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:

DECEMBER 31,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)

Nonaccrual loans ...................... $ 443 $ 290 $ 298 $ 722 $ 817
Accruing loans past due 90 days or more
574 866 918 411 172
Restructured loans .................... -- -- -- -- 10
Other real estate ..................... 79 97 714 953 1,016
------ ------ ------ ------ ------
Total nonperforming assets .. $1,096 $1,253 $1,930 $2,086 $2,015
====== ====== ====== ====== ======
Nonperforming assets to total loans and
other real estate ................. 0.43% 0.67% 1.22% 1.49% 1.58%

The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, as amended
by SFAS No. 118, ACCOUNTING FOR CREDITORS FOR IMPAIRMENT OF A LOAN- INCOME
RECOGNITION AND DISCLOSURES. Under SFAS No. 114, as amended, a loan is
considered impaired based on current information and events, if it is probable
that the Company will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan agreement.
The measurement of impaired loans is based on the present value of expected
future cash flows discounted at the loan's effective interest rate or the loan's
observable market price or based on the fair value of the collateral if the loan
is collateral-dependent. The implementation of SFAS No. 114 did not have a
material adverse affect on the Company's financial statements.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is a reserve established through charges to
earnings in the form of a provision for loan losses. Management has established
an allowance for loan losses, which it believes, is adequate for estimated
losses in the Company's loan portfolio. Based on an evaluation of the loan
portfolio, management presents a quarterly review of the allowance for loan
losses to the Company's Board of Directors, indicating any change in the
allowance since the last review and any recommendations as to adjustments in the
allowance. In making its evaluation, management considers the diversification by
industry of the Company's commercial loan portfolio, the effect of changes in
the local real estate market on collateral values, the results of recent
regulatory examinations, the effects on the loan portfolio of current economic
indicators and their probable impact on borrowers, the amount of charge-offs for
the period, the amount of nonperforming loans and related collateral security,
the evaluation of its

-26-

loan portfolio through an annual external loan review conducted by IBS and the
annual examination of the Company's financial statements by its independent
auditors. Charge-offs occur when loans are deemed to be uncollectible.

The Company follows an internal loan review program to evaluate the credit
risk in the loan portfolio. In addition, the Company contracts with IBS to
annually perform an external loan review. Through the loan review process, the
Company maintains an internally classified loan list, which, along with the
delinquency list of loans, helps management assess the overall quality of the
loan portfolio and the adequacy of the allowance for loan losses. Loans
internally classified as "substandard" or in the more severe categories of
"doubtful" or "loss" are those loans that at a minimum have clear and defined
weaknesses such as a highly-leveraged position, unfavorable financial ratios,
uncertain repayment sources or poor financial condition, which may jeopardize
recoverability of the debt. At December 31, 1999, the Company had $7.5 million
of such loans compared with $2.8 million at December 31, 1998, a 167.9%
increase. This increase is due primarily to the classification of approximately
$2.5 million in loans as substandard during 1999. The classification was made
due to cash flow deficiencies and the acquisition of approximately $2.2 million
of internally classified substandard problem assets from First American.

In addition to the internally classified loan list and delinquency
list of loans, the Company maintains a separate "watch list" which further aids
the Company in monitoring loan portfolios. Watch list loans show warning
elements where the present status portrays one or more deficiencies that require
attention in the short term or where pertinent ratios of the loan account have
weakened to a point where more frequent monitoring is warranted. These loans do
not have all of the characteristics of a classified loan (substandard or
doubtful) but do show weakened elements as compared with those of a satisfactory
credit. The Company reviews these loans to assist in assessing the adequacy of
the allowance for loan losses. At December 31, 1999, the Company had $3.0
million of such loans compared with $1.8 million at December 31, 1998, a 66.7%
increase.

In order to determine the adequacy of the allowance for loan losses,
management considers the risk classification or delinquency status of loans and
other factors, such as collateral value, portfolio composition, trends in
economic conditions and the financial strength of borrowers. Management
establishes specific allowances for loans which management believes require
reserves greater than those allocated according to their classification or
delinquent status. An unallocated allowance is also established based on the
Company's historical charge-off experience. The Company then charges to
operations a provision for loan losses to maintain the allowance for loan losses
at an adequate level determined by the foregoing methodology.

Management actively monitors the Company's asset quality and provides
specific loss allowances when necessary. Loans are charged-off against the
allowance for loan losses when appropriate. Although management believes it uses
the best information available to make determinations with respect to the
allowance for loan losses, future adjustments may be necessary if economic
conditions differ from the assumptions used in making the initial
determinations.

For the twelve months ended December 31, 1999, net loan charge-offs
totaled $177,000 or 0.08% of average loans outstanding for the period, compared
with $157,000 in net loan charge-offs or 0.09% of average loans for the year
ended December 31, 1998. During 1999, the Company recorded a provision for loan
losses of $310,000 compared with $540,000 for 1998. The decrease in the
provision for 1999 is due primarily to the $846,000 balance in the allowance for
loan losses acquired from First American and the decrease of nonperforming loans
during the year. The Company made a provision for loan losses of $355,000 for
1997. At December 31, 1999, the allowance for loan losses totaled $2.5 million,
or 0.98% of total loans. At December 31, 1998, the allowance for loan losses
totaled $1.5 million or 0.81% of total loans.

-27-

The following table presents, for the periods indicated, an analysis of
the allowance for loan losses and other related data:

YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)

Average loans outstanding ...................... $ 213,737 $ 169,754 $ 146,061 $ 132,400 $ 124,209
========= ========= ========= ========= =========
Gross loans outstanding at end of period ....... $ 255,209 $ 185,886 $ 157,395 $ 139,289 $ 126,287
========= ========= ========= ========= =========
Allowance for loan losses at beginning
of period ................................. $ 1,512 $ 1,129 $ 1,055 $ 1,005 $ 1,012
Provision for loan losses ...................... 310 540 355 206 149
Balance acquired with First American acquisition 846 -- -- -- --
Charge-offs:
Commercial and industrial ................. (64) (113) (53) (116) (184)
Real estate ............................... (2) (14) (170) (66) (19)
Consumer .................................. (267) (149) (162) (101) (95)
Recoveries:
Commercial and industrial ................. 65 33 65 65 81
Real estate ............................... 42 26 13 23 15
Consumer .................................. 49 60 26 39 46
--------- --------- --------- --------- ---------
Net loan charge-offs ........................... (177) (157) (281) (156) (156)
--------- --------- --------- --------- ---------
Allowance for loan losses at end of period ..... $ 2,491 $ 1,512 $ 1,129 $ 1,055 $ 1,005
========= ========= ========= ========= =========
Ratio of allowance to end of
period loans .............................. 0.98% 0.81% 0.72% 0.76% 0.80%
Ratio of net loan charge-offs to
average loans ............................. 0.08% 0.09% 0.19% 0.12% 0.13%
Ratio of allowance to end of period
nonperforming loans ....................... 244.94% 130.80% 92.85% 93.12% 100.60%

The following tables describe the allocation of the allowance for loan
losses among various categories of loans and certain other information for the
dates indicated. The allocation is made for analytical purposes and is not
necessarily indicative of the categories in which future losses may occur. The
total allowance is available to absorb losses from any segment of loans.

DECEMBER 31,
-----------------------------------------------------
1999 1998
------------------------ ------------------------
PERCENT OF PERCENT OF
LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)

Balance of allowance for loan losses applicable to:
Commercial, industrial and agriculture ......... $ 1,543 27.53% $ 932 31.86%
Real estate:
Construction and land development ......... -- 3.11 -- 1.68
One to four family residential ............ 110 32.83 67 26.02
Commercial mortgage ....................... 176 20.49 145 25.81
Farmland .................................. -- 3.13 -- 3.90
Multi-family .............................. -- 2.44 -- 0.45
Consumer ...................................... 262 10.47 166 10.28
Unallocated ................................... 400 -- 202 --
---------- ---------- ---------- ----------
Total allowance for loan losses ....... $ 2,491 100.00% $ 1,512 100.00%
========== ========== ========== ==========

-28-

DECEMBER 31,
----------------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS TO LOANS TO LOANS TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)

Balance of allowance for loan losses
applicable to:
Commercial, industrial and agriculture .... $ 554 28.45% $ 501 26.25% $ 320 25.79%
Real estate:
Construction and land development ....... -- 1.95 -- 1.65 -- 2.33
One to four family residential .......... 58 26.30 86 26.54 95 27.73
Commercial mortgage ..................... 128 26.92 91 26.18 93 23.50
Farmland ................................ -- 4.12 -- 4.80 -- 4.64
Multi-family ............................ -- 0.23 -- 0.38 -- 0.31
Consumer .................................. 171 12.03 128 14.20 124 15.70
Unallocated ............................... 218 -- 249 -- 373 --
---------- ---------- ---------- ---------- ---------- ----------
Total allowance for loan losses ... $ 1,129 100.00% $ 1,055 100.00% $ 1,005 100.00%
========== ========== ========== ========== ========== ==========

SECURITIES

The Company uses its securities portfolio to ensure liquidity for cash
requirements, to manage interest rate risk, to provide a source of income, to
ensure collateral is available for municipal pledging requirements and to manage
asset quality. At December 31, 1999, investment securities totaled $79.8
million, an increase of $28.4 million from $51.4 million at December 31, 1998.
The increase was primarily attributable to the investment of additional funds
both internally generated and acquired with the First American acquisition.
During 1998, securities decreased approximately $6.7 million from $58.1 million
at December 31, 1997, to $51.4 million at December 31, 1998. The decrease was
primarily attributable to the Company's strong loan demand that increased loans
by approximately $28.5 million during 1998. At December 31, 1999, investment
securities represented 21.5% of total assets compared to 18.8% of total assets
at December 31, 1998. The yield on the investment portfolio for the year ended
December 31, 1999, was 6.22% compared to a yield of 6.47% for the year ended
December 31, 1998.

During 1999, the Company invested in collateralized mortgage obligations
("CMOs") in its securities portfolio. A CMO is collateralized directly by
mortgages or by mortgage-backed securities issued by government agencies. These
investments were made in order to obtain higher yielding securities with more
defined cash flows and shorter average lives.

The following table summarizes the amortized cost of investment securities
held by the Company as of the dates shown:

DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities ...................... $ 993 $ 3,115 $14,372
U.S. Government securities ................... 25,859 27,114 20,366
Mortgage-backed securities .................... 31,610 17,884 20,664
CMOs .......................................... 17,451 -- --
Equity securities ............................. 1,420 1,092 992
State and municipal securities ................ 3,602 1,825 1,379
------- ------- -------
Total securities .................... $80,935 $51,030 $57,773
======= ======= =======

-29-

The following table summarizes the contractual maturity of investment
securities on an amortized cost basis and their weighted average yields as of
December 31, 1999:

DECEMBER 31, 1999
-----------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN YEAR BUT WITHIN YEARS BUT WITHIN
ONE YEAR FIVE YEARS TEN YEARS AFTER TEN YEARS TOTAL
---------------- ---------------- ------------------ ------------------ ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)

U.S. Treasury securities ....... $ -- -% $ 993 5.57% $ -- -% $ -- -% $ 993 5.57%
U.S. Government securities ..... 3,216 5.58 14,096 6.01 8,547 6.13 -- -- 25,859 6.00
Mortgage-backed securities ..... -- -- 4,275 6.78 10,112 6.39 17,223 6.50 31,610 6.50
CMOs ........................... -- -- 384 6.19 4,119 6.33 12,948 6.76 17,451 6.65
Equity securities .............. -- -- -- -- -- -- 1,420 5.07 1,420 5.07
State and municipal securities . 10 5.67 60 6.07 2,586 4.47 946 5.27 3,602 4.71
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Totals ................. $ 3,226 5.58% $19,808 6.16% $25,364 6.10% $32,537 6.51% $80,935 6.26%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======

The Company accounts for securities according to SFAS No.115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. At the date of purchase,
the Company is required to classify debt and equity securities into one of three
categories: held-to-maturity, trading or available-for-sale. At each reporting
date, the appropriateness of the classification is reassessed. Investments in
debt securities are classified as held-to-maturity and measured at amortized
cost in the financial statements only if management has the positive intent and
ability to hold those securities to maturity. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading and measured at fair value in the financial statements with
unrealized gains and losses included in earnings. Investments not classified as
either held-to-maturity or trading are classified as available-for-sale and
measured at fair value in the financial statements with unrealized gains and
losses reported, net of tax, in a separate component of shareholders' equity
until realized.

The following table summarizes the carrying value and classification of
securities as of the dates shown:

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

Available-for-sale ................... $79,761 $44,305 $42,906
Held-to-maturity ..................... -- 7,062 15,233
------- ------- -------
Total securities ........... $79,761 $51,367 $58,139
======= ======= =======

The following table summarizes the amortized cost of securities classified
as available-for-sale and their approximate fair values as of the dates shown:

DECEMBER 31, 1999 DECEMBER 31, 1998
---------------------------------------- ----------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
------- ------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)

U.S. Treasury securities ................... $ 993 $ -- $ 6 987 $ 3,015 $ 29 $ -- $ 3,044
U.S. Government securities ................. 25,859 6 649 25,216 27,114 241 5 27,350
Mortgage-backed securities ................. 31,610 35 388 31,257 12,747 77 5 12,819
CMOs ....................................... 17,451 55 141 17,365 -- -- -- --
Equity securities .......................... 1,420 -- -- 1,420 1,092 -- -- 1,092
State and municipal securities ............. 3,602 13 99 3,516 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total ................................ $80,935 $ 109 $ 1,283 $79,761 $43,968 $ 347 $ 10 $44,305
======= ======= ======= ======= ======= ======= ======= =======

-30-

DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)

U.S. Treasury securities .......... $ 12,178 $ 272 $ -- $ 12,450
U.S. Government securities ........ 16,174 94 -- 16,268
Mortgage-backed securities ........ 13,196 -- -- 13,196
CMOs .............................. -- -- -- --
Equity securities ................. 992 -- -- 992
State and municipal securities .... -- -- -- --
-------- -------- -------- --------
Total ...................... $ 42,540 $ 366 $ -- $ 42,906
======== ======== ======== ========

The following table summarizes the amortized cost of securities classified
as held-to-maturity and their approximate fair values as of the dates shown:

DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------------------------------- --------------------------------------------
GROSS GROSS GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE COST GAIN LOSS VALUE
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

U.S. Treasury securities ......... $ -- $ -- $ -- $ -- $ 100 $ 1 $ -- $ 101
U.S. Government securities ....... -- -- -- -- -- -- -- --
Mortgage-backed securities ....... -- -- -- -- 5,137 74 2 5,209
CMOs ............................. -- -- -- -- -- -- -- --
State and municipal securities ... -- -- -- -- 1,825 65 4 1,886
-------- -------- -------- -------- -------- -------- -------- --------
Total ....................... $ -- $ -- $ -- $ -- $ 7,062 $ 140 $ 6 $ 7,196
======== ======== ======== ======== ======== ======== ======== ========

DECEMBER 31, 1997
--------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
U.S. Treasury securities ........ $ 2,194 $ 8 $ -- $ 2,202
U.S. Government securities ...... 4,192 144 -- 4,336
Mortgage-backed securities ...... 7,468 -- -- 7,468
CMOs ............................ -- -- -- --
State and municipal securities .. 1,379 96 -- 1,475
-------- -------- -------- --------
Total ...................... $ 15,233 $ 248 $ -- $ 15,481
======== ======== ======== ========

Mortgage-backed securities are securities, which have been developed by
pooling a number of real estate mortgages and are principally issued by federal
agencies such as the Federal National Mortgage Association and the Federal Home
Loan Mortgage Corporation. These securities are deemed to have high credit
ratings and minimum regular monthly cash flows of principal and interest, which
are guaranteed by the issuing agencies. All the Company's mortgage-backed
securities at December 31, 1999 were agency-issued collateral obligations.

At December 31, 1999, 61.5% of the mortgage-backed securities held by the
Company had final maturities of more than 10 years. However, unlike U.S.
Treasury and U.S. Government agency securities, which have a lump sum payment at
maturity, mortgage-backed securities provide cash flows from regular principal
and interest payments and principal prepayments throughout the lives of the
securities. Therefore, the average life, or the average amount of time until the
Company receives the total amount invested, of the mortgage-backed security will
be shorter than the contractual maturity. The Company estimates the remaining
average life of the fixed-rate mortgage-backed security portfolio to be less
than five years. Mortgage-backed securities, which are purchased at a

-31-

premium, will generally suffer decreasing net yields as interest rates drop
because homeowners tend to refinance their mortgages. Thus, the premium paid
must be amortized over a shorter period. Therefore, securities purchased at a
discount will obtain higher net yields in a decreasing interest rate
environment. As interest rates rise, the opposite will generally be true. During
a period of increasing interest rates, fixed rate mortgage-backed securities do
not tend to experience heavy prepayments of principal and consequently, the
average life of this security will not be unduly shortened. Approximately $10.4
million of the Company's mortgage-backed securities and CMOs earn interest at
floating rates and reprice within one year, and accordingly are less susceptible
to declines in value should interest rates increase.

PREMISES AND EQUIPMENT

Premises and equipment totaled $11.7 million at December 31, 1999 and $7.0
million at December 31, 1998. The net change reflects an increase of $4.7
million or 65.8% in fixed assets. The increase is primarily due to the purchase
of the land and building in Pittsburg, Texas for a new full-service location
which opened in May 1999, the First American acquisition, which included
full-service bank facilities in Sulphur Springs and Commerce, Texas, and the
building of an operations center in Mount Pleasant, Texas to handle the
additional staff required due to increased volumes and locations.

OTHER ASSETS

On July 1, 1998, the Company invested $3.1 million in single insurance
premium policies. Such policies insured the lives of certain key senior
officers. As of December 1999, the net surrender values of these policies
totaled $3.9 million.

DEPOSITS

The Company offers a variety of deposit accounts having a wide range of
interest rates and terms. The Company's deposit accounts consist of demand,
savings, money market and time accounts. The Company relies primarily on
competitive pricing policies and customer service to attract and retain these
deposits. The Company does not have or accept any brokered deposits.

Total deposits at December 31, 1999, increased to $328.6 million from
$242.3 million at December 31, 1998, an increase of $86.3 million or 35.6%. The
increase can be attributed to several factors. First, the Company's certificates
of deposits increased from $130.7 million at December 31, 1998, to $181.2
million at December 31, 1999, a $50.5 million or 38.6% increase for the year.
Second, public fund deposits were $37.4 million at December 31, 1999, an
increase of $10.0 million or 36.6% from $27.4 million at December 31, 1998. One
contract, Lamar County, was added in 1999 and no contracts were added in 1998.
Third, the Company continues to expand its customer base with its free checking
product and its Premier money market account. The number of checking accounts
increased 26.6% to 18,454 while the number of Premier money market accounts
increased 29.5% to 1,955 during 1999. The Paris and Texarkana locations, as well
as the new Pittsburg, Sulphur Springs, and Commerce locations, increased their
deposits by a combined $84.4 million during the year ended December 31, 1999.
Management believes these locations will continue to gain market share as the
Company becomes better known in these communities. In 1998, deposits rose to
$242.3 million from $223.0 million in 1997, an increase of $19.4 million or
8.7%. This increase is primarily attributable to an increase in certificates of
deposits of $11.1 million and an increase in public funds of $6.3 million. The
Company's ratio of average noninterest-bearing demand deposits to average total
deposits for years ended December 31, 1999, 1998 and 1997, were 18.0%, 18.1% and
17.8%, respectively.

-32-

The daily average balances and weighted average rates paid on deposits for
each of the years ended December 31, 1999, 1998 and 1997 are presented below:

YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)

Regular savings .................... $ 8,427 2.50% $ 7,653 2.68% $ 7,555 2.74%
NOW accounts ....................... 24,214 2.49 19,276 2.64 17,516 2.78
Money market checking .............. 42,228 4.15 32,347 4.02 31,565 4.12
Time deposits less than $100,000 ... 89,889 5.03 78,724 5.37 70,743 5.32
Time deposits $100,000 and over .... 62,065 5.16 48,748 5.50 43,853 5.53
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits $226,823 4.54% $186,748 4.78% $171,232 4.78%
Noninterest-bearing deposits ....... 49,702 -- 41,171 -- 37,169 --
-------- -------- -------- -------- -------- --------
Total deposits ........... $276,525 3.72% $227,919 3.92% $208,401 3.92%
======== ======== ======== ======== ======== ========

The following table sets forth the amount of the Company's certificates of
deposit that are $100,000 or greater by time remaining until maturity:

DECEMBER 31, 1999
---------------------
(DOLLARS IN THOUSANDS)
3 months or less ........................................ $23,431
Over 3 months through 6 months .......................... 16,578
Over 6 months through 1 year ............................ 24,547
Over 1 year ............................................. 8,072
-------
Total ......................................... $72,628
=======
OTHER BORROWINGS

Federal Home Loan Bank ("FHLB") advances may be utilized from time to time
as either a short-term funding source or a longer-term funding source. FHLB
advances can be particularly attractive as a longer-term funding source to
balance interest rate sensitivity and reduce interest rate risk. The Company is
eligible for two borrowing programs through the FHLB. The first, called "Short
Term Fixed," requires delivery of eligible securities for collateral. Maturities
under this program range from 1-35 days. The Company does not currently have any
borrowings under this program. As of December 31, 1999, the Company does not
have any of its investment securities in safekeeping at the FHLB.

The second borrowing program, the "Blanket Borrowing Program," is under a
borrowing agreement, which does not require the delivery of specific collateral.
Borrowings are limited to a maximum of 75% of the Company's one to four family
residential mortgage loans. At December 31, 1999, the Company had approximately
$10.7 million borrowed of a potential $62.8 million available under this
program, leaving approximately $52.1 million in available borrowings.

INTEREST RATE SENSITIVITY AND LIQUIDITY

The Company's Asset Liability and Funds Management Policy provides
management with the necessary guidelines for effective funds management, and the
Company has established a measurement system for monitoring its net interest
rate sensitivity position. The Company manages its sensitivity position within
established guidelines.

-33-

Interest rate risk is managed by the Asset Liability Committee ("ALCO"),
which is composed of senior officers of the Company, in accordance with policies
approved by the Company's Board of Directors. The ALCO formulates strategies
based on appropriate levels in interest rate risk. In determining the
appropriate level of interest rate risk, the ALCO considers the impact on
earnings and capital based on the current outlook on interest rates, potential
changes in interest rates, regional economies, liquidity, business strategies,
and other factors. The ALCO meets regularly to review, among other things, the
sensitivity of assets and liabilities to interest rate changes, the book and
market values of assets and liabilities, unrealized gains and losses, purchase
and sale activity, commitments to originate loans, and the maturities of
investments and borrowings. Additionally, the ALCO reviews liquidity, cash flow
flexibility, maturities of deposits and consumer and commercial deposit
activity. Management uses two methodologies to manage interest rate risk: (i) an
analysis of relationships between interest-earning assets and interest-bearing
liabilities; and (ii) an interest rate shock simulation model. The Company has
traditionally managed its business to reduce its overall exposure to changes in
interest rates, however, under current policies of the Company's Board of
Directors, management has been given some latitude to increase the Company's
interest rate sensitivity position within certain limits if, in management's
judgment, it will enhance profitability. As a result, changes in market interest
rates may have a greater impact on the Company's financial performance in the
future than they have had historically.

To effectively measure and manage interest rate risk, the Company uses an
interest rate shock simulation model to determine the impact on net interest
income under various interest rate scenarios, balance sheet trends and
strategies. From these simulations, interest rate risk is quantified and
appropriate strategies are developed and implemented. Additionally, duration and
market value sensitivity measures are utilized when they provide added value to
the overall interest rate risk management process. The overall interest rate
risk position and strategies are reviewed by the Company's Board of Directors on
an ongoing basis. The Company manages its exposure to interest rates by
structuring its balance sheet in the ordinary course of business. The Company
does not currently enter into instruments such as leveraged derivatives,
structured notes, interest rate swaps, caps, floors, financial options,
financial futures contracts or forward delivery contracts for the purpose of
reducing interest rate risk.

An interest rate sensitive asset or liability is one that, within a
defined time period, either matures or experiences an interest rate change in
line with general market interest rates. The management of interest rate risk is
performed by analyzing the maturity and repricing relationships between
interest-earning assets and interest-bearing liabilities at specific points in
time ("GAP") and by analyzing the effects of interest rate changes on net
interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest
rate sensitivity reflects the potential effect on net interest income of a
movement in interest rates. A company is considered to be asset sensitive, or
having a positive GAP, when the amount of its interest-earning assets maturing
or repricing within a given period exceeds the amount of its interest-bearing
liabilities also maturing or repricing within that time period. Conversely, a
company is considered to be liability sensitive, or having a negative GAP, when
the amount of its interest-bearing liabilities maturing or repricing within a
given period exceeds the amount of its interest-earning assets also maturing or
repricing within that time period. During a period of rising interest rates, a
negative GAP would tend to affect net interest income adversely, while a
positive GAP would tend to result in an increase in net interest income. During
a period of falling interest rates, a negative GAP would tend to result in an
increase in net interest income, while a positive GAP would tend to affect net
interest income adversely. However, it is management's intent to achieve a
proper balance so that incorrect rate forecasts should not have a significant
impact on earnings.

-34-

The following table sets forth an interest rate sensitivity analysis for
the Company at December 31, 1999:

VOLUMES SUBJECT TO REPRICING WITHIN
-----------------------------------------------------------------------------------------------
0-30 31-180 181-365 1-3 3-5 5-10 GREATER THAN
DAYS DAYS DAYS YEARS YEARS YEARS 10 YEARS TOTAL
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)

Interest-earning assets:
Securities .....................$ 6,155 $ 6,329 $ 9,945 $ 14,881 $ 20,420 $ 19,076 $ 2,955 $ 79,761
Loans .......................... 94,083 33,399 24,999 41,592 39,686 15,970 5,480 255,209
Federal funds sold ............. 1,140 -- -- -- -- -- -- 1,140
Due from banks ................. 50 -- -- -- -- -- -- 50
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-earning
assets .............. 101,428 39,728 39,944 56,473 60,106 35,046 8,435 341,160
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
NOW, money market and
savings deposits .......... 91,003 -- -- -- -- -- -- 91,003
Certificates of deposit and
other time deposits ....... 22,712 66,294 71,989 17,253 2,882 -- 100 181,230
Borrowed funds ................. 7,024 122 150 3,403 -- -- -- 10,699
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest-bearing
liabilities .......... 120,739 66,416 72,139 20,656 2,882 -- 100 282,932
--------- --------- --------- --------- --------- --------- --------- ---------
Period GAP ..........................$ (19,311) $ (26,688) $ (37,195) $ 35,817 $ 57,224 $ 35,046 $ 8,335 $ 53,228
Cumulative GAP ......................$ (19,311) $ (45,999) $ (83,194) $ (47,377) $ 9,847 $ 44,893 $ 53,228
Period GAP to total assets .......... (5.21)% (7.20)% (10.04)% 9.67% 15.45% 9.46% 2.25%
Cumulative GAP to total assets ...... (5.21)% (12.42)% (22.46)% (12.79)% 2.66% 12.12% 14.37%
Cumulative interest-earning assets
to cumulative interest-bearing
liabilities .................... 84.01% 75.42% 67.92% 83.08% 103.48% 115.87% 118.81%

The Company's one-year cumulative GAP position at December 31, 1999, was
negative $83.2 million or 10.04% of assets. This is a one-day position that is
continually changing and is not indicative of the Company's position at any
other time. While the GAP position is a useful tool in measuring interest rate
risk and contributes toward effective asset and liability management, it is
difficult to predict the effect of changing interest rates solely on that
measure, without accounting for alterations in the maturity or repricing
characteristics of the balance sheet that occur during changes in market
interest rates. For example, the GAP position reflects only the prepayment
assumptions pertaining to the current rate environment. Assets tend to prepay
more rapidly during periods of declining interest rates than during periods of
rising interest rates. Because of this and other risk factors not contemplated
by the GAP position, an institution could have a matched GAP position in the
current rate environment and still have its net interest income exposed to
increased rate risk. The Company maintains a Rate Committee and the ALCO that
reviews the Company's interest rate risk position on a weekly or monthly basis,
respectively.

Liquidity involves the Company's ability to raise funds to support asset
growth or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate the
Company on an ongoing basis. The Company's liquidity needs are met primarily by
financing activities, which consisted mainly of growth in core deposits,
supplemented by investment securities and earnings through operating activities.
Although access to purchased funds from correspondent banks is available and has
been utilized on occasion to take advantage of investment opportunities, the
Company does not generally rely on these external-funding sources. The cash and
federal funds sold position, supplemented by amortizing investments along with
payments and maturities within the loan portfolio, have historically created an
adequate liquidity position.

-35-

CAPITAL RESOURCES

Capital management consists of providing equity to support both current
and future operations. The Company is subject to capital adequacy requirements
imposed by the Federal Reserve and the Bank is subject to capital adequacy
requirements imposed by the FDIC and the TDB. Both the Federal Reserve and the
FDIC have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards currently
in effect are designed to make regulatory capital requirements more sensitive to
differences in risk profiles among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The resulting capital
ratios represent capital as a percentage of total risk-weighted assets and
off-balance sheet items.

The risk-based capital standards issued by the Federal Reserve require all
bank holding companies to have "Tier 1 capital" of at least 4.0% and "total
risk-based" capital (Tier 1 and Tier 2) of at least 8.0% of total risk-adjusted
assets. "Tier 1 capital" generally includes common shareholders' equity and
qualifying perpetual preferred stock together with related surpluses and
retained earnings, less deductions for goodwill and various other intangibles.
"Tier 2 capital" may consist of a limited amount of intermediate-term preferred
stock, a limited amount of term subordinated debt, certain hybrid capital
instruments and other debt securities, perpetual preferred stock not qualifying
as Tier 1 capital, and a limited amount of the general valuation allowance for
loan losses. The sum of Tier 1 capital and Tier 2 capital is "total risk-based
capital".

The Federal Reserve has also adopted guidelines which supplement the
risk-based capital guidelines with a minimum ratio of Tier 1 capital to average
total consolidated assets ("leverage ratio") of 3.0% for institutions with well
diversified risk, including no undue interest rate exposure; excellent asset
quality; high liquidity; good earnings; and that are generally considered to be
strong banking organizations, rated composite 1 under applicable federal
guidelines, and that are not experiencing or anticipating significant growth.
Other banking organizations are required to maintain a leverage ratio of at
least 4.0% to 5.0%. These rules further provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
capital positions substantially above the minimum supervisory levels and
comparable to peer group averages, without significant reliance on intangible
assets.

Pursuant to FDICIA, each federal banking agency revised its risk-based
capital standards to ensure that those standards take adequate account of
interest rate risk, concentration of credit risk and the risks of nontraditional
activities, as well as reflect the actual performance and expected risk of loss
on multifamily mortgages. The Bank is subject to capital adequacy guidelines of
the FDIC that are substantially similar to the Federal Reserve's guidelines.
Also pursuant to FDICIA, the FDIC has promulgated regulations setting the levels
at which an insured institution such as the Bank would be considered "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized." The Bank is classified
"well capitalized" for purposes of the FDIC's prompt corrective action
regulations. SEE "SUPERVISION AND REGULATION - THE COMPANY" AND " - THE BANK".

Shareholders' equity increased to $28.5 million at December 31, 1999, from
$23.8 million at December 31, 1998, an increase of $4.7 million or 19.8%. This
increase was primarily the result of net income of $3.1 million, and net
proceeds from the First American acquisition of $3.5 million, offset by the
payment of Common Stock dividends of $768,000, the net change in unrealized loss
on available for-sale securities of $997,000 and the purchase of treasury stock
of $174,000. During 1998, shareholders' equity increased by $5.5 million or
30.4%, from $18.3 million at December 31, 1997. The increase was primarily the
result of net income of $2.7 million and net proceeds from the Company's initial
public offering of $4.4 million, offset by the payment of Common Stock and
preferred stock dividends of $696,000 and $37,000, respectively, and the
redemption of preferred stock of $827,000.

-36-

The following table provides a comparison of the Company's and the Bank's
leverage and risk-weighted capital ratios as of December 31, 1999 to the minimum
and well-capitalized regulatory standards:

TO BE WELL
MINIMUM REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE ACTUAL RATIO AT
ADEQUACY PURPOSES ACTION PROVISIONS DECEMBER 31, 1999
----------------- ----------------- -----------------
THE COMPANY

Leverage ratio .......................... 3.00% (1) N/A 8.21%
Tier 1 risk-based capital ratio ......... 4.00% N/A 9.86%
Risk-based capital ratio ................ 8.00% N/A 10.83%
THE BANK
Leverage ratio .......................... 3.00% (2) 5.00% 7.84%
Tier 1 risk-based capital ratio ......... 4.00% 6.00% 9.39%
Risk-based capital ratio ................ 8.00% 10.00% 10.36%

- ----------------------
(1) The Federal Reserve may require the Company to maintain a leverage ratio
of up to 200 basis points above the required minimum.
(2) The FDIC may require the Bank to maintain a leverage ratio of up to 200
basis points above the required minimum.

YEAR 2000 COMPLIANCE

GENERAL. The Year 2000 risk involved computer programs and computer
software that are not able to perform without interruption into and during the
Year 2000. If computer systems did not correctly recognize the date change from
December 31, 1999, to January 1, 2000, computer applications that rely on the
date field could fail or create erroneous results. Such erroneous results could
affect interest, payments or due dates or caused the temporary inability to
process transactions, send invoices or engage in similar normal business
activities. If the Company, its suppliers and its borrowers, failed to address
these issues there could be a material adverse impact on the Company's financial
condition or results of operations.

STATE OF READINESS. The Company formally initiated its Year 2000 project
and plan in August 1997 to insure that its operational and financial systems
would not be adversely affected by Year 2000 problems. The Company formed a Year
2000 project team, and the Board of Directors and management supported all
compliance efforts and allocated the necessary resources to ensure completion.
An inventory of all systems and products (including both information technology
("IT") and non-informational technology ("non-IT") systems) that could have been
affected by the Year 2000 date change was developed, verified and categorized as
to their importance to the Company and an assessment of all mission critical IT
and mission critical non-IT systems was completed. This assessment involved
inputting test data which simulated the Year 2000 date change into such IT
systems and reviewing the system output for accuracy. The Company's assessment
of mission critical non-IT systems involved reviewing such systems to determine
whether they were date dependent. Based on such assessment, the Company believed
that none of its critical systems were date dependent. The software for the
Company's systems is provided through service bureaus and software vendors. The
Company contacted all of its third party vendors and software providers and
required them to demonstrate and represent that the products provided were Year
2000 compliant and a program of testing compliance was planned. The Company's
item processing software provider, which performs substantially all of the
Company's data processing functions, stated that its software is Year 2000
compliant and pursuant to applicable regulatory guidelines the Company tested
scenarios to verify this assertion. In addition, the FDIC reviewed the Company's
compliance with Year 2000 issues on several occasions.

RISKS RELATED TO THIRD PARTIES. The impact of Year 2000 noncompliance by
third parties with which the Company transacts business cannot be accurately
gauged. The Company identified its largest dollar depositors (aggregate deposits
over $100,000) and loan customers ($150,000 or more) and, based on information
available to the Company, conducted evaluations to determine which of those
customers were likely to be affected by Year 2000 issues. In addition, corporate
borrowers were contacted and assessed by their respective lending officers and
scored on a scale of one, two or three, with three being the least affected by
Year 2000 issues. A corporate borrower, which

-37-

received a rating of one or two, was subsequently contacted to assess Year 2000
readiness efforts. To the extent a problem was identified with respect to a
customer, the Company monitored the customer's progress in resolving such
problem. In the event that Year 2000 noncompliance adversely affected borrowers,
the Company may be required to charge-off the loan to such borrowers. For a
discussion of possible effects of such charge-offs, see "Contingency Plans"
below. The Company is not aware of any material problem by any of its customers
that would affect their repayment of any such loans. With respect to depositors,
the Company had additional cash on hand to handle any excessive withdrawals.
With respect to its borrowers, the Company includes in its loan documents a Year
2000 disclosure form and an addendum to the loan agreement in which the borrower
represents and warrants its Year 2000 compliance to the Company.

TRANSITION INTO THE YEAR 2000. The Company suffered no failures in any
system or product upon the date change from December 31, 1999 to January 1,
2000. In addition, management is not aware of any vendor or provider used by the
Company for data processing or related services which experienced a material
failure of its product or service due to a Year 2000 related problem. The
Company is also subject to risks associated with Year 2000 noncompliance by its
customers. Management is not aware of any customer which suffered losses related
to a Year 2000 problem which would adversely affect that customer's financial
condition or its ability to repay any outstanding loan it has with the Company.

COST OF COMPLIANCE. The Company budgeted $50,000 to address Year 2000
issues. As of February 15, 2000, the Company's expenses did not exceed the
amount budgeted. While the Company believes that it will incur no additional
material expenses related to the Year 2000 issue, there can be no assurance that
the Company will not be impacted by a Year 2000 related problem which occurs
after the date hereof or by the failure of a third party to achieve proper Year
2000 compliance.

ONGOING PLANS. Although many of the critical dates related to potential
Year 2000 related problems have passed, experts predict that Year 2000 related
failures could occur throughout the year, such as on February 29, 2000 and
December 31, 2000. Accordingly, the Company's Year 2000 project team will
continue to monitor the Company's IT and non-IT systems and attempt to identify
any potential problems during the course of the year. In addition, the Company
will continue to monitor the Year 2000 compliance of the third parties with
which the Company transacts business.

CONTINGENCY PLANS. The Company continues to maintain its contingency plans
with respect to Year 2000 and believes that if its own systems should fail, the
Company could convert to a manual entry system for a period of up to three
months without significant losses. The Company believes that any mission
critical system could be recovered and operating within three to five days. In
the event that the Federal Reserve is unable to handle electronic funds
transfers and check clearing, the Company does not expect the impact to be
material to its financial condition or results of operations as long as the
Company is able to utilize an alternative funds transfer and clearing source. As
part of its contingency planning, the Company reviewed its loan customer base
and the potential impact on capital of Year 2000 noncompliance. Based upon such
review and the fact that no material problems occurred at the date rollover,
using what it considers to be a reasonable worst case scenario, the Company has
assumed that certain of its commercial borrowers whose businesses may still be
affected by Year 2000 noncompliance would be unable to repay their loans,
resulting in charge-offs of loan amounts in excess of collateral values. If such
were the case, the Company believes that it is unlikely that its exposure would
exceed $100,000. Management does not believe that this amount is material enough
for the Company to adjust its current methodology for making provisions to the
allowance for loan losses.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

For information regarding the market risk of the Company's financial
instruments, see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION--INTEREST RATE SENSITIVITY AND LIQUIDITY". The
Company's principal market risk exposure is to interest rates.

-38-

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements, the reports thereon, the notes thereto and
supplementary data commence at page F-1 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Information on the change in accountant of the Company reported in a
Current Report on Form 8-K/A filed February 25, 2000, is incorporated herein by
reference.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information under the captions "Election of Directors," "Continuing
Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement relating to
its 2000 Annual Meeting of Shareholders (the "2000 Proxy Statement") is
incorporated herein by reference in response to this item.

ITEM 11. EXECUTIVE COMPENSATION

The information under the caption "Executive Compensation and Other
Matters" in the 2000 Proxy Statement is incorporated herein by reference in
response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information under the caption "Beneficial Ownership of Common Stock by
Management of the Company and Principal Shareholders" in the 2000 Proxy
Statement is incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information under the caption "Interests of Management and Others in
Certain Transactions" in the 2000 Proxy Statement is incorporated herein by
reference in response to this item.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Reference is made to the Financial Statements, the reports thereon, the
notes thereto and supplementary data commencing at page F-1 of this Annual
Report on Form 10-K. Set forth below is a list of such Financial Statements:

Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Earnings for the Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997
Notes to Consolidated Financial Statements

-39-

FINANCIAL STATEMENT SCHEDULES

All supplemental schedules are omitted as inapplicable or because the
required information is included in the Consolidated Financial Statements or
notes thereto.

EXHIBITS

Each exhibit marked with an asterisk is filed with this Annual Report on
Form 10-K.

EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
2.1 Agreement and Plan of Reorganization dated as of April 23,
1999 between First American Financial Corporation and Guaranty
Bancshares, Inc. (incorporated herein by reference to Exhibit
2.1 to the Company's Registration Statement on Form S-4
(Registration No. 333-81881)).

2.2 First Amendment to the Agreement and Plan of Reorganization
between First American Financial Corporation and Guaranty
Bancshares, Inc. (incorporated herein by reference to Exhibit
2.2 to the Company's Registration Statement on Form S-4
(Registration No. 333-81881)).

2.3 Second Amendment to the Agreement and Plan of Reorganization
between First American Financial Corporation and Guaranty
Bancshares, Inc. (incorporated herein by reference to Exhibit
2.3 to the Company's Registration Statement on Form S-4
(Registration No. 333-81881)).

3.1 Amended Articles of Incorporation of the Company (incorporated
herein by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No.
333-48959) (the "Registration Statement")).

3.2 Amended and Restated Bylaws of the Company (incorporated
herein by reference to Exhibit 3.2 to the Registration
Statement).

4 Specimen form of certificate evidencing the Common Stock
(incorporated herein by reference to Exhibit 4 to the
Registration Statement).

10.1 Guaranty Bancshares, Inc. 1998 Stock Incentive Plan
(incorporated herein by reference to Exhibit 10.1 to the
Registration Statement).

21 Subsidiaries of Guaranty Bancshares, Inc. (incorporated herein
by reference to Exhibit 21 to the Registration Statement).

23.1* Consent of Arnold, Walker, Arnold & Co., P. C.

27* Financial Data Schedule.

REPORTS ON FORM 8-K

The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1999.

-40-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Guaranty Bancshares, Inc., has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mount Pleasant and the State of Texas on March 10,
2000.

GUARANTY BANCSHARES, INC.

By: /s/ ARTHUR B. SCHARLACH, JR.
----------------------------
Arthur B. Scharlach, Jr.
PRESIDENT

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report or amendment thereto has been signed by the following
persons in the indicated capacities on March 10, 2000.

SIGNATURE POSITIONS
--------- ---------

/S/ BILL G. JONES Chairman of the Board and Chief
----------------------------------------------- Executive Officer (principal
Bill G. Jones executive officer)

/S/ CLIFTON A. PAYNE Senior Vice President, Controller and
----------------------------------------------- Director (principal financial officer
Clifton A. Payne and principal accounting officer)

/S/ ARTHUR B. SCHARLACH, JR. President and Director
-----------------------------------------------
Arthur B. Scharlach, Jr.

/S/ JOHN A. CONROY Director
-----------------------------------------------
John A. Conroy

/S/ JONICE CRANE Director
-----------------------------------------------
Jonice Crane

/S/ C. A. HINTON, SR. Director
-----------------------------------------------
C. A. Hinton, Sr.

/S/ WELDON MILLER Director
-----------------------------------------------
Weldon Miller

/S/ D. R. ZACHRY, JR. Director
-----------------------------------------------
D. R. Zachry, Jr.

-41-

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

TABLE OF CONTENTS TO FINANCIAL STATEMENTS

PAGE
----
Independent Auditor's Report ...............................................F-2

Consolidated Balance Sheets as of December 31, 1999 and 1998................F-3

Consolidated Statements of Earnings for the
Years Ended December 31, 1999, 1998, and 1997..............................F-4

Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1999, 1998, and 1997..............................F-5

Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998, and 1997..............................F-6

Notes to Consolidated Financial Statements .................................F-7

F-1

[Arnold, Walker, Arnold & Co., P.C. Letterhead]

INDEPENDENT AUDITOR'S REPORT

The Board of Directors and Shareholders
Guaranty Bancshares, Inc.

We have audited the accompanying consolidated balance sheets of Guaranty
Bancshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of earnings, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Guaranty Bancshares, Inc.
and Subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

/s/ Arnold, Walker, Arnold & Co.
ARNOLD, WALKER, ARNOLD & CO., P.C.

Mt. Pleasant, Texas

January 26, 2000

F-2

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

ASSETS

DECEMBER 31,
-----------------------
1999 1998
--------- ---------

Cash and cash equivalents
Cash and due from banks ................................ $ 13,102 $ 9,691
Interest bearing deposits in other banks ............... 50 2,030
--------- ---------
Total cash and cash equivalents ................ 13,152 11,721
Federal funds sold ....................................... 1,140 10,090
Securities
Available-for-sale ..................................... 79,761 44,305
Held-to-maturity (approximate market value of $7,196
at December 31, 1998) .............................. -- 7,062
--------- ---------
Total securities ............................... 79,761 51,367
Loans, net ............................................... 252,718 184,374
Premises and equipment, net .............................. 11,662 7,032
Other real estate ........................................ 79 97
Accrued interest receivable .............................. 2,735 2,331
Other assets ............................................. 9,191 5,894
--------- ---------
$ 370,438 $ 272,906
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY

Liabilities
Deposits
Noninterest-bearing .................................. $ 56,404 $ 47,360
Interest-bearing deposits ............................ 272,233 194,965
--------- ---------
Total deposits ................................. 328,637 242,325
Borrowed funds ......................................... 10,699 3,980
Accrued interest and other liabilities ................. 2,606 2,805
--------- ---------
Total liabilities .............................. 341,942 249,110
Commitments and contingencies ............................ -- --
Shareholders' equity
Common stock ........................................... 3,250 2,898
Additional capital ..................................... 12,659 9,494
Retained earnings ...................................... 13,535 11,181
Accumulated other comprehensive income
net unrealized appreciation on available-for-sale
securities, net of tax of ($400) and $114 ............ (774) 223
--------- ---------
28,670 23,796
Less common stock in treasury-at cost .................. 174 --
--------- ---------
28,496 23,796
--------- ---------
$ 370,438 $ 272,906
========= =========

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

F-3

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
-------- -------- --------

Interest income
Loans, including fees ...................................... $ 17,481 $ 14,544 $ 13,051
Securities
Taxable .................................................. 3,500 2,991 3,177
Nontaxable ............................................... 126 64 70
Federal funds sold and interest bearing deposits ........... 461 769 711
-------- -------- --------
Total interest income .............................. 21,568 18,368 17,009
Interest expense
Deposits ................................................. 10,292 8,926 8,179
Other .................................................... 214 25 13
-------- -------- --------
Total interest expense ............................. 10,506 8,951 8,192

Net interest income ................................ 11,062 9,417 8,817
Provision for loan losses .................................... 310 540 355
-------- -------- --------
Net interest income after provision for losses ..... 10,752 8,877 8,462
Noninterest income
Service charges ............................................ 1,901 1,336 1,097
Net realized gains on sales of available-for-sale securities 11 81 19
Other income ............................................... 1,462 1,409 541
-------- -------- --------
Total noninterest income ........................... 3,374 2,826 1,657
Noninterest expense
Employee compensation and benefits ......................... 5,666 4,458 3,717
Occupancy expenses ......................................... 1,405 1,206 1,125
Other operating expenses ................................... 3,188 2,824 2,604
-------- -------- --------
Total noninterest expenses ........................ 10,259 8,488 7,446
-------- -------- --------
Earnings before income taxes ...................... 3,867 3,215 2,673
Provision for income taxes
Current .................................................... 977 541 228
Deferred (benefit) ......................................... (232) -- 45
-------- -------- --------
745 541 273
-------- -------- --------

NET EARNINGS ...................................... $ 3,122 $ 2,674 $ 2,400
======== ======== ========

Basic earnings per common share .............................. $ 1.03 $ 0.95 $ 0.91
======== ======== ========
Diluted earnings per common share ............................ $ 1.03 $ 0.95 $ 0.91
======== ======== ========

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED STATEMENTS.

F-4

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

ACCUMULATED
OTHER
COMPREHENSIVE
INCOME-NET
UNREALIZED
GAIN (LOSS)
ON SECURITIES COMMON TOTAL
PREFERRED COMMON ADDITIONAL RETAINED AVAILABLE- STOCK IN SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS FOR-SALE TREASURY EQUITY
-------- -------- -------- -------- -------- -------- --------

Balance at January 1, 1997 ...... $ 827 $ 2,548 $ 5,396 $ 7,480 $ 19 $ (20) $ 16,250
-------- -------- -------- -------- -------- -------- --------
Net earnings for the year 1997 ... -- -- -- 2,400 -- -- 2,400
Accumulated other comprehensive
income-net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $114 ... -- -- -- -- 223 -- 223
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income ...... -- -- -- 2,400 223 -- 2,623
Sale of treasury stock ........... -- -- -- -- -- 20 20
Dividends
Preferred - $0.45 per share ... -- -- -- (74) -- -- (74)
Common - $0.22 per share ...... -- -- -- (566) -- -- (566)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1997 ..... 827 2,548 5,396 9,240 242 -- 18,253
-------- -------- -------- -------- -------- -------- --------
Net earnings for the year 1998 ... -- -- -- 2,674 -- -- 2,674
Accumulated other comprehensive
income- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of $10 .. -- -- -- -- (19) -- (19)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income ....... -- -- -- 2,674 (19) -- 2,655
Purchase of treasury stock ....... -- -- -- -- -- (2) (2)
Sale of treasury stock ........... -- -- -- -- -- 2 2
Redemption of Preferred stock .... (827) -- -- -- -- -- (827)
Sale of Common stock ............. -- 350 4,098 -- -- -- 4,448
Dividends
Preferred-$0.225 per share .... -- -- -- (37) -- -- (37)
Common-$0.24 per share ........ -- -- -- (696) -- -- (696)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1998 .... -- 2,898 9,494 11,181 223 -- 23,796
-------- -------- -------- -------- -------- -------- --------
Net earnings for the year 1999 .. -- -- -- 3,122 -- -- 3,122
Accumulated other comprehensive
income- net change in unrealized
gain (loss) on available-for-sale
securities, net of tax of ($514) . -- -- -- -- (997) -- (997)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income ....... -- -- -- 3,122 (997) -- 2,125
Purchase of treasury stock ....... -- -- -- -- -- (174) (174)
Stock issued to acquire
First American ................... -- 352 3,165 -- -- -- 3,517
Dividends
Common - $0.25 per share ...... -- -- -- (768) -- -- (768)
-------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1999 ..... $ -- $ 3,250 $ 12,659 $ 13,535 $ (774) $ (174) $ 28,496
======== ======== ======== ======== ======== ======== ========

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

F-5

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
-------- -------- --------

Cash flows from operating activities
Net earnings ....................................... $ 3,122 $ 2,674 $ 2,400
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation ..................................... 672 564 537
Amortization of premiums, net of (accretion) of
discounts on securities ........................ 196 186 95
Net realized gain on available-for-sale securities (11) (81) (19)
Gain on sale of loans ............................ -- (674) --
Provision for loan losses ........................ 310 540 355
Write-down of other real estate and
repossessed assets ............................. 13 25 150
Proceeds from sale of loans ...................... -- 1,967 --
Gain on sale of premises, equipment and other
real estate .................................... (90) (63) (11)
Decrease (increase) in accrued interest
receivable and other assets .................... 843 (3,112) (623)
(Decrease) increase in accrued interest
and other liabilities .......................... (390) (128) 287
-------- -------- --------
Net cash provided by operating activities ... 4,665 1,898 3,171
Cash flows from investing activities
Purchases of held-to-maturity securities ......... -- (688) (7,179)
Proceeds from sales and maturities of
available-for-sale securities .................. 17,197 16,186 1,630
Purchases of available-for-sale securities ....... (34,914) (17,709) (35,990)
Proceeds from maturities and principal repayments
of held-to-maturity securities ................. 1,343 8,849 14,023
Purchases of premises and equipment .............. (4,219) (1,237) (1,368)
Proceeds from sale of premises, equipment
and other real estate .......................... 538 751 296
Net increase in loans ............................ (31,639) (29,941) (18,387)
Cash paid for acquisitions ....................... (3,380) -- --
Cash and cash equivalents from acquisitions ...... 1,983 -- --
Net decrease (increase) in federal funds sold .... 15,985 (2,370) 10,430
-------- -------- --------
Net cash used in investing activities ........ (37,106) (26,159) (36,545)
Cash flows from financing activities
Proceeds from borrowings ......................... 7,000 4,000 --
Repayment of borrowings .......................... (281) (20) (171)
Change in deposits, net .......................... 28,095 19,364 28,106
Purchase of treasury stock ....................... (174) (2) --
Sale of treasury stock ........................... -- 2 20
Redemption of preferred stock .................... -- (827) --
Sale of common stock ............................. -- 4,448 --
Dividends paid ................................... (768) (733) (640)
-------- -------- --------
Net cash provided by financing activities .... 33,872 26,232 27,315
-------- -------- --------
Net (decrease) increase in cash and
cash equiva1ents ........................... 1,431 1,971 (6,059)
Cash and cash equivalents at beginning of year ........... 11,721 9,750 15,809
-------- -------- --------
Cash and cash equivalents at end of year ................. $ 13,152 $ 11,721 $ 9,750
======== ======== ========

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

F-6

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of the significant accounting policies followed
in the preparation of the consolidated financial statements. The policies
conform to generally accepted accounting principles and to general practices
within the banking industry.

1. GENERAL

The Company operates ten locations in Northeast Texas. The Company's main
sources of income are derived from granting loans primarily in Northeast Texas
and investing in United States Treasury and Agency securities. A variety of
financial products and services are provided to individual and corporate
customers. The primary deposit products are checking accounts, money market
accounts, and certificates of deposit. The primary lending products are real
estate, commercial, and consumer loans. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' abilities to honor
contracts is dependent on the economy of the area.

2. PRINCIPLES OF CONSOLIDATION AND INVESTMENT IN SUBSIDIARIES

The consolidated financial statements include the accounts of Guaranty
Bancshares, Inc. (collectively referred to as the Company) and its wholly-owned
subsidiary Guaranty Financial Corp., Inc. which wholly owns Guaranty Bank and
one non-bank subsidiary Guaranty Company. Guaranty Bank has three non-bank
subsidiaries, Guaranty Leasing Company, Guaranty Mortgage Company, and GB Com,
Inc. All significant intercompany balances and transactions have been eliminated
in consolidation.

3. CASH AND CASH EQUIVALENTS

For the purpose of presentation in the consolidated statements of cash
flows, cash and cash equivalents are defined as those amounts included in the
balance sheet caption "Total cash and cash equivalents." Cash and cash
equivalents includes due from bank accounts, teller and vault cash.

4. SECURITIES

The Company accounts for securities according to Statement of Financial
Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT
AND EQUITY SECURITIES. At the date of purchase, the Company is required to
classify debt and equity securities into one of three categories:
held-to-maturity, trading, or available-for-sale. At each reporting date, the
appropriateness of the classification is reassessed. Investments in debt
securities are classified as held-to- maturity and measured at amortized cost in
the financial statements only if management has the positive intent and ability
to hold those securities to maturity. Securities that are bought and held
principally for the purpose of selling them in the near term are classified as
trading and measured at fair value in the financial statements with unrealized
gains and losses included in earnings. Investments not classified as either
held-to-maturity or trading are classified as available-for-sale and measured at
fair value in the financial statements with unrealized gains and losses
reported, net of tax, in a separate component of shareholders' equity until
realized.

Gains and losses on the sale of securities are determined using the
specific-identification method.

Declines in the fair value of individual held-to-maturity and
available-for-sale securities below their carrying value that are other than
temporary result in write-downs of the individual securities to their fair
value. The related write-downs are included in earnings as realized losses.

Premiums and discounts are recognized in interest income using the
interest method over the period to maturity.

F-7

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

5. LOANS

Loans are reported at the principal amount outstanding, net of
charge-offs, unearned discounts, purchase discounts and an allowance for loan
losses. Unearned discounts on installment loans are recognized using a method
which approximates a level yield over the term of the loans. Interest on other
loans is calculated using the simple interest method on the daily balance of the
principal amount outstanding.

Loan origination and commitment fees, as well as certain direct
origination costs, are deferred and amortized as a yield adjustment over the
lives of the related loans using the interest method. Amortization of deferred
loan costs is discontinued when a loan is placed on nonaccrual status.

The Company applies SFAS No. 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT
OF A LOAN, as amended by SFAS No. 118. Under SFAS 114, as amended, a loan is
identified as impaired when it is probable that interest and principal will not
be collected according to the contractual terms of the loan agreement. The
accrual of interest on impaired loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. All
loans past due 90 days are placed on nonaccrual status unless the loan is both
well-secured and in the process of collection. When interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are received. Loans are
not again placed on accrual status until payments are brought current and, in
management's judgement, the loan will continue to pay as agreed.

6. ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is considered adequate to provide for losses
based on past loan loss experience and management's evaluation of the loan
portfolio under current economic conditions. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. Recognized losses, net of
recoveries, are charged to the allowance for loan losses. Additions to the
allowance are included in the consolidated statements of earnings as provision
for loan losses.

7. PREMISES AND EQUIPMENT

Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided on the straight- line method over the estimated useful
lives of the related assets. Maintenance, repairs and minor improvements are
charged to noninterest expense as incurred.

8. OTHER REAL ESTATE AND REPOSSESSED ASSETS

Real estate properties acquired by foreclosure and repossessed assets are
recorded at fair value at the date of foreclosure, establishing a new cost
basis. After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair value
less cost to sell. Revenue and expenses from operations and changes in the
valuation allowance are included in other noninterest expenses. Repossessed
assets are presented on the Balance Sheet as a component of other assets.

9. EXCESS COST OVER FAIR VALUE OF NET ASSETS ACQUIRED

The excess cost over fair value of net assets acquired ("goodwill") in
business combinations accounted for as purchases is amortized using the
straight-line method over 20 years, the estimated period to be benefited. Such
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be recoverable.

F-8

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

10. INVESTMENT IN LEVERAGED LEASES

The Company accounts for investment in leveraged leases according to SFAS
No. 13, ACCOUNTING FOR LEASES. Under SFAS 13, the Company records its investment
in leveraged leases net of nonrecourse debt. The investment in leveraged leases
less deferred taxes arising from differences between pretax accounting income
and taxable income represents the lessor's net investment in leveraged leases
for purposes of computing periodic net income from the leases. Net investment in
leveraged leases is adjusted annually by the difference in net cash flow and the
amount of income recognized. If at any time during the lease term the projected
net cash receipts over the term of the lease are less than the initial
investment, a loss is recognized for the deficiency. Estimated residual values
and other important assumptions affecting total net income from the leases are
reviewed annually. The net investment balance is adjusted considering all values
and assumptions.

During the initial years of the leases, the Company receives benefits for
income tax purposes of deductions for depreciation on the equipment and interest
on the debt that in the aggregate exceed the rental income from the related
equipment. During the later years, rental income will exceed related deductions.
Provision has been made for deferred income taxes that arise from these
differences. The Company deducts, for tax purposes, rent payments paid to
lessors under a master lease. A prior sale of user lease receivables created a
difference between tax and book basis which will not reverse.

11. INCOME TAXES

The Company files a consolidated Federal income tax return. By agreement
with the Parent, subsidiaries record a provision or benefit for Federal income
taxes on the same basis as if they filed a separate Federal income tax return.
The asset and liability method of accounting is used for income taxes where
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. When management determines that it is more likely than not that a
deferred tax asset will not be realized, a valuation allowance must be
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.

12. EARNINGS PER SHARE

Effective March 24, 1998, the Company approved a seven for one common
shares stock split. The effects of such split have been incorporated into the
consolidated financial statements and notes thereto as if the split had been
effective January 1, 1997.

Basic earnings per common share is calculated by dividing net income
available for common shareholders by the weighted average number of common
shares outstanding during the year. Diluted earnings per share is calculated by
dividing net earnings available for common shareholders by the weighted average
number of common and dilutive potential common shares. Stock options may be
potential dilutive common shares and are therefore considered in the earnings
per share calculation, if dilutive. The number of dilutive potential common
shares is determined using the treasury stock method.

F-9

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

13. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

In the ordinary course of business, the Company enters into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the financial
statements when they are funded or related fees are incurred or received.

14. USE OF ESTIMATES

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

Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.

A majority of the loan portfolio consists of real estate loans. The
ultimate collectibility of the loan portfolio and the recovery of a substantial
portion of the carrying amount of foreclosed real estate are susceptible to
changes in local market conditions.

While management uses available information to recognize losses on loans
and foreclosed real estate, future additions to the allowance may be necessary
based on changes in local economic conditions. In addition, regulatory agencies,
as an integral part of their examination process, periodically review the
recognition of allowances for losses on loans and foreclosed real estate. Such
agencies may require additions to the allowances based on their judgements about
information available to them at the time of their examination. Because of these
factors, it is reasonably possible that the allowances for losses on loans and
foreclosed real estate may change in the near term.

15. RECENT ACCOUNTING STANDARDS

As of January 1, 1998, the Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which requires that all components of comprehensive income
and total comprehensive income be reported on the financial statements. The
Company is disclosing this information on its consolidated statements of
shareholders' equity.

16. RECLASSIFICATIONS

Certain reclassifications of 1998 and 1997 information have been made to
conform to the 1999 presentation.

F-10

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE B - BUSINESS COMBINATIONS

Information relating to business combinations accounted for as a purchase
for the three-year period ended December 31, 1999 is summarized below. Under the
purchase method of accounting, the results of operations of the acquired
institution is included in the Company's results of operations since the date of
its acquisition.

COMMON
SHARES ISSUED
(DOLLARS IN MILLIONS, MERGER CASH ----------------- GOODWILL ASSETS
EXCEPT SHARE AMOUNTS) DATE PAID SHARES DOLLARS CREATED ACQUIRED
- -----------------------------------------------------------------------------------------------

First American
Financial Corporation
Sulphur Springs, Texas September 1, 1999 $3.4 351,736 $3.4 $3.1 $63.7
- -----------------------------------------------------------------------------------------------

The following unaudited information presents pro forma results of operations of
the Company for the years ended December 31, 1998 and 1997 assuming the
acquisitions had taken place on January 1, 1998 and January 1, 1997,
respectively:

(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA) 1998 1997
- ------------------------------------------------------------------------------
Net interest income $11,585 $10,985
Net income 3,258 2,984
- ------------------------------------------------------------------------------
Earnings per share, basic $ 1.04 $ 1.03
Earnings per share, diluted 1.04 1.03
- ------------------------------------------------------------------------------

F-11

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE C - SECURITIES

The securities have been classified in the consolidated balance sheets
according to management's intent. The carrying amount of securities and their
approximate fair values are as follows:

GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------- ------- ------- -------

Available-for-sale securities:
December 31, 1999:
U. S. Treasury securities ................................... $ 993 $ -- $ 6 $ 987
U. S. Government agency securities .......................... 25,859 6 649 25,216
Mortgage-backed securities .................................. 31,610 35 388 31,257
Collateralized mortgage obligations ......................... 17,451 55 141 17,365
Equity securities ........................................... 1,420 -- -- 1,420
Obligations of state and political subdivisions ............. 3,602 13 99 3,516
------- ------- ------- -------
$80,935 $ 109 $ 1,283 $79,761
======= ======= ======= =======

December 31, 1998:
U. S. Treasury securities ................................... $ 3,015 $ 29 $ -- $ 3,044
U. S. Government agency securities .......................... 27,114 241 5 27,350
Mortgage-backed securities .................................. 12,747 77 5 12,819
Collateralized mortgage obligations ......................... -- -- -- --
Equity securities ........................................... 1,092 -- -- 1,092
------- ------- ------- -------
$43,968 $ 347 $ 10 $44,305
======= ======= ======= =======

HELD-TO-MATURITY SECURITIES:
December 31, 1999:
U.S. Treasury securities .................................... -- -- -- --
U.S. Government agency securities ........................... -- -- -- --
Mortgage-backed securities .................................. -- -- -- --
Obligations of state and political subdivisions ............. -- -- -- --
------- ------- ------- -------
-- -- -- --
======= ======= ======= =======

December 31, 1998:
U.S. Treasury securities .................................... $ 100 $ 1 $ -- $ 101
Mortgage-backed securities .................................. 5,137 74 2 5,209
Obligations of state and political subdivisions ............. 1,825 65 4 1,886
------- ------- ------- -------
$ 7,062 $ 140 $ 6 $ 7,196
======= ======= ======= =======

There were no gross realized losses on sales of available-for-sale
securities for the years ended December 31, 1999, 1998, and 1997. Gross realized
gains on sales of available-for-sale securities were $11, $81, and $19 for the
years ended December 31, 1999, 1998, and 1997.

F-12

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

C - SECURITIES (CONTINUED)

The scheduled maturities of securities available-for-sale at December 31, 1999
were as follows:

Available-for-sale securities
-----------------------------
Amortized
Cost Fair value
--------- ----------
Due in one year or less ............. $ 3,226 $ 3,204
Due from one year through five years 19,808 19,369
Due from five years through ten years 25,364 24,831
Due after ten years ................. 31,117 30,937
Equity securities ................... 1,420 1,420
------- -------
$80,935 $79,761
======= =======

Mortgage-backed securities are presented based on contractual maturities.
The actual average life of these securities may be different from the
contractual maturity. Securities with a market value of approximately $40,893
and $32,041 at December 31, 1999, and 1998, were pledged to secure public
deposits and for other purposes as required or permitted by law.

NOTE D - LOANS

Major classifications of loans are as follows at December 31:

1999 1998
-------- --------
Commercial ......................... $ 61,153 $ 51,589
Agriculture ........................ 9,102 7,652
Real estate
Construction ..................... 7,926 3,130
1-4 family residential ........... 83,777 48,376
Farmland ......................... 7,976 7,258
Non-residential and non-farmland . 52,303 47,977
Other ............................ 6,239 844
Consumer ........................... 27,262 20,043
-------- --------
255,738 186,869
Less:
Unearned discounts ............... 529 983
Allowance for loan losses ........ 2,491 1,512
-------- --------
$252,718 $184,374
======== ========

Impaired loans were $443 and $290 at December 31, 1999 and 1998. The
interest income associated with these impaired loans was insignificant and no
valuation allowance for loan losses related to impaired loans has been
established. There were no commitments to lend additional funds to borrowers
whose loans were classified as impaired.

Outstanding loans to directors and executive officers of the Bank and to
their related business interests aggregated approximately $10,713 and $9,611 at
December 31, 1999 and 1998.

Following is an analysis of activity with respect to such amounts:

1999 1998
-------- --------
Balance at January 1 ..... $ 9,611 $ 6,130
New loans and advances 11,097 6,261
Repayments ........... (9,995) (2,780)
-------- --------
Balance at December 31 ... $ 10,713 $ 9,611
======== ========

F-13

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE E - ALLOWANCE FOR LOAN LOSSES

Changes in the allowance for loan losses were as follows at December 31:

1999 1998 1997
------- ------- -------
Balance at January 1 .......... $ 1,512 $ 1,129 $ 1,055
Provision ..................... 310 540 355
Balance acquired First American 846 -- --
Charge-offs ................... (333) (276) (385)
Recoveries .................... 156 119 104
------- ------- -------
Balance at December 31 ........ $ 2,491 $ 1,512 $ 1,129
======= ======= =======

NOTE F - PREMISES AND EQUIPMENT

Premises and equipment are summarized as follows at December 31:

1999 1998
-------- --------

Land .............................. $ 2,405 $ 1,627
Building and improvements ......... 10,133 6,402
Furniture, fixtures and equipment . 3,195 2,810
Automobiles ....................... 291 292
-------- --------
16,024 11,131
Less accumulated depreciation ..... 4,362 4,099
-------- --------
$ 11,662 $ 7,032
======== ========

NOTE G - INTEREST-BEARING DEPOSITS

The types of accounts and their respective balances included in
interest-bearing deposits are as follows at December 31:

1999 1998
-------- --------

NOW accounts ...................... $ 30,748 $ 23,241
Savings and money market accounts . 60,255 41,064
Certificates of deposit ........... 181,230 130,660
-------- --------
$272,233 $194,965
======== ========

The aggregate amount of certificates of deposit, each with a minimum
denomination of $100,000 was approximately $72,628 and $51,727 at December 31,
1999 and 1998. At December 31, 1999, the scheduled maturities of certificates of
deposit are as follows:

3 months or less ............ $ 47,288
Between 3 months and 6 months 38,230
Between 6 months and 1 year . 73,875
Over 1 year ................. 21,837
--------
$181,230
========

Deposits of executive officers, significant shareholders and directors
were $5,085 and $2,659 (including time deposits of $1,760 and $1,551) at
December 31, 1999 and 1998.

F-14

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE H - BORROWINGS

During the year ended December 31, 1997, the Company retired the final
installment of a note payable to Texas Independent Bank, Dallas, Texas. Company
subsidiaries' stock securing the debt was released. Interest expense was $6 for
the year ended December 31, 1997.

During the years ended December 31, 1998 and 1999 the Company borrowed
from the Federal Home Loan Bank of Dallas ("FHLB"). On September 25, 1998, the
Company borrowed $1,000 at 5.06% with final maturity of October 1, 2008, and
$1,000 at 5.18% with maturity of October 1, 2013. On November 9, 1998, the
Company borrowed $2,000 at 5.34% with final maturity of October 1, 2013. On
December 27, 1999, the Company borrowed $2,000 at 5.98% with final maturity of
January 11, 2000, and $2,000 at 5.98% with final maturity of January 28, 2000.
On December 30, 1999, the Company borrowed $3,000 at 5.50% with final maturity
of January 10, 2000. Interest expense was $25 and $211 for the year ended
December 31, 1998 and 1999. The following is a schedule of the next five years
of principal and interest requirements.

YEAR PRINCIPAL INTEREST TOTAL
---- --------- -------- -------
2000 ..... $ 7,296 $ 206 $ 7,502
2001 ..... 312 171 483
2002 ..... 328 154 482
2003 ..... 346 136 482
2004 ..... 365 118 483
Thereafter 2,052 280 2,332
------- ------- -------
$10,699 $ 1,065 $11,764
======= ======= =======

The Company secures such FHLB borrowings under a "Blanket Borrowing
Program", with its 1-4 family residential mortgage loans.

NOTE I - PREFERRED AND COMMON STOCK

The following summary of issued and outstanding shares of stock shows the
effects of a seven for one common shares stock split, effective March 24, 1998.

ISSUED AND COMMON COMMON
OUTSTANDING STOCK STOCK TREASURY
PREFERRED STOCK ISSUED OUTSTANDING STOCK
--------------- --------- ----------- ---------

Balance at January 1, 1997 .... 165,456 2,548,280 2,545,067 (3,213)
Sale of treasury stock ...... -- -- 3,213 3,213
--------- --------- --------- ---------
Balance at December 31, 1997 .. 165,456 2,548,280 2,548,280 --
Purchase of treasury stock .. -- -- -- (1,867)
Sale of common stock ........ -- 350,000 350,000 --
Sale of treasury stock ...... -- -- -- 1,867
Redemption of preferred stock (165,456) -- -- --
--------- --------- --------- ---------
Balance at December 31, 1998 .. -- 2,898,280 2,898,280 --
Purchase of treasury stock .. -- -- -- (11,600)
Sale of common stock ........ -- 351,736 351,736 --
--------- --------- --------- ---------
Balance at December 31, 1999 .. -- 3,250,016 3,250,016 (11,600)
========= ========= ========= =========

F-15

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE I - PREFERRED AND COMMON STOCK (CONTINUED)

At December 31, 1997, the Company had 3,000,000 authorized shares of
preferred stock of $5 par value. Effective March 24, 1998 a resolution was
passed authorizing a total of 15,000,000 shares of preferred stock of $5 par
value. At December 31, 1999, and 1998, the Company had 15,000,000 authorized
shares of preferred stock at $5 par value.

Preferred stock pays dividends semi-annually. Preferred stock is not
cumulative or participating, has no voting rights and is not convertible.
Preferred stock has liquidation preferences over common stock of the Company.
Dividends on common stock of the Company may not be declared or paid unless
dividends for the same period on preferred stock have been paid or declared.

At December 31, 1997, the Company had 1,000,000 authorized shares of
common stock of $1 par value. Effective March 24, 1998 a resolution was passed
authorizing a total of 50,000,000 shares of common stock of $1 par value. At
December 31, 1999 and 1998, the Company had 50,000,000 shares of common stock at
$1 par value.

In May 1998, the Company sold 350,000 shares of common stock at an
aggregate offering amount of $4,897. Expenses related to the sale were
approximately $540.

In September 1999, the Company issued 351,736 shares of common stock
related to the First American acquisition.

F-16

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE J - INCOME TAXES

Federal income tax currently receivable (payable), deferred tax asset and
deferred tax liability, included in other assets and other liabilities,
respectively, are as follows at December 31:

1999 1998 1997
---- ---- ----
Current .............. $ 104 $ 150 $ (89)
Deferred tax asset ... 707 155 256
Deferred tax liability (1,269) (1,463) (1,574)

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of December
31 are presented below:

1999 1998 1997
------- ------- -------
Deferred tax assets:
Allowance for loan losses ...... $ 237 $ 65 $ 74
Unrealized loss on
available-for-sale securities 400 -- --
Difference in basis of other
real estate .................. -- 90 113
Other .......................... 70 -- 69
------- ------- -------
$ 707 $ 155 $ 256
======= ======= =======
Deferred tax liabilities:
Unrealized gain on
available-for-sale securities $ -- $ (114) $ (124)
Depreciation .................. (686) (623) (546)
Leasing transactions .......... (197) (387) (644)
Deferred loan costs, net ...... (316) (301) (260)
Other ......................... (70) (38) --
------- ------- -------
$(1,269) $(1,463) $(1,574)
======= ======= =======

The reconciliation between the Company's effective income tax rate and the
statutory federal income tax rate as of December 31 is as follows:

1999 1998 1997
----- ----- -----
Statutory federal income tax rate .. 34.00% 34.00% 34.00%
Effect of utilization of graduated
tax rate ......................... (0.30) (0.37) (0.44)
Tax exempt income .................. (1.94) (1.86) (0.90)
Effect of utilization of tax credits -- -- (0.90)
Recognition of benefit on leveraged
leases ............................. (10.95) (11.99) (19.93)
Other, net ......................... (1.54) (2.95) (1.62)
----- ----- -----
Effective income tax rate .......... 19.27% 16.83% 10.21%
===== ===== =====

F-17

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE K - COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into various
transactions which, in accordance with generally accepted accounting principles,
are not included in the consolidated balance sheets. These transactions are
referred to as "off-balance sheet commitments". The Company enters into these
transactions to meet the financing needs of its customers. These transactions
include commitments to extend credit and letters of credit which involve
elements of credit risk in excess of the amounts recognized in the consolidated
balance sheets. The Company minimizes its exposure to loss under these
commitments by subjecting them to credit approval and monitoring procedures.

The Company enters into contractual commitments to extend credit, normally
with fixed expiration dates or termination clauses, at specified rates and for
specific purposes. Customers use credit commitments to ensure that funds will be
available for working capital purposes, for capital expenditures and to ensure
access to funds at specified terms and conditions. Substantially all of the
Company's commitments to extend credit are contingent upon customers maintaining
specific credit standards at the time of loan funding. Management assesses the
credit risk associated with certain commitments to extend credit in determining
the level of the allowance for credit losses.

Letters of credit are written conditional commitments issued by the
Company to guarantee the performance of a customer to a third party. The
Company's policies generally require that letters of credit arrangements contain
security and debt covenants similar to those contained in loan agreements.

Outstanding commitments and letters of credit at December 31 are
approximately as follows:

Contract or
Notional Amount
------------------
1999 1998
------- -------
Commitments to extend credit $23,864 $12,831
Letters of credit .......... 396 176

Guaranty Leasing Company, a non-bank subsidiary of the Bank, is a partner
in various equipment leasing transactions involving leveraged leases. The
transactions were structured as "wrap leases" under which the partnerships are
the lessees with respect to the owners of the equipment and are the sublessors
under the sublease with the users.

The following is a schedule by years of future gross minimum rental
payments, without respect to related offsetting note receivable payments due the
partnerships, under the leases as of December 31, 1999.

DECEMBER 31,
--------------
2000 ......... $2,291
2001 ......... 1,407
2002 ......... --
------

Total .......... $3,698
======

The Company is involved in certain claims and lawsuits occurring in the
normal course of business. Management, after consultation with legal counsel,
does not believe that the outcome of these actions would have a material impact
on the financial statements of the Company.

The Company maintains an Employee Stock Ownership Plan containing Section
401(k) provisions covering substantially all employees. The plan provides for a
matching contribution of up to 4% of qualified compensation. Total contributions
accrued or paid for December 31, 1999, 1998 and 1997 were approximately $294,
$271 and $234.

F-18

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)

The Company established a non-qualified, non-contributory "Supplemental
Retirement Plan" in 1992. The plan covers an executive officer to provide
benefits equal to amounts payable under the Company's retirement plan and
certain social security benefits to aggregate a predetermined percentage of the
final five year average salary. The plan is non- funded. Amounts accrued or paid
for the period ended December 31, 1999, 1998 and 1997 were approximately $17,
$18 and $20.

The Company established a non-qualified, non-contributory, "Salary
Continuation Plan" in 1998. The plan covers an executive officer to provide
benefits equal to an amount which represents 75% of projected compensation at
retirement as adjusted for amounts payable under the Company's retirement plan
and certain social security benefits. This plan is non- funded. As of December
31, 1999 and 1998, $91 and $30, respectively, was accrued in other liabilities
and charged to expense.

During 1998 the Company established a non-qualified, non-contributory,
"Executive Incentive Retirement Plan." The plan covers a selected group of key
personnel to provide benefits equal to amounts computed under an "award
criteria" at various targeted salary levels as adjusted for annual earnings
performance of the Company. As of December 31, 1999, and 1998, $23 and $18,
respectively, was accrued in other liabilities and charged to expense.

The Company has a bonus plan which provides guidelines whereby key
employees can earn bonus compensation based on the profitability of the Company.
The bonus amounts are determined based on achievement by the Company on certain
percentages of return on equity targets. This plan is approved and adopted
annually by the Board of Directors of the Company at the first board meeting of
the year. Total expenses under this plan for the years ended December 31, 1999,
1998, and 1997 were $419, $387, and $306.

The Company on March 24, 1998 adopted a Stock Incentive Plan (the "1998
Stock Incentive Plan") which is intended to provide employees with an
opportunity to acquire a proprietary interest in the Company and provide
additional incentive opportunities based on the growth of the Company. The 1998
Stock Incentive Plan provides that a committee of the Board of Directors (the
"Compensation Committee") shall have the right to grant incentive stock options,
non- qualified stock options, restricted stock awards, stock appreciation
rights, performance awards, phantom stock awards and any combination thereof.
The aggregate number of shares that may be issued under this plan is limited to
1,000,000 shares. The Plan has not been implemented, and, no stock options have
been awarded to any employee of the Company.

If approved by the Compensation Committee, incentive stock options may be
granted under terms and conditions they approve, provided, however, that the
term of any incentive stock option cannot exceed ten years, and no option may be
exercised earlier than six months from the date of the grant. The exercise price
is determined by the Compensation Committee, provided that the exercise price
cannot be less than the fair market value on the date the option is granted,
subject to adjustments. Restricted stock awards may allow an employee to receive
stock without cash payment, under terms approved by the Compensation Committee,
provided, that such awards are subject to restrictions regarding disposition and
subject to forfeiture as the Compensation Committee may approve. The
restrictions may be based on items such as earnings of the Company, revenue of
the Company, return on shareholders' equity achieved by the Company, or other
factors. A stock appreciation right permits the holder to receive an amount in
cash or stock or combination thereof equal to the number of stock appreciation
rights exercised by the holder multiplied by the excess of the fair market value
of the stock on the exercise date over the stock appreciation right exercise
price. No stock appreciation right may be exercised earlier than six months from
the date of the grant. Performance of phantom stock awards may also be paid in
cash, stock, or any combination thereof, determined by the Compensation
Committee. The grant of such awards may be contingent upon the achievement by
the Company or a department thereof, of performance goals established by the
Company. The awards may terminate if the grantee's employment with the Company
is terminated. Such awards may vest as determined by the Compensation Committee.
As mentioned above, the Compensation Committee has awarded no such options or
rights to any employee.

F-19

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE L - REGULATORY MATTERS

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

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1999, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.

The most recent notification from the Federal Deposit Insurance
Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the institution's
category. The Company's and the Bank's actual capital amounts and ratios are
also presented in the table.

MINIMUM TO BE WELL
REQUIRED CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----

As of December 31, 1999
Total Capital (to Risk Weighted Assets):
Guaranty Bancshares, Inc. ............ $27,868 10.83% $20,586 8.00% N/A
Guaranty Bank ........................ 26,620 10.36% 20,556 8.00% $25,695 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Guaranty Bancshares, Inc. ............ 25,377 9.86% 10,295 4.00% N/A
Guaranty Bank ........................ 24,129 9.39% 10,279 4.00% 15,418 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc. ............ 25,377 8.21% 9,273 3.00% N/A
Guaranty Bank ........................ 24,129 7.84% 9,233 3.00% 15,388 5.00%
As of December 31, 1998
Total Capital (to Risk Weighted Assets):
Guaranty Bancshares, Inc. ............ 25,089 13.08% 15,345 8.00% N/A
Guaranty Bank ........................ 24,155 12.86% 14,991 8.00% 18,739 10.00%
Tier 1 Capital (to Risk Weighted Assets):
Guaranty Bancshares, Inc. ............ 23,577 12.29% 7,673 4.00% N/A
Guaranty Bank ........................ 22,643 12.05% 7,516 4.00% 11,275 6.00%
Tier 1 Capital (to Average Assets):
Guaranty Bancshares, Inc. ............ 23,577 9.30% 7,605 3.00% N/A
Guaranty Bank ........................ 22,643 8.97% 7,572 3.00% 12,622 5.00%

F-20

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE M - MERGER

Effective January 1, 1997, former bank subsidiary Talco State Bank, merged with
Guaranty Bank under the Articles of Merger as filed with the Texas Department of
Banking. As a result of that merger, the Articles of Association of Guaranty
Bank were amended and restated and the common shares of Talco State Bank were
canceled. This merger had no effect on the consolidated financial statements of
the Company.

NOTE N - SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION

The following is supplemental information with respect to the December 31
Consolidated Statements of Cash Flows:

1999 1998 1997
------- ------- -------
CASH PAID FOR:
Interest .............................. $10,365 $ 8,926 $ 8,030
Income taxes .......................... 931 790 130
NON-CASH ACTIVITY:
Loans transferred to other real estate
or repossessed assets .............. 328 167 206

NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS

The fair values of financial instruments are based on management's
estimates and do not purport to represent the aggregate net fair value of the
Company. Further, the fair value estimates are based on various assumptions,
methodologies and subjective considerations, which vary widely among different
financial institutions and which are subject to change.

The following methods and assumptions were used by the Company in
estimating financial instrument fair values:

o CASH AND CASH EQUIVALENTS AND FEDERAL FUNDS SOLD

The balance sheet carrying amount approximates fair value.

o SECURITIES TO BE HELD-TO-MATURITY AND SECURITIES AVAILABLE-FOR-SALE

Fair values for investment securities are based on quoted market prices or
quotations received from securities dealers. If quoted market prices are
not available, fair value estimates may be based on quoted market prices
of similar instruments, adjusted for differences between the quoted
instruments and the instruments being valued.

o LOANS

Fair values of loans are estimated for segregated groupings of loans with
similar financial characteristics. Loans are segregated by type such as
commercial, real estate and consumer loans. Each of these categories is
further subdivided into fixed and adjustable rate loans and performing and
nonperforming loans. The fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest rate
risk inherent in the various types of loans. The fair value of
nonperforming loans is estimated at the value of the underlying
collateral.

F-21

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE O - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

o DEPOSITS

The fair value of demand deposits, such as non-interest bearing demand
deposits and interest-bearing transaction accounts such as savings, NOW
and money market accounts are equal to the amount payable on demand as of
December 31, 1999 and 1998 (i.e. their carrying amounts).

The fair value of demand deposits is defined as the amount payable, and
prohibits adjustment for any value derived from the expected retention of
such deposits for a period of time. That value, commonly referred to as
the core deposit base intangible, is neither included in the following
fair value amounts nor recorded as an intangible asset in the balance
sheet.

The fair value of certificates of deposit is based on the discounted value
of contractual cash flows. The discount rate used represents rates
currently offered for deposits of similar remaining maturities.

o BORROWINGS

The fair value of borrowings is estimated by discounting the contractual
cash flows using the current interest rate at which similar borrowing for
the same remaining maturities could be made.

o OFF-BALANCE SHEET INSTRUMENTS

Estimated fair values for the Company's off-balance sheet instruments are
based on fees, net of related expenses, currently charged to enter into
similar agreements, considering the remaining terms of the agreements and
the counterparties' credit standing.

The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 1999 and 1998. The fair value of
financial instruments is defined as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.

1999 1998
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
Financial assets:
Cash and cash equivalents $ 13,152 $ 13,152 $ 11,721 $ 11,721
Federal funds sold ....... 1,140 1,140 10,090 10,090
Securities
Available-for-sale .... 79,761 79,761 44,305 44,305
Held-to-maturity ...... -- -- 7,062 7,196
Loans, net ............... 252,718 249,783 184,374 183,782

Financial liabilities:
Deposits
Noninterest-bearing ... $ 56,404 $ 56,404 $ 47,360 $ 47,360
Interest-bearing
transaction and money
market accounts ..... 91,003 91,003 64,305 64,305
Certificates of deposit 181,230 181,504 130,660 131,292
Borrowings ............... 10,699 10,699 3,980 3,980

F-22

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE P - EARNINGS PER SHARE

The following data show the amounts used in computing earnings per share
(EPS) and the weighted average number of shares of dilutive potential common
stock. Computations reflect the effects of a seven for one common shares stock
split, effective March 24, 1998.

YEAR ENDED DECEMBER 31,
--------------------------

1999 1998 1997
------ ------ ------
Net earnings ....................... $3,122 $2,674 $2,400
Less: dividends on preferred stock . -- 37 74
------ ------ ------
Net earnings available to common
shareholders used in basic and
diluted EPS .................... $3,122 $2,637 $2,326
====== ====== ======

Weighted average common shares
in basic EPS ................... 3,045 2,782 2,547
Effect of dilutive securities ...... -- -- --
------ ------ ------
Weighted average common and
potential dilutive common shares
used in dilutive EPS ........... 3,045 2,782 2,547
====== ====== ======

F-23

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE Q - PARENT-ONLY FINANCIAL STATEMENTS

GUARANTY BANCSHARES, INC.
(PARENT ONLY)

BALANCE SHEETS
DECEMBER 31,

ASSETS
1999 1998
-------- --------

Cash and cash equivalents ................................ $ 396 $ 57
Investment in subsidiaries ............................... 27,253 22,867
Investments, insurance ................................... 744 701
Premises and equipment, net .............................. 20 9
Other assets ............................................. 132 207
-------- --------
$ 28,545 $ 23,841
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Other liabilities ........................................ 49 45
-------- --------
Total liabilities .............................. 49 45
Commitments and contingencies ............................ -- --
Common stock ........................................... 3,250 2,898
Additional capital ..................................... 12,659 9,494
Retained earnings ...................................... 13,535 11,181
Net unrealized appreciation on available-for-sale
securities, net of tax of ($400) and $114 ........... (774) 223
-------- --------
28,670 23,796
Less common stock in treasury - at cost ................ 174 --
-------- --------
28,496 23,796
-------- --------
$ 28,545 $ 23,841
======== ========

F-24

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE Q - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

GUARANTY BANCSHARES, INC.
(PARENT ONLY)

STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31,

1999 1998 1997
------- ------- -------
Interest income
Interest bearing deposits ................. $ -- $ -- $ --
Life insurance proceeds gain ................ -- -- --
Other income ................................ -- -- 2
------- ------- -------
-- -- 2
Costs and expenses
General and administrative ................ 486 405 321
Income taxes
Current ................................... -- -- (77)
Deferred .................................. -- -- --
------- ------- -------
(Loss) earnings before equity in net earnings
of subsidiaries ........................... (486) (405) (242)
Equity in net earnings of subsidiaries ...... 3,608 3,079 2,642
------- ------- -------
NET EARNINGS ................................ $ 3,122 $ 2,674 $ 2,400
======= ======= =======

F-25

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
(DOLLARS IN THOUSANDS)

NOTE Q - PARENT-ONLY FINANCIAL STATEMENTS (CONTINUED)

GUARANTY BANCSHARES, INC.
(PARENT ONLY)

STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,

1999 1998 1997
------- ------- -------

Cash flows from operating activities
Net earnings .............................................. $ 3,122 $ 2,674 $ 2,400
Adjustments to reconcile net earnings to net cash used in
operating activities
Earnings of subsidiaries ................................. (3,608) (3,079) (2,642)
Depreciation ............................................. 10 13 14
Decrease (increase) in other assets ...................... 32 (276) (83)
Increase (decrease) in other liabilities ................. 4 (78) 94
------- ------- -------
Net cash used in operating activities ............. (440) (746) (217)
Cash flows from investing activities
Dividends from subsidiaries .............................. 1,700 1,250 950
Purchase of subsidiary stock ............................. -- (3,500) --
Purchases of premises and equipment ...................... 21 -- --
------- ------- -------
Net cash provided by (used in) investing activities 1,721 (2,250) 950
Cash flows from financing activities
Repayment of borrowings .................................. -- -- (171)
Purchase of treasury stock ............................... (174) (2) --
Sale of treasury stock ................................... -- 2 20
Redemption of preferred stock ............................ -- (827) --
Sale of common stock ..................................... -- 4,448 --
Dividends paid ........................................... (768) (733) (640)
------- ------- -------
Net cash (used in) provided by financing activities (942) 2,888 (791)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ....... 339 (108) (58)
Cash and cash equivalents at beginning of year ............. 57 165 223
------- ------- -------
Cash and cash equivalents at end of year ................... $ 396 $ 57 $ 165
======= ======= =======

F-26

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, 1999, 1998, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NOTE R - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following sets forth condensed quarterly results of operations for
1999 and 1998

QUARTER ENDED 1999

Dec.31 Sept.30 June 30 March 31
------ ------- ------- --------

Interest income ................................... $6,485 $5,526 $4,794 $4,763
Interest expense .................................. 3,222 2,666 2,345 2,273
------ ------ ------ ------
Net interest income ............................... 3,263 2,860 2,449 2,490
Provision for loan losses ......................... 40 95 70 105
------ ------ ------ ------
Net interest income after provision for loan losses 3,223 2,765 2,379 2,385
Noninterest income ................................ 1,317 740 655 662
Noninterest expense ............................... 3,128 2,607 2,297 2,227
------ ------ ------ ------
Earnings before taxes ............................. 1,412 898 737 820
Provision for income tax expense .................. 210 190 180 165
------ ------ ------ ------
$1,202 $ 708 $ 557 $ 655
====== ====== ====== ======

Earnings per share:
Basic ......................................... $ 0.37 $ 0.23 $ 0.20 $ 0.23
Diluted ...................................... $ 0.37 $ 0.23 $ 0.20 $ 0.23

QUARTER ENDED 1998

Dec.31 Sept.30 June 30 March 31
------ ------- ------- --------
Interest income ................................... $4,721 $4,605 $4,561 $4,481
Interest expense .................................. 2,227 2,255 2,237 2,232
------ ------ ------ ------
Net interest income ............................... 2,494 2,350 2,324 2,249
Provision for loan losses ......................... 50 60 60 370
------ ------ ------ ------
Net interest income after provision for loan losses 2,444 2,290 2,264 1,879
Noninterest income ................................ 587 611 466 1,162
Noninterest expense ............................... 2,146 2,128 2,188 2,026
------ ------ ------ ------
Earnings before taxes ............................. 885 773 542 1,015
Provision for income tax expense .................. 150 21 75 295
------ ------ ------ ------
$ 735 $ 752 $ 467 $ 720
====== ====== ====== ======

Earnings per share:
Basic ........................................ $ 0.26 $ 0.26 $ 0.15 $ 0.28
Diluted ...................................... $ 0.26 $ 0.26 $ 0.15 $ 0.28

F-27