deposits of $57.6 million.

The acquisition was accounted for using the purchase method of accounting.
Under the purchase method of accounting, the results of operations of First
American are included in the Company's results of operations from the date of
acquisition. The excess of cost over fair value of assets acquired was $3.1
million, which was treated for accounting purposes as goodwill.

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COMPETITION

The banking business is highly competitive, and the profitability of the
Company depends principally on the Company's ability to compete in the market
areas in which its banking operations are located. The Company competes with
other commercial banks, savings banks, savings and loan associations, credit
unions, finance companies, mutual funds, insurance companies, brokerage and
investment banking firms, asset-based non-bank lenders and certain other
non-financial entities, including retail stores which may maintain their own
credit programs and certain governmental organizations which may offer more
favorable financing than the Company. The Company has been able to compete
effectively with other financial institutions by emphasizing customer service,
technology and local office decision-making, by establishing long-term customer
relationships and building customer loyalty, and by providing products and
services designed to address the specific needs of its customers. Competition
from both financial and non-financial institutions is expected to continue.

Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "-Supervision and Regulation - The
Company". The financial services industry is also likely to become even more
competitive as further technological advances enable more companies to provide
financial services. These technological advances may diminish the importance of
depository institutions and other financial intermediaries in the transfer of
funds between parties.

LEVERAGED LEASE TRANSACTIONS

In a series of transactions in 1992, 1994 and 1995, Guaranty Leasing
acquired limited partnership interests in certain partnerships (collectively,
the "Partnerships" or individually, a "Partnership") engaged in the equipment
leasing business. The investments were structured by TransCapital Corporation
("TransCapital") through various subsidiaries and controlled partnerships.

Generally, in each of the transactions the Partnership became the lessee
of equipment from an equipment owner (pursuant to a sale and leaseback
transaction) and the sublessor of the equipment to the equipment user. Each
Partnership receives note payments from the equipment owner under a purchase
money note given to purchase the equipment from that Partnership. The
Partnership makes lease payments to the equipment owner pursuant to the master
lease of the equipment. In most instances, payments under the purchase money
note equals lease payments under the master lease. Rental payments from the
equipment used under these equipment subleases were sold in advance subject to
existing liens for purchase of the equipment.

The Partnership incurs a tax loss while the master lease/sublease
structure is in place; primarily because deductions for rentals paid under the
master lease exceed taxable interest income under the purchase money note.
Consequently, Guaranty Leasing has reported tax losses as a result of its
investments in the Partnerships, which were deductible by the Company. In
November 1998, Guaranty Leasing was informed by the Internal Revenue Service
(the "Service") that it has taken the position that certain losses taken by the
Partnerships during 1994, 1995 and 1996 of $302,000, $410,000 and $447,000,
respectively, would be disallowed. The Company believes that it has correctly
reported these transactions for tax purposes and that it has obtained
appropriate legal, accounting and appraisal opinions and authority to support
its positions. The Partnership plans to appeal the Service's determination with
the Service's Appellate Division. If the appeal is unsuccessful, the Partnership
plans to litigate the matter in Tax Court. Any final determination with respect
to the Partnership will be binding on the Company. If the Service is ultimately
successful in redetermining the Partnerhips' tax liability, the Company's tax
deductions taken in 1994, 1995 and 1996 may be disallowed and its tax liability
may be adjusted, which may have a material adverse affect on the Company. The
Partnership is actively contesting the position of the Service in connection
with this matter, and will take appropriate steps necessary to protect its legal
position.

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EMPLOYEES

As of December 31, 1999, the Company had 192 full-time equivalent
employees, 75 of whom were officers of the Bank. The Company provides medical
and hospitalization insurance to its full-time employees. The Company considers
its relations with employees to be excellent.

SUPERVISION AND REGULATION

The supervision and regulation of bank holding companies and their
subsidiaries is intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of the bank holding
company shareholders or creditors. The banking agencies have broad enforcement
power over bank holding companies and banks including the power to impose
substantial fines and other penalties for violations of laws and regulations.

The following description summarizes some of the laws to which the Company
and the Bank are subject. References herein to applicable statutes and
regulations are brief summaries thereof, do not purport to be complete, and are
qualified in their entirety by reference to such statutes and regulations.

THE COMPANY. The Company is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended (the "BHC Act"), and it is subject
to supervision, regulation and examination by the Board of Governors of the
Federal Reserve System ("Federal Reserve"). The BHC Act and other federal laws
subject 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 regulations.

REGULATORY RESTRICTIONS ON DIVIDENDS; SOURCE OF STRENGTH. It is the policy
of the Federal Reserve that bank holding companies should pay cash dividends on
common stock only out of income available over the past year and only if
prospective earnings retention is consistent with the organization's expected
future needs and financial condition. The policy provides that bank holding
companies should not maintain a level of cash dividends that undermines the bank
holding company's ability to serve as a source of strength to its banking
subsidiaries.

Under Federal Reserve policy, a bank holding company is expected to act as
a source of financial strength to each of its banking subsidiaries and commit
resources to their support. Such support may be required at times when, absent
this Federal Reserve policy, a holding company may not be inclined to provide
it. As discussed below, a bank holding company in certain circumstances could be
required to guarantee the capital plan of an undercapitalized banking
subsidiary.

In the event of a bank holding company's bankruptcy under Chapter 11 of
the U.S. Bankruptcy Code, the trustee will be deemed to have assumed and is
required to cure immediately any deficit under any commitment by the debtor
holding company to any of the federal banking agencies to maintain the capital
of an insured depository institution, and any claim for breach of such
obligation will generally have priority over most other unsecured claims.

FINANCIAL MODERNIZATION. Under the BHC Act, bank holding companies
generally may not acquire a direct or indirect interest in or control of more
than 5% of the voting shares of any company that is not a bank or bank holding
company or from engaging in activities other than those of banking, managing or
controlling banks or furnishing services to or performing services for its
subsidiaries, except that it may engage in, directly or indirectly, certain
activities that the Federal Reserve determined to be closely related to banking
or managing and controlling banks as to be a proper incident thereto.

However, on November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act that eliminated the barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers. The
Gramm-Leach-Bliley Act will, effective March 11, 2000, permit bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other

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activities that are financial in nature. No regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activity's that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve.

Under the Gramm-Leach-Bliley Act, a bank holding company may become a
financial holding company by filing a declaration with the Federal Reserve if
each of its subsidiary banks is well capitalized under the FDICIA prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act of 1977 ("CRA"). The
Gramm-Leach-Bliley Act defines "financial in nature" to include securities
underwriting, dealing and market making; sponsoring mutual funds and investment
companies; insurance underwriting and agency; merchant banking activities; and
activities that the Federal Reserve has determined to be closely related to
banking.

While the Federal Reserve will serve as the "umbrella" regulator for
financial holding companies and has the power to examine banking organizations
engaged in new activities, regulation and supervision of activities which are
financial in nature or determined to be incidental to such financial activities
will be handled along functional lines. Accordingly, activities of subsidiaries
of a financial holding company will be regulated by the agency or authorities
with the most experience regulating that activity as it is conducted in a
financial holding company.

SAFE AND SOUND BANKING PRACTICES. Bank holding companies are not permitted
to engage in unsafe and unsound banking practices. The Federal Reserve's
Regulation Y, for example, generally requires a holding company to give the
Federal Reserve 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 year, is equal to 10%
or more of the company's consolidated net worth. The Federal Reserve may oppose
the transaction if it believes that the transaction would constitute an unsafe
or unsound practice or would violate any law or regulation. Depending upon the
circumstances, the Federal Reserve could take the position that paying a
dividend would constitute an unsafe or unsound banking practice.

The Federal Reserve has broad authority to prohibit activities of bank
holding companies and their non-banking subsidiaries which represent unsafe and
unsound banking practices or which constitute violations of laws or regulations,
and can assess civil money penalties for certain activities conducted on a
knowing and reckless basis, if those activities caused a substantial loss to a
depository institution. The penalties can be as high as $1.0 million for each
day the activity continues.

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

CAPITAL ADEQUACY REQUIREMENTS. The Federal Reserve has adopted a system
using risk-based capital guidelines to evaluate the capital adequacy of bank
holding companies. Under the guidelines, specific categories of assets are
assigned different risk weights, 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. The guidelines require a minimum total
risk-based capital ratio of 8.0% (of which at least 4.0% is required to consist
of Tier 1 capital elements). Total capital is the sum of Tier 1 and Tier 2
capital. As of December 31, 1999, the Company's ratio of Tier 1 capital to total
risk-weighted assets was 9.86% and its ratio of total capital to total
risk-weighted assets was 10.83%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

In addition to the risk-based capital guidelines, the Federal Reserve uses
a leverage ratio as an additional tool to evaluate the capital adequacy of bank
holding companies. The leverage ratio is a company's Tier 1 capital divided by
its average total consolidated assets. Certain highly-rated bank holding
companies may maintain a minimum leverage ratio of 3.0%, but other bank holding
companies may be required to maintain a leverage ratio of up to 200 basis points
above the regulatory minimum. As of December 31, 1999, the Company's leverage
ratio was 8.21%.

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The federal banking agencies' risk-based and leverage ratios are minimum
supervisory ratios generally applicable to banking organizations that meet
certain specified criteria, assuming that they have the highest regulatory
rating. Banking organizations not meeting these criteria are expected to operate
with capital positions well above the minimum ratios. The federal bank
regulatory agencies may set capital requirements for a particular banking
organization that are higher than the minimum ratios when circumstances warrant.
Federal Reserve guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels, without
significant reliance on intangible assets.

IMPOSITION OF LIABILITY FOR UNDERCAPITALIZED SUBSIDIARIES. Bank regulators
are required to take "prompt corrective action" to resolve problems associated
with insured depository institutions whose capital declines below certain
levels. In the event an institution becomes "undercapitalized," it must submit a
capital restoration plan. The capital restoration plan will not be accepted by
the regulators unless each company having control of the undercapitalized
institution guarantees the subsidiary's compliance with the capital restoration
plan up to a certain specified amount. Any such guarantee from a depository
institution's holding company is entitled to a priority of payment in
bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank
is limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to be
"adequately capitalized." The bank regulators have greater power 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 can be required to obtain prior Federal Reserve
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.

ACQUISITIONS BY BANK HOLDING COMPANIES. The BHC Act requires every bank
holding company to obtain the prior approval of the Federal Reserve 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 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.

CONTROL ACQUISITIONS. The Change in Bank Control Act prohibits a person or
group of persons from acquiring "control" of a bank holding company unless the
Federal Reserve has been notified and has not objected to the transaction. Under
a rebuttable presumption established by the Federal Reserve, the acquisition of
10% or more of a class of voting stock of a bank holding company with a class of
securities registered under Section 12 of the Exchange Act, such as the Company,
would, under the circumstances set forth in the presumption, constitute
acquisition of control of the Company.

In addition, any company is required to obtain the approval of the Federal
Reserve under the BHC Act before acquiring 25% (5% in the case of an acquirer
that is a bank holding company) or more of the outstanding Common Stock of the
Company, or otherwise obtaining control or a "controlling influence" over the
Company.

THE BANK. The Bank is a Texas-chartered banking association, the deposits
of which are insured by the Bank Insurance Fund ("BIF") of the FDIC. The Bank is
not a member of the Federal Reserve System; therefore, the Bank is subject to
supervision and regulation by the FDIC and the Texas Department of Banking
("TDB"). Such supervision and regulation subjects the Bank to special
restrictions, requirements, potential enforcement actions and periodic
examination by the FDIC and the TDB. Because the Federal Reserve regulates the
bank holding company parent of the Bank, the Federal Reserve also has
supervisory authority, which directly affects the Bank.

-9-

EQUIVALENCE TO NATIONAL BANK POWERS. The Texas Constitution, as amended in
1986, provides that a Texas-chartered bank has the same rights and privileges
that are or may be granted to national banks domiciled in Texas. To the extent
that the Texas laws and regulations may have allowed state-chartered banks to
engage in a broader range of activities than national banks, the Federal Deposit
Insurance Corporation Improvement Act ("FDICIA") has operated to limit this
authority. FDICIA provides that no state bank or subsidiary thereof may engage
as principal in any activity not permitted for national banks, unless the
institution complies with applicable capital requirements and the FDIC
determines that the activity poses no significant risk to the insurance fund. In
general, statutory restrictions on the activities of banks are aimed at
protecting the safety and soundness of depository institutions.

FINANCIAL MODERNIZATION. Under the Gramm-Leach-Bliley Act, a national bank
may establish a financial subsidiary and engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting as principal, insurance company portfolio investment, real estate
development, real estate investment and annuity issuance. To do so, a bank must
be well capitalized, well managed and have a CRA rating of satisfactory or
better. Subsidiary banks of a financial holding company or national banks with
financial subsidiaries must remain well capitalized and well managed in order to
continue to engage in activities that are financial in nature without regulatory
actions or restrictions, which could include divestiture of the financial in
nature subsidiary or subsidiaries. In addition, a financial holding company or a
bank may not acquire a company that is engaged in activities that are financial
in nature unless each of the subsidiary banks of the financial holding company
or the bank has a CRA rating of satisfactory or better.

Although the powers of state chartered banks with respect to engaging in
financial activities are not specifically addressed in the Gramm-Leach-Bliley
Act, state banks such as the Bank, will have the same if not greater powers as
national banks through the parity provision contained in the Texas Constitution.

BRANCHING. Texas law provides that a Texas-chartered bank can establish a
branch anywhere in Texas provided that the branch is approved in advance by the
TDB. The branch must also be approved by the FDIC, 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.

RESTRICTIONS ON TRANSACTIONS WITH AFFILIATES AND INSIDERS. Transactions
between the Bank and its nonbanking subsidiaries, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions, and also requires certain
levels of collateral for loans to affiliated parties. It also limits the amount
of advances to third parties, which are collateralized by the securities, or
obligations of the Company or its subsidiaries.

Affiliate transactions are also subject to Section 23B of the Federal
Reserve Act which generally requires that certain transactions between the Bank
and its affiliates be on terms substantially the same, or at least as favorable
to the Bank, as those prevailing at the time for comparable transactions with or
involving other nonaffiliated persons.

The restrictions on loans to directors, executive officers, principal
shareholders and their related interests (collectively referred to herein as
"insiders") contained in the Federal Reserve Act and Regulation O apply to all
insured institutions and their subsidiaries and holding companies. These
restrictions include limits on loans to one borrower and conditions that must be
met before such a loan can be made. There is also an aggregate limitation on all
loans to insiders and their related interests. These loans cannot exceed the
institution's total unimpaired capital and surplus, and the FDIC may determine
that a lesser amount is appropriate. Insiders are subject to enforcement actions
for knowingly accepting loans in violation of applicable restrictions.

-10-

RESTRICTIONS ON DISTRIBUTION OF SUBSIDIARY BANK DIVIDENDS AND ASSETS.
Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and it is anticipated that dividends paid by the Bank to the
Company will continue to be the Company's principal source of operating funds.
Capital adequacy requirements serve to limit the amount of dividends that may be
paid by the Bank. Under federal law, the Bank cannot pay a dividend if, after
paying the dividend, the Bank will be "undercapitalized." The FDIC may declare a
dividend payment to be unsafe and unsound even though the Bank would continue to
meet its capital requirements after the dividend.

Because the Company is a legal entity separate and distinct from its
subsidiaries, its right to participate in the distribution of assets of any
subsidiary upon the subsidiary's liquidation or reorganization will be subject
to the prior claims of the subsidiary's creditors. In the event of a liquidation
or other resolution of an insured depository institution, the claims of
depositors and other general or subordinated creditors are entitled to a
priority of payment over the claims of holders of any obligation of the
institution to its shareholders, including any depository institution holding
company (such as the Company) or any shareholder or creditor thereof.

EXAMINATIONS. The FDIC periodically examines and evaluates insured banks.
Based upon such an evaluation, the FDIC may revalue the assets of the
institution and require that it establish specific reserves to compensate for
the difference between the FDIC-determined value and the book value of such
assets. The TDB also conducts examinations of state banks but may accept the
results of a federal examination in lieu of conducting an independent
examination.

AUDIT REPORTS. Insured institutions with total assets of $500 million or
more must submit annual audit reports prepared by independent auditors to
federal and state regulators. In some instances, the audit report of the
institution's holding company can be used to satisfy this requirement. Auditors
must receive examination reports, supervisory agreements and reports of
enforcement actions. In addition, financial statements prepared in accordance
with generally accepted accounting principles, management's certifications
concerning responsibility for the financial statements, internal controls and
compliance with legal requirements designated by the FDIC, and an attestation by
the auditor regarding the statements of management relating to the internal
controls must be submitted. For institutions with total assets of more than $3
billion, independent auditors may be required to review quarterly financial
statements. FDICIA requires that independent audit committees be formed,
consisting of outside directors only. The committees of such institutions must
include members with experience in banking or financial management, must have
access to outside counsel, and must not include representatives of large
customers.

CAPITAL ADEQUACY REQUIREMENTS. The FDIC has adopted regulations
establishing minimum requirements for the capital adequacy of insured
institutions. The FDIC may establish higher minimum requirements if, for
example, a bank has previously received special attention or has a high
susceptibility to interest rate risk.

The FDIC's risk-based capital guidelines generally require state banks to
have a minimum ratio of Tier 1 capital to total risk-weighted assets of 4.0% and
a ratio of total capital to total risk-weighted assets of 8.0%. The capital
categories have the same definitions for the Bank as for the Company. As of
December 31, 1999, the Bank's ratio of Tier 1 capital to total risk-weighted
assets was 9.39% and its ratio of total capital to total risk-weighted assets
was 10.36%. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS".

The FDIC's leverage guidelines require state banks to maintain Tier 1
capital of no less than 5.0% of average total assets, except in the case of
certain highly rated banks for which the requirement is 3.0% of average total
assets. The TDB has issued a policy, which generally requires state chartered
banks to maintain a leverage ratio (defined in accordance with federal capital
guidelines) of 6.0%. As of December 31, 1999, the Bank's ratio of Tier 1 capital
to average total assets (leverage ratio) was 7.84%. SEE "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

-11-

CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. The federal banking
regulators are required to take "prompt corrective action" with respect to
capital-deficient institutions. Agency regulations define, for each capital
category, the levels at which institutions are "well capitalized," "adequately
capitalized," "under capitalized," "significantly under capitalized" and
"critically under capitalized." A "well capitalized" bank has a total risk based
capital ratio of 10.0% or higher; a Tier 1 risk based capital ratio of 6.0% or
higher; a leverage ratio of 5.0% or higher; and is not subject to any written
agreement, order or directive requiring it to maintain a specific capital level
for any capital measure. An "adequately capitalized" bank has a total risk based
capital ratio of 8.0% or higher; a Tier 1 risk based capital ratio of 4.0% or
higher; a leverage ratio of 4.0% or higher (3.0% or higher if the bank was rated
a composite 1in its most recent examination report and is not experiencing
significant growth); and does not meet the criteria for a well capitalized bank.
A bank is "under capitalized" if it fails to meet any one of the ratios required
to be adequately capitalized. The Bank is classified as "well capitalized" for
purposes of the FDIC's prompt corrective action regulations.

In addition to requiring undercapitalized institutions to submit a capital
restoration plan, agency regulations contain broad restrictions on certain
activities of undercapitalized institutions including asset growth,
acquisitions, branch establishment, and expansion into new lines of business.
With certain exceptions, an insured 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 enforcement powers
become more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management, and other restrictions. The
FDIC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver or
conservator.

Banks with risk-based capital and leverage ratios below the required
minimums may also be 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.

DEPOSIT INSURANCE ASSESSMENTS. The Bank must pay assessments to the FDIC
for federal deposit insurance protection. The FDIC has adopted a risk-based
assessment system as required by FDICIA. Under this system, FDIC-insured
depository institutions pay insurance premiums at rates based on their risk
classification. Institutions assigned to higher-risk classifications (that is,
institutions that pose a greater risk of loss to their respective deposit
insurance funds) pay assessments at higher rates than institutions that pose a
lower risk. An institution's risk classification is assigned based on its
capital levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between 0% and 0.27% of
deposits.

The FDIC established a process for raising or lowering all rates for
insured institutions semi-annually if conditions warrant a change. Under this
new system, the FDIC has the flexibility to adjust the assessment rate schedule
twice a year without seeking prior public comment, 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 recapitalize the Savings Association
Insurance Fund ("SAIF") and 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 in
1987. The BIF rate was required to equal one-fifth of the SAIF rate through
year-end 1999, or until the insurance funds merged, whichever occurred first.
Thereafter, BIF and SAIF payers will be assessed pro rata for the FICO bond
obligations. With regard to the assessment for the FICO obligation, for the
fourth quarter 1999, the BIF rate was .01184% of deposits and the SAIF rate was
.05920% of deposits, and for the first quarter of 2000, both the BIF and SAIF
rates are .02120% of deposits.

-12-

ENFORCEMENT POWERS. The FDIC and the other federal banking agencies have
broad enforcement powers, including the power to terminate deposit insurance,
impose substantial fines and other civil and criminal penalties and appoint a
conservator or receiver. Failure to comply with applicable laws, regulations and
supervisory agreements could subject the Company or its banking subsidiaries, as
well as officers, directors and other institution-affiliated parties of these
organizations, to administrative sanctions and potentially substantial civil
money penalties. The appropriate federal banking agency may appoint the FDIC as
conservator or receiver for a banking institution (or the FDIC may appoint
itself, under certain circumstances) if any one or more of a number of
circumstances exist, including, without limitation, the fact that the banking
institution is undercapitalized and has no reasonable prospect of becoming
adequately capitalized; fails to become adequately capitalized when required to
do so; fails to submit a timely and acceptable capital restoration plan; or
materially fails to implement an accepted capital restoration plan. The TDB also
has broad enforcement powers over the Bank, including the power to impose
orders, remove officers and directors, impose fines and appoint supervisors and
conservators.

BROKERED DEPOSIT RESTRICTIONS. Adequately capitalized institutions cannot
accept, renew or roll over brokered deposits except with a waiver from the FDIC,
and are subject to restrictions on the interest rates that can be paid on such
deposits. Undercapitalized institutions may not accept, renew or roll over
brokered deposits.

CROSS-GUARANTEE PROVISIONS. The Financial Institutions Reform, Recovery
and Enforcement Act of 1989 ("FIRREA") contains a "cross-guarantee" provision
which generally makes commonly controlled insured depository institutions liable
to the FDIC for any losses incurred in connection with the failure of a commonly
controlled depository institution.

COMMUNITY REINVESTMENT ACT. The CRA and the regulations issued there under
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.

CONSUMER LAWS AND REGULATIONS. In addition to the laws and regulations
discussed herein, the Bank is also subject to certain consumer laws and
regulations that are designed to protect consumers in transactions with banks.
While the list set forth herein is not exhaustive, these laws and regulations
include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds
Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity
Act, and the Fair Housing Act, among others. These laws and regulations mandate
certain disclosure requirements and regulate the manner in which financial
institutions must deal with customers when taking deposits or making loans to
such customers. The Bank must comply with the applicable provisions of these
consumer protection laws and regulations as part of their ongoing customer
relations.

INSTABILITY OF REGULATORY STRUCTURE. Various legislation, such as the
Gramm-Leach-Bliley Act which expanded the powers of banking institutions and
bank holding companies, and proposals to overhaul the bank regulatory system and
limit the investments that a depository institution may make with insured funds,
is from time to time introduced in Congress. Such legislation may change banking
statutes and the operating environment of the Company and the Bank in
substantial and unpredictable ways. The Company cannot determine the ultimate
effect that the Gramm-Leach-Bliley Act will have or the effect that potential
legislation, if enacted, or implementing regulations with respect thereto, would
have, upon the financial condition or results of operations of the Company or
its subsidiaries.

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 and FDIC are possessed of extensive authority to
police unsafe or

-13-

unsound practices and violations of applicable laws and regulations by
depository institutions and their holding companies. For example, the FDIC may
terminate the deposit insurance of any institution, which it determines has
engaged in an unsafe or unsound practice. The 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, have a significant effect
on the operating results of bank holding companies and their subsidiaries. Among
the means available to the Federal Reserve to affect the money supply are open
market operations in U.S. Government securities, changes in the discount rate on
member bank borrowings, and changes in reserve requirements against member bank
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 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 nature of future monetary policies and the effect of such
policies on the business and earnings of the Company and the Bank cannot be
predicted.

ITEM 2. PROPERTIES

The Company conducts business at ten banking locations, two of which are
located in Mount Pleasant and the others located in the Northeast Texas
communities of Bogata, Commerce, Deport, Paris, Pittsburg, Sulphur Springs,
Talco, and Texarkana. The Company's headquarters are located at 100 West
Arkansas in Mount Pleasant in a two-story office building. The Company owns all
of its locations. The following table sets forth specific information on each of
the Company's locations:

DEPOSITS AT
LOCATION ADDRESS DECEMBER 31, 1999
-------- ------- -----------------
(DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------------

Bogata ................................. 110 Halesboro St., Bogata, Texas 75417 $ 14,230
Commerce ............................... 1108 Park St., Commerce, Texas 75429 7,535
Deport.................................. 111 Main St., Deport, Texas 75435 9,810
Mount Pleasant-Downtown ................ 100 W. Arkansas, Mount Pleasant, Texas 75455 157,435
Mount Pleasant-South ................... 2317 S. Jefferson, Mount Pleasant, Texas 75455 3,238
Paris .................................. 3250 Lamar Ave., Paris, Texas 75460 46,672
Pittsburg .............................. 116 S. Greer Blvd., Pittsburg, Texas 75686 4,532(1)
Sulphur Springs ........................ 919 Gilmer St., Sulphur Springs, Texas 75482 53,578
Talco .................................. 104 Broad St., Talco, Texas 75487 14,042
Texarkana .............................. 2202 St. Michael Dr., Texarkana, Texas 75503 17,565
- ---------------------------------------------
(1) Opened for business in May of 1999.

ITEM 3. LEGAL PROCEEDINGS

Neither the Company nor the Bank is currently a party to any material
legal proceeding.

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

No matters were submitted to a vote of security holders during the fourth
quarter of 1999.

-14-

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Common Stock began trading on May 21, 1998 and is listed on the Nasdaq
National Market System ("Nasdaq NMS") under the symbol "GNTY". Prior to that
date, the Company's Common Stock was privately held and not listed on any public
exchange or actively traded. The Company had a total of 3,250,016 shares
outstanding at December 31, 1999. As of December 31, 1999, there were 409
shareholders of record. The number of beneficial shareholders is unknown to the
Company at this time.

The following table presents the high and low Common Stock prices reported
on the Nasdaq NMS by quarter during the two years ended December 31, 1999:

1999 1998
--------------- ----------------
HIGH LOW HIGH LOW
------ ----- ------ -----
Fourth quarter ...... $11.00 $7.75 $11.50 $8.88
Third quarter ....... 11.63 7.25 15.50 12.00
Second quarter ...... 11.13 9.38 15.25(1) 14.38(1)
First quarter ....... 10.63 8.75 -(1) -(1)
----------------------
(1) The Company's Common Stock began trading May 21, 1998.

Holders of Common Stock are entitled to receive dividends when, as and if
declared by the Company's Board of Directors out of funds legally available
therefore. While the Company has declared dividends on its Common Stock since
1980, and paid semi-annual dividends aggregating $0.25 per share per annum in
1999, there is no assurance that the Company will continue to pay dividends in
the future.

The principal source of cash revenues to the Company is dividends paid by
the Bank with respect to the Bank's capital stock. There are certain
restrictions on the payment of such dividends imposed by federal and state
banking laws, regulations and authorities. SEE "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "SUPERVISION AND
REGULATION - THE BANK".

The cash dividends paid per share (adjusted for a seven for one stock
split effective March 24, 1998) by quarter were as follows:

1999 1998
------ ------
Fourth quarter .... $ 0.13 $ 0.13
Third quarter....... - -
Second quarter...... 0.12 0.11
First quarter....... - -

-15-

ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY

The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements of the Company and the
notes thereto, appearing elsewhere in this Annual Report on Form 10-K, and the
information contained in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." The selected historical
consolidated financial data as of and for the five years ended December 31, 1999
are derived from the Company's Consolidated Financial Statements, which have
been audited by independent certified public accountants.

AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA:

Interest income .............................................. $ 21,568 $ 18,368 $ 17,009 $ 14,851 $ 14,248
Interest expense ............................................. 10,506 8,951 8,192 6,919 6,372
-------- -------- -------- -------- --------
Net interest income ..................................... 11,062 9,417 8,817 7,932 7,876
Provision for loan losses .................................... 310 540 355 206 149
-------- -------- -------- -------- --------
Net interest income after provision for loan losses ..... 10,752 8,877 8,462 7,726 7,727
Noninterest income ........................................... 3,374 2,826 1,657 2,390 1,440
Noninterest expense .......................................... 10,259 8,488 7,446 7,073 6,795
-------- -------- -------- -------- --------
Earnings before taxes ................................... 3,867 3,215 2,673 3,043 2,372
Provision for income tax expense ............................. 745 541 273 165 261
-------- -------- -------- -------- --------
Net earnings ............................................ 3,122 2,674 2,400 2,878 2,111
Preferred stock dividend ..................................... -- 37 74 74 74
-------- -------- -------- -------- --------
Net earnings available to common shareholders ........... $ 3,122 $ 2,637 $ 2,326 $ 2,804 $ 2,037
======== ======== ======== ======== ========

COMMON SHARE DATA (1):

Net earnings (basic and diluted) (2) ......................... $ 1.03 $ 0.95 $ 0.91 $ 1.08 $ 0.75
Book value ................................................... 8.77 8.21 6.84 6.06 5.32
Tangible book value .......................................... 7.81 8.14 6.74 5.95 5.21
Cash dividends ............................................... 0.25 0.24 0.22 0.21 0.19
Dividend payout ratio ........................................ 24.58% 26.38% 24.24% 18.81% 24.79%
Weighted average common shares outstanding (in thousands) .... 3,045 2,782 2,547 2,592 2,724
Period end shares outstanding (in thousands) ................. 3,250 2,898 2,548 2,545 2,725

BALANCE SHEET DATA:

Total assets ................................................. $370,438 $272,906 $244,157 $213,932 $192,935
Securities ................................................... 79,761 51,367 58,139 30,382 31,200
Loans ........................................................ 255,209 185,886 157,395 139,289 126,287
Allowance for loan losses .................................... 2,491 1,512 1,129 1,055 1,005
Total deposits ............................................... 328,637 242,325 222,961 194,855 174,717
Total common shareholders' equity ............................ 28,496 23,796 17,426 15,423 14,499

-16-

AS OF AND FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

AVERAGE BALANCE SHEET DATA:
Total assets ................................................. $309,247 $253,633 $228,782 $203,056 $190,782
Securities ................................................... 58,308 47,972 50,089 29,520 30,770
Loans ........................................................ 213,737 169,754 146,061 132,400 124,209
Allowance for loan losses .................................... 1,876 1,397 1,070 1,029 968
Total deposits ............................................... 276,525 227,919 208,401 183,896 172,964
Total common shareholders' equity ............................ 25,989 21,363 16,508 15,164 13,861

PERFORMANCE RATIOS:
Return on average assets ..................................... 1.01% 1.05% 1.05% 1.42% 1.11%
Return on average common equity .............................. 12.01% 12.34% 14.09% 18.49% 14.70%
Net interest margin .......................................... 3.93% 4.07% 4.24% 4.32% 4.59%
Efficiency ratio (3) ......................................... 71.12% 69.33% 71.09% 68.52% 72.94%

ASSET QUALITY RATIOS(4):
Nonperforming assets to total loans and other real estate .... 0.43% 0.67% 1.22% 1.49% 1.58%
Net loan charge-offs to average loans ........................ 0.08 0.09 0.19 0.12 0.13
Allowance for loan losses to total loans .................... 0.98 0.81 0.72 0.76 0.80
Allowance for loan losses to nonperforming loans (5) ......... 244.94 130.80 92.85 93.12 100.60

CAPITAL RATIOS (4):
Leverage ratio ............................................... 8.21% 9.30% 7.87% 7.87% 7.88%
Average shareholders' equity to average total assets ......... 8.40 8.59 7.58 7.88 7.70
Tier 1 risk-based capital ratio .............................. 9.86 12.29 11.16 11.07 12.11
Total risk-based capital ratio ............................... 10.83 13.08 11.86 11.80 12.92

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

(1) Adjusted for a seven for one stock split effective March 24, 1998.
(2) Net earnings per share are based upon the weighted average number of
common shares outstanding during the period. The Company has no dilutive
potential common shares.
(3) Calculated by dividing total noninterest expenses, excluding securities
losses, by net interest income plus noninterest income.
(4) At period end, except net loan charge-offs to average loans, and average
shareholders' equity to average total assets.
(5) Nonperforming loans consist of nonaccrual loans, loans contractually past
due 90 days or more and restructured loans.

-17-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Management's Discussion and Analysis of Financial Condition and Results of
Operations analyzes the major elements of the Company's balance sheets and
statements of earnings. This section should be read in conjunction with the
Company's Consolidated Financial Statements and accompanying notes and other
detailed information appearing elsewhere in this Annual Report on Form 10-K.

FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997

OVERVIEW

Net earnings available to common shareholders were $3.1 million, $2.6
million and $2.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively, and net earnings per common share were $1.03, $0.95 and $0.91 for
these same periods. The increase in earnings from 1998 to 1999 resulted
primarily from higher net interest income generated by a significant growth in
average earning assets during the year. Average earning assets increased $50.0
million from $231.2 million in 1998 to $281.2 million in 1999. Noninterest
income increased $548,000 in 1999 compared with 1998. Additional income was
generated in 1999 by the sale of assets of $353,000 and an increase in service
charge income of $565,000. The increase in earnings from 1997 to 1998 resulted
primarily from higher net interest income generated by the significant growth in
loans during the year. Additional income was generated by a $674,000 gain on
sale of approximately $2.0 million in aggregate principal amount of mortgage
loans, which the company originally purchased in 1991 from the Resolution Trust
Company ("RTC"). The Company posted returns on average assets of 1.01%, 1.05 %
and 1.05% and returns on average common equity of 12.01%, 12.34% and 14.09% for
the years ended 1999, 1998 and 1997, respectively.

Total assets at December 31, 1999, 1998 and 1997 were $370.4 million,
$272.9 million and $244.2 million, respectively. Total deposits at December 31,
1999, 1998 and 1997 were $328.6 million, $242.3 million and $223.0 million,
respectively. Deposits increased by $86.3 million or 35.6% in 1999 compared with
fiscal 1998 and by $19.4 million or 8.7 % in 1998 compared with fiscal 1997.
These increases were primarily attributable to the First American acquisition in
September 1999 and the growth in public funds deposit monies, certificates of
deposits, and the Premier Money Market Account. At December 31, 1999, 1998 and
1997, investment securities totaled $79.8 million, $51.4 million and $58.1
million, respectively. The increase of investment securities in 1999 was
primarily attributable to the investment of additional deposit funds and the
deposit and investment securities acquired from First American. The decrease in
1998 compared with 1997 was primarily attributable to the Company's strong loan
demand resulting in an increase of $28.5 million in loans during the year.
Common shareholders' equity was $28.5 million, $23.8 million and $17.4 million
at December 31, 1999, 1998 and 1997, respectively. The increase in common
shareholder's equity for the year ended December 31, 1999 reflects earnings
retention and issuance of common stock in connection with the First American
acquisition in September 1999.

RESULTS OF OPERATION

NET INTEREST INCOME

Net interest income represents the amount by which interest income on
interest-earning assets, including securities and loans, exceeds interest
expense incurred 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 earning assets and liabilities, combine to affect net interest income.

1999 VERSUS 1998. Net interest income increased from $9.4 million in 1998
to $11.1 million in 1999, an increase of $1.7 million or 17.5%, primarily due to
growth in interest income of $3.2 million. This increase was partially offset by
an increase in interest expense of $1.6 million. This resulted in net interest
margins of 3.93% and 4.07% and net interest spreads of 3.12% and 3.18% for 1999
and 1998, respectively.

-18-

The increase in net interest income for 1999 was primarily due to growth
in average loans of $44.0 million or 25.9% and growth in average investment
securities of $10.3 million or 21.5%, which contributed $2.9 million and
$522,000, respectively, to the increase in total interest income. Net interest
income was negatively effected by lower yields on both loans and securities. The
Company also decreased federal funds from an average $12.9 million in 1998 to
$7.7 million in 1999, causing a decrease in federal funds interest income of
$304,000.

1998 VERSUS 1997. Net interest income increased from $8.8 million in 1997
to $9.4 million in 1998, an increase of $600,000 or 6.8% primarily due to growth
in interest income of $1.4 million. This increase was partially offset by an
increase in interest expense of $760,000. This resulted in net interest margins
of 4.07% and 4.24% and net interest spreads of 3.18% and 3.39% for 1998 and
1997, respectively.

The increase in interest income was driven by growth in average
interest-earning assets of $23.0 million or 11.0% primarily attributable to the
growth in average loans of $23.7 million or 16.2% offset by a small decrease in
average securities. The yield on average interest-earning assets decreased 22
basis points from 1997 to 1998.

-19-

The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made and
all average balances are yearly average balances. Nonaccruing loans have been
included in the tables as loans carrying a zero yield.

YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------- -
1999 1998
----------------------------------------- ----------------------------------------
AVERAGE INTEREST AVERAGE AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans:
Commercial and industrial ......... $ 64,468 $ 5,720 8.87% $ 49,182 $ 4,108 8.35%
Real estate-mortgage and
construction ............... 125,600 9,498 7.56 98,962 8,247 8.33
Installment and other ............. 23,669 2,220 9.38 21,610 2,135 9.88
Fees on loans ..................... -- 43 -- -- 54 --
Securities ........................ 58,308 3,626 6.22 47,972 3,104 6.47
Federal funds sold ................ 7,725 385 4.98 12,867 689 5.35
Interest-bearing deposits in
other financial institutions .... 1,428 76 5.32 572 31 5.42
----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets ..... 281,198 21,568 7.67% 231,165 18,368 7.95%
----------- -----------
Less allowance for loan losses ......... (1,876) (1,397)
----------- -----------
Total interest-earning
assets, net of allowance .... 279,322 229,768
Non-earning assets:
Cash and due from banks ............ 9,926 8,579
Premises and equipment ............. 8,617 6,687
Interest receivable and
other assets ................. 11,230 8,209
Other real estate owned ............ 152 390
----------- -----------
Total assets ................ $ 309,247 $ 253,633
=========== ===========

LIABILITIES AND SHAREHOLDERS'
Interest-bearing liabilities:
NOW, savings, and money
market accounts ............... $ 74,898 $ 2,569 3.43% $ 59,276 $ 2,013 3.40%
Time deposits ..................... 151,924 7,723 5.08 127,472 6,913 5.42
----------- ----------- ----------- -----------
Total interest-bearing
deposits ................... 226,822 $ 10,292 4.54 186,748 8,926 4.78
Other borrowed funds .............. 4,027 214 5.31 809 25 3.09
----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities ................ 230,849 10,506 4.55% 187,557 8,951 4.77%
----------- -----------
Noninterest-bearing liabilities:
Demand deposits ................... 49,702 41,171
Accrued interest, taxes and
other liabilities ............. 2,707 3,129
----------- -----------
Total liabilities ............. 283,258 231,857
Shareholders' equity ................... 25,989 21,776
----------- -----------
Total liabilities and
shareholders' equity ...... $ 309,247 $ 253,633
=========== ===========
Net interest income .................... $ 11,062 $ 9,417
=========== ===========

Net interest spread ..................... 3.12% 3.18%

Net interest margin ..................... 3.93% 4.07%

YEARS ENDED DECEMBER 31,
------------------------------------------
1997
------------------------------------------
AVERAGE INTEREST AVERAGE
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- ----------- -----------
(DOLLARS IN THOUSANDS)

ASSETS
Interest-earning assets:
Loans:
Commercial and industrial ......... $ 39,975 $ 3,411 8.53%
Real estate-mortgage and
construction ............... 84,570 7,478 8.84
Installment and other ............. 21,516 2,116 9.83
Fees on loans ..................... -- 46 --
Securities ........................ 50,089 3,247 6.48
Federal funds sold ................ 9,470 520 5.49
Interest-bearing deposits in
other financial institutions .... 2,554 191 7.48
----------- ----------- -----------
Total interest-earning assets ..... 208,174 17,009 8.17%
-----------
Less allowance for loan losses ......... (1,070)
-----------
Total interest-earning
assets, net of allowance .... 207,104
Non-earning assets:
Cash and due from banks ............ 8,228
Premises and equipment ............. 6,199
Interest receivable and
other assets ................. 6,361
Other real estate owned ............ 890
-----------
Total assets ................ $ 228,782
===========

LIABILITIES AND SHAREHOLDERS'
Interest-bearing liabilities:
NOW, savings, and money
market accounts ............... $ 56,636 $ 1,994 3.52%
Time deposits ..................... 114,596 6,185 5.40
----------- -----------
Total interest-bearing
deposits ................... 171,232 8,179 4.78
Other borrowed funds .............. 168 13 7.74
----------- ----------- -----------
Total interest-bearing
liabilities ................ 171,400 8,192 4.78%
----------- -----------
Noninterest-bearing liabilities:
Demand deposits ................... 37,169
Accrued interest, taxes and
other liabilities ............. 2,878
-----------
Total liabilities ............. 211,447
Shareholders' equity ................... 17,335
-----------
Total liabilities and
shareholders' equity ...... $ 228,782
===========
Net interest income .................... $ 8,817
===========
Net interest spread ..................... 3.39%
Net interest margin ..................... 4.24%

-20-

The following schedule presents the dollar amount of changes in interest
income and interest expense for the major components of interest-earning assets
and interest-bearing liabilities and distinguishes between the increase related
to higher outstanding balances and the volatility of interest rates. For
purposes of this table, changes attributable to both rate and volume, which can
be segregated, have been allocated.

YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
---------------------------------- ----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
--------------------- ---------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNINGS ASSETS:

Loans ............................................. $ 3,768 $ (831) $ 2,937 $ 2,121 $ (628) $ 1,493
Securities ........................................ 669 (147) 522 (137) (6) (143)
Federal funds sold ................................ (275) (29) (304) 187 (18) 169
Interest-bearing deposits in other financial
institutions ................................. 46 (1) 45 (148) (12) (160)
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest
income ........................... 4,208 (1,008) 3,200 2,023 (664) 1,359
INTEREST-BEARING LIABILITIES:
NOW, savings and money market accounts ............ 534 22 556 90 (71) 19
Time deposits ..................................... 1,326 (516) 810 701 27 728
Other borrowed funds .............................. 99 90 189 50 (38) 12
-------- -------- -------- -------- -------- --------
Total increase (decrease) in interest expense 1,959 (404) 1,555 841 (82) 759
-------- -------- -------- -------- -------- --------
Increase (decrease) in net interest income ........ $ 2,249 $ (604) $ 1,645 $ 1,182 $ (582) $ 600
======== ======== ======== ======== ======== ========

PROVISION FOR LOAN LOSSES

The Company's provision for loan losses is established through charges to
operating income in the form of the provision in order to bring the total
allowance for loan losses to a level deemed appropriate by management of the
Company based on such factors as historical experience, the volume and type of
lending conducted by the Company, the amount of nonperforming assets, regulatory
policies, generally accepted accounting principles, general economic conditions,
and other factors related to the collectibility of loans in the Company's
portfolio.

The Company's provision for loan losses during the twelve months ended
December 31, 1999 was $310,000 compared with $540,000 during the twelve months
ended December 31, 1998, a decrease of $230,000. The decrease in the provision
was due in part to the strong asset quality of the loan portfolio and the
transfer of the allowance for loan losses of $846,000 acquired from First
American. Strong asset quality is reflected as net charge-offs remain at low
levels totaling $177,000, or 0.08% of average loans in 1999 compared with
$157,000, or 0.09% of average loans in 1998. The Company's provision for loan
losses increased from $355,000 in 1997 to $540,000 in 1998 as a result of loan
growth.

NONINTEREST INCOME

Noninterest income is an important source of revenue for financial
institutions. The Company's primary sources of noninterest income are service
charges on deposit accounts and other banking service related fees. Noninterest
income for the year ended December 31, 1999 was $3.4 million, an increase of
$548,000 from $2.8 million in 1998 and up from $1.7 million in 1997. The year
ended December 31, 1999 included a gain on sale of assets of $330,000 and the
year ended December 31, 1998 included a gain on sale of loans of $674,000 which
occurred when the Company sold $2.0 million in loans that were originally
purchased at a discount in 1991 from the RTC. Excluding these gains, noninterest
income was $892,000 greater in 1999 than in 1998, and $495,000 greater in 1998
than in 1997. This results in annual percentage increases of 41.4% and 29.8% for
1999 and 1998, respectively.

-21-

The following table presents for the periods indicated the major
categories of noninterest income:

YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Service charges ............................. 1,901 1,336 1,097
Fee income .................................. 518 434 386
Securities gains, net ....................... 11 81 19
Fiduciary income ............................ 63 46 43
Earnings from key-man life insurance ........ 192 89 --
Gain on sale of loans ....................... -- 674 --
Gain (loss) on sale of assets ............... 330 (23) (4)
Other noninterest income .................... 359 189 116
------- ------- -------
Total noninterest income ......... $ 3,374 $ 2,826 $ 1,657
======= ======= =======

After excluding the gain on the sale of assets in 1999 and on the sale of
loans in 1998, the increase in noninterest income from 1998 to 1999 resulted
primarily from service charges and fee income due to an increase in the number
of deposit accounts, from both internal growth and the First American
acquisition. Additionally, the Company's increased emphasis on fee-based
services resulted in greater income from check cashing, ATM fees, appraisal fees
and wire transfer fees.

NONINTEREST EXPENSE

For the years ended December 31, 1999, 1998 and 1997, noninterest expense
totaled $10.3 million, $8.5 million and $7.4 million, respectively. The 20.9%
increase in 1999 was primarily the result of additional operating expenses
incurred at the new Pittsburg, Texas location which opened in May 1999 and in
connection with the addition of the Sulphur Springs and Commerce locations
acquired from First American in September 1999. These new locations as well as
customer growth in various other markets contributed to the increase in employee
compensation and benefits as the Company's number of full-time equivalent
employees grew from 135 at December 31, 1998 to 192 at December 31, 1999. In
addition, bank premises and fixed asset expense increased from $1.2 million to
$1.4 million, an increase of $200,000 or 16.5%. Legal and professional fees
increased $107,000 or 27.3% due to independent loan review expenses and
bankruptcy and litigation proceedings.

The increase in total noninterest expense for 1998 over 1997 of $1.0
million or 14.0% was primarily the result of the opening of the initial opening
of the Texarkana location in August 1997. The Company's efficiency ratios,
calculated by dividing total noninterest expenses (excluding securities losses)
by net interest income plus noninterest income, were 71.12% in 1999, 69.33% in
1998 and 71.09% in 1997.

The following table presents for the periods indicated the major
categories of noninterest expense:

YEARS ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
Employee compensation and benefits ............ $ 5,666 $ 4,458 $ 3,717
Non-staff expenses:
Net bank premises and fixed asset expense ... 1,405 1,206 1,125
Office and computer supplies ................ 309 280 291
Legal and professional fees ................. 499 392 335
Advertising ................................. 231 254 246
Postage ..................................... 140 132 119
FDIC insurance .............................. 33 26 23
Other ....................................... 1,976 1,740 1,590
------- ------- -------
Total non-staff expenses ............ 4,593 4,030 3,729
------- ------- -------
Total noninterest expense ........... $10,259 $ 8,488 $ 7,446
======= ======= =======
-22-

INCOME TAXES

Federal income tax is reported as income tax expense and is influenced by
the amount of taxable income, the amount of tax-exempt income, the amount of
non-deductible interest expense and the amount of other non-deductible expense.
The Company utilized tax benefits on leveraged lease transactions in the amounts
of $423,000, $430,000 and $530,000 in 1999, 1998 and 1997, respectively. The
effective tax rates in 1999, 1998 and 1997 were 19.27%, 16.83% and 10.21%,
respectively. Income taxes for financial purposes in the consolidated statements
of earnings differ from the amount computed by applying the statutory income tax
rate of 34% to earnings before income taxes. The difference in the statutory
rate is primarily due to the tax benefits on the leveraged lease transactions
and non-taxable income.

Additionally, the State of Texas imposes a Texas franchise tax. Taxable
income for the income tax component of the Texas franchise tax is the federal
pre-tax income, plus certain officers' salaries, less interest income from
federal securities. Total franchise tax expense was $40,000 in 1999, $52,000 in
1998 and $34,000 in 1997. Such expense was included as a part of other
noninterest expense.

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. Since
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 tries to
control the impact of interest rate fluctuations by managing the relationship
between its interest rate sensitive assets and liabilities. See "-Interest Rate
Sensitivity and Liquidity" below.

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company provides a broad range of commercial, real estate and consumer
loan products to small and medium-sized businesses and individuals. The Company
aggressively pursues qualified lending customers in both the commercial and
consumer sectors, providing customers with direct access to lending personnel
and prompt, professional service. The 77.7% loan to deposit ratio as of December
31, 1999, reflects the Company's commitment as an active lender in the local
business communities it serves. Total loans were $255.2 million at December 31,
1999, an increase of $69.3 million or 37.3% compared with $185.9 million at
December 31, 1998. In 1998, total loans increased by $28.5 million or 18.1% to
$185.9 million from $157.4 million at December 31, 1997. In 1997, total loans
increased by $18.1 million or 13.0% from $139.3 million at December 31, 1996.
The growth in loans reflects the improving local economy, an aggressive
advertising campaign, the Company's pro-lending reputation and the solicitation
of new companies and individuals entering the Company's market areas.

-23-

The following table summarizes the loan portfolio of the Company by type
of loan as of the dates indicated:

DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Commercial and industrial ......... $ 61,153 23.96% $ 51,589 27.75% $ 36,598 23.26%
Agriculture ........................ 9,102 3.57 7,652 4.11 8,174 5.19
Real estate:
Construction and land
development ............... 7,926 3.11 3,130 1.68 3,072 1.95
One to four family residential . 83,777 32.83 48,376 26.02 41,398 26.30
Farmland ....................... 7,976 3.13 7,258 3.90 6,492 4.12
Non-residential and non-farmland 52,303 20.49 47,977 25.81 42,363 26.92
Multi-family residential ....... 6,239 2.44 844 0.45 360 0.23
Consumer ........................... 26,733 10.47 19,060 10.28 18,938 12.03
-------- -------- -------- -------- -------- --------
Total loans ............... $255,209 100.00% $185,886 100.00% $157,395 100.00%
======== ======== ======== ======== ======== ========

DECEMBER 31,
---------------------------------------------
1996 1995
-------------------- --------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Commercial and industrial ......... $ 29,412 21.11% $ 26,099 20.67%
Agriculture ........................ 7,159 5.14 6,466 5.12
Real estate:
Construction and land
development ............... 2,292 1.65 2,948 2.33
One to four family residential . 36,967 26.54 35,024 27.73
Farmland ....................... 6,685 4.80 5,865 4.64
Non-residential and non-farmland 36,460 26.18 29,672 23.50
Multi-family residential ....... 535 0.38 388 0.31
Consumer ........................... 19,779 14.20 19,825 15.70
-------- -------- -------- --------
Total loans ............... $139,289 100.00% $126,287 100.00%
======== ======== ======== ========

The primary lending focus of the Company is on loans to small and
medium-sized businesses and one to four family residential mortgage loans. The
Company's commercial lending products include business loans, commercial real
estate loans, equipment loans, working capital loans, term loans, revolving
lines of credit and letters of credit. Most commercial loans are collateralized
and on payment programs. The purpose of a particular loan generally determines
its structure. In almost all cases, the Company requires personal guarantees on
commercial loans to help assure repayment.

The Company's commercial mortgage loans are generally secured by first
liens on real estate, typically have fixed interest rates and amortize over a 10
to 15 year period with balloon payments due at the end of one to three years. In
underwriting commercial mortgage loans, consideration is given to the property's
operating history, future operating projections, current and projected
occupancy, location and physical condition. The underwriting analysis also
includes credit checks, appraisals and a review of the financial condition of
the borrower.

The Company makes loans to finance the construction of residential and, to
a limited extent, nonresidential properties. Construction loans generally are
secured by first liens on real estate. The Company conducts periodic
inspections, either directly or through an agent, prior to approval of periodic
draws on these loans. Underwriting guidelines similar to those described above
are also used in the Company's construction lending activities. In keeping with
the community-oriented nature of its customer base, the Company provides
construction and permanent financing for churches located within its market
area.

The Company rarely makes loans at its legal lending limit. Lending
officers are assigned various levels of loan approval authority based upon their
respective levels of experience and expertise. Loans above $500,000 are
evaluated and acted upon by the Executive Committee, which meets weekly and are
reported to the Board of Directors. The Company's strategy for approving or
disapproving loans is to follow conservative loan policies and underwriting
practices which include: (i) granting loans on a sound and collectible basis;
(ii) investing funds properly for the benefit of shareholders and the protection
of depositors; (iii) serving the legitimate needs of the community and the
Company's general market area while obtaining a balance between maximum yield
and minimum risk; (iv) ensuring that primary and secondary sources of repayment
are adequate in relation to the amount of the loan; (v) developing and
maintaining adequate diversification of the loan portfolio as a whole and of the
loans within each category; and (vi) ensuring that each loan is properly
documented and, if appropriate, insurance coverage is adequate. The Company's
loan review and compliance personnel interact daily with commercial and consumer
lenders to identify potential underwriting or technical exception variances. In
addition, the Company has placed increased emphasis on the early identification
of problem loans to aggressively seek resolution of the situations and thereby
keep loan losses at a minimum. Management believes that this strict adherence to
conservative loan policy guidelines has contributed to the Company's below
average level of loan losses compared to its industry peer group over the past
few years.

-24-

The Company's loans collateralized by one to four family residential real
estate generally are originated in amounts of no more than 90% of the lower of
cost or appraised value. The Company requires mortgage title insurance and
hazard insurance in the amount of the loan. Of the mortgages originated, the
Company generally retains mortgage loans with short terms or variable rates and
sells longer-term fixed-rate loans that do not meet the Company's credit
underwriting standards. Prior to the acquisition of First American, the Company
sold such loans to Texas Independent Bank Mortgage Company, however, since the
First American acquisition, the Company sells these loans in the secondary
market through Guaranty Mortgage Company.

As of December 31, 1999, the Company's one to four family residential real
estate loan portfolio was $83.8 million. Of this amount, $34.8 million is
repriceable in one year or less and an additional $31.7 million is repriceable
from one year to five years. These high percentages in short-term real estate
loans reflect the Company's commitment to reducing interest rate risk.

The Company provides a wide variety of consumer loans including motor
vehicle, watercraft, education loans, personal loans (collateralized and
uncollateralized) and deposit account collateralized loans. The terms of these
loans typically range from 12 to 72 months and vary based upon the nature of
collateral and size of loan. As of December 31, 1999, the Company had no
indirect consumer loans, indicating a preference to maintain personal banking
relationships and strict underwriting standards. During the last two years,
management has placed tighter controls on consumer credit due to record high
personal bankruptcy filings nationwide. This concern also prompted management to
sell its credit card portfolio at book value to Texas Independent Bank in March
1997.

The contractual maturity ranges of the commercial, industrial and real
estate construction loan portfolio and the amount of such loans with
predetermined interest rates in each maturity range as of December 31, 1999, are
summarized in the following table:

DECEMBER 31, 1999
----------------------------------------------------
AFTER ONE
ONE YEAR THROUGH AFTER
OR LESS FIVE YEARS FIVE YEARS TOTAL
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)

Commercial and industrial .............. $ 49,538 $ 10,641 $ 974 $ 61,153
Real estate construction ............... 6,847 1,017 62 7,926
---------- ---------- ---------- ----------
Total ........................ $ 56,385 $ 11,658 $ 1,036 $ 69,079
========== ========== ========== ==========

Loans with a predetermined interest rate $ 29,001 $ 13,481 $ 2,945 $ 45,427
Loans with a floating interest rate .... 11,507 9,584 2,561 23,652
---------- ---------- ---------- ----------
Total ........................ $ 40,508 $ 23,065 $ 5,506 $ 69,079
========== ========== ========== ==========

NONPERFORMING ASSETS

The Company has several procedures in place to assist it in maintaining
the overall quality of its loan portfolio. The Company has established
underwriting guidelines to be followed by its officers and also monitors its
delinquency levels for any negative or adverse trends. There can be no
assurance, however, that the Company's loan portfolio will not become subject to
increasing pressures from deteriorating borrower credit due to general economic
conditions.

The Company's conservative lending approach, as well as a healthy local
economy, has resulted in strong asset quality. Nonperforming assets at December
31, 1999, decreased 12.5% to $1.1 million compared with $1.3 million at December
31, 1998. Nonperforming assets were $1.9 million at December 31, 1997. This
resulted in ratios of nonperforming assets to total loans plus other real estate
of 0.43%, 0.67% and 1.22% for the years ended December 31, 1999, 1998 and 1997,
respectively.

-25-

The Company generally places a loan on nonaccrual status and ceases to
accrue interest when loan payment performance is deemed unsatisfactory. Loans
where the interest payments jeopardize the collection of principal are placed on
nonaccrual status, unless the loan is both well secured and in the process of
collection. Cash payments received while a loan is classified as nonaccrual is
recorded as a reduction of principal as long as doubt exists as to collection.
The Company is sometimes required to revise a loan's interest rate or repayment
terms in a troubled debt restructuring, however, the Company had no restructured
loans at either December 31, 1999, December 31, 1998 or December 31, 1997. In
addition to an internal loan review, the Company retains IBS for an annual
external review to evaluate the loan portfolio.

The Company maintains current appraisals on loans secured by real estate,
particularly those categorized as nonperforming loans and potential problem
loans. In instances where updated appraisals reflect reduced collateral values,
an evaluation of the borrower's overall financial condition is made to determine
the need, if any, for possible write-downs or appropriate additions to the
allowance for loan losses. The Company records other real estate at fair value
at the time of acquisition, less estimated costs to sell.

The following table presents information regarding nonperforming assets at
the dates indicated: