-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MGwd8zJxeShI+uo/1rAmQliV/GhK8Tg7JhxASB66ezo4mrbt9GgCogXljgcSl2Dc IZ5CZCWcxBljWQl6O/6O2Q== 0000912057-96-001289.txt : 19960205 0000912057-96-001289.hdr.sgml : 19960205 ACCESSION NUMBER: 0000912057-96-001289 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960202 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: SURETY CAPITAL CORP /DE/ CENTRAL INDEX KEY: 0000784932 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 752065607 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64789 FILM NUMBER: 96510786 BUSINESS ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174988154 MAIL ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 FORMER COMPANY: FORMER CONFORMED NAME: K CAPITAL INC DATE OF NAME CHANGE: 19870407 S-1/A 1 FORM S-1/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 2, 1996 REGISTRATION NO. 33-64789 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ SURETY CAPITAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 6021 75-2065607 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification Number) organization) Code Number)
1845 Precinct Line Road C. Jack Bean Suite 100 1845 Precinct Line Road Hurst, Texas 76054 Suite 100 (817) 498-2749 Hurst, Texas 76054 (Address, including zip code, and telephone (817) 498-2749 number, including area code, of registrant's (Name, address, including zip code, and principal executive offices) telephone number, including area code, of agent for service)
-------------------------- COPY TO: Dan R. Waller, P.C. SECORE & WALLER, L.L.P. One Galleria Tower, Suite 2290 13355 Noel Road, LB 75 Dallas, Texas 75240 (214) 776-0200 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED BE REGISTERED PER SHARE OFFERING PRICE FEE (1) Common stock, $0.01 per share par value............................ 2,100,000 $ $7,841,400 $2,704
(1) The Registration fee is estimated based upon the average of the high and low market prices reported for the Common Stock of the Registrant carried on the Primary List of the American Stock Exchange during the week ended November 24, 1995, which was $3.734 per share. -------------------------- THE COMPANY HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SURETY CAPITAL CORPORATION FORM S-1 CROSS REFERENCE SHEET
ITEM NO. ITEM PROSPECTUS CAPTION OR PAGE - --------- -------------------------------------------------- ------------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus................... Facing Page of Registration Statement, ii, and 1 2. Inside Front and Outside Back Cover Pages of Prospectus....................................... 57 and back cover page 3. Summary Information............................... 3 3. Risk Factors...................................... 7 3. Ratios of Earnings to Fixed Charges............... Not Applicable 4. Use of Proceeds................................... 8 5. Determination of Offering Price................... Not applicable 6. Dilution.......................................... Not applicable 7. Selling Security Holders.......................... 54 8. Plan of Distribution.............................. 56 9. Description of Securities to be Registered........ 56 10. Interests of Named Experts and Counsel............ Not applicable 11. Information with Respect to the Registrant........ 9-56 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities... Not applicable
ii INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED FEBRUARY 2, 1996 PROSPECTUS 2,100,000 Shares Surety Capital Corporation Common Stock Of the 2,100,000 shares of Common Stock (the "Common Stock") offered hereby, 1,925,061 shares are being sold by Surety Capital Corporation (the "Company") and 174,939 shares are being sold by a shareholder of the Company (the "Selling Shareholder"). The Company will not receive any proceeds from the sale of shares by the Selling Shareholder. The Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "SRY". See "Market Price and Dividend Policy". On January 30, 1996 the last sale price of the Common Stock as reported on AMEX was $3.75. The Company intends to use the proceeds of this Offering primarily to finance the Company's acquisition of First Midlothian Corporation, Midlothian, Texas and its subsidiary, First National Bank, and to retire the Company's outstanding indebtedness. Any remaining proceeds will be used for general corporate purposes. See "Use of Proceeds" and "The Midlothian Bank Acquisition". THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. SEE "INVESTMENT CONSIDERATIONS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR. ----------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. -------------------
PROCEEDS TO UNDERWRITING PROCEEDS TO SELLING PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER(3) Per Share..................... $ $ $ $ Total(4)...................... $ $ $ $
(1) The Company and the Selling Shareholder have agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting". (2) Before deducting offering expenses payable by the Company, estimated at $324,704. (3) Before deducting offering expenses payable by the Selling Shareholder, estimated at $30,000. (4) The Company has granted the Underwriter a 30-day option to purchase up to 288,759 additional shares of Common Stock, on the same terms and conditions as set forth above, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be approximately $ , $ and $ , respectively. See "Underwriting". The shares of Common Stock are offered by the Underwriter when, as and if received and accepted by it, subject to its right to withdraw, cancel or reject orders in whole or in part and subject to certain other conditions. It is expected that delivery of the certificates representing the shares will be made against payment therefor on or about , 1996 in Dallas, Texas. HOEFER & ARNETT Incorporated The date of this Prospectus is , 1996. SURETY CAPITAL CORPORATION OFFICE LOCATIONS IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE, THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION AND FINANCIAL INFORMATION (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS PROSPECTUS. AS USED IN THE PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM "COMPANY" MEANS SURETY CAPITAL CORPORATION AND ITS SUBSIDIARY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. THE COMPANY Surety Capital Corporation (the "Company") is a bank holding company headquartered in Hurst, Texas. The Company, which is a Delaware corporation, owns 99% of the outstanding shares of Surety Bank, National Association (the "Bank"). The Company operates full service banking offices in the Texas communities of Chester, Hurst, Kennard, Lufkin, Waxahachie, Wells, and Whitesboro. At September 30, 1995, the Company had $119.6 million in total assets, $108.2 million in deposits and $10.0 million in shareholders' equity. The Company's net income has grown from $16,424 in 1992 to $370,723 in 1993, $472,760 in 1994 and $648,413 for the nine months ended September 30, 1995. Additionally, since 1990 the Company's total assets have grown at an average annual rate of 40.4% while deposits have grown at a 48.4% average annual rate. This growth has been a result of a combination of internal growth in the Company's niche lending products and the Company's acquisition of community banks. Although the Company provides the traditional services of a community bank in its market areas, it has also attempted to distinguish itself by developing specialty products. The Company's primary niche product is insurance premium finance ("IPF") lending, which involves the lending of funds to companies and individuals for the purpose of financing their purchase of property and casualty insurance. The Company markets this product through over 3,000 independent insurance agents and maintains a loan portfolio representing nearly 400 insurance companies. At September 30, 1995, the Company reported gross IPF loans of $24.3 million (34% of gross loans), a 16% increase over the December 31, 1994 total balance of $20.9 million in IPF loans (31.7% of gross loans). The loans are relatively short term, generally with maturities of eight to nine months, giving the Company flexibility with regard to its asset/liability strategy. The Company believes that the structure of these loans results in more limited credit losses than other types of loans. Specifically, the down payment and monthly installments on each loan are calculated such that at all times the equity or value of the unearned premium in the policy exceeds the net balance due on the loan. If the borrower does not make the loan payments on time, the Company has the right, after notice to the borrower, to cancel the insurance policy and to receive the entire amount of the unearned premium from the insurance company writing the insurance. The unearned premium is then applied to the loan balance. Since 1992, the Company has experienced no net loan losses on this product. See "Business -- Insurance Premium Financing". Another niche product in which the Company specializes is insurance medical claims factoring. The Company purchases medical claims from a variety of health care providers, including individual medical practices, medical clinics, hospitals, and out-patient facilities. At September 30, 1995, the Company reported $3.0 million in medical claims receivable, representing 4.3% of net loans outstanding. The Company purchases only insurance company claims that have been pre-approved for payment by the insurance company, funding only 50%-60% of the face value of each claim to the provider. The collection period on these receivables is approximately 60 to 90 days. As of September 30, 1995, the Company has experienced no losses in this program, while realizing an annualized yield in excess of 18.1%. See "Business -- Medical Receivables Factoring". The Company funds these specialty lending products using core retail deposits from its network of community banking offices. For the nine months ended September 30, 1995, the Company's average cost of funds was 3.6% compared with a loan portfolio yield of over 11%. This relatively low cost of funds gives the Company a pricing advantage over non-bank competitors for its loan products. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Deposit Activities". 3 Since 1992, the Company has established five new full service branches by acquiring four community banks and purchasing a branch of another bank. Additionally, the Company has recently entered into an agreement to acquire the First Midlothian Corporation ("First Midlothian") and its subsidiary, First National Bank, Midlothian, Texas (the "Midlothian Bank"), which reported $52.1 million in total assets, $47.2 million in deposits and $3.8 million in shareholders' equity at September 30, 1995. The Company's strategy is to continue to acquire community banks with low loan-to-deposit ratios and use excess deposits to fund IPF and other niche lending products. See "The Midlothian Bank Acquisition". THE OFFERING Securities Offered by the Company............ 1,925,061 shares of Common Stock Securities Offered by Selling Shareholder.... 174,939 shares of Common Stock Common Stock to be Outstanding after the Offering.................................... 5,431,490 shares (1) Use of Proceeds.............................. The proceeds of this Offering will be used to finance the acquisition of First Midlothian and the Midlothian Bank, to repay indebtedness, and for general corporate purposes. See "Use of Proceeds". Investment Considerations.................... Prospective investors are advised to carefully review the matters discussed under "Investment Considerations". AMEX Symbol.................................. "SRY"
- ------------------------ (1) Excludes shares issuable upon the exercise of options under the Company's incentive stock option plans. See "Management -- Executive Compensation and Other Information". 4 SUMMARY CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of the Company should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto appearing elsewhere in this prospectus and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of and for the five years in the period ended December 31, 1994 are derived from the Company's Consolidated Financial Statements which have been audited by independent public accountants. The selected historical consoli- dated financial data as of and for the nine months ended September 30, 1995 and September 30, 1994 is unaudited.
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ---------------------- ------------------------------------------------------- 1995 (1) 1994 (2) 1994 (2) 1993 (3) 1992 1991 1990 --------- ----------- --------- ----------- --------- --------- --------- (UNAUDITED) INCOME STATEMENT DATA: ($ in 000's) Interest income............................... $ 6,872 $ 3,743 $ 5,387 $ 3,995 $ 3,344 $ 2,953 $ 2,175 Interest expense.............................. 2,537 972 1,488 1,124 978 1,380 1,071 Net interest income......................... 4,335 2,771 3,899 2,871 2,366 1,573 1,104 Provision for loan losses..................... 60 67 107 91 300 467 221 Net interest income after provision for loan losses..................................... 4,275 2,705 3,792 2,781 2,067 1,107 883 Noninterest income............................ 1,056 801 1,160 1,182 784 488 455 Noninterest expense........................... 4,382 3,205 4,462 3,592 2,835 2,185 1,933 Extraordinary item - gain on debt settlement.. -- -- -- -- -- -- 517 Earnings before income taxes.................. 949 301 490 371 16 (590) (78) Income taxes.................................. 301 8 17 -- -- -- -- Net earnings (loss)........................... $ 648 $ 294 $ 473 $ 371 $ 16 $ (590) $ (78) COMMON SHARE DATA: (4) Net earnings (loss)........................... $ 0.20 $ 0.13 $ 0.20 $ 0.19 $ 0.00 $ (0.45) $ (0.08) Book value.................................... 2.85 2.52 2.65 2.32 2.05 1.85 1.43 Weighted average common shares outstanding (in 000's)....................................... 3,208 2,344 2,394 2,002 1,952 1,310 963 Period end shares outstanding (in 000's)...... 3,506 2,373 3,041 2,273 1,981 1,767 988 BALANCE SHEET DATA: ($ in 000's) Total assets.................................. $ 119,554 $ 61,784 $ 102,294 $ 49,036 $ 30,964 $ 26,877 $ 22,088 Insurance premium finance loans, net.......... 23,724 20,254 20,497 14,209 7,051 8,016 6,801 Other loans, net.............................. 44,924 19,509 44,167 17,417 12,442 11,242 8,388 Allowance for loan losses..................... 725 407 698 401 325 343 277 Total deposits................................ 108,209 55,552 92,027 43,596 26,840 23,335 20,012 Shareholders' equity.......................... 10,037 5,969 8,066 5,281 4,058 3,263 1,409 PERFORMANCE DATA: (5) Return (loss) on average total assets......... .9% .7% .8% .8% .1% (2.3)% (.4)% Return (loss) on average shareholders' equity....................................... 9.6 6.8 7.4 8.7 .4 (30.4) (7.2) Net interest margin........................... 6.3 7.4 7.1 7.0 8.7 7.0 7.0 Loans to deposits............................. 63.4 71.6 70.3 72.5 72.6 82.5 75.9 ASSET QUALITY RATIOS: (5) Nonperforming assets to total assets.......... .1% .1% .2% .3% .7% 2.1% 3.8% Nonperforming loans to total loans............ .1 .1 .2 .3 .8 2.4 5.3 Net loan charge-offs to average loans......... .1 .3 .4 .3 1.6 2.3 .5 Allowance for loan losses to total loans...... 1.1 1.0 1.1 1.3 1.7 1.8 1.8 Allowance for loan losses to nonperforming loans........................................ 1,772.5 456.9 574.8 425.8 201.1 74.8 34.8 CAPITAL RATIOS: Tier I risk-based capital..................... 10.2% 11.0% 10.1% 11.4% 14.4% 13.2% 5.3% Total risk-based capital...................... 11.1 11.7 11.2 12.6 15.7 14.7 6.8 Leverage...................................... 6.4 8.5 5.6 10.0 11.9 10.9 4.6
- ---------------------------------- (1) On September 28, 1995 the Company completed the acquisition of certain assets and the assumption of certain liabilities relating to the branch of Bank One, Texas, National Association located in Waxahachie, Texas. (2) On May 31, 1994 the Company acquired 100% of the outstanding common stock of The Farmers Guaranty State Bank of Kennard, Kennard, Texas, and on December 8, 1994 the Company acquired 100% of the outstanding common stock of First National Bank, Whitesboro, Texas. (3) On March 23, 1993 the Company acquired 100% of the outstanding common stock of the Bank of East Texas, Chester, Texas and First State Bank, Wells, Texas. Operations of these two banks have been included in consolidated operations subsequent to February 28, 1993. (4) The information provided for 1990, 1991 and 1992 has been restated to reflect a one for ten reverse stock split in June 1993. (5) All interim periods have been annualized. 5 RECENT UNAUDITED SELECTED CONSOLIDATED FINANCIAL DATA The following recent selected consolidated financial data of the Company (which is derived from the financial statements of the Company for the three months ended December 31, 1995 and 1994, and for the year ended December 31, 1995) is unaudited but, in the opinion of management, reflects adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations of the Company as of the dates and for the periods indicated. Audited financial statements as of, and for the year ended, December 31, 1995 were not available as of the date of this prospectus.
YEAR ENDED QUARTER ENDED DECEMBER 31, DECEMBER 31, ------------------------ ---------------------- INCOME STATEMENT DATA 1995 1994 1995 1994 ----------- ---------- ---------- ---------- (UNAUDITED) (UNAUDITED) Interest income............................................. $ 9,534,781 $5,387,009 $2,663,014 $1,643,978 Interest expense............................................ 3,677,479 1,487,731 1,140,537 516,167 ----------- ---------- ---------- ---------- Net interest income....................................... 5,857,302 3,899,278 1,522,477 1,127,811 Provision for loan losses................................... 60,000 106,899 0 40,000 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses....... 5,797,302 3,792,379 1,522,477 1,087,811 Noninterest income.......................................... 1,419,067 1,160,007 362,972 359,202 Noninterest expense......................................... 5,894,200 4,461,938 1,512,270 1,263,487 ----------- ---------- ---------- ---------- Income before income taxes................................ 1,322,169 490,448 373,179 183,526 Income taxes................................................ 435,283 17,688 134,706 4,500 ----------- ---------- ---------- ---------- Net income.................................................. $ 886,886 $ 472,760 $ 238,473 $ 179,026 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ---------- Weighted-average common shares outstanding.................. 3,279,448 2,393,841 3,506,429 2,540,279 Net earnings per share...................................... $ 0.27 $ 0.20 $ 0.07 $ 0.07 ----------- ---------- ---------- ---------- ----------- ---------- ---------- ----------
AS OF DECEMBER 31, -------------------------- BALANCE SHEET DATA 1995 1994 ------------ ------------ (UNAUDITED) Total assets.................................................................... $121,397,490 $102,294,311 Loans, net...................................................................... 66,399,312 63,965,402 Allowance for loan losses....................................................... 702,927 697,948 Total deposits.................................................................. 109,598,502 92,027,122 Shareholders' equity............................................................ 10,294,472 8,065,681 Book value per share............................................................ 2.94 2.65 Allowance for loan losses to total loans........................................ 1.1% 1.1% Allowance for loan losses to total nonperforming loans.......................... 418.7% 574.8% Nonperforming loans to total loans.............................................. 0.1% 0.2% Nonperforming assets to total assets............................................ 0.1% 0.2% Capital ratios Leverage ratio................................................................ 6.9% 5.6% Tier I risk-based capital..................................................... 10.8% 10.13% Total risk-based capital...................................................... 11.7% 11.17% Loans to deposit.............................................................. 61.2% 69.5%
For the fourth quarter of 1995, net earnings were $238,473, a 33% increase over $179,026 for the fourth quarter of 1994. Earnings before income taxes increased 103.4% for the quarter ended December 31, 1995 compared with the quarter ended December 31, 1994. Earnings per share were unchanged for the quarters ended December 31, 1995 and 1994. Earnings for the twelve months ended December 31, 1995 increased to $886,886, or 88% over $472,760 in earnings for the twelve months ended December 31, 1994. At December 31, 1995, the Company had total assets of $121,397,490 and total deposits of $109,598,502. Total nonperforming assets decreased 30.9% to $167,871, at December 31, 1995, from $242,791 at December 31, 1994. The allowance for loan losses was $702,927 (1.1% of loans outstanding) at December 31, 1995. The allowance for loan losses was 4.19 times nonperforming loans at December 31, 1995, compared with 2.88 times nonperforming loans at December 31, 1994. At December 31, 1995, the Bank's total risk-based capital ratio was 11.7%, compared with the minimum capital ratio of 8%. The Bank's leverage ratio at December 31, 1995 was 6.9%. See "Supervision and Regulation". 6 INVESTMENT CONSIDERATIONS IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY, ITS BUSINESS AND PROSPECTS BEFORE PURCHASING ANY OF THE SHARES OF COMMON STOCK OFFERED HEREBY. INSURANCE PREMIUM FINANCING CONCENTRATION. As of September 30, 1995, IPF loans represented approximately 34% of the gross loans of the Company. Such a high concentration of IPF loans may expose the Company to a greater risk of loss than would a more diversified loan portfolio. Losses or other difficulties encountered by any one insurance company could have a material adverse effect on the Company. In addition, regulatory or structural changes affecting the insurance industry generally may have a material adverse effect on the Company. The Company extends IPF loans with an average maturity of nine months. Most of these loans are repaid in monthly installments. If the Company is unable to generate new IPF loans to replace those being repaid, it will have to originate other types of loans or make other investments, some or all of which may not be as profitable for the Company. As the Company expands through acquisitions such as the Midlothian Bank, the Company must increase the aggregate amount of IPF loans originated on a continuous basis in order to maintain its current net interest margin. See "Business -- Insurance Premium Financing". ADDITIONAL FINANCING. The Company has in the past expanded through acquisitions, and has financed its recent acquisitions primarily through offerings of the Company's Common Stock. There can be no assurance that the Company will continue to expand as rapidly in the future or will continue to make acquisitions. However, if the Company does make additional acquisitions, it is likely to finance the acquisitions through offerings of its stock. If the Company does sell additional shares of common and/or preferred stock to raise funds in the future, the terms and conditions of the issuances may have a dilutive effect or otherwise adversely impact existing shareholders. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources". RELIANCE ON KEY PERSONNEL. The Company and the Bank are dependent upon their executive officers and key employees. Specifically, the Company considers the services of C. Jack Bean, G. M. Heinzelmann, III, and Bobby W. Hackler to be important to the success of the Company. The unexpected loss of the services of any of these individuals could have a detrimental effect on the Company and the Bank. The Company has entered into Change in Control Agreements with Messers. Bean, Heinzelmann and Hackler under which each will receive certain benefits if their employment is terminated other than for cause, or constructively terminated, following a change in control of the Company. See "Management". DIVIDEND HISTORY. The Company has not previously paid any cash dividends on its Common Stock, and the Company does not intend to pay dividends in the near future. The payment of any cash dividends by the Company in the future will depend to a large extent on the receipt of dividends from the Bank. The ability of the Bank to pay dividends is dependent upon the Bank's earnings and financial condition. The payment of cash dividends by the Bank to the Company and by the Company to its shareholders are both subject to certain statutory and regulatory restrictions. See "Market Price and Dividend Policy" and "Regulation and Supervision". COMPETITION. There is significant competition among banks and bank holding companies, many of which have far greater assets and resources than the Company, in the areas in which the Company operates. The Company also encounters intense competition in its commercial banking business from savings and loan associations, credit unions, factors, insurance companies, commercial and captive finance companies, and certain other types of financial institutions located in other major metropolitan areas in the United States, many of which are larger in terms of capital, resources and personnel than the Company. The casualty IPF business of the Company is also very competitive. Large insurance companies offer their own financing plans, and other independent premium finance companies and other financial institutions offer IPF. The Company believes that such competition will continue and increase in the future. In addition, the manner in 7 which and the means by which financial services are delivered to customers have changed significantly in the past and can be expected to continue to change in the future. It is not possible to predict the manner in which existing technology, and changes in existing technology, will affect the Company. Changes in technology are likely to require additional capital investments to remain competitive. Although the Company has invested in new technology in the past, there can be no assurance that the Company will have sufficient financial resources or access to the proprietary technology which might be necessary to remain competitive in the future. See "Business -- Competition". REGULATION AND SUPERVISION. The Company and the Bank are subject to extensive federal and state regulation and supervision, which is intended primarily for the protection of insured depositors and consumers. In addition, the Company and the Bank are subject to changes in federal and state law, as well as changes in regulations, governmental policies and accounting principles. The effects of any such potential changes cannot be predicted, but could adversely affect the business and operations of the Company and the Bank. See "Regulation and Supervision". REGULATION OF CONTROL. Individuals, alone or acting in concert with others, seeking to acquire more than 10% of any class of voting securities of the Company must comply with the Change in Bank Control Act. Entities seeking to acquire 5% or more of any class of voting securities of, or otherwise to control, the Company must comply with the Bank Holding Company Act. Accordingly, prospective investors need to be aware of and to comply with these requirements, if applicable, in connection with any purchase of shares of the Common Stock offered hereby. GENERAL ECONOMIC CONDITIONS AND MONETARY POLICY. The operating income and net income of the Company depend to a substantial extent on "rate differentials", i.e., the differences between the income the Company receives from loans, securities and other earning assets, and the interest expense it pays to obtain deposits and other liabilities. These rates are highly sensitive to many factors which are beyond the control of the Company, including general economic conditions and the policies of various governmental and regulatory authorities. For example, in an expanding economy, loan demand usually increases and the interest rates charged on loans increase. Increases in the discount rate by the Federal Reserve System usually lead to rising interest rates, which affect the Company's interest income, interest expense and investment portfolio. Also, governmental policies such as the creation of a tax deduction for individual retirement accounts can increase savings and affect the cost of funds. TRADING MARKET FOR THE COMMON STOCK. Although the Common Stock is listed for trading on the American Stock Exchange, the trading market in the Company's Common Stock on such exchange historically has been less active than the average trading market for companies listed on such exchange. As a result, the price of the Company's Common Stock has ranged from $3.06 to $6.75 during 1995. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of Common Stock at any given time, which presence is dependent upon the individual decisions of investors and general economic and market conditions over which the Company has no control. Consequently, although the Company believes that this Offering will improve the liquidity of the market for the Common Stock, no assurance can be given that this Offering will increase the volume of trading in the Common Stock. See "Market Price and Dividend Policy". USE OF PROCEEDS The Company has entered into an agreement to acquire First Midlothian, and its wholly-owned subsidiary, the Midlothian Bank. In connection with the acquisition, the shareholders of First Midlothian will receive cash for their shares in that corporation. The Company intends to use the net proceeds from the sale of Common Stock to finance this acquisition. The Company also intends to use approximately $375,000 of the net proceeds to retire its outstanding debt. Any remaining proceeds will be used by the Company for general corporate purposes. See "The Midlothian Bank Acquisition -- Pro Forma Financial Statements". 8 CAPITALIZATION The following table sets forth the unaudited consolidated capitalization of the Company as of September 30, 1995, and the pro forma capitalization adjusted to reflect (i) the sale by the Company of the Common Stock offered hereby at an assumed per share price of $3.75, the closing price as of January 30, 1996 net of underwriting commissions and other estimated offering expenses; (ii) the consummation of the acquisition of the Midlothian Bank; and (iii) the application of net proceeds as described under "Use of Proceeds".
SEPTEMBER 30, 1995 ---------------------------- PRO FORMA AS ACTUAL ADJUSTED ------------- ------------- Note payable................................................... $ 375,000 $ 0 Shareholders' equity: Common stock, $.01 par value; Authorized -- 20,000,000 shares; Issued -- 3,516,595 shares, (5,441,656 as adjusted)................................................... 35,166 54,417 Additional paid-in capital................................... 9,364,515 15,734,210 Retained earnings............................................ 573,311 573,311 Treasury stock............................................... (50,830) (50,830) Unrealized gain on available-for-sale securities............. 114,539 114,539 ------------- ------------- Total shareholders' equity................................. $ 10,036,701 $ 16,425,647 ------------- ------------- ------------- -------------
MARKET PRICE AND DIVIDEND POLICY MARKET PRICE Since January 10, 1995 the Company's Common Stock has been traded on the Primary List of the AMEX under the symbol "SRY". From February 23, 1994 through January 9, 1995 the Company's Common Stock was traded on the AMEX Emerging Company Marketplace under the symbol "SRY.EC". Prior to February 23, 1994, the Company's Common Stock was traded in the over-the-counter market on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"). The following table sets forth, for the periods indicated, the high and low sale price per share of the Company's Common Stock as reported on the AMEX Primary List since January 10, 1995, and on the AMEX Emerging Company Marketplace from February 23, 1994, until January 9, 1995, and the high and low bid price per share as reported by NASDAQ for prior periods. All prices have been adjusted to reflect a one-for-ten reverse stock split effected by the Company on June 14, 1993. The NASDAQ quotations reflect prices quoted by market makers of the Company's Common Stock, without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
HIGH LOW --------- --------- 1994 FISCAL YEAR: First quarter.............................................................. $ 6.38 $ 3.00 Second quarter............................................................. 5.25 3.88 Third quarter.............................................................. 5.00 4.00 Fourth quarter............................................................. 4.50 3.00 1995 FISCAL YEAR: First quarter.............................................................. 4.38 3.06 Second quarter............................................................. 6.75 3.19 Third quarter.............................................................. 5.13 3.50 Fourth quarter............................................................. 5.00 3.50
DIVIDEND POLICY THE COMPANY. The Company has not paid cash dividends in the past and does not intend to pay dividends for the foreseeable future. The Company intends to retain any future earnings for use in the business of the Company and the Bank. The payment of any dividends in the future will be made at the discretion of the Board of Directors of the Company and will depend upon the operating results and financial condition of the Company and the Bank, their capital requirements, contractual agreements, 9 general business conditions and other factors. The Company's principal source of funds to pay dividends in the future, if any, on the Common Stock will be cash dividends the Company receives from the Bank. See "Regulation and Supervision" for a discussion of regulatory constraints on the payment of dividends by national banks and bank holding companies generally. THE BANK. The Bank is subject to various restrictions imposed by the National Bank Act relating to the declaration and payment of dividends. The board of directors of a national banking association may, subject to the following limitations, declare a quarterly, semiannual or annual dividend of as much of its net profits as it may judge expedient. The payment of dividends is subject to the provisions of 12 U.S.C. Section 60, which provides that no dividends may be declared or paid without the approval of the Office of the Comptroller of the Currency ("OCC") if the total of all dividends, including the proposed dividend, in any calendar year exceeds the total of the national banking association's net profits for that year combined with its retained net profits of the preceding two years. Under the provisions of 12 U.S.C. Section 56 no dividends may ever be paid in an amount greater than the bank's net profits. The OCC also has authority to prohibit a national bank from engaging in what in the OCC's opinion constitutes an unsafe or unsound practice in conducting business, including the payment of a dividend. See "Regulation and Supervision" for a discussion of regulatory constraints on the payment of dividends by national banks and bank holding companies generally. THE MIDLOTHIAN BANK ACQUISITION THE REORGANIZATION AGREEMENT The Company intends to acquire First Midlothian and its subsidiary, the Midlothian Bank. The Company and the Bank have entered into a reorganization agreement dated October 17, 1995 and amended on January 16, 1996 with First Midlothian, the Midlothian Bank, and the directors of the Midlothian Bank in both their individual and representative capacities ("Reorganization Agreement"). Under the Reorganization Agreement, an operating subsidiary of the Bank (to be formed) will be merged with and into First Midlothian, and the shareholders of First Midlothian will receive cash in the aggregate amount of (i) 150% of the book value of the Midlothian Bank, as of the closing date, up to a book value of $4.5 million plus (ii) 100% of the book value of the Midlothian Bank, as of the closing date, in excess of $4.5 million minus (iii) all outstanding principal and accrued interest on debentures issued by First Midlothian. Immediately following the merger of the operating subsidiary of the Bank and First Midlothian, the Bank and the Midlothian Bank will be consolidated under the charter of the Bank. The Reorganization Agreement provides that First Midlothian will pay for certain audit fees, agent fees and one-half the cost of canceling the Midlothian Bank's data processing contract, collectively estimated in the aggregate at $272,500. The purchase price paid by the Company will be increased by one-half the cost of canceling the Midlothian Bank's data processing contract. The total cost to cancel the contract is estimated at $125,000. If the acquisition had been completed on September 30, 1995, the purchase price paid to the shareholders of First Midlothian would have been approximately $5.4 million. The obligations of the parties to complete the acquisition are subject to certain conditions, including the conditions that (i) all approvals of any regulatory authority having jurisdiction shall have been received and all applicable statutory waiting periods shall have expired; and (ii) at the closing date, no litigation shall be pending or threatened to restrain or prohibit or obtain damages regarding the acquisition or as a result of which, in the reasonable judgment of the Company or First Midlothian, the parties could be deprived of any of the material benefits contemplated under the Reorganization Agreement. In addition, the Company and the Bank are not obligated to complete the acquisition unless certain conditions set out in the Reorganization Agreement have been satisfied or waived by the Company and the Bank, including that (i) the shareholders of First Midlothian shall have approved the transactions contemplated under the Reorganization Agreement; (ii) neither First Midlothian nor the Midlothian Bank shall have, in the opinion of the Company and the Bank, suffered any material adverse change in their financial condition, business, operations, prospects, properties or assets; (iii) holders of no more than 5% of the outstanding shares of First Midlothian shall have dissented from the merger of First Midlothian and the Bank's operating subsidiary; and (iv) the Company shall have sufficient financial resources available, in its sole opinion, to consummate the acquisition. The directors of First Midlothian, and the Midlothian Bank are not obligated to complete 10 the transaction if certain conditions are not met, including the condition that the shareholders of the Bank shall have approved the consolidation of the Bank and the Midlothian Bank contemplated under the Reorganization Agreement. The directors of First Midlothian have agreed, in their individual and representative capacities, jointly and severally, that they shall be responsible for all federal, state and local income, franchise and other tax liabilities of First Midlothian or Midlothian Bank for all periods prior to the acquisition. In addition, they shall be responsible for payment of federal income and Texas franchise tax liabilities incurred by the Company, the Bank, First Midlothian or the Midlothian Bank as a result of the acquisition and the subsequent liquidation of First Midlothian being held to be a taxable acquisition or disposition of assets or other taxable transaction. If the Company elects to terminate the Reorganization Agreement because, in its opinion, it does not have sufficient financial resources available to complete the acquisition, the Company is obligated to pay First Midlothian a break-up fee of up to $50,000. The closing date of the acquisition will be selected by mutual agreement of the parties to the Reorganization Agreement following the satisfaction of all conditions to closing. As of the date of this prospectus, OCC approval and approval of the shareholders of First Midlothian have been obtained. The Company anticipates that the closing will take place substantially contemporaneously with the closing of this Offering. BUSINESS OF FIRST MIDLOTHIAN First Midlothian is a Texas corporation located in Midlothian, Texas. First Midlothian engages in no significant activities other than owning and managing the Midlothian Bank. First Midlothian has 48,000 shares of common stock issued and outstanding. The directors who individually and as a group approved and executed the Reorganization Agreement are the record and beneficial owners of approximately 42% of the outstanding common stock of First Midlothian. At September 30, 1995, First Midlothian had total consolidated assets of approximately $52.1 million, total consolidated deposits of approximately $47.2 million, and total consolidated shareholders' equity of approximately $3.8 million. First Midlothian had $674,707 in principal amount of debentures issued and outstanding at September 30, 1995. The Reorganization Agreement contemplates that First Midlothian will be liquidated, and the debentures repaid by First Midlothian, following the acquisition. First Midlothian's subsidiary, the Midlothian Bank, is a community bank which offers interest and noninterest bearing depository accounts, and makes consumer and commercial loans. As of September 30, 1995, the Midlothian Bank's loan portfolio consisted of $12.4 million of real estate loans (60% of the gross loan portfolio), $4.2 million of commercial loans (20% of the gross loan portfolio), and $4.0 million of installment loans (19% of the gross loan portfolio). At September 30, 1995, the Midlothian Bank's total nonaccrual loans were $128,621 (0.6% of the gross loan portfolio). The allowance for possible loan losses was $230,615, or 179% of total nonaccruing loans, and 1.1% of the gross loan portfolio. Other real estate owned by the Midlothian Bank was $713,268 at September 30, 1995. Midlothian Bank reported net income after taxes of $274,943 for 1994, and $306,264 for the nine months ended September 30, 1995. See the consolidated financial statements of First Midlothian included in this prospectus. PRO FORMA FINANCIAL STATEMENTS The following pro forma financial statements set forth the consolidated balance sheets at September 30, 1995 and income statements for the nine months ended September 30, 1995 and for the year ended December 31, 1994 for the Company and First Midlothian, the adjustments reflecting the proposed acquisition, and the pro forma combined information. The information with respect to the Company as of September 30, 1995 and the pro forma information are unaudited. The pro forma balance sheet assumes that the acquisition was consummated on September 30, 1995. The pro forma income statements assume that the acquisition was consummated at the beginning of the periods indicated. The pro forma financial statements should be read in conjunction with the financial statements and footnotes thereto appearing elsewhere in this prospectus. The pro forma combined balance sheet and statement of income are not necessarily indicative of the combined financial position at consummation or the results of operations following consummation. 11 PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1995
SURETY FIRST CAPITAL MIDLOTHIAN PRO FORMA CORPORATION CORPORATION DEBITS CREDITS COMBINED ------------ --------------- -------------- ---------- ------------ (UNAUDITED) (UNAUDITED) ASSETS: Cash and due from banks......................... $ 4,997,517 $ 3,586,274(B) $6,013,946(A) $6,051,946 $ 8,545,791 Federal funds sold.............................. 21,660,000 7,100,000 28,760,000 ------------ --------------- ------------ Cash and cash equivalents..................... 26,657,517 10,686,274 6,013,946 6,051,946 37,305,791 Interest bearing deposits in financial institutions................................... 1,334,860 -- 1,334,860 Investment securities........................... 17,017,258 19,309,212(C) 40,336 36,366,806 Net loans....................................... 67,923,543 20,094,209 88,017,752 Premises and equipment, net..................... 2,776,443 861,532(D) 319,468 3,957,443 Accrued interest receivable..................... 622,518 429,114 1,051,632 Other real estate and repossessed assets........ 92,830 653,035 745,865 Other assets.................................... 594,762 96,866 691,628 Excess of cost over fair value of net assets acquired, net.................................. 2,534,050 --(A) 1,254,334 3,788,384 ------------ --------------- -------------- ---------- ------------ Total assets................................ $119,553,781 $52,130,242 $7,628,084 $6,051,946 $173,260,161 ------------ --------------- -------------- ---------- ------------ ------------ --------------- -------------- ---------- ------------ LIABILITIES: Demand deposits................................. $ 13,914,468 $10,154,310 $ -- $ -- $ 24,068,778 Savings, NOW and money markets.................. 31,421,332 16,729,861 48,151,193 Time deposits, $100,000 and over................ 13,885,925 1,963,600 15,849,525 Other time deposits............................. 48,986,950 18,312,770 67,299,720 ------------ --------------- ------------ Total deposits.............................. 108,208,675 47,160,541 155,369,216 Note payable.................................... 375,000 674,707(A) 1,049,707 -- Federal income tax payable...................... 254,386 -- 254,386 Accrued interest payable........................ 679,019 531,893 1,210,912 ------------ --------------- -------------- ---------- ------------ Total liabilities........................... 109,517,080 48,367,141 1,049,707 156,834,514 ------------ --------------- -------------- ---------- ------------ SHAREHOLDERS' EQUITY: Common stock.................................... 35,166 480,000(A) 480,000(B) 19,251 54,417 Additional paid in capital...................... 9,364,515 679,493(A) 679,493(B) 6,369,695 15,734,210 Retained earnings............................... 573,311 2,603,608(A) 2,603,608 573,311 Treasury stock.................................. (50,830) -- (50,830) Unrealized gain (loss) on available-for-sale securities..................................... 114,539 -- 114,539 ------------ --------------- -------------- ---------- ------------ Total equity................................ 10,036,701 3,763,101 3,763,101 6,388,946 16,425,647 ------------ --------------- -------------- ---------- ------------ Total liabilities and equity.............. $119,553,781 $52,130,242 $4,812,808 $6,388,946 $173,260,161 ------------ --------------- -------------- ---------- ------------ ------------ --------------- -------------- ---------- ------------
- -------------------------- (A) To record the purchase of First Midlothian. The shareholders of First Midlothian will receive 150% of the book value of the Midlothian Bank at closing, up to a book value of $4.5 million, plus 100% of any book value in excess of $4.5 million, plus 50% of the cost to cancel an EDS data processing contract, (estimated at $62,500), minus the total principal and accrued interest attributable to debt issued by First Midlothian. The adjustments are based upon an estimated aggregate purchase price as of September 30, 1995. First Midlothian will pay off its debt with part of the proceeds of the purchase price. The difference between the purchase price and the value of the assets purchased, estimated at $1,254,334, is recorded as goodwill and is amortized over a 15 year period. The Company anticipates that the book value of the Midlothian Bank will be increased through the retention of earnings prior to closing. (B) To record $6,388,946 net capital raised through the offering and the payoff of the Company's debt of $375,000 based upon an assumed sales price of $3.75 per share, the closing price as of January 30, 1996 net of underwriting and other estimated offering expenses. (C) In order to adjust investment securities to estimated market value an increase of $40,336 is recorded. (D) In order to adjust property and equipment to estimated market value an increase of $319,468 is recorded. 12 PRO FORMA INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
PRO FORMA SURETY FIRST ADJUSTMENTS CAPITAL MIDLOTHIAN --------------------------- PRO FORMA CORPORATION CORPORATION DEBITS CREDITS COMBINED ----------- ----------- ------------ ------------ ---------- (UNAUDITED) (UNAUDITED) Interest Income: Commercial loans and real estate loans.................. $ 2,759,887 $ 1,240,594 $ -- $ -- $4,000,481 Consumer loans.......................................... 861,646 296,496 1,158,142 Insurance premium financing............................. 2,080,915 -- 2,080,915 Federal funds sold...................................... 358,600 320,679 679,279 Investment securities and interest bearing deposits..... 810,719 866,236 1,676,955 Other interest income................................... -- 1,757 1,757 ----------- ----------- ------------ ------------ ---------- Total interest income............................... 6,871,767 2,725,762 9,597,529 ----------- ----------- ------------ ------------ ---------- Interest expense: Savings, NOW and money market........................... 569,783 368,646 938,429 Time deposits, $100,000 and over........................ 579,022 202,403 781,425 Other time deposits..................................... 1,276,222 595,985 1,872,207 Other interest expense.................................. 111,915 68,011 179,926 ----------- ----------- ------------ ------------ ---------- Total interest expense.............................. 2,536,942 1,235,045 3,771,987 ----------- ----------- ------------ ------------ ---------- Net interest income before provision for loan losses.... 4,334,825 1,490,717 5,825,542 Provision for loan losses............................... 60,000 35,000 95,000 ----------- ----------- ------------ ------------ ---------- Net interest income................................. 4,274,825 1,455,717 5,730,542 ----------- ----------- ------------ ------------ ---------- Noninterest income........................................ 1,056,095 469,788 1,525,883 ----------- ----------- ------------ ------------ ---------- Noninterest expense: Salaries and employee benefits.......................... 2,143,694 720,361 2,864,055 Occupancy & equipment................................... 668,483 156,170 7,987(C) 832,640 General & administrative................................ 1,569,753 592,140 335,217(B) 159,300(A) 2,337,810 ----------- ----------- ------------ ------------ ---------- Total noninterest expense........................... 4,381,930 1,468,671 343,204 159,300 6,034,505 ----------- ----------- ------------ ------------ ---------- Income before income taxes.......................... 948,990 456,834 343,204 159,300 1,221,920 Income tax expense: Current................................................. 300,577 50,498(D) 108,796(D) 242,279 Deferred................................................ -- 150,570 150,570 ----------- ----------- ------------ ------------ ---------- Net income.......................................... $ 648,413 $ 306,264 $393,702(F) $268,096(F) $ 829,071 ----------- ----------- ------------ ------------ ---------- ----------- ----------- ------------ ------------ ---------- Net income per share of common stock...................... $ 0.20 $ 0.16 ----------- ---------- ----------- ---------- Weighted average shares outstanding....................... 3,208,319 5,133,380(E) ----------- ---------- ----------- ----------
- ------------------------ (A) To record savings to be realized in connection with the acquisition. These adjustments are a direct result of the elimination of director, committee and professional fees which will not continue after the acquisition. In addition to the elimination of these fees, a reduction in computer processing fees is also recorded. (B) To record amortization of the goodwill recorded in connection with the acquisition of First Midlothian for the nine months ended September 30, 1995 and to record payment of fees by First Midlothian (i.e. agent's fee of $170,000, First Midlothian's share of the estimated cost to cancel the EDS contract of $62,500 and estimated audit fee of $40,000). (C) To record the additional depreciation to premises and equipment as a result of the write up to estimated market value for First Midlothian for the nine months ended September 30, 1995. (D) To record tax effect of adjustments. (E) The additional shares offered hereby (1,925,061 shares) increase total outstanding shares. (F) This pro forma income statement does not reflect all adjustments to, or projected changes in, income the Bank expects to realize following consummation of the acquisition. 13 PRO FORMA INCOME STATEMENT FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994
PRO FORMA SURETY FIRST ADJUSTMENTS CAPITAL MIDLOTHIAN ------------------------- PRO FORMA CORPORATION CORPORATION DEBITS CREDITS COMBINED ----------- ----------- ----------- ----------- ------------- (UNAUDITED) Interest Income: Commercial loans and real estate loans............... $ 1,422,911 $ 1,466,820 $ -- $ -- $2,889,731 Consumer loans....................................... 1,059,188 351,874 1,411,062 Insurance premium financing.......................... 2,172,038 -- 2,172,038 Federal funds sold................................... 302,621 185,581 488,202 Investment securities and interest bearing deposits............................................ 430,251 963,043 1,393,294 Other interest income................................ -- 32,621 32,621 ----------- ----------- ----------- ----------- ------------- Total interest income............................ 5,387,009 2,999,939 8,386,948 ----------- ----------- ----------- ----------- ------------- Interest expense: Savings, NOW and money market........................ 353,123 327,632 680,755 Time deposits, $100,000 and over..................... 362,700 134,369 497,069 Other time deposits.................................. 760,833 627,142 1,387,975 Other interest expense............................... 11,075 81,777 92,852 ----------- ----------- ----------- ----------- ------------- Total interest expense........................... 1,487,731 1,170,920 2,658,651 ----------- ----------- ----------- ----------- ------------- Net interest income before provision for loan losses.............................................. 3,899,278 1,829,019 5,728,297 Provision for loan losses............................ 106,899 -- 106,899 ----------- ----------- ----------- ----------- ------------- Net interest income.............................. 3,792,379 1,829,019 5,621,398 ----------- ----------- ----------- ----------- ------------- Noninterest income..................................... 1,160,007 627,846 1,787,853 ----------- ----------- ----------- ----------- ------------- Noninterest expense: Salaries and employee benefits....................... 2,201,188 941,462 3,142,650 Occupancy & equipment................................ 669,936 194,860 10,649(C) 875,445 General & administrative............................. 1,590,814 936,371 356,122(B) 212,400(A) 2,670,907 ----------- ----------- ----------- ----------- ------------- Total noninterest expense........................ 4,461,938 2,072,693 366,771 212,400 6,689,002 ----------- ----------- ----------- ----------- ------------- Income before income taxes....................... 490,448 384,172 366,771 212,400 720,249 Income tax expense: Current.............................................. 36,697 -- 67,331(D) 116,266(D) (12,239) Deferred............................................. (19,009) 109,229 90,220 ----------- ----------- ----------- ----------- ------------- Net income....................................... $ 472,760 $ 274,943 $434,102(F) $328,666(F) $ 642,268 ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ------------- Net income per share of common stock................... $ 0.20 $ 0.15 ----------- ------------- ----------- ------------- Weighted average shares outstanding.................... 2,393,841 4,318,902(E) ----------- ------------- ----------- -------------
- ------------------------ (A) To record savings to be realized by the acquisition. These adjustments are a direct result of the elimination of director, committee and professional fees which will not continue after the acquisition. In addition to the elimination of these fees, a reduction in computer processing fees is also recorded. (B) To record amortization of the goodwill recorded in connection with the acquisition of First Midlothian for the year ended December 31, 1994 and to record payment of fees by First Midlothian (i.e. agent's fee of $170,000, First Midlothian's share of the estimated cost to cancel the EDS contract of $62,500 and estimated audit fee of $40,000). (C) To record the additional depreciation to premises and equipment as a result of the write up to estimated market value for First Midlothian for the year ended December 31, 1994. (D) To record tax effect of adjustments. (E) The additional shares offered hereby (1,925,061 shares) increase total outstanding shares. (F) This pro forma income statement does not reflect all adjustments to, or projected changes in, income the Company expects to realize following consummation of the acquisition. 14 SELECTED CONSOLIDATED FINANCIAL DATA The following summary consolidated financial data of the Company should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto appearing elsewhere in this prospectus and the information contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations." The selected historical consolidated financial data as of and for the five years in the period ended December 31, 1994 are derived from the Company's Consolidated Financial Statements which have been audited by independent public accountants. The selected historical consolidated financial data as of and for the nine months ended September 30, 1995 and September 30, 1994 is unaudited..
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, -------------------- ----------------------------------------------------- 1995 (1) 1994 (2) 1994 (2) 1993 (3) 1992 1991 1990 --------- -------- --------- -------- -------- -------- -------- (UNAUDITED) INCOME STATEMENT DATA: ($ in 000's) Interest income................................. $ 6,872 $ 3,743 $ 5,387 $ 3,995 $ 3,344 $ 2,953 $ 2,175 Interest expense................................ 2,537 972 1,488 1,124 978 1,380 1,071 Net interest income........................... 4,335 2,771 3,899 2,871 2,366 1,573 1,104 Provision for loan losses....................... 60 67 107 91 300 467 221 Net interest income after provision for loan losses....................................... 4,275 2,705 3,792 2,781 2,067 1,107 883 Noninterest income.............................. 1,056 801 1,160 1,182 784 488 455 Noninterest expense............................. 4,382 3,205 4,462 3,592 2,835 2,185 1,933 Extraordinary item -- gain on debt settlement... -- -- -- -- -- -- 517 Earnings before income taxes.................... 949 301 490 371 16 (590) (78) Income taxes.................................... 301 8 17 -- -- -- -- Net earnings (loss)............................. $ 648 $ 294 $ 473 $ 371 $ 16 $ (590) $ (78) COMMON SHARE DATA: (4) Net earnings (loss)............................. $ 0.20 $ 0.13 $ 0.20 $ 0.19 $ 0.00 $ (0.45) $ (0.08) Book value...................................... 2.85 2.52 2.65 2.32 2.05 1.85 1.43 Weighted average common shares outstanding (in 000's)......................................... 3,208 2,344 2,394 2,002 1,952 1,310 963 Period end shares outstanding (in 000's)........ 3,506 2,373 3,041 2,273 1,981 1,767 988 BALANCE SHEET DATA: ($ in 000's) Total assets.................................... $119,554 $61,784 $102,294 $49,036 $30,964 $26,877 $22,088 Insurance premium finance loans, net............ 23,724 20,254 20,497 14,209 7,051 8,016 6,801 Other loans, net................................ 44,924 19,509 44,167 17,417 12,442 11,242 8,388 Allowance for loan losses....................... 725 407 698 401 325 343 277 Total deposits.................................. 108,209 55,552 92,027 43,596 26,840 23,335 20,012 Shareholders' equity............................ 10,037 5,969 8,066 5,281 4,058 3,263 1,409 PERFORMANCE DATA: (5) Return (loss) on average total assets........... .9% .7% .8% .8% .1% (2.3)% (.4)% Return (loss) on average shareholders' equity... 9.6 6.8 7.4 8.7 .4 (30.4) (7.2) Net interest margin............................. 6.3 7.4 7.1 7.0 8.7 7.0 7.0 Loans to deposits............................... 63.4 71.6 70.3 72.5 72.6 82.5 75.9 ASSET QUALITY RATIOS: (5) Nonperforming assets to total assets............ .1% .1% .2% .3% .7% 2.1% 3.8% Nonperforming loans to total loans.............. .1 .1 .2 .3 .8 2.4 5.3 Net loan charge-offs to average loans........... .1 .3 .4 .3 1.6 2.3 .5 Allowance for loan losses to total loans........ 1.1 1.0 1.1 1.3 1.7 1.8 1.8 Allowance for loan losses to nonperforming loans.......................................... 1,772.5 456.9 574.8 425.8 201.1 74.8 34.8 CAPITAL RATIOS: Tier I risk-based capital....................... 10.2% 11.0% 10.1% 11.4% 14.4% 13.2% 5.3% Total risk-based capital........................ 11.1 11.7 11.2 12.6 15.7 14.7 6.8 Leverage........................................ 6.4 8.5 5.6 10.0 11.9 10.9 4.6
- ------------------------------ (1) On September 28, 1995 the Company completed the acquisition of certain assets and the assumption of certain liabilities relating to the branch of Bank One, Texas, National Association Texas located in Waxahachie, Texas. (2) On May 31, 1994 the Company acquired 100% of the outstanding common stock of The Farmers Guaranty State Bank of Kennard, Kennard, Texas, and on December 8, 1994 the Company acquired 100% of the outstanding common stock of First National Bank, Whitesboro, Texas. (3) On March 23, 1993 the Company acquired 100% of the outstanding common stock of the Bank of East Texas, Chester, Texas and First State Bank, Wells, Texas. Operations of these two banks have been included in consolidated operations subsequent to February 28, 1993. (4) The information provided for 1990, 1991 and 1992 has been restated to reflect a one for ten reverse stock split in June 1993. (5) All interim periods have been annualized. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion highlights the major changes affecting the operations and financial condition of the Company for the nine months ended September 30, 1995 and 1994 and the three years ended December 31, 1994. The discussion should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this prospectus. A summary of the Company's consolidated financial condition as of, and results of operations for, the three and twelve month periods ended December 31, 1995 and 1994 is set forth under "Recent Unaudited Selected Consolidated Financial Data". GENERAL The Company derives substantially all of its revenues and income from the operation of its subsidiary, the Bank, which provides a full range of commercial and consumer banking services to businesses and individuals in the north and east Texas area and has attempted to distinguish itself by developing niche products such as insurance premium finance. As of September 30, 1995, the Company had total assets of $119.6 million, net loans of $67.9 million, total deposits of $108.2 million, and total shareholders' equity of $10.0 million. The Company reported net income of $648,413 for the nine months ended September 30, 1995 compared with net income of $293,734 for the nine months ended September 30, 1994 as a result of internal loan growth within its niche products and its acquisitions of community banks. During 1994, the Company had no effective tax rate through the utilization of its net operating losses. The Company returned to paying federal income taxes at the effective rate of 32% during 1995. Income before taxes was $948,990 for the nine months ended September 30, 1995, an increase of $647,756 or 215.0% when compared with the same period for 1994. On May 31, 1994, the Company acquired The Farmers Guaranty State Bank of Kennard, Texas. On December 8, 1994 the Company acquired the First National Bank, Whitesboro, Texas and on September 28, 1995, the Company acquired the assets and assumed the liabilities of the Waxahachie, Texas, branch of Bank One, Texas, National Association. The Company views these acquisitions as a means of expanding its operations and anticipates they will contribute favorably to future results of the Company. The Company continues to actively serve the banking needs of these local communities, as it has served the local communities of its other branches. The deposits at these new branches will allow the Company to increase its niche lending activities of IPF and insurance medical claims factoring. The Company's strategy is to continue to acquire community banks with low loan-to-deposit ratios and use excess deposits to fund IPF and other niche lending products. See "Business -- Acquisitions". RESULTS OF OPERATIONS NET EARNINGS Net earnings were $648,413 ($0.20 per share) for the nine months ended September 30, 1995, compared with net earnings of $293,734 ($0.13 per share) for the nine months ended September 30, 1994, an increase of $354,679 or 120.7%. Factors contributing to the increase in earnings in 1995 compared with 1994 include an increase in net interest income, loan growth in the Company's niche lending products, and the growth of noninterest income mainly as a result of the acquisition of The Farmers Guaranty State Bank, Kennard, Texas and First National Bank, Whitesboro, Texas. Net earnings were $472,760 for 1994 ($0.20 per share), compared with net earnings of $370,723 for 1993 ($0.19 per share) and $16,424 for 1992 ($0.00 per share). The earnings per share for 1994 were affected by additional shares issued in December 1994 in connection with the acquisition of First National Bank, Whitesboro. The 27.5% increase and 2,157.2% increase in earnings for 1994 and 1993 respectively, were attributable to an increase in net interest income resulting from improved asset quality, loan growth in the Company's niche lending products and acquisitions of community banks. 16 EARNINGS BEFORE INCOME TAXES Earnings before income taxes were $948,990 for the nine months ended September 30, 1995, compared with $301,234 for the first nine months of 1994, a 215% increase. As previously mentioned, the Company returned to paying federal income taxes at the effective rate of 32% during 1995, compared with a nominal effective tax rate for 1994. As a result of the return to paying federal taxes, the net income for the nine months ended September 30, 1995 may be more indicative of operating trends in the future. Conversely, earnings before income taxes in the 1995 period may be more useful when comparing results with prior periods. Earnings before income taxes were $490,448 in 1994, compared with $370,723 in 1993, an increase of $119,725 or 32.3%. Earnings before income taxes were $16,424 in 1992. The improvement in earnings before income taxes for 1994 compared with 1993 was primarily attributable to an increase in net interest income resulting from an increase in net interest margin. The increase in net interest income in 1994, as compared with 1993, was the result of loan growth within the Company's niche lending products. The average balance of insurance premium finance loans grew by 96.6% to a balance of $19.4 million from $9.9 million for 1994 and 1993, respectively. The 2,157.2% growth in earnings before income taxes in 1993 as compared with 1992 was attributable to an increase in net interest income as a result of loan growth. In 1993, the Company also realized a gain on the sale of investment securities of approximately $94,000. NET INTEREST INCOME Net interest income is the difference between income earned on interest-earning assets and the interest expense incurred on interest-bearing liabilities. The net yield on total interest-earning assets, also referred to as interest rate margin or net interest margin, represents net interest income divided by average interest-earning assets. The Company's principal interest-earning assets are loans, investment securities, medical receivables factoring and federal funds sold. Net interest income was $4.3 million for the first nine months of 1995, an increase of $1.6 million or 58.1% compared with the first nine months of 1994, resulting principally from an increase in interest-earning assets from $55.3 million to $107.9 million, a significant portion of which was comprised of loans (typically the highest yielding asset). The increase in interest-earning assets was offset by an increase in interest-bearing liabilities from $47.1 million to $94.7 million. In addition, the Company experienced a decrease in the net interest spread of 110 basis points from 6.9% to 5.8% for the nine months ended September 30, 1994 and 1995, respectively. The foregoing decrease resulted principally from the fact that the cost of interest-bearing liabilities increased more than the yield on interest-earning assets. The yield on interest-earning assets increased 10 basis points from 9.9% to 10.0%, while the cost of interest-bearing liabilities increased 120 basis points from 3.0% to 4.2% for the nine months ended September 30, 1994 and 1995, respectively. Net interest income was $3.9 million for 1994, an increase of $1.0 million or 35.8% compared with net interest income of $2.9 million for 1993, which represented an increase of $505,224 or 21.4% compared with net interest income of $2.4 million for 1992. The Company's average total interest-earning assets increased from approximately $41.2 million for 1993 to $54.8 million for 1994, representing a 33.1% increase resulting principally from an increase in loans. The net interest margin of 7.1% for 1994 increased 10 basis points from 7.0% for 1993. The Company's average total interest-earning assets increased from $27.1 million for 1992 to $41.2 million for 1993, representing a 51.7% increase resulting principally from an increase in loans and investment securities. The Company's net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a "volume change". It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change". The decline in the net yield on total interest-earning assets from 1994 through the first nine months of 1995 resulted principally from an increase in investment securities as a percentage of total interest-earning assets, which produced a lower average rate of return for the Company than loans, and the addition of the consumer, commercial and real estate loans through the acquisition of First National Bank, Whitesboro, Texas. The yield on consumer, commercial and real estate loans declined to 10.9% for the first nine months of 1995 from 12% for the twelve months ended December 31, 1994. The following table 17 sets forth for each category of interest-earning assets and interest-bearing liabilities the average amounts outstanding, the interest earned or paid on such amounts and the average rate paid for the nine months ended September 30, 1995 and 1994 and for the three years ended December 31, 1994, 1993 and 1992. The table also sets forth the average rate earned on all interest-earning assets, the average rate paid on all interest-bearing liabilities, and the net yield on average interest-earning assets for the same periods. AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1995 SEPTEMBER 30, 1994 --------------------------------- -------------------------------- INTEREST INTEREST AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE A S S E T S BALANCE EXPENSE RATE BALANCE EXPENSE RATE ------------ ---------- ------- ----------- ---------- ------- Interest-earning assets: Interest-bearing deposits................................. $ 1,433,354 $ 76,419 7.1% $ 783,493 $ 40,389 6.9% U.S. Treasury and agency securities (1)................... 15,073,774 734,300 6.5 6,847,990 250,231 4.9 Federal funds sold........................................ 7,995,800 358,600 6.0 5,711,995 188,197 4.4 Loans (2)(3).............................................. 67,992,319 5,702,448 11.2 37,313,907 3,264,214 11.7 Allowance for loan losses................................. (711,919) N/A N/A (430,212) N/A N/A ------------ ---------- ------- ----------- ---------- ------- Total interest-earning assets........................... $ 91,783,328 $6,871,767 10.0% $50,227,173 $3,743,031 9.9% ------------ ---------- ----------- ---------- Cash and due from banks................................... 4,403,273 3,047,360 Premises and equipment.................................... 2,402,578 1,433,014 Accrued interest receivable............................... 639,556 167,977 Other real estate owned................................... 71,545 35,947 Other assets.............................................. 2,989,181 742,739 ------------ ----------- Total assets............................................ $102,289,461 $55,654,210 ------------ ----------- ------------ ----------- L I A B I L I T I E S Interest-bearing liabilities: Interest-bearing demand deposits.......................... $ 22,422,644 $ 476,084 2.8% $13,505,323 $ 231,110 2.3% Savings deposits.......................................... 4,697,675 93,699 2.7 3,844,726 74,622 2.6 Time deposits............................................. 52,078,213 1,855,244 4.8 25,399,059 665,832 3.5 Notes payable............................................. 1,297,565 111,915 11.5 -- -- -- ------------ ---------- ------- ----------- ---------- ------- Total interest-bearing liabilities...................... $ 80,496,097 $2,536,942 4.2% $42,749,108 $ 971,564 3.0% ------------ ---------- ----------- ---------- Noninterest-bearing deposits.............................. 12,297,624 6,912,272 Other liabilities......................................... 489,746 244,682 ------------ ----------- Total liabilities....................................... 93,283,467 49,906,062 Shareholders' equity........................................ 9,005,994 5,748,148 ------------ ----------- Total liabilities and equity............................ $102,289,461 $55,654,210 ------------ ----------- ------------ ----------- Net interest income......................................... $4,334,825 $2,771,467 ---------- ---------- ---------- ---------- Net interest spread......................................... 5.8% 6.9% ------- ------- ------- ------- Net interest margin......................................... 6.3% 7.4% ------- ------- ------- -------
- ------------------------ (1) Interest income on tax exempt securities does not reflect the tax equivalent yield. (2) Loans on nonaccrual status have been included in the computation of average balances. (3) The interest income on loans does not include loan fees. Loan fees are immaterial and are included in noninterest income. 18 AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1994 1993 1992 --------------------------------------- --------------------------------------- ------------ INTEREST INTEREST AVERAGE INCOME/ AVERAGE INCOME/ AVERAGE A S S E T S BALANCE EXPENSE AVERAGE RATE BALANCE EXPENSE AVERAGE RATE BALANCE - ------------------------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------ Interest-earning assets: Interest-bearing deposits... $ 981,184 $ 68,173 6.9% $ 636,420 $ 20,853 3.3% $ 483,333 U.S. Treasury and agency securities (1)............. 7,648,411 362,078 4.7 9,567,829 507,273 5.3 -- Federal funds sold.......... 6,456,165 302,621 4.7 5,343,461 162,830 3.0 6,474,639 Loans (2)(3)................ 40,136,926 4,654,137 11.6 26,008,833 3,304,105 12.7 20,496,380 Allowance for loan losses... (444,805) N/A N/A (388,255) N/A N/A (311,970) ------------ ----------- --- ------------ ----------- --- ------------ Total interest-earning assets................. $ 54,777,881 $ 5,387,009 9.8% $ 41,168,288 $ 3,995,061 9.7% $ 27,142,382 ------------ ----------- ------------ ----------- ------------ Cash and due from banks..... 3,249,783 2,705,248 1,819,201 Premises and equipment...... 1,520,404 1,094,260 885,511 Accrued interest receivable................. 205,770 185,109 46,005 Other real estate owned..... 51,043 31,715 19,195 Other assets................ 1,357,765 417,878 640,993 ------------ ------------ ------------ Total assets............ $ 61,162,646 $ 45,602,498 $ 30,553,287 ------------ ------------ ------------ ------------ ------------ ------------ L I A B I L I T I E S Interest-bearing liabilities: Interest-bearing demand deposits................... $ 14,680,300 $ 259,113 1.8% 12,538,376 209,937 1.7% 6,935,234 Savings deposits............ 3,104,155 94,010 3.0 3,165,466 96,962 3.1 1,305,089 Time deposits............... 28,530,396 1,123,533 4.0 19,095,938 816,685 4.3 14,553,547 Notes payable............... 146,756 11,075 7.5 -- -- -- -- ------------ ----------- --- ------------ ----------- --- ------------ Total interest-bearing liabilities.............. $ 46,461,607 $ 1,487,731 3.2 % $ 34,799,780 $ 1,123,584 3.2 % $ 22,793,870 ------------ ----------- ------------ ----------- ------------ Noninterest-bearing deposits................... 7,996,860 6,375,876 3,675,287 Other liabilities........... 281,660 151,681 145,950 ------------ ------------ ------------ Total liabilities............. 54,740,127 41,327,337 26,615,107 Shareholders' equity.......... 6,422,519 4,275,161 3,938,180 ------------ ------------ ------------ Total liabilities and equity................... $ 61,162,646 $ 45,602,498 $ 30,553,287 ------------ ------------ ------------ ------------ ------------ ------------ Net interest income........... $ 3,899,278 $ 2,871,477 ----------- ----------- ----------- ----------- Net interest spread........... 6.6 % 6.5 % --- --- --- --- Net interest margin........... 7.1 % 7.0 % --- --- --- --- INTEREST INCOME/ A S S E T S EXPENSE AVERAGE RATE - ------------------------------ ----------- ------------ Interest-earning assets: Interest-bearing deposits... $ 17,455 3.6% U.S. Treasury and agency securities (1)............. -- -- Federal funds sold.......... 222,146 3.4 Loans (2)(3)................ 3,104,367 15.2 Allowance for loan losses... N/A N/A ----------- --- Total interest-earning assets................. $ 3,343,968 12.3% ----------- Cash and due from banks..... Premises and equipment...... Accrued interest receivable................. Other real estate owned..... Other assets................ Total assets............ L I A B I L I T I E S Interest-bearing liabilities: Interest-bearing demand deposits................... 194,073 2.8% Savings deposits............ 45,984 3.5 Time deposits............... 737,658 4.9 Notes payable............... -- -- ----------- --- Total interest-bearing liabilities.............. $ 977,715 4.3 % ----------- Noninterest-bearing deposits................... Other liabilities........... Total liabilities............. Shareholders' equity.......... Total liabilities and equity................... Net interest income........... $ 2,366,253 ----------- ----------- Net interest spread........... 8.0 % --- --- Net interest margin........... 8.7 % --- ---
- -------------------------- (1) Interest income on tax exempt securities does not reflect the tax equivalent yield. (2) Loans on nonaccrual status have been included in the computation of average balances. (3) The interest income on loans does not include loan fees. Loan fees are immaterial and are included in noninterest income. 19 The following table reflects the changes in net interest income stemming from changes in interest rates and from asset and liability volume, including mix. The change in interest attributable to both rate and volume has been allocated to the changes in the rate and the volume on a pro rata basis. RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
YEARS ENDED NINE MONTHS ENDED SEPTEMBER 30, DECEMBER 31, 1994 1995 COMPARED WITH NINE MONTHS COMPARED WITH ENDED SEPTEMBER 30, 1994 DECEMBER 31, 1993 ----------------------------------- ----------------------------------- INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO ----------------------------------- ----------------------------------- VOLUME(1) RATE CHANGES VOLUME(1) RATE CHANGES ---------- ---------- ---------- ---------- ---------- ---------- Interest Income: Interest-bearing deposits in financial institutions........................................ $ 34,602 $ 1,428 $ 36,030 $ (551) $ 47,871 $ 47,320 U.S. Treasury and agency securities.................. 378,968 105,101 484,069 (94,659) (50,536) (145,195) Federal funds sold................................... 89,525 80,878 170,403 38,998 100,793 139,791 Loans................................................ 2,578,263 (140,209) 2,438,234 1,659,906 (309,874) 1,350,032 ---------- ---------- ---------- ---------- ---------- ---------- Total interest income.................................. $3,081,358 $ 47,198 $3,128,736 $1,603,694 $(211,746) $1,391,948 ---------- ---------- ---------- ---------- ---------- ---------- Interest Expense: Interest-bearing demand deposits..................... $ 179,906 $ 63,909 $ 243,815 $ 38,707 $ 10,469 $ 49,176 Savings deposits..................................... 16,962 2,115 19,077 (1,827) (1,125) (2,952) Time deposits........................................ 885,864 304,707 1,190,571 375,946 (69,098) 306,848 Federal funds purchased and other borrowed funds..... 111,915 -- 111,915 11,075 -- 11,075 ---------- ---------- ---------- ---------- ---------- ---------- Total interest expense................................. $1,194,647 $ 370,731 $1,565,378 $ 423,901 $ (59,754) $ 364,147 ---------- ---------- ---------- ---------- ---------- ---------- Net interest margin.................................... $1,886,711 $(323,533) $1,563,358 $1,179,793 $(151,992) $1,027,801 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- YEARS ENDED DECEMBER 31, 1993 COMPARED WITH DECEMBER 31, 1992 --------------------------------- INCREASE (DECREASE) DUE TO --------------------------------- VOLUME(1) RATE CHANGES ---------- ---------- -------- Interest Income: Interest-bearing deposits in financial institutions........................................ $ 5,133 $ (1,735) $ 3,398 U.S. Treasury and agency securities.................. 507,273 -- 507,273 Federal funds sold................................... (36,164) (23,152) (59,316) Loans................................................ 750,748 (551,010) 199,738 ---------- ---------- -------- Total interest income.................................. $1,226,990 $(575,897) $651,093 ---------- ---------- -------- Interest Expense: Interest-bearing demand deposits..................... $ 114,730 $ (98,866) $ 15,864 Savings deposits..................................... 57,705 (6,727) 50,978 Time deposits........................................ 206,265 (127,238) 79,027 Federal funds purchased and other borrowed funds..... -- -- -- ---------- ---------- -------- Total interest expense................................. $ 378,700 $(232,831) $145,869 ---------- ---------- -------- Net interest margin.................................... $ 848,290 $(343,066) $505,224 ---------- ---------- -------- ---------- ---------- --------
- ------------------------------ (1) Nonaccrual loans are included in the average volumes used in calculating this table. 20 PROVISION FOR LOAN LOSSES The amount of the provision for loan losses is based on periodic (not less than quarterly) evaluations of the loan portfolio, with particular attention directed toward nonperforming and other potential problem loans. During these evaluations, consideration is given to such factors as: management's evaluation of specific loans; the level and composition of nonperforming loans; historical loss experience; results of examinations by regulatory agencies; an internal asset review process; the market value of collateral; the strength and availability of guaranties; concentrations of credits; and other judgmental factors. The Company determines separate general allowances for IPF and non-IPF loans. The Company's loss experience on insurance premium finance lending was adversely affected during the second half of 1991 by the failure of a non-Best's rated insurance company. The Company has implemented certain changes in its lending policies and procedures with respect to insurance premium finance lending which have reduced the maximum concentration by insurance carrier except as approved by the Board of Directors and also reduced the amount of loans secured by unearned premiums of insurance policies written by non-rated carriers. See "Business -- Insurance Premium Financing". As a result of these changes in loan policy and recoveries of previously charged-off IPF loans, the Company's historical loss factor on IPF loans has improved from 0.15% in 1993 to 0.00% in 1994 and as of September 30, 1995. The Company recorded a $60,000 provision for loan losses during the nine months ended September 30, 1995 compared with $66,898 during the first nine months of 1994. As the Company's ratio of net charge-offs to average loans remained unchanged for these periods, the Company provided amounts to compensate for growth in the loan portfolio in order to maintain the allowance for loan losses at an adequate level. The 1994 provision for loan losses was $106,899 compared with $90,584 in 1993 and $299,555 in 1992. The 18% increase in the 1994 provision for loan losses when compared with 1993 is a result of the 54.3% growth in average loans outstanding. The 69.8% reduction in the provision for 1993 compared with 1992 was a result of successful collection efforts in both the insurance premium finance portfolio and the general loan portfolio. NONINTEREST INCOME Noninterest income is generated primarily from fees associated with noninterest and interest-bearing accounts as well as fees associated with loans (e.g., late fees). Noninterest income for the first nine months of 1995 was $1,056,095, an increase of $255,290 or 31.9% compared with noninterest income of $800,805 for the first nine months of 1994. The increase in noninterest income is attributed to the acquisition of The Farmers Guaranty State Bank, Kennard and First National Bank, Whitesboro during 1994, as well as an increase in loans outstanding. The acquisition of the two banks during 1994 increased the number and balance of loans outstanding and increased the number and balance of noninterest and interest-bearing accounts, which resulted in increased noninterest income. Noninterest income was $1,160,007 for 1994, a decrease of $20,801 or 1.8% compared with noninterest income of $1,181,808 for 1993, which represented an increase of $397,742 or 50.7% over 1992. While service charges and exchange fees increased from 1993 to 1994, loan fees and other income decreased. The decrease in loan fees was attributable to a decision by management to discontinue servicing outside loan portfolios. The decrease in other income from 1993 to 1994 is the result of a gain realized on the sale of investment securities during 1993 in the amount of approximately $94,000. Noninterest income increased from 1992 to 1993 in all categories, primarily as a result of the acquisition of banks in Wells and Chester, Texas. The following table sets forth the various categories of noninterest income for the nine months ended September 30, 1995 and 1994, and for the years ended December 31, 1994, 1993 and 1992. 21 NONINTEREST INCOME
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, ------------------------ -------------------------------------- 1995 1994 1994 1993 1992 ------------ ---------- ------------ ------------ ---------- Noninterest income Nonsufficient fund charges................... $ 214,501 $ 202,674 $ 263,315 $ 248,890 $ 145,365 Late fee charges............................. 366,356 293,582 426,476 304,354 278,520 Service charges.............................. 163,648 119,684 163,336 120,143 47,717 Collection fees.............................. 93,536 77,001 96,162 71,760 44,351 Credit life insurance........................ 59,570 33,231 44,402 49,777 46,346 Premium finance servicing.................... -- -- -- 161,310 101,853 Secured credit card annual fee............... 4,487 13,774 15,905 36,968 52,837 Other........................................ 153,897 60,859 150,411 97,843 67,077 Gain on sale of investment................... 100 -- -- 90,763 -- ------------ ---------- ------------ ------------ ---------- Total noninterest income................... $ 1,056,095 $ 800,805 $ 1,160,007 $ 1,181,808 $ 784,066 ------------ ---------- ------------ ------------ ---------- ------------ ---------- ------------ ------------ ----------
NONINTEREST EXPENSE Noninterest expense was $4,381,930 for the first nine months of 1995, an increase of $1,177,790 or 36.8% compared with noninterest expense of $3,204,140 for the first nine months of 1994. This increase resulted principally from the acquisition of The Farmers Guaranty State Bank, Kennard and First National Bank, Whitesboro during 1994. The addition of the two banks in 1994 resulted in additional personnel, occupancy and office expenses. The amortization of intangibles increased in 1995 as a result of the addition of goodwill and costs associated with the acquisition of The Farmers Guaranty State Bank, Kennard in the amount of $296,164 and the addition of goodwill and costs associated with the acquisition of First National Bank, Whitesboro in the amount of $1,886,682. Deposits held by the Bank are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC"). The FDIC assessment is calculated on the level of deposits held by the Bank. The increase in the FDIC assessment in 1995 over 1994 was tied to the increased deposits added through the two acquisitions completed in 1994. The BIF assessment rate is determined by the FDIC for categories of banks based upon the risk to the insurance fund. On August 8, 1995, the FDIC's Board of Directors voted to significantly reduce the deposit insurance premiums paid by most banks but to keep existing assessment rates intact for savings associations. Under the new rate structure, the best-rated institutions insured by the BIF pay $.04 per $100 of domestic deposits, down from the rate of $.23 per $100. The new BIF assessment rates apply from the first day of the month after the BIF was recapitalized. The recapitalization of the BIF occurred in early September 1995. The FDIC has issued refunds to the best-rated institutions for assessments which exceeded the recapitalization of the BIF. The Bank received a refund from the FDIC of approximately $42,000. The change in assessment rate is expected to significantly reduce the cost of deposit insurance for the Bank. In connection with the new rate schedule, the FDIC established a process for quickly raising or lowering all rates for BIF-insured institutions up to twice a year without seeking public comment. See "Regulation and Supervision". Noninterest expense was $4,461,938 for 1994, an increase of $869,960 or 24.2% compared with noninterest expense of $3,591,978 for 1993, which represented an increase of $757,638 or 26.7% compared with noninterest expense of $2,834,340 for 1992. The increase in noninterest expense for 1994 from 1993 was attributable to a 28.3% increase in salaries and employee benefits and a 15.2% increase in general and administrative expenses. The increase in salaries and benefits for the same period was due primarily to additional staffing associated with the acquisition of the two banks and the Bank's loan and deposit growth. Noninterest expense increased in 1993 from 1992 primarily as a result of a 43.7% increase in salaries and employee benefits and a 12.4% increase in general and administrative expenses. The increase in salaries and benefits was due primarily to additional staffing associated with the two 1993 acquisitions, the Bank's loan and deposit growth and the establishment of the secured credit card program. 22 NONINTEREST EXPENSE
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31, -------------------------- ---------------------------------------- 1995 1994 1994 1993 1992 ------------ ------------ ------------ ------------ ------------ Salaries and employee benefits............. $ 2,143,694 $ 1,577,591 $ 2,201,188 $ 1,715,952 $ 1,194,179 Occupancy and equipment.................... 668,483 473,588 669,936 495,055 411,587 General and administrative expense: Professional fees........................ 343,866 264,627 315,434 362,571 351,593 Office supplies.......................... 193,466 150,187 201,028 165,416 126,880 Travel and entertainment................. 49,760 47,603 60,162 62,184 42,593 Telephone................................ 115,428 95,616 128,407 103,921 78,384 Advertising.............................. 65,216 43,146 54,683 60,302 88,589 Postage.................................. 150,301 97,349 133,887 125,092 105,229 Amortization of intangibles.............. 137,171 34,329 51,201 35,567 29,388 Dues and subscriptions................... 28,322 36,704 54,609 26,707 20,935 Insurance................................ 97,200 78,420 97,473 59,882 25,519 Credit cards............................. 14,707 44,698 59,573 63,298 83,941 Bank service charge...................... 29,914 18,901 25,808 29,018 17,922 FDIC assessment.......................... 114,541 90,623 133,112 71,003 56,594 Credit reports........................... 40,911 15,025 17,714 48,495 27,256 Operational losses....................... -- -- -- -- 62,044 Other.................................... 188,950 135,733 257,723 167,515 111,707 ------------ ------------ ------------ ------------ ------------ Total general and administrative....... 1,569,753 1,152,961 1,590,814 1,380,971 1,228,574 ------------ ------------ ------------ ------------ ------------ Total noninterest expense.............. $ 4,381,930 $ 3,204,140 $ 4,461,938 $ 3,591,978 $ 2,834,340 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
INCOME TAXES During 1993, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") No. 109, "Accounting for Income Taxes". The principal effect is to allow a tax benefit for cumulative book loss reserves in excess of tax reserves. SFAS No. 109 provides that deferred tax assets may be reduced by a valuation allowance if, based on the weight of available expense, it is more likely than not that some portion or all of the deferred tax asset will not be realized. In accordance with the provisions of SFAS No. 109, the Company elected not to restate prior years and has determined that the cumulative effect of implementation was not significant. The Company and the Bank will file a consolidated tax return for 1995. The Company estimates that its effective tax rate for 1995 will be approximately 32% and has recognized income tax expense of $300,577 on income before taxes of $948,990 for the nine months ended September 30, 1995 as compared with income tax expense of $7,500 on income before taxes of $301,234 for the nine months ended September 30, 1994. INTEREST RATE SENSITIVITY MANAGEMENT The operating income and net income of the Bank depend, to a substantial extent, on "rate differentials", i.e., the differences between the income the Bank receives from loans, securities and other earning assets, and the interest expense it pays to obtain deposits and other liabilities. These rates are highly sensitive to many factors which are beyond the control of the Bank, including general economic conditions and the policies of various governmental and regulatory authorities. See "Investment Considerations -- General Economic Conditions and Monetary Policy". The objective of monitoring and managing the interest rate risk position of the balance sheet is to contribute to earnings and to minimize the adverse changes in net interest income. The potential for earnings to be affected by changes in interest rates is inherent in a financial institution. Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to the repricing characteristics of assets and liabilities. An asset sensitive position in a given period will 23 result in more assets being subject to repricing; therefore, as interest rates rise, such a position will have a positive effect on net interest income. Conversely, in a liability sensitive position, where liabilities reprice more quickly than assets in a given period, a rise in interest rates will have an adverse effect on net interest income. One way to analyze interest rate risk is to evaluate the balance of the interest rate sensitivity position. A mix of assets and liabilities that are roughly equal in volume and term and repricing represents a matched interest rate sensitivity position. Any excess of assets or liabilities in a particular period results in an interest rate sensitivity gap. The following table presents the interest rate sensitivity for the Company's interest-earning assets and interest-bearing liabilities at September 30, 1995: 24 INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
3 MONTHS OR 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 5 OVER 5 LESS 6 MONTHS 1 YEAR YEARS YEARS TOTAL ----------- ----------- ----------- ----------- ----------- ------------ Interest-earning assets: Interest-earning deposits in financial institutions................................... $ 90,179 $ 285,689 $ 284,768 $ 674,224 -- $ 1,334,860 Investment securities........................... 2,244,856 1,029,188 138,479 6,108,666 $ 7,496,069 17,017,258 Federal funds sold.............................. 21,660,000 -- -- -- -- 21,660,000 Loans........................................... 26,278,756 13,691,539 12,558,560 13,985,289 1,409,399 67,923,543 ----------- ----------- ----------- ----------- ----------- ------------ Interest-earning assets........................... $50,273,791 $15,006,416 $12,981,807 $20,768,179 $ 8,905,468 $107,935,661 ----------- ----------- ----------- ----------- ----------- ------------ Interest-bearing liabilities: Interest-bearing demand deposits................ $25,892,195 -- -- -- -- $ 25,892,195 Savings deposits................................ 5,529,137 -- -- -- -- 5,529,137 Time deposits................................... 16,234,083 $13,811,978 $21,682,568 $11,144,246 -- 62,872,875 Notes payable................................... -- 375,000 -- -- -- 375,000 ----------- ----------- ----------- ----------- ----------- ------------ Interest-bearing liabilities...................... $47,655,415 $14,186,978 $21,682,568 $11,144,246 -- $ 94,669,207 ----------- ----------- ----------- ----------- ----------- ------------ Period interest sensitivity gap................... $ 2,618,376 $ 819,438 $(8,700,761) $ 9,623,933 $ 8,905,468 $ 13,266,454 ----------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- ------------ Cumulative interest sensitivity gap............... $ 2,618,376 $ 3,437,814 $(5,262,947) $ 4,360,986 $13,266,454 $ 13,266,454 ----------- ----------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- ----------- ------------ Cumulative gap as a percent of total assets....... 2.2% 2.9% (4.4%) 3.6% 11.1% 11.1% Cumulative interest-sensitive assets as percent of cumulative interest-sensitive liabilities........ 105.5% 105.6% 93.7% 104.6% 114.0% 114.0%
The cumulative rate-sensitive gap position at one year was a liability-sensitive position of $5.3 million, or negative 4.4%, which indicates that the Company is currently in a closely matched interest rate-sensitive position. Accordingly the Company believes it will not experience a significant impact from changes in interest rates. The Company undertakes this interest rate-sensitivity analysis to monitor the potential risk to future earnings from the impact of possible future changes in interest rates on currently existing net assets or net liability positions. However, this type of analysis is as of a point-in-time, when in fact the Company's interest rate sensitivity can quickly change as market conditions, customer needs, and management strategies change. Thus, interest rate changes do not affect all categories of assets and liabilities equally or at the same time. The Company's investment policy does not permit the purchase of derivative financial instruments or structured notes. The preceding table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competitive and other pressures. Currently, the Bank is holding approximately $812,000 in mortgage-backed securities. Although the mortgage-backed securities have a stated maturity greater than five years, it is not uncommon for mortgage-backed securities to fully pay down well ahead of stated maturities. As a result, assets and liabilities indicated as repricing within the same period may, in fact, reprice at different times and at different rate levels. 25 ANALYSIS OF FINANCIAL CONDITION LOANS AND ASSET QUALITY The Company's loans are diversified by borrower and industry group. Loan growth has occurred every year over the past five years and can be attributed to acquisitions, increased loan demand and the addition of new lending products. The following table describes the composition of loans by major categories outstanding at September 30, 1995 and at December 31, 1994, 1993, 1992, 1991 and 1990: LOAN PORTFOLIO ANALYSIS
DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ------------- ----------- ----------- ----------- ----------- ----------- AGGREGATE PRINCIPAL AMOUNT ------------------------------------------------------------------------------- Loans, net of unearned interest: Insurance premium financing..................... $23,723,803 $20,496,562 $14,209,177 $ 7,051,266 $ 8,015,723 $ 6,801,483 Commercial loans................................ 15,590,320 13,205,698 5,198,223 4,142,926 4,029,111 2,609,485 Installment loans............................... 10,139,550 10,968,948 7,961,350 6,395,752 5,558,513 4,679,965 Real estate loans............................... 16,224,602 17,297,636 1,878,030 809,215 738,950 668,664 Medical claims receivable....................... 2,969,812 2,694,506 2,379,482 1,094,461 915,259 429,412 ------------- ----------- ----------- ----------- ----------- ----------- Total loans..................................... 68,648,087 64,663,350 31,626,262 19,493,620 19,257,556 15,189,009 Less: Allowance for loan losses................. (724,544) (697,948) (401,227) (324,728) (343,206) (276,473) ------------- ----------- ----------- ----------- ----------- ----------- Total net loans............................... $67,923,543 $63,965,402 $31,225,035 $19,168,892 $18,914,350 $14,912,536 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- PERCENTAGE OF TOTAL LOAN PORTFOLIO ------------------------------------------------------------------------------- Loans, net of unearned interest: Insurance premium financing..................... 34.6% 31.7% 44.9% 36.1% 41.6% 44.8% Commercial loans................................ 22.7 20.4 16.5 21.2 20.9 17.1 Installment loans............................... 14.8 17.0 25.2 32.9 28.9 30.9 Real estate loans............................... 23.6 26.8 5.9 4.2 3.8 4.4 Medical claims receivable....................... 4.3 4.1 7.5 5.6 4.8 2.8 ------------- ----------- ----------- ----------- ----------- ----------- Total......................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- -----------
As of September 30, 1995 and December 31, 1994 commitments of the Bank under standby letters of credit and unused lines of credit totaled approximately $2,448,000 and $2,353,000, respectively. Stated loan maturities (including floating rate loans reset to market interest rates) of the total loan portfolio, net of unearned income, as of September 30, 1995 were: STATED LOAN MATURITIES
WITHIN ONE ONE YEAR TO AFTER FIVE YEAR FIVE YEARS YEARS TOTAL ------------- ------------- ------------ ------------- Stated Loan Maturities/Floating Rates Reset: Insurance premium financing......................... $ 23,723,803 $ -- $ -- $ 23,723,803 Commercial & real estate loans...................... 25,600,032 4,805,491 1,409,399 31,814,922 Installment loans................................... 959,752 9,179,798 -- 10,139,550 Medical claims receivable........................... 2,969,812 -- -- 2,969,812 ------------- ------------- ------------ ------------- Total............................................. $ 53,253,399 $ 13,985,289 $ 1,409,399 $ 68,648,087 ------------- ------------- ------------ ------------- ------------- ------------- ------------ -------------
26 Rate sensitivities of the total loan portfolio before unearned income, as of September 30, 1995 were as follows: LOAN REPRICING
WITHIN ONE ONE YEAR TO AFTER FIVE YEAR FIVE YEARS YEARS TOTAL ------------- ------------- ------------ ------------- Fixed rate............................................ $ 35,264,000 $ 13,701,000 $ 1,409,000 $ 50,374,000 Variable rate......................................... 20,027,000 183,000 -- 20,210,000 Nonaccrual............................................ -- 27,000 -- 27,000 ------------- ------------- ------------ ------------- Total............................................... $ 55,291,000 $ 13,911,000 $ 1,409,000 $ 70,611,000 ------------- ------------- ------------ ------------- ------------- ------------- ------------ -------------
The maturities presented above are based upon contractual maturities. Many of these loans are made on a short-term basis with the possibility of renewal at time of maturity. All loans, however, are reviewed on a continuous basis for creditworthiness. NONPERFORMING ASSETS The Company's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual basis when there are serious doubts regarding the complete collectibility of principal and interest. Amounts received on nonaccrual loans generally are applied first to principal and then to interest after all principal has been collected. Troubled debt restructurings are those for which concessions, including reduction of interest rates or deferral of interest or principal, have been granted, due to a borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. It is the policy of the Bank not to renegotiate the terms of a loan simply because of a delinquent status. Rather, a loan is generally transferred to a nonaccrual status if it is not in the process of collection and is delinquent in payment of either principal or interest beyond 90 days. Loans which are 90 days delinquent but are well secured and in the process of collection are not included in nonperforming assets. Other nonperforming assets consist of real estate acquired through loan foreclosures or other workout situations and other assets acquired through repossessions. The following table summarizes nonperforming assets by category as of September 30, 1995 and December 31, 1994: NONPERFORMING ASSETS
SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------ Nonaccrual loans.................................................................... $ 27,000 $ 83,000 Loans 90 days past due and still accruing interest.................................. 13,877 38,432 ------------- ------------ Total nonperforming loans........................................................... 40,877 121,432 Other real estate owned and other assets............................................ 92,830 121,359 ------------- ------------ Total nonperforming assets.......................................................... $ 133,707 $ 242,791 ------------- ------------ ------------- ------------ Nonperforming assets to total assets................................................ 0.01% 0.02% Nonperforming loans to total loans.................................................. 0.01% 0.02%
The classification of a loan on nonaccrual status does not necessarily indicate that the principal is uncollectible, in whole or in part. A determination as to collectibility is made by the Bank on a case-by-case basis. The Bank considers both the adequacy of the collateral and the other resources of the borrower in determining the steps to be taken to collect nonaccrual loans. The final determination as to these steps is made on a case-by-case basis. Alternatives that are considered are foreclosure, collecting on guarantees, restructuring the loan or collection lawsuits. 27 The following table sets forth a summary of other real estate owned and other collateral acquired as of September 30, 1995: OTHER REAL ESTATE OWNED & OTHER COLLATERAL ACQUIRED
NUMBER OF NET BOOK DESCRIPTION PARCELS/AUTOS CARRYING VALUE - ------------------------------------------------------------ ------------- -------------- Developed property.......................................... 2 $29,676 Vacant land or unsold lots.................................. 2 3,429 Repossessed automobiles..................................... 15 59,725 --- ------- 19 $92,830 --- ------- --- -------
ALLOWANCE FOR LOAN LOSSES In originating loans, the Company recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. The allowance for loan losses represents the Company's estimate of the allowance necessary to provide for losses incurred in the loan portfolio. In making this determination, the Company analyzes the ultimate collectibility of the Company's loan portfolio, incorporating feedback provided by the internal loan review staff and provided by examinations performed by regulatory agencies. The Company makes an ongoing evaluation as to the adequacy of the allowance for loan losses. To establish the appropriate level of the allowance, all loans (including nonperforming loans), commitments to extend credit and standby letters of credit are reviewed and classified as to potential loss exposure. Specific allowances are then established for those loans, commitments to extend credit or standby letters of credit with identified loss exposure and an additional allowance is maintained based upon the size, quality, and concentration characteristics of the remaining loan portfolio using both historical quantitative trends and the Company's evaluation of qualitative factors including future economic and industry outlooks. The determination by the Company of the appropriate level of allowance amount was $724,544 at September 30, 1995. The allowance for loan losses is based on estimates, and ultimate losses will vary from current estimates. These estimates are reviewed monthly and as adjustments, either positive or negative, become necessary they are reported in earnings in the periods in which they become known. The following table presents a detailed analysis of the Company's allowance for loan losses for the nine months ended September 30, 1995 and for the years ended December 31, 1994, 1993, 1992, 1991 and 1990: 28 ALLOWANCE FOR LOAN LOSSES
DECEMBER 31, SEPTEMBER 30, --------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 ------------- ----------- ----------- ----------- ----------- ----------- Beginning balance................................. $ 697,948 $ 401,227 $ 324,728 $ 343,206 $ 276,473 $ 108,513 ------------- ----------- ----------- ----------- ----------- ----------- Charge-offs: Commercial loans................................ (6,000) (41,537) (48,681) (202,777) (71,000) (52,658) Installment loans............................... (76,750) (163,669) (179,713) (287,113) (179,140) (17,189) Real estate loans............................... -- (5,350) -- -- -- -- Insurance premium finance....................... -- (1,710) (19,380) (182,423) (231,000) -- ------------- ----------- ----------- ----------- ----------- ----------- Total charge-offs................................. (82,750) (212,266) (247,774) (672,313) (481,140) (69,847) ------------- ----------- ----------- ----------- ----------- ----------- Recoveries: Commercial loans................................ 6,009 15,698 1,412 30,081 4,000 1,000 Installment loans............................... 24,031 43,070 88,511 89,005 50,000 14,807 Real estate loans............................... 9,125 -- -- -- 15,373 1,000 Insurance premium finance....................... -- 2,488 71,790 235,194 12,000 -- ------------- ----------- ----------- ----------- ----------- ----------- Total recoveries.................................. 39,165 61,256 161,713 354,280 81,373 16,807 ------------- ----------- ----------- ----------- ----------- ----------- Net charge-offs................................... (43,585) (151,010) (86,061) (318,033) (399,767) (53,040) Bank acquisition.................................. 10,181 340,832 71,976 -- -- -- Provision for loan losses......................... 60,000 106,899 90,584 299,555 466,500 221,000 ------------- ----------- ----------- ----------- ----------- ----------- Ending balance.................................... $ 724,544 $ 697,948 $ 401,227 $ 324,728 $ 343,206 $ 276,473 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Period end total loans, net of unearned interest......................................... $68,648,087 $64,663,350 $31,626,262 $19,493,620 $19,199,387 $15,142,843 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Average loans..................................... $67,992,319 $40,136,926 $26,008,833 $20,496,380 $17,496,528 $11,303,522 ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Ratio of net charge-offs to average loans......... 0.1% 0.4% 0.3% 1.6% 2.3% 0.5% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Ratio of provision for loan losses to average loans............................................ 0.1% 0.3% 0.4% 1.5% 2.7% 2.0% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Ratio of allowance for loan losses to ending total loans............................................ 1.1% 1.1% 1.3% 1.7% 1.8% 1.8% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Ratio of allowance for loan losses to total nonperforming loans.............................. 1,772.5% 574.8% 425.8% 201.1% 74.8% 34.8% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- ----------- Ratio of allowance for loan losses to total nonperforming assets............................. 541.9% 287.5% 311.2% 148.5% 60.5% 32.9% ------------- ----------- ----------- ----------- ----------- ----------- ------------- ----------- ----------- ----------- ----------- -----------
29 The following table sets forth an allocation of the allowance for loan losses among categories as of September 30, 1995 and December 31, 1994. The Company believes that any allocation of the allowance for loan losses into categories lends an appearance of precision which does not exist. The allowance is utilized as a single unallocated allowance available for all loans. The following allocation table should not be interpreted as an indication of the specific amounts or the relative proportion of future charges to the allowance. Such a table is merely a convenient device for assessing the adequacy of the allowance as a whole. The following allocation table has been derived by applying a general allowance to the portfolio as a whole, in addition to specific allowance amounts for internally classified loans. In retrospect, the specific allocation in any particular category may prove excessive or inadequate and consequently may be reallocated in the future to reflect the then current condition. Accordingly, the entire allowance is available to absorb losses in any category. ALLOWANCE FOR LOAN LOSSES
SEPTEMBER 30, 1995 DECEMBER 31, 1994 ------------------------------ ------------------------------ PERCENT OF ALLOWANCE PERCENT OF ALLOWANCE BY CATEGORY TO BY CATEGORY TO LOANS, NET OF LOANS, NET OF AMOUNT UNEARNED INCOME AMOUNT UNEARNED INCOME -------- -------------------- -------- -------------------- Insurance premium financing loans................................. $159,162 .23% $136,326 .21% Commercial loans.................................................. 184,606 .27% 181,669 .28% Installment loans................................................. 229,387 .33% 224,697 .35% Real estate loans................................................. 151,389 .22% 155,256 .24% -------- --- -------- --- Total........................................................... $724,544 1.1% $697,948 1.1% -------- --- -------- --- -------- --- -------- ---
INVESTMENT ACTIVITIES The investment portfolio, which was 15.8% of the Company's earning asset base as of September 30, 1995, is being managed to minimize interest rate risk, maintain sufficient liquidity and maximize return. Investment securities which are classified as held-to-maturity are purchased with the intent and ability of the Company to hold them to maturity as evidenced by the strong capital position of the Company and short maturity of the portfolio. Securities classified as held-to-maturity are carried at historical cost. The Company's financial planning anticipates income streams based on normal maturity and reinvestment. The short duration of the portfolio provides adequate liquidity through normal maturities. Investment securities classified as available-for-sale are purchased with the intent to provide liquidity and to increase returns. The securities classified as available-for-sale are carried at fair value. The Company does not have any securities classified as trading. As of September 30, 1995, $10.3 million in investment securities were classified as held-to-maturity and $6.5 million were classified as available-for-sale. On December 8, 1994, the Bank's investment portfolio increased by $14.6 million as a result of the acquisition of the bank in Whitesboro. The securities added to the investment portfolio through the acquisition increased the size of the investment portfolio by approximately 213%. This large increase resulted in a need to restructure the investment portfolio in an effort to address capital budgeting needs and to address the Bank's investment objectives. During the first quarter of 1995, $4.7 million in available-for-sale securities were sold for gross realized gains of $100 and no gross recognized losses. As of September 30, 1995, proceeds from the maturity of held-to-maturity securities were $2.7 million and the maturity of available-for-sale securities were $2.7 million. Purchases of held-to-maturity securities were $3.5 million and purchases of available-for-sale securities were $4.0 million. Prior to the acquisition of the bank in Whitesboro, all investment securities were classified as held-to-maturity with the exception of the Federal Reserve Bank stock which was classified as available-for-sale. During 1994, the Bank's investment portfolio increased by $14.6 million as a result of the acquisition of the bank in Whitesboro. At the time of acquisition, $4.7 million was classified as held-to-maturity and $9.8 million was classified as available-for-sale. As of December 31, 1994, the net unrealized loss on the available- 30 for-sale securities was $4,301. Proceeds from sales of held-to-maturity investment securities during the twelve months ended December 31, 1994 were $500,000. These securities were sold within 90 days of the call date and were expected to be called. The amortized cost of the held-to-maturity securities was $9.5 million as compared with their estimated market value of $9.4 million on December 31, 1994. The net unrealized loss on the held-to-maturity securities was $189,970 and has not been realized because the Company has the intent and the ability to hold these securities to maturity. The securities within the available-for-sale classification had an amortized cost of $10.0 million and an estimated market value of $10.0 million on December 31, 1994. The net unrealized loss in the available-for-sale securities was $4,301 as of December 31, 1994. These unrealized losses are the result of interest rate movements during 1994 and other market forces, and would be realized in part or in whole if some or all of the available-for-sale securities were sold and no changes in the respective market values occurred. The mortgage-backed securities held by the Bank include $511,554 fixed rate and no variable rate as held-to-maturity. The held-to-maturity mortgage-backed securities are stated at cost, adjusted for amortization of premiums and accretion of fees and discounts using a method that approximates a level yield. The available-for-sale mortgage-backed securities includes $147,976 fixed rate mortgage-backed securities and no variable rate mortgage-backed securities. The available-for-sale securities are carried at fair value. The following tables describe the composition of investments by major category and maturity at September 30, 1995: INVESTMENT PORTFOLIO
HELD-TO- AVAILABLE- MATURITY FOR-SALE ------------- ------------ U.S. Treasury notes.................................................................. $ 99,205 $ 495,000 U.S. Government agencies............................................................. 5,476,904 5,909,800 Municipal securities................................................................. 4,735,574 -- Federal Reserve Bank stock........................................................... -- 280,850 Other investments.................................................................... -- 19,925 ------------- ------------ Total.............................................................................. $ 10,311,683 $ 6,705,575 ------------- ------------ ------------- ------------
31 INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
MATURING OR REPRICING ------------------------------------------------------------------------------------------- AFTER 1 YEAR BUT WITHIN 5 AFTER 5 YEARS BUT WITHIN OTHER WITHIN 1 YEAR YEARS 10 YEARS SECURITIES ------------------------- ------------------------- ------------------------- ---------- AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT ------------ ----- ------------ ----- ------------ ----- ---------- HELD-TO-MATURITY - ------------------------------ U.S. Treasury notes........... $ 99,205 6.4% -- -- -- -- -- U.S. Government agencies...... 790,286 5.6% $ 2,508,963 5.8% $ 1,666,101 6.9% -- Municipal securities.......... 342,602 4.3% 2,576,414 4.1% 1,816,558 4.1% -- Mortgage-backed securities.... -- -- -- -- 511,554 5.9% -- ------------ ------------ ------------ Total....................... $ 1,232,093 -- $ 5,085,377 -- $ 3,994,213 -- -- ------------ ------------ ------------ ------------ ------------ ------------ AVAILABLE-FOR-SALE - ------------------------------ U.S. Treasury notes........... $ 197,994 6.8% $ 297,006 7.3% U.S. Government agencies...... 203,709 6.6% 2,339,534 6.7% $ 3,218,581 7.6% Mortgage-backed securities.... -- -- -- $ 147,976 Federal Reserve Bank stock.... -- -- -- 280,850 Other investments............. -- -- -- 19,925 ------------ ------------ ------------ ---------- Total....................... $ 401,703 $ 2,636,540 $ 3,218,581 $ 448,751 ------------ ------------ ------------ ---------- ------------ ------------ ------------ ---------- YIELD ----- HELD-TO-MATURITY - ------------------------------ U.S. Treasury notes........... -- U.S. Government agencies...... -- Municipal securities.......... -- Mortgage-backed securities.... -- Total....................... -- AVAILABLE-FOR-SALE - ------------------------------ U.S. Treasury notes........... U.S. Government agencies...... Mortgage-backed securities.... 6.3% Federal Reserve Bank stock.... Other investments............. Total.......................
DEPOSIT ACTIVITIES Deposits are attracted through the offering of a broad variety of deposit instruments, including checking accounts, money market accounts, regular savings accounts, term certificate accounts (including "jumbo" certificates in denominations of $100,000 or more), and retirement savings plans. The Company's average balance of total deposits was $91,496,156 for the nine months ended September 30, 1995, representing an increase of $37,184,445 or 68.5% compared with the average balance of total deposits for the year ended December 31, 1994. The Company's average balance of total deposits was $54,311,711 for the year ended 1994, an increase of $13,136,055 or 31.9% compared with the average balance of total deposits outstanding for 1993 of $41,175,656, an increase of $14,706,499 or 55.6% compared with the average balance of total deposits outstanding for 1992 of $26,469,157. The increases in deposits are due to both acquisitions and internally generated growth. The following table sets forth certain information regarding the Bank's average deposits as of September 30, 1995 and December 31, 1994: AVERAGE DEPOSITS
SEPTEMBER 30, 1995 DECEMBER 31, 1994 ------------------------------------------- ------------------------------------------- AVERAGE PERCENT OF AVERAGE RATE AVERAGE PERCENT OF AVERAGE RATE AMOUNT TOTAL PAID AMOUNT TOTAL PAID ------------- ----------- --------------- ------------- ----------- --------------- Noninterest-bearing demand deposits...................... $ 12,297,624 13.4% N/A $ 7,996,860 14.7% N/A Interest-bearing demand deposits...................... 22,422,644 24.5% 2.8% 14,680,300 27.0% 1.8% Savings deposits............... 4,697,675 5.2% 2.7% 3,104,155 5.7% 2.5% Time deposits.................. 52,078,213 56.9% 4.8% 28,530,396 52.6% 4.0% ------------- ----- --- ------------- ----- --- Total average deposits....... $ 91,496,156 100.0% 4.2% $ 54,311,711 100.0% 3.2% ------------- ----- --- ------------- ----- --- ------------- ----- --- ------------- ----- ---
32 As of September 30, 1995, non-brokered time deposits over $100,000 represented 12.8% of total deposits, compared with 8.6% of total deposits as of December 31, 1994, 12.9% as of December 31, 1993, and 16.2% as of December 31, 1992. As of September 30, 1995, jumbo certificates of deposit in excess of $100,000 accounted for $13,885,925 of the Bank's deposits. Of this amount, $12,243,610 had a maturity of one year or less. The Bank does not have and does not solicit brokered deposits. The following table sets forth the remaining maturities for time deposits of $100,000 or more at September 30, 1995 and at December 31, 1994: TIME DEPOSITS OF $100,000 OR MORE
SEPTEMBER 30, DECEMBER 31, MATURITY RANGE 1995 1994 - ---------------------------------------------------------------- ------------- ------------ Three months or less............................................ $ 5,459,318 $3,054,111 Three through six months........................................ 2,165,640 1,562,924 Six through twelve months....................................... 4,618,652 3,125,847 Over twelve months.............................................. 1,642,315 200,000 ------------- ------------ Total......................................................... $ 13,885,925 $7,942,882 ------------- ------------ ------------- ------------
RETURN ON EQUITY AND ASSETS The following are various ratios for the Company for the nine months ended September 30, 1995 and the year ended December 31, 1994: RETURN ON EQUITY AND ASSETS
FOR THE NINE MONTHS ENDED FOR THE YEAR SEPTEMBER 30, ENDED DECEMBER 1995 31, 1994 ----------------- --------------- Return on average assets........................................ 0.9% 0.8% Return on average equity........................................ 9.6% 7.4% Average equity to average assets................................ 8.8% 10.5%
LIQUIDITY The Bank's investment securities portfolio, including federal funds sold, and its cash and due from bank deposit balances serve as the primary sources of liquidity. At September 30, 1995, 12.8% of the Bank's interest-bearing liabilities were in the form of time deposits of $100,000 and over. Substantially all of such large deposits were obtained from the Bank's market area, and none were obtained through brokers. Management believes these deposits to be a stable source of funds. However, if a large number of these time deposits matured at approximately the same time and were not renewed, the Bank's liquidity could be adversely affected. Currently, the maturities of the Bank's large time deposits are spread throughout the year, with 40% maturing in the fourth quarter of 1995, 16% maturing in the first quarter of 1996, 33% maturing in the second and third quarter of 1996, and the remaining 11% maturing thereafter. The Bank monitors those maturities in an effort to minimize any adverse effect on liquidity. The Company raised $1.3 million during 1995, $2.3 million during 1994, $852,000 during 1993, and $779,000 during 1992 through the sale, in registered offerings, private offerings and incentive stock option exercises, of the Company's Common Stock. Management anticipates that future registered and private offerings of the Company's Common Stock may be used to raise additional capital, in connection with acquisitions or if the regulatory capital requirements with which the Bank must comply necessitate the injection of additional capital by the Company into the Bank. Failure to raise such additional capital could adversely impact the growth of the Bank or result in its failure to comply with applicable regulatory capital 33 requirements, which could necessitate a reduction in the volume of assets and deposits of the Bank. Such reductions could adversely affect the Bank's earnings and liquidity. See "Regulation and Supervision -- Capital Adequacy Guidelines". In the longer term, the liquidity of the Company and its ability to meet its cash obligations will depend substantially on its receipt of dividends from the Bank, which are limited by banking statutes and regulations. See "Regulation and Supervision". CAPITAL RESOURCES The Company's shareholders' equity at September 30, 1995 was $10.0 million, compared with $8.1 million at December 31, 1994. The growth in equity has been the result of the sale of Common Stock by the Company and the retention of earnings. The Company had consolidated net income of $648,413 for the nine months ended September 30, 1995. There can be no assurance that the Company can continue to operate profitably in the future and failure to operate profitably would have a material adverse effect on the Company. The Bank is expected to meet a minimum risk-based capital to risk-weighted assets ratio of 8%, of which at least one-half (or 4%) must be in the form of Tier 1 (core) capital. The remaining one-half (or 4%) may be either in the form of Tier 1 (core) or Tier 2 (supplementary) capital. The amount of loan loss allowance that may be included in capital is limited to 1.25% of risk-weighted assets. The ratio of Tier 1 (core) and the combined amount of Tier 1 (core) and Tier 2 (supplementary) capital to risk-weighted assets for the Bank were 10.17% and 11.14%, respectively, at September 30, 1995, and 10.13% and 11.17%, respectively, at December 31, 1994. The Bank is currently, and expects to continue to be, in compliance with these guidelines. See "Regulation and Supervision -- Capital Adequacy Guidelines". While the Company believes it has sufficient financing for its current working capital needs, the Company is considering acquiring banks in addition to the Midlothian Bank, the branch acquired in 1995 and the four banks acquired in 1993 and 1994. There can be no assurance that the Company's present capital and financing will be sufficient to finance future operations thereafter. If the Company sells additional shares of Common Stock to raise funds, the terms and conditions of the issuances and any dilutive effect may have an adverse impact on the existing shareholders. If additional financing becomes necessary, there can be no assurance that such financing can be obtained on satisfactory terms. In this event, the Company could be required to restrict its operations. See "Investment Considerations -- Additional Financing". The Board of Governors of the Federal Reserve System ("FRB") has announced a policy sometimes known as the "source of strength doctrine" that requires a bank holding company to serve as a source of financial and managerial strength to its subsidiary banks. The FRB has interpreted this requirement to require that a bank holding company, such as the Company, stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity. The FRB has stated that it would generally view a failure to assist a troubled or failing subsidiary bank in these circumstances as an unsound or unsafe banking practice or a violation of Regulation Y or both, justifying a cease and desist order or other enforcement action, particularly if appropriate resources are available to the bank holding company on a reasonable basis. The requirement that a bank holding company, such as the Company, make its assets and resources available to a failing subsidiary bank could have an adverse effect upon the Company and its shareholders. The following table sets forth an analysis of the Bank's capital ratios: 34 RISK-BASED CAPITAL RATIOS
SEPTEMBER 30, DECEMBER 31, MINIMUM WELL- ------------- ------------------------------------------- CAPITAL CAPITALIZED 1995 1994 1993 1992 RATIOS RATIOS ------------- ------------- ------------- ------------- ----------- ----------- Tier I risk-based capital... $ 7,596,000 $ 6,790,000 $ 3,821,000 $ 2,978,000 Tier II risk-based capital.. 725,000 698,000 401,000 258,000 Total capital............... 8,321,000 7,488,000 4,222,000 3,236,000 Risk-weighted assets........ 74,692,000 67,011,000 33,594,000 20,622,000 Capital ratios (1): Tier I risk-based capital.................. 10.17% 10.13% 11.37% 14.44% 4.00% 6.00% Tier II risk-based capital.................. 11.14 11.17 12.57 15.69 8.00 10.00 Leverage ratio............ 6.41 5.56 9.96 11.92 4.00 5.00 Pro Forma Capital Ratios (2): Tier I risk-based capital.................. 12.64% Total risk-based capital.................. 13.59% Leverage ratio............ 7.46%
- ------------------------ (1) As a national bank, the Bank is subject to certain minimum risk-based capital standards established by the OCC. (2) The pro forma information assumes the sale of the Common Stock in the Offering hereby and the consummation of the other transactions discussed in this prospectus, as if all such transactions had occurred on September 30, 1995. ACCOUNTING MATTERS In May 1993, the Financial Accounting Standards Board issued SFAS No. 114 "Accounting by Creditors of Impairment of a Loan" as amended by SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures". Together, these standards require that when a loan is impaired, a creditor shall measure impairment based on the present value of expected future cash flows discounted at the loan's effective interest rate, the fair value of the collateral if the loan is collateral dependent or the loan's observable market price. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The new standards also require certain disclosures regarding impaired loans. The Company adopted these standards effective January 1, 1995. The adoption of these accounting standards did not have a material effect on the Company's consolidated financial position or results of operations since the Company's recognition and measurement policies regarding nonperforming loans are materially consistent with the accounting standards. In March 1995, the FASB issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". This Statement requires that long-lived assets and certain identifiable intangibles be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. This Statement is effective for fiscal years beginning after December 15, 1995. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This Statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of 35 accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Entities electing to continue to use the method of accounting specified in Opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value method of accounting defined in this Statement had been applied. This Statement is effective for fiscal years beginning after December 15, 1995. In November 1995, the FASB issued a Financial Accounting Series Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities". The FASB concluded that concurrent with the initial adoption of this implementation guidance, but no later than December 31, 1995, an enterprise may reassess the appropriateness of the classification of all securities held at that time and account for any resulting reclassifications at fair value and such reclassifications should be disclosed in accordance with the provisions of Statement 115. Management believes that the adoption of these pronouncements will not have a material impact on the financial statements of the Company. IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The financial statements and related financial data concerning the Company presented in this prospectus have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Company is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors which are beyond the control of the Bank, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the United States government and federal agencies, particularly the FRB. The FRB implements national monetary policy such as seeking to curb inflation and combat recession by its open market operations in United States government securities, control of the discount rate applicable to borrowing by banks and establishment of reserve requirements against bank deposits. The actions of the FRB in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on the Bank and its results of operations are not predictable. See "Investment Considerations -- General Economic Conditions and Monetary Policy". 36 BUSINESS THE COMPANY Surety Finance Company, the predecessor to the Company, commenced business in 1985 as a sole proprietorship owned by C. Jack Bean and Lorene Sims Bean. On December 30, 1989 the Company acquired approximately 98% of the common stock of the Bank and subsequently increased its ownership to in excess of 99%. Prior to acquisition of the Bank, the Company operated as a casualty insurance premium finance company licensed by the State of Texas. Upon its acquisition by the Company, the Bank began operating as an insurance premium finance company, and the Company ceased writing new IPF business to allow the Bank to succeed to the existing business of the Company at that time. The Company is a registered bank holding company under the Bank Holding Company Act. The Company conducts all its operations through the Bank. The Company's principal executive offices are located at 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054, and its telephone number is (817) 498-8154. At September 30, 1995 the Company had total assets of $119.6 million, total net loans of $67.9 million, total deposits of $108.2 million, and total shareholders' equity of $10.0 million. ACQUISITIONS In the past five years, the Company has increased its asset size and geographically diversified its business through a number of acquisitions. On March 22, 1993, the Company acquired First State Bank, Wells, Texas, for $1.1 million. On March 23, 1993, the Company acquired Bank of the East, Chester, Texas, for $645,676. On June 1, 1994, the Company acquired The Farmers Guaranty State Bank of Kennard for $1.2 million. The Company financed each of these three acquisitions with internally generated funds. On December 9, 1994, the Company acquired First National Bank, Whitesboro, Texas, for $6 million. The Company financed the acquisition in part through a private placement of 667,400 shares of its common stock, pursuant to which the Company raised approximately $2.2 million, and in part through a $1.75 million loan from a financial institution. As of September 30, 1995, the principal amount of the loan outstanding had been reduced to $375,000. On September 28, 1995, the Company acquired a branch located in Waxahachie, Texas (the "Waxahachie branch") from Bank One, Texas, National Association, by purchasing certain assets and assuming certain liabilities. The Company financed the acquisition with internally-generated funds. At the closing, the Company assumed deposits and other liabilities totaling approximately $16.6 million. In addition, the Company acquired certain small business and consumer loans totaling approximately $875,000, certain real property, furniture and equipment related to the Waxahachie branch totaling approximately $271,000, and cash and other assets totaling approximately $15.5 million. After paying a deposit premium totaling approximately $331,000, the Company received approximately $15.4 million in cash from Bank One as consideration for the net deposit liabilities assumed. The Waxahachie branch has been incorporated into the Bank's existing branch network. THE BANK The Bank was chartered as a national banking association in 1963. The Bank's principal offices are located at 600 South First Street, Lufkin, Texas 75901, and its telephone number is (409) 632-5541. The Bank also operates six branches in Hurst, Chester, Wells, Kennard, Waxahachie and Whitesboro, Texas. Following the completion of this Offering and the acquisition of the Midlothian Bank, the Bank's principal offices will be located in Hurst, Texas. The services offered by the Bank and its branches are generally those offered by commercial banks of comparable size in their respective areas, except that a significant portion of the Bank's loan portfolio represents IPF loans. At September 30, 1995 approximately 23%, 43% and 34% of the Bank's total loan portfolio represented commercial loans, consumer banking loans and IPF loans, respectively. 37 INSURANCE PREMIUM FINANCING IPF involves lending money to purchasers of property and casualty insurance (the "insureds") for the payment of their annual insurance premiums. This is an established type of lending, which has typically been provided by special purpose subsidiaries of major insurance companies and by finance companies. IPF ("premium financing") is generally considered a low risk form of lending for three reasons: - Approximately 25% of the annual premium must be paid by the insured at the time the insurance is purchased, so the amount of the loan represents only approximately 75% of the annual insurance premium. - At any date before the end of the policy term, a portion of the premium is not yet earned because it applies to the period from that date to the end of the policy term. This unearned premium is refunded if the policy is canceled before the end of the policy term. The amount of the premium financed is generally payable over the first nine months of the policy's term, so the unearned premium exceeds the outstanding balance of the loan and will repay the loan in full if the policy is canceled before the end of the policy term. - Even though the insured is responsible for repayment of the premium finance loan, if the insured does not make the loan payments on time, the lender has the right to cancel the policy (after notice to the insured) and to receive the entire amount of the unearned premium from the insurance carrier. The unearned premium is usually more than enough to repay the entire balance of the loan, including accrued interest. The Company has engaged in premium financing since 1986, and the business has grown in terms of volume and outstanding loan balances since that time. The following table shows the outstanding balance of premium finance loans at the end of each of the following periods: INSURANCE PREMIUM FINANCE LOANS OUTSTANDING
GROSS LOANS YEAR OUTSTANDING - --------------------------------------------------------------------- ------------- 1989................................................................. $ 4,682,321 1990................................................................. 7,061,880 1991................................................................. 8,265,490 1992................................................................. 7,267,889 1993................................................................. 14,518,680 1994................................................................. 20,931,642 September 30, 1995................................................... 24,283,325
The typical premium finance loan has a nine month life. Because of the need to bill policy holders and to promptly cancel policies when loan payments are not received in a timely fashion, this niche lending product requires highly sophisticated data processing systems. Over the past several years, the Company has developed a customized computer system, and has established a variety of policies and procedures that allow it to handle, on an integrated basis, all of the administrative aspects of this business. The Company's computer system handles the preparation of loan documents, the billing of borrowers, the preparation of notices, the calculation and billing of late charges, the notification of policy cancellations, and the preparation of premium rebate requests to insurance companies when a policy is canceled. The premium finance division, which is headed by G.M. Heinzelmann, III, is staffed by ten people in the Bank's offices in Hurst, Texas and by two people in Atlanta, Georgia. Three of the employees of the premium finance division devote all of their time to developing and maintaining the Company's relationships with both insurance companies and insurance brokers. At the present time the Company has active relationships with approximately 400 insurance companies and approximately 3,000 insurance agents. These parties refer insurance purchasers who request financing to the Company, although in most cases the relationships are not exclusive. 38 The vast majority of insurance premiums that are financed by the Company relate to commercial property and casualty policies. Since the premiums on these policies can be quite high, many businesses prefer to pay the premiums over the course of the policy life rather than to pay the entire premium at the time the policy is purchased. Since the Company relies on a rebate of the unearned premium as collateral to pay off defaulted insurance premium loans, the Company evaluates the financial strength of the insurance company as well as the insured. In order to avoid excessive concentrations, the Company limits the dollar amount of premium financing for policies written by any single insurance company. The Company's current policy limits the aggregate loans related to any single insurance company or any insurance syndicate to a maximum of 35% of the Bank's capital. The 35% limit applies only to insurance companies rated "A" or better by A. M. Best, and to certain unrated insurance organizations which the Company's management has determined to be financially strong. Lower percentage limits apply to insurance companies which have ratings of less than "A" from A. M. Best or are not rated by A. M. Best. For example, the aggregate premium loans related to any insurance entity that is not rated by A.M. Best and is not admitted in Texas may not exceed 10% of the Bank's capital unless the Bank's board of directors authorizes a higher limit based on a review of the insurer, principally concerning its financial strength. A. M. Best is the most widely recognized rater of insurance companies in the United States. A. M. Best only rates companies that have been in business for five years, and these companies are rated using the following system: A++, A+......................................... Superior A, A-........................................... Excellent B++, B+......................................... Very Good B, B-........................................... Adequate C++,C+.......................................... Fair C, C-........................................... Marginal
In addition to these six ratings, A. M. Best has a variety of ratings for companies for which the normal six ratings are not applicable. These additional ratings simply indicate the reason no rating is assigned and are not necessarily qualitative assessments. Set forth below is a table showing a breakdown of the Company's premium financing loans outstanding as of September 30, 1995 by the type and where applicable the rating of the entity providing the insurance. BREAKDOWN BY TYPE OF INSURING ENTITY Insurance companies rated "A++, A+, A or A-" by A. M. Best......... 54.6% Insurance companies rated "B++, B+, B or B-" by A. M. Best......... 8.0% Texas Workers Compensation Insurance Fund.......................... 12.2% Insurance syndicates operating through established insurance exchanges......................................................... 7.3% Non-rated insurance companies admitted in Texas.................... 14.3% Non-rated insurance companies not admitted in Texas................ 3.6% ----- Total.......................................................... 100.0% ----- -----
The Company believes that the structure of these loans results in limited credit losses. The Company may incur losses in its IPF business for a number of reasons, including fraud, refusal of an insurance company to refund a premium, insurance company insolvency, failure of the Company to properly notify an insurance company of the Company's interest in unearned premiums under applicable law and other reasons. The Company's loss experience on insurance premium finance lending was adversely affected during the second half of 1991 by the failure of a non-rated insurance company. Since 1991, the Company has limited its exposure to non-rated companies, as described above, and has experienced no net loan losses on premium financing loans. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Allowance for Loan Losses". 39 MEDICAL RECEIVABLES FACTORING The Company has engaged in medical receivables factoring since 1990. Medical receivables factoring involves the purchase of accounts receivable from doctors, hospitals, and other health care organizations. These accounts receivable are due principally from major insurance companies and governmental agencies. These receivables are purchased by the Company at a price equal to approximately 50% to 60% of their face amount. When the receivable is paid the Company retains the purchase price it paid for the receivables plus a discount factor and a servicing fee. The remaining balance of the payment is paid to the party from which the receivable was initially purchased. The turnover in the Company's medical receivables portfolio is rapid and is attributable to each factored receivable having an average life of approximately nine weeks. During the nine months ended September 30, 1995, the yield on the funds committed to this activity was 18.1%. The administration of the medical receivables is handled for the Company by Providers Funding Corporation ("PFC"), a company which specializes in the acquisition and processing of medical receivables. PFC has developed specialized computer systems which automate much of the administration of the medical receivables. In addition to a review of the receivables conducted by PFC, the Company has two individuals who conduct secondary review of the receivables to make sure that they meet the Company's criteria. The Company has experienced no losses in its medical receivables factoring business since the Company began this type of lending in 1990. However, the Company could incur losses in its medical receivables factoring business for a number of reasons, including fraud and the failure of the insurance company or the government agency to pay the receivable for any reason. The Company generally has no recourse against the health care provider for payment of a medical receivable which is not otherwise paid, although the Company generally obtains and perfects a security interest in all medical receivables of that health care provider to secure payment of the receivables. Therefore, payments on any other receivable in excess of the balance due the Company regarding that receivable may, under certain circumstances, be applied to an unpaid receivable. Medical receivables factoring, like IPF, is a specialty type of financing which provides high yields and requires specialized expertise and systems. The Company considers the market for this type of financing to be relatively broad, and to extend beyond the local markets served by the Bank's branches. COMMERCIAL AND CONSUMER BANKING The Bank provides general commercial banking services for corporate and other business clients through its main office located in Angelina County, Texas, and through its branches located in Tarrant County, Tyler County, Cherokee County, Houston County, Ellis County and Grayson County, Texas as a part of the Bank's efforts to serve the local communities in which it operates. These loans are generally made to provide working capital, to finance the purchase of equipment, and for the expansion of existing businesses. The Bank's loans are secured by the assets of the businesses, including real estate, inventories, receivables, equipment and cash. Virtually all of these loans are also guaranteed by the owners of the businesses. The commercial loan portfolio also includes a significant amount of agricultural loans to farmers and ranchers. These loans are normally secured by equipment, crops, livestock, real estate and cash. The average yield during the nine months ended September 30, 1995 for the Bank's commercial lending activities was 10.9%. The Bank's commercial loans generally have maturities of twelve months or less. The Bank provides a full range of consumer banking services, including checking accounts, "NOW" and "money market" accounts, savings programs, installment and real estate loans, money transfers and safe deposit facilities. COMPETITION There is significant competition among banks and bank holding companies in Angelina County, Tarrant County, Tyler County, Cherokee County, Houston County, Ellis County, and Grayson County, Texas, and the Company believes that such competition among such banks and bank holding companies, many of which have far greater assets and financial resources than the Company, will continue to increase in the future. The Bank also encounters intense competition in its commercial and consumer banking business from savings and loan associations, credit unions, factors, insurance companies, commercial and captive finance companies, and certain other types of financial institutions located in other major metropolitan areas in the United 40 States, many of which are larger in terms of capital, resources and personnel. The casualty IPF business of the Bank is also very competitive. Large insurance companies offer their own financing plans, and other independent premium finance companies and other financial institutions offer IPF loans. EMPLOYEES As of September 30, 1995 the Company and the Bank collectively had 92 full-time employees and two part-time employees. None of the Company's or the Bank's employees are subject to a collective bargaining agreement, and the Company and the Bank believe that their respective employee relations are good. PROPERTIES The Bank has seven banking facilities. The Bank's main office is currently located in Lufkin, Texas, and the Bank's six branches are located in Hurst, Chester, Wells, Kennard, Waxahachie and Whitesboro, Texas. Upon consummation of the acquisition of Midlothian Bank, which will become the Bank's seventh branch, the Bank plans to move its main office to Hurst, Texas, and the Lufkin office will become a branch facility. The Lufkin facility is a two-story building located at 600 South First Street, Lufkin, Texas 75901. This building and the underlying tract of land are owned by the Bank. The building includes approximately 10,000 square feet of office space. A detached motor bank facility is also located on the land. The Hurst banking facility is located at 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054. The Company and a branch of the Bank occupy approximately 13,000 square feet of leased space in a two-story building under a lease dated February 14, 1994 for a term of five years and ten months beginning March 1, 1994 and ending on December 31, 1999. The Chester facility is located in a two-story building located on U.S. Highway 287 in Chester, Texas. This building, and the underlying tract of land consisting of approximately 15,000 square feet, are owned by the Bank. The building includes approximately 5,600 square feet of office space. The Bank also owns an improved tract of land (containing approximately 3,000 square feet) located adjacent to the Chester facility. The Wells facility is located in a one-story building located on U.S. Highway 69 in Wells, Texas. This building, and the underlying tract of land consisting of approximately 9,000 square feet, are owned by the Bank. The building includes approximately 4,500 square feet of office space. The Bank also owns two unimproved tracts of land (one containing approximately 2.31 acres and the other approximately 1,800 square feet) located adjacent to the Wells facility. The Kennard facility is located in a one-story building located at Broadway and Main Streets, in Kennard, Texas. This building, and the underlying tract of land consisting of approximately 14,000 square feet, are owned by the Bank. The building includes approximately 2,790 square feet of office space. The Bank also owns two storage buildings located on the same tract of land. The Waxahachie facility is located in a two-story building located at 104 Elm Street, Waxahachie, Texas 75165. This building, and the underlying tract of land consisting of approximately 14,100 square feet, are owned by the Bank. The building includes approximately 5,100 square feet of office space. The Whitesboro facility is located in a one-story building located at 2500 Highway 82 East, in Whitesboro, Texas. This building, and the underlying tract of land consisting of approximately 132,000 square feet, are owned by the Bank. The building includes approximately 6,400 square feet of office space. The Company believes the existing facilities are adequate for its present needs. LEGAL PROCEEDINGS The Company is a defendant in two related cases: TENNESSEE EX REL. DOUGLAS SIZEMORE, COMMISSIONER OF COMMERCE AND INSURANCE FOR THE STATE OF TENNESSEE, ET AL. VS. SURETY BANK, N.A., filed in June 1995 in the Federal District Court for the Northern District of Texas, Dallas Division, (the "Anchorage Case"), and UNITED SHORTLINE INC. ASSURANCE SERVICES, N.A. ET AL. VS. MACGREGOR GENERAL INSURANCE COMPANY, LTD., ET AL., now pending in the 141st Judicial District Court of Tarrant County, Texas (the "MacGregor Case"). The 41 claimant in the Anchorage Case is a liquidator (the "Liquidator") appointed by the Tennessee Commissioner of Commerce and Insurance to liquidate Anchorage Fire and Casualty Insurance Company ("Anchorage"). The Liquidator seeks to recover compensatory and punitive damages on various alleged causes of action, including violation of orders issued by a Tennessee court, fraudulent and preferential transfers, common law conversion, fraud, negligence, and bad faith, all of which are based on the same underlying facts and course of conduct. The plaintiff in the MacGregor Case, United Shortline Inc. Assurance Services, N.A. ("United Shortline"), is the holder of a Florida judgment against MacGregor General Insurance Company, Ltd. ("MacGregor") and seeks to recover funds allegedly belonging to MacGregor which were held by the Company. Both cases arise out of the Company's alleged exercise of control over funds held in accounts at the Company under agreements with Anchorage and MacGregor. The exercise of control included the setoff of approximately $570,000, and the interpleader, in the MacGregor Case, of approximately $600,000. The Company asserts that it had a right to exercise control over the funds, in the first instance under contractual agreements between the Company and the respective insurance companies or the Company and the policy holders, and in the second instance in order to protect the Company against the possibility of inconsistent orders regarding the same funds. The Liquidator also seeks to recover funds allegedly transferred from Anchorage/MacGregor accounts at the Bank during approximately a four month period in 1993, which exceed $2.6 million in the aggregate. The Company believes that the claims lack merit and intends to defend the cases vigorously. Although Anchorage Fire & Casualty Insurance Company, in Liquidation, acting through Jeanne Barnes Bryant, Special Deputy Commissioner and Liquidator under the Liquidation Order dated May 13, 1993, is also the Selling Shareholder in this Offering, the sale of shares by the Selling Shareholder will not release or waive any of the Liquidator's asserted claims in these cases. 42 REGULATION AND SUPERVISION GENERAL The Company and the Bank are subject to the generally applicable state and federal laws governing businesses and employers. The Company and the Bank are further extensively regulated by special state and federal laws and regulations applicable only to financial institutions and their parent companies. Virtually all aspects of the Company's and Bank's operations are subject to specific requirements or restrictions and general regulatory oversight, from laws regulating consumer finance transactions, such as the Truth in Lending Act, the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act, to laws regulating collections and confidentiality, such as the Fair Debt Collection Practices Act, the Fair Credit Reporting Act and the Right to Financial Privacy Act. With few exceptions, state and federal banking laws have as their principal objective either the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, rather than the specific protection of shareholders of the Company. To the extent that the following discussion describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation. Any change in applicable laws, regulations or policies of various regulatory authorities may have a material effect on the business, operations and prospects of the Company and the Bank. The Company is unable to predict the nature or the extent of the effects on its business or earnings that fiscal or monetary policies, economic control or new federal or state legislation may have in the future. REGULATION OF THE COMPANY The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended ("BHCA"), and therefore is subject to regulation and supervision by the FRB. The Company is required to file reports with, and to furnish such other information as, the FRB may require pursuant to the BHCA, and to subject itself to examination by the FRB. The FRB has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil monetary penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company. Certain violations may also result in criminal penalties. The OCC is authorized to exercise comparable authority with respect to the Bank. The FRB takes the position that a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe or unsound manner. In addition, it is the FRB's position that, in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company's failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the FRB to be an unsafe and unsound banking practice or a violation of the FRB regulations or both. This doctrine has become known as the "source of strength" doctrine. In addition, statutory changes in the Federal Deposit Insurance Act (the "FDIA") made by the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") now require the holding company parent of an undercapitalized bank to guarantee, up to certain limits, the bank's compliance with a capital restoration plan approved by the bank's primary federal supervisory agency. The BHCA and the Change in Bank Control Act, together with regulations promulgated by the FRB, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or company acquiring "control" of a bank holding company, such as the Company, subject to certain exemptions for certain transactions. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Control is rebuttably presumed to exist if a person acquires 10% or more but less than 25% of any class of voting securities and either the company has registered securities 43 under Section 12 of the Securities Exchange Act of 1934, as amended, or no other person will own a greater percentage of that class of voting securities immediately after the transaction. The regulations provide a procedure for challenge of the rebuttable control presumption. Control is rebuttably presumed not to exist if a company acquires less than 5% of any class of voting securities of a bank or a bank holding company. As a bank holding company, the Company is required to obtain approval prior to merging or consolidating with any other bank holding company, acquiring all or substantially all of the assets of any bank or acquiring ownership or control of shares of a bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of the voting shares of such bank or bank holding company. The Company is also prohibited from acquiring a direct or indirect interest in or control of more than 5% of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities found by the FRB to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. These activities include, among others, operating a mortgage, finance, credit card, or factoring company; performing certain data processing operations; providing investment and financial advice; acting as an insurance agent for certain types of credit-related insurance; leasing personal property on a full-payout, non-operating basis; and providing certain stock brokerage and investment advisory services. In approving acquisitions or the addition of activities, the FRB considers whether the acquisition or the additional activities can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. In considering any application for approval of an acquisition or merger, the FRB is also required to consider the financial and managerial resources of the companies and the banks concerned, as well as the applicant's record of compliance with the Community Reinvestment Act (the "CRA"). The BHCA generally imposes certain limitations on transactions by and between banks that are members of the Federal Reserve System and other banks and non-bank companies in the same holding company structure, including limitations on extensions of credit (including guarantees of loans) by the Bank to affiliates, investments in the stock or other securities of the Company by the Bank, and the nature and amount of collateral that the Bank may accept from any affiliate to secure loans extended to the affiliate. The Company, as an affiliate of the Bank, is also subject to these restrictions. Under the BHCA and the FRB's regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or furnishing of services. As of September 30, 1995, the Riegle-Neal Interstate Banking and Branching Act of 1994 (the "Interstate Banking Act") allows adequately capitalized and managed bank holding companies to acquire banks in any state, regardless of whether the acquisition would be prohibited by applicable state law. An out-of-state bank holding company seeking to acquire ownership or control of a Texas state bank, a national bank located in Texas or any bank holding company owning or controlling a state bank or a national bank located in Texas must obtain the prior approval of both the FRB and the Banking Commissioner of Texas. In addition, under the Interstate Banking Act, a bank holding company and its insured depository institution affiliates may not complete an acquisition which would cause it to control more than 10% of total deposits in insured depository institutions nationwide or to control 30% or more of total deposits in insured depository institutions in the home state of the target bank. However, state deposit concentration caps adopted by various states, such as the State of Texas, which limit control of in-state insured deposits to a greater extent than the Interstate Banking Act will be given effect. The State of Texas has adopted a deposit concentration cap of 25% of in-state insured deposits; therefore, the Texas state deposit concentration cap will lower the otherwise applicable 30% federal deposit concentration cap. Additionally, state provisions regarding the minimum years the target has been in existence will be honored; provided, however, acquisitions may be 44 approved when the target bank has been in existence for at least five years, notwithstanding state provisions to the contrary. The minimum age provision adopted by the State of Texas is five years and therefore this provision will not be preempted by the federal provision. The Interstate Banking Act will also allow out-of-state branches through interstate mergers commencing June 1, 1997, provided that each bank involved in the merger is adequately capitalized and managed. States are permitted, however, to pass legislation either providing for earlier approval of mergers with out- of-state banks or "opting-out" of interstate mergers entirely, provided such legislation applies equally to all out-of-state banks. Texas has passed legislation to "opt out" of interstate mergers entirely until 1999. The Interstate Banking Act also provides for interstate mergers involving an out-of-state bank's acquisition of a branch of an insured bank without the acquisition of the entire bank, if permitted under the laws of the state where the branch is located. The deposit concentration caps and the minimum age provisions applicable to interstate bank acquisitions also apply to interstate bank mergers. The Interstate Banking Act also provides for de novo branches in a state if that state expressly elects to permit de novo branching on a non-discriminatory basis. A "de novo branch" is defined as a branch office of a national or state bank that is originally established as a branch and does not become a branch as a result of an acquisition, conversion, merger or consolidation. De novo interstate branching is subject to the same conditions applicable to interstate mergers under the Interstate Banking Act, other than deposit concentration limits. REGULATION OF THE BANK The Bank is a national banking association and therefore is subject to regulation, supervision, and examination by the OCC. The Bank is also a member of the FRB and the FDIC. Requirements and restrictions under the laws of the United States include the requirement that reserves be maintained against deposits, restrictions on the nature and the amount of loans which can be made, restrictions on the business activities in which a bank may engage, restrictions on the payment of dividends to shareholders, and minimum capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources". As discussed above, the OCC has enforcement authority over the Bank that is similar to that of the FRB with respect to the Company. In addition, upon making certain determinations with respect to the condition of any insured national bank, such as the Bank, the FDIC may begin to terminate a bank's federal deposit insurance. There are certain statutory limitations on the payment of dividends by national banks. Without approval of the OCC, dividends may not be paid in excess of a bank's total net profits for that year, plus its retained profits for the preceding two years, less any required transfers to capital surplus. In addition, a national bank may not pay dividends in excess of total retained profits, including current year's earnings. In some cases, the OCC may find a dividend payment that meets these statutory requirements to be an unsafe or unsound practice. Federal and Texas state laws generally limit the amount of interest and fees which lenders, including the Bank, may charge regarding loans. The applicable law, and the applicable limits, may vary depending upon, among other things, the identity, nature and location of the lender, and the type of loan or collateral. In Texas, the maximum interest rate applicable to most loans changes with changes in the average auction rate for United States Treasury Bills, but does not decline below 18% or rise above 24% (except for certain loans in excess of $250,000 for which the maximum annual rate may not rise above 28%). However, the interest which may be charged on an IPF loan is regulated by the Texas State Board of Insurance. See "Business -- Insurance Premium Financing". National banks domiciled in Texas are permitted to engage in unlimited branch banking, subject to the prior approval of the OCC to establish any branch. Banks are affected by the credit policies of other monetary authorities, including the FRB, which affect the national supply of bank credit. Such policies influence overall growth of bank loans, investments, and 45 deposits and may also affect interest rates charged on loans and paid on deposits. The monetary policies of the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. FDICIA requires the OCC to take "prompt corrective action" with respect to any national bank which does not meet specified minimum capital requirements. The applicable regulations establish five capital levels, ranging from "well-capitalized" to "critically undercapitalized," and require or permit the OCC to take supervisory action regarding any national bank that is not at least "adequately capitalized". Under these regulations, which became effective December 19, 1992, a national bank is considered well capitalized if it has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and it is not subject to an order, written agreement, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A national bank is considered "adequately capitalized" if it has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio and leverage capital ratio of 4.0% or greater (or a leverage ratio of 3.0% or greater if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines), and the institution does not meet the definition of an undercapitalized institution. A national bank is considered "undercapitalized" if it has a total risk-based capital ratio that is less than 8%, a Tier I risk-based capital ratio that is less than 4%, or a leverage ratio that is less than 4.0% (or a leverage ratio that is less than 3.0% if the institution is rated composite 1 in its most recent report of examination, subject to appropriate federal banking agency guidelines). A "significantly undercapitalized" institution is one which has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%. A "critically undercapitalized" institution is one which has a ratio of tangible equity to total assets that is equal to or less than 2.0%. With certain exceptions, national banks will be prohibited from making capital distributions or paying management fees if the payment of such distributions or fees will cause them to become undercapitalized. Furthermore, undercapitalized national banks will be required to file capital restoration plans with the OCC. Undercapitalized national banks also will be subject to restrictions on growth, acquisitions, branching and engaging in new lines of business unless they have an approved capital plan that permits otherwise. The OCC also may, among other things, require an undercapitalized national bank to issue shares or obligations, which could be voting stock, to recapitalize the institution or, under certain circumstances, to divest itself of any subsidiary. The OCC is authorized to take various enforcement actions against any significantly undercapitalized national bank and any undercapitalized national bank that fails to submit an acceptable capital restoration plan or fails to implement a plan accepted by the OCC. The powers include, among other things, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company which controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring a new election of directors, and requiring the dismissal of directors and officers. Significantly and critically undercapitalized national banks may be subject to more extensive control and supervision. The OCC may prohibit any such institutions from, among other things, entering into any material transaction not in the ordinary course of business, amending their charters or bylaws, or engaging in certain transactions with affiliates. In addition, critically undercapitalized institutions generally will be prohibited from making payments of principal or interest on outstanding subordinated debt. Within 90 days of a national bank's becoming critically undercapitalized, the OCC must appoint a receiver or conservator unless certain findings are made with respect to the prospect for the institution's continued viability. Based on its capital ratios as of September 30, 1995, the Bank was classified as "well capitalized" under the applicable regulations. The Company does not believe that FDICIA's prompt corrective action regulations will have any material effect on the activities or operations of the Bank. However, if the Bank were to become undercapitalized and these restrictions were to be imposed, the restrictions, either individually or in the aggregate, could have a significant adverse effect on the operations of the Bank, and, as a result, the ability of the Company to pay dividends on the Common Stock or service any cash flow needs. 46 CURRENT REGULATORY ISSUES In late 1993, the Secretary of the Treasury of the United States proposed a wide-ranging restructuring of the bank regulatory system in the United States, including the merger or other combination of the FRB, the OCC and the FDIC, among others. As of the date of this prospectus, the legislation to effect such a restructuring has not yet been introduced in Congress and there can be no certainty as to the effect, if any, that such legislation would have on the regulation of the Company or the Bank. FDICIA requires the FDIC to establish a schedule to increase (over a period of not more than 15 years) the reserve ratio of the BIF, which insures the deposits of the Bank to a maximum of $100,000 per depositor, to 1.25% of insured deposits, and impose higher deposit insurance premiums of BIF members, if necessary, to achieve that ratio. Generally, banks are assessed insurance premiums according to how much risk they are deemed to present to BIF. Such premiums ranged from 0.23% of insured deposits to 0.31% of insured deposits in 1994 and 1995. Banks with higher levels of capital and which have earned a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern. During 1994 and 1995 (until a new rate structure) the Bank was assessed at the rate of $0.23 per $100 of deposits. On August 8, 1995, the FDIC Board of Directors voted to significantly reduce the deposit insurance premium paid by most banks but to keep existing assessment rates intact for savings associations. Under the new rate structure, which went into effect in October, 1995, the highest rated institutions insured by BIF pay $0.04 per $100 of domestic deposits. Based on the risk category applicable to the Bank, the premium paid by the Bank is presently $.04 per $100 of deposit. On November 14, 1995, the FDIC announced that commencing in 1996 it would eliminate insurance deposit premiums for all but the banks warranting the highest level of supervisory concern. FDICIA contains numerous other provisions, including new accounting, auditing and reporting requirements, the termination (beginning in 1995) of the "too big to fail" doctrine except in special cases, new regulatory standards in areas such as asset quality, earnings and compensation and revised regulatory standards for the powers of state chartered banks, real estate lending, bank closures and capital adequacy. Under CRA, a bank's applicable regulatory authority (which is the OCC for the Bank) is required to assess the record of each financial institution which it regulates to determine if the institution meets the credit needs of its entire community, including low- and moderate-income neighborhoods served by the institution, and to take that record into account in its evaluation of any application made by such institution for, among other things, approval of the acquisition or establishment of a branch or other deposit facility, an office relocation, a merger, or the acquisition of shares of capital stock of another financial institution. The regulatory authority prepares a written evaluation of an institution's record of meeting the credit needs of its entire community and assigns a rating. The Bank has undertaken significant actions to comply with the CRA. The Bank has received a "satisfactory" commendation in its most recent review by federal regulators with respect to its compliance with the CRA. Both the United States Congress and the banking regulatory authorities have proposed substantial changes to the CRA and fair lending laws, rules and regulations, and there can be no certainty as to the effect, if any, that any such changes would have on the Bank. CAPITAL ADEQUACY GUIDELINES Capital management consists of providing equity to support both current and future operations. The Company is subject to capital adequacy requirements issued by the FRB, and the Bank is subject to similar requirements imposed by the OCC. Specifically, the various federal bank regulatory agencies, including the FRB and the OCC, 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 profile 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. On September 14, 1993, the FRB together with the FDIC and 47 the OCC jointly proposed new rules implementing an interest rate risk ("IRR") component to the risk-based standards as required by FDICIA. The effect the proposed IRR rule will have on the Bank's risk-based capital requirements, if any, cannot be determined until the rule is finalized. The minimum standard for the ratio of capital to risk-weighted assets (including certain off-balance sheet obligations, such as standby letters of credit) is 8.0%. At least half of the risk-based capital must consist of common equity, retained earnings, and qualifying perpetual preferred stock, less deductions for goodwill and various other intangibles ("Tier I capital"). The remainder may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock, and a limited amount of the general valuation allowance for loan losses ("Tier II capital"). The sum of Tier I capital and Tier II capital is "total risk-based capital." The FRB (for the Company) and the OCC (for the Bank) have also adopted guidelines which supplement the risk-based capital guidelines with a minimum leverage ratio of Tier I capital to average total consolidated assets ("leverage ratio") of 3% for institutions with well diversified risk (including no undue interest rate exposure; excellent asset quality; high liquidity; good earnings); 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. The FRB continues to consider a "tangible Tier I leverage ratio" in evaluating proposals for expanding activities by bank holding companies. The tangible Tier I leverage ratio is the ratio of a banking organization's Tier I capital (less deductions for intangibles otherwise includable in Tier I capital) to total tangible assets. As of September 30, 1995, the Company's Tier I risk-based capital ratio was 10.17%, its total risk-based capital ratio was 11.14% and its leverage ratio was 6.4%, which equaled or exceeded the federal minimum regulatory requirements. Bank regulators may raise capital requirements applicable to banking organizations beyond current levels. However, the Company is unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules, and therefore cannot predict what effect such higher requirements may have on the Company and the Bank. For an analysis of the Company's and the Bank's capital, see "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Capital Resources" and "Recent Unaudited Selected Consolidated Financial Data." 48 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The Company elected eight directors at the annual meeting of the shareholders in April 1995. All directors are elected annually and hold office until the next annual meeting of shareholders, expected to be held in May 1996, or until their respective successors have been duly elected and have qualified. The following table provides information about the directors and executive officers of the Company.
NAME AND AGE; YEARS SERVED AS DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS; OTHER DIRECTORSHIPS - --------------------------- ----------------------------------------------------------------------------------- C. Jack Bean C. Jack Bean has been Chairman of the Board and a director of the Company since Age 67 March 1987, and served as President of the Company from March 1987 to July 1992. Director Since 1987 Mr. Bean was the owner and founder of Surety Finance Company, the predecessor company to the Company's business, from 1985 until March 1987. He has served as Chairman of the Board and a director of the Bank since December 1989. G. M. Heinzelmann, III G. M. Heinzelmann, III has been President of the Company since July 1992 and a Age 33 director of the Company since July 1993. He previously served as Vice President of Director Since 1993 the Company from May 1987 to July 1992. Mr. Heinzelmann has served as Senior Vice President and a director of the Bank since December 1989 and as Manager of the Insurance Premium Finance Division of the Company, and subsequently the Bank, since May 1987. He has also served as Secretary, Treasurer and a director of Brian Capital, Inc., a non-operating publicly held corporation, since November 1988. Bobby W. Hackler Bobby W. Hackler has been Vice President and Secretary of the Company since January Age 49 1992. He served as Chief Financial Officer of the Company from January 1992 to Director Since 1994 October 1995. He has served as President of the Bank since February 1994, as Chief Executive Officer of the Bank since July 1992, and as a director of the Bank since December 1990. Mr. Hackler previously served as the Bank's Chief Operating Officer from January 1992 to July 1992, as its Senior Vice President and Controller from March 1991 to December 1991, and as its Vice President and Controller from January 1990 to March 1991. William B. Byrd William B. Byrd has served as a director of the Company since April 1993. He has Age 63 been involved in personal investment activities, real estate brokerage and Director Since 1993 management, and ranching for the past five years. Mr. Byrd has served as a director of the Bank since January 1994. Joseph S. Hardin Joseph S. Hardin has served as a director of the Company since April 1989. He has Age 79 been involved in personal investment activities for the past five years. Mr. Director Since 1989 Hardin has served as a director of the Bank since May 1994. Michael L. Milam Michael L. Milam has served as a director of the Company since May 1994. He has Age 43 been president of Dallas Fire Insurance Company, a licensed Texas stock insurance Director Since 1994 company, since December 1988. Mr. Milam has served as a director of the Bank since May 1994. Garrett Morris Garrett Morris has served as a director of the Company since May 1994. He has been Age 69 a member of the law firm of Morris and Schiffer since 1989. Mr. Morris has served Director Since 1994 as a director of the Bank since May 1994. Cullen W. Turner Cullen W. Turner has served as a director of the Company since March 1987. He has Age 54 been involved in personal investment activities for the past five years. Mr. Director Since 1987 Turner has served as a director of the Bank since December 1993.
49
NAME AND AGE; YEARS SERVED AS DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS; OTHER DIRECTORSHIPS - --------------------------- ----------------------------------------------------------------------------------- B. J. Curley B.J. Curley has served as the Company's Chief Financial Officer and Vice President Age 31 since October 1995. Since December 1994 he has served as Chief Financial Officer of the Bank and since May 1993 has served as the Bank's Controller. Prior to May, 1993, he served as controller for Environmental Engineering & Geotechnics.
G. M. Heinzelmann, III, President and a director of the Company, is the son-in-law of C. Jack Bean, Chairman of the Board of the Company. Otherwise, there is no family relationship between any of the directors and any executive officer of the Company. EXECUTIVE COMPENSATION AND OTHER INFORMATION SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table provides certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chairman of the Board and Chief Executive Officer and each of the two other most highly compensated executive officers of the Company (determined as of the end of the last fiscal year) (hereafter referred to as the "named executive officers") for the fiscal years ended December 31, 1995, 1994 and 1993: SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION
NAME AND OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION (2) COMPENSATION (3) - --------------------------------------------------- --------- ---------- --------- ---------------- ----------------- C. Jack Bean 1995 $ 102,613 $ 17,000 -- $ 4,000 Chairman of the Board and Chief 1994 $ 107,653 $ 14,500 -- $ 3,740 Executive Officer of the Company; 1993 $ 87,740 $ 8,700 -- $ 2,126 Chairman of the Board of the Bank G. M. Heinzelmann, III 1995 $ 73,601 $ 12,000 -- $ 3,150 President of the Company; Senior 1994 $ 71,872 $ 10,100 -- $ 2,600 Vice President of the Bank 1993 $ 60,855 $ 6,050 -- $ 1,477 Bobby W. Hackler 1995 $ 80,869 $ 13,000 -- $ 6,125 Vice President, Secretary and Chief 1994 $ 78,879 $ 11,100 -- $ 2,857 Financial Officer of the Company; 1993 $ 66,793 $ 6,650 -- $ 1,623 President and Chief Executive Officer of the Bank
- ------------------------ (1) Includes salary and directors' fees paid by the Company, before any salary reduction for contributions in 1994 and 1993 to the Company's Savings Plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). (2) Excludes perquisites and other personal benefits, securities, or property which, in the aggregate, do not exceed the lesser of $50,000 or ten percent (10%) of the annual salary and bonus, if any, for each named executive officer. (3) The total amounts shown in this column consist of matching contributions under the Company's Savings Plan under Section 401(k) of the Code, which was adopted by the Company in 1993 and includes the compensation associated with the use of a company vehicle. The amounts shown in this column for 1995 are estimates. 1995 STOCK OPTION PLAN. At the annual meeting in April, 1995, the shareholders of the Company adopted the 1995 Incentive Stock Option Plan of Surety Capital Corporation (the "1995 Stock Plan"). The purpose of the 1995 Stock Plan is to permit officers and key employees of the Company and its subsidiaries (whether now owned or hereafter acquired) to acquire a proprietary interest in the Company, thereby 50 providing them with an additional incentive for further promoting the success of the Company's business operations and encouraging them to remain as officers and key employees of the Company and its subsidiaries. All executive officers and other key personnel of the Company who are active, full-time employees of the Company or its subsidiaries, and who otherwise qualify under the 1995 Stock Plan, are eligible to participate in the 1995 Stock Plan. However, members of the Board who are not employed by the Company or any of its subsidiaries on a full time basis are not eligible to participate in the 1995 Stock Plan. The 1995 Stock Plan is administered by the Stock Option Committee (the "Committee"), which is comprised of five members of the Board, none of whom are eligible to receive options under the 1995 Stock Plan while serving as a member of the Committee and who have been ineligible to receive options under the 1995 Stock Plan or any other stock option or stock appreciation rights plan of the Company (including the 1988 Incentive Stock Option Plan of the Company) for a period of at least one year prior to the date of their appointment as a member of the Committee. The Committee is empowered (i) to construe and interpret the 1995 Stock Plan and all options granted thereunder, (ii) to recommend the individuals to whom and the time or times at which options will be granted, the number of shares to be subject to each option and the option exercise price, and (iii) to make all other determinations necessary or advisable for the administration of the 1995 Stock Plan. Subject to provisions for proportionate adjustment occasioned by changes in the Company's capital structure, a total of 100,000 shares of Common Stock of the Company have been set aside under the 1995 Stock Plan for use upon exercise of options granted thereunder. As of January 30, 1996 options have been granted under the 1995 Stock Plan covering 15,000 shares of the Company's Common Stock. Options under the 1995 Stock Plan must be granted on or before February 20, 2005, and the options by their terms may not be exercised after ten years from the date the options are granted. The exercise price for options granted under the 1995 Stock Plan is determined by the Committee, except that in no event may such exercise price be less than the fair market value of the Company's Common Stock on the date of the grant. In the event an option is granted to a person who, at the time the option is granted, owns stock possessing more than ten percent of the total combined voting power of all classes of stock of the Company, the exercise price at the time the option is granted must be at least 110% of the fair market value of the Company's Common Stock. The aggregate fair market value (determined at the time the options are granted) of the Company's Common Stock with respect to which options of a participant are exercisable for the first time during any calendar year under the 1995 Stock Plan, together with any options granted to such participant under any other plan of the Company or its subsidiaries, may not exceed $100,000. The proceeds from the sale of shares of Common Stock pursuant to options granted under the 1995 Stock Plan will constitute general corporate funds of the Company. 51 OPTION GRANTS As of December 31, 1995, the three executive officers named below held options granted under the Company's 1988 Incentive Stock Option Plan (the "1988 Plan") covering 55,214 shares of Common Stock. No additional options may be granted under the 1988 Plan. The following table provides information on incentive stock options granted in fiscal year 1995 to the named executive officers under the 1988 Plan as of December 31, 1995. No options have been granted under the 1995 Stock Plan during 1995. OPTION GRANTS IN FISCAL YEAR 1995 (1)
POTENTIAL REALIZABLE INDIVIDUAL GRANTS VALUE AT ASSUMED ------------------------------ ANNUAL RATES OF NUMBER OF STOCK PRICE SECURITIES PERCENT OF TOTAL APPRECIATION FOR UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION -------------------- NAME GRANTED (2) FISCAL YEAR ($/SH)(3) DATE 5% (4) 10% (4) - ----------------------------------------- ----------- ----------------- ----------- ----------- --------- --------- C. Jack Bean............................. 16,266 41% $ 3.125 1-3-00 $ 14,044 $ 31,033 G. M. Heinzelmann, III................... 11,175 28% $ 3.125 1-3-00 $ 9,648 $ 21,320 Bobby W. Hackler......................... 12,328 31% $ 3.125 1-3-00 $ 10,644 $ 23,520
- ------------------------ (1) This table reflects incentive stock options granted on January 3, 1995 under the Company's 1988 Plan to the named executive officers. These options vested on the date of grant. The options have been granted for a term of five years, subject to earlier termination upon the occurrence of certain events related to termination of employment. See "Management -- 1988 Stock Option Plan" for a discussion of the 1988 Plan. (2) Under the terms of the 1988 Plan, the Committee retains the discretion, subject to the 1988 Plan limits, to modify the terms of outstanding options. (3) Based on 100% of the fair market value of the shares underlying options on the date of grant. (4) The dollar amounts under these columns are the result of calculations of the potential realizable value under the 5% and 10% rates set by the Securities and Exchange Commission. The assumed appreciation rates of 5% and 10% (compounded annually on the $3.125 market value at date of grant) from the date of grant are not intended to forecast possible future appreciation, if any, of the Company's stock price. These amounts show potential realizable value of the options at the end of the five year term. OPTIONS EXERCISES AND HOLDINGS. The following table provides information with respect to the named executive officers concerning the exercise of incentive stock options during the last fiscal year and unexercised incentive stock options held as of December 31, 1995: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF IN-THE-MONEY UNEXERCISED OPTIONS AT OPTIONS AT FY-END ($) FY-END (#) ---------------- ------------- EXERCISABLE/ SHARES ACQUIRED VALUE EXERCISABLE/ UNEXERCISABLE NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE (1) - ------------------------------------------------- --------------- ------------ ------------- ---------------- C. Jack Bean..................................... 16,266 $ 30,498.75 11,900/-0- $ -0-/-0- G. M. Heinzelmann, III........................... 0 $ 0 21,960/-0- $7,217.33/-0- Bobby W. Hackler................................. 0 $ 0 21,354/-0- $4,623.00/-0-
- ------------------------ (1) Market value of underlying securities as of the fiscal year-end ($3.50), minus the exercise or base price. 52 CERTAIN TRANSACTIONS In 1995, the Company entered into an Executive Life Insurance Agreement with Messrs. Hackler and Heinzelmann pursuant to which the Company has purchased a $250,000 insurance policy on their respective lives. The Company will pay the premiums on such policies, which are owned by the insureds, until the insureds reach age 65. If the insured is terminated prior to reaching age 65 under certain circumstances, the Company is obligated to continue to pay the premiums on the policy until the insured reaches age 65 or dies. The annual premiums on each such policy are approximately $2,500. The Company is a party to termination of employment and change in control agreements with certain of its employees. While these agreements were not adopted to deter takeovers, they may have an incidental anti-takeover effect by making it more expensive for a bidder to acquire control of the Company. The Company believes that these agreements are in the best interest of the Company in order to encourage the continued attention and dedication of members of the Company's management to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company. Specifically, the Company has entered into agreements with C. Jack Bean, Chairman of the Board, G. M. Heinzelmann, III, President, Bobby W. Hackler, Senior Vice President, and B.J. Curley, Vice President, providing that, if there is a change in control of the Company and any or all of such employees are terminated as employees of the Company or are materially relieved of their duties, the Company will pay to such employee three times his annual base salary at the time of termination or relief from duties as a lump sum severance payment or the equivalent value in Common Stock of the Company based upon the prevailing market price for the Common Stock at the time of termination or relief from duties. A change in control of the Company for purposes of the agreements is (i) the acquisition of 20% or more of the Company's outstanding voting securities by any person or entity other than a fiduciary of an employee benefit plan of the Company, or (ii) a change in the persons constituting a majority of the Board of Directors over a two year period unless the election of each person who was not a director at the beginning of the two years was approved in advance by directors representing at least two-thirds of the directors then in office who were directors at the beginning of the period. The Company has entered into Executive Deferred Compensation Agreements with Messers. Hackler and Heinzelmann under which each is entitled to receive certain deferred compensation payments from the Company after age 65. If employment is terminated prior to age 65 due to a change in control, disability, death, or other than for cause, each officer will be entitled to a lump sum payment equal to the cash surrender value of a designated universal key man life insurance policy. The Company is not required to reserve or accrue funds to make such payments. From time to time, the Bank makes loans to officers, directors and principal shareholders (and their affiliates) of the Company or the Bank. All loans to such persons are made in the ordinary course of business; are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons; and do not involve more than the normal risk of collectibility or present other unfavorable features. As of the date of this prospectus, there are no loans to officers, directors or principal shareholders outstanding. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the General Corporation Law of the State of Delaware (the "Act") empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity as directors and officers. The Act further provides that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, vote of the shareholders, or otherwise. Section 6.04 of the Company's Bylaws provides that the Company shall indemnify all persons to the full extent allowable by law who, by reason of the fact that they are or were a director of the Company, become a party or are threatened to be made a party to any indemnifiable action, suit or proceeding. The Company shall pay, in advance of the final disposition of any indemnifiable action, suit or proceeding under this bylaw, all reasonable expenses incurred by the director, upon receipt of an undertaking by or on behalf of the director to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the 53 Company under the law. The Company may indemnify persons other than directors, such as officers and employees, as permitted by law. The Company may purchase and maintain insurance on behalf of directors, officers and other persons against any liability asserted against him, whether or not the Company would have the power to indemnify such person against such liability, as permitted by law. SELLING SHAREHOLDER The Selling Shareholder, Anchorage Fire & Casualty Insurance Company, in Liquidation, acting through Jeanne Barnes Bryant, Special Deputy Commissioner and Liquidator under the Liquidation Order dated May 13, 1993, issued by the Chancery Division of the Twentieth Judicial District Court, Davidson County, Tennessee ("Liquidation Order"), is offering an aggregate of 174,939 shares of Common Stock in the Offering, which constitutes all of the shares of Common Stock beneficially owned by the Selling Shareholder. The shares are being sold by the Selling Shareholder pursuant to the Liquidation Order, which authorizes the liquidation of all assets of Anchorage Fire & Casualty Insurance Company. The 174,939 shares were acquired by Anchorage Fire & Casualty Insurance Company in December 1991 under a Regulation S offering of Common Stock of the Company. In December 1995, in order to eliminate the market overhang represented by these shares and to obtain the advantages of a larger public float, among other things, the Company and the Selling Shareholder agreed to include the Selling Shareholder's shares of Common Stock in this Offering. The Selling Shareholder will bear the underwriting discount applicable to the shares sold by it, as well as a pro rata share of the expenses and filing fees associated with this Offering. The Company and the Selling Shareholder will indemnify the Underwriter and each other from certain liabilities, including liabilities under the Securities Act of 1933, as amended. BENEFICIAL STOCK OWNERSHIP BY MANAGEMENT The following table shows beneficial ownership of shares of Common Stock of the Company by all current directors and executive officers of the Company named under the caption "Management" individually, and together with all current executive officers of the Company as a group, as of November 30, 1995:
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF INDIVIDUAL OR NUMBER OF PERSONS IN GROUP OWNERSHIP (1) CLASS (2) - -------------------------------------------------------------------------------- ------------------ ------------ C. Jack Bean.................................................................... 206,019 shares(3) 5.86% William B. Byrd................................................................. 5,800 shares * Bobby W. Hackler................................................................ 21,482 shares(4) * Joseph S. Hardin................................................................ 191,583 shares(5) 5.46% G. M. Heinzelmann, III.......................................................... 29,685 shares(6) * Michael L. Milam................................................................ 250 shares * Garrett Morris.................................................................. 250 shares * Cullen W. Turner................................................................ 60,300 shares(7) 1.72% All directors and executive officers as a group (8 persons)..................... 515,369 shares(8) 14.47%
- ------------------------ * Less than 1% of all the issued and outstanding shares of Common Stock. (1) Based on information furnished by persons named and, except as otherwise indicated below, each person has sole voting power with respect to all shares of Common Stock owned by such person. (2) Based on 3,506,429 shares of Common Stock issued and outstanding at November 30, 1995, as adjusted for shares convertible or exercisable within 60 days which are deemed outstanding for a specific shareholder pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of 1934, as amended. 54 (3) Includes 206,019 shares of Common Stock owned of record and 11,900 shares of Common Stock which Mr. Bean has the right to acquire within 60 days from the date hereof pursuant to options granted to him under the 1988 Plan of the Company. See "Management -- Executive Compensation and Other Information -- Options Exercises and Holdings". (4) Includes 128 shares of Common Stock owned of record and 21,354 shares of Common Stock which Mr. Hackler has the right to acquire within 60 days from the date hereof pursuant to options granted to him under the 1988 Plan of the Company. See "Management -- Executive Compensation and Other Information -- Options Exercises and Holdings". (5) Represents 191,583 shares of Common Stock held by a trust for which Mr. Hardin serves as a co-trustee. (6) Includes 7,725 shares of Common Stock owned of record and 21,960 shares of Common Stock which Mr. Heinzelmann has the right to acquire within 60 days from the date hereof pursuant to options granted to him under the 1988 Plan of the Company. See "Management -- Executive Compensation and Other Information -- Options Exercises and Holdings". (7) Includes 39,500 shares of Common Stock owned of record and 20,800 shares of Common Stock held by a trust for which Mr. Turner serves as trustee. (8) Includes 55,214 shares of Common Stock of the Company currently exercisable pursuant to the Company's 1988 Plan. BY OTHERS The following table sets forth certain information with respect to shareholders of the Company who were known to be beneficial owners of more than 5% of the issued and outstanding shares of the Common Stock of the Company as of November 30, 1995:
AMOUNT AND NATURE PERCENT OF BENEFICIAL OF CLASS NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) (2) - --------------------------------------------- ------------------ --------- C. Jack Bean & the Estate of Lorene Sims Bean 206,019 shares(3) 5.86% 1845 Precinct Line Road, #100 Hurst, Texas 76054 Joseph S. Hardin 191,583 shares(4) 5.46% 5310 Tanbark Road Dallas, Texas 75229 John Hancock Bank & Thrift 303,700 shares 8.66% Opportunity Fund c/o State Street Bank 61 Broadway New York, New York 10009 Evergreen Limited Market Fund, Inc. 346,000 shares 9.87% c/o Lieber & Company 2500 Westchester Avenue Purchase, NY 10577
- ------------------------ (1) Based on information furnished by persons and entities named and, except as otherwise indicated below, each person and entity has sole voting power with respect to all shares of Common Stock owned by such person or entity. (2) Based on 3,506,429 shares of Common Stock issued and outstanding at November 30, 1995, as adjusted for shares convertible or exercisable within sixty (60) days which are deemed outstanding for a specific shareholder pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act of 1934. 55 (3) Includes 206,019 shares of Common Stock owned of record and 11,900 shares of Common Stock which Mr. Bean has the right to acquire within 60 days from the date hereof pursuant to options granted to him under the 1988 Plan of the Company. See "Management -- Executive Compensation and Other Information -- Options Exercises and Holdings". (4) Represents 191,583 shares of Common Stock held by a trust for which Mr. Hardin serves as a co-trustee. DESCRIPTION OF SECURITIES COMMON STOCK The Company is authorized to issue twenty million (20,000,000) shares of Common Stock, par value $0.01 per share, 3,506,429 of which shares were issued and outstanding as of November 30, 1995 (not including 55,216 shares issuable upon the exercise of outstanding stock options). Holders of shares are entitled to one vote per share, without cumulative voting, on all matters to be voted on by shareholders. Therefore, the holders of a majority of the shares voting for the election of directors can elect all the directors without the concurrence of any other shareholder. Subject to preferences that may be applicable to any outstanding preferred stock, shareholders are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available. See "Market Price and Dividend Policy". In the event of a liquidation, dissolution or winding up of the Company, shareholders are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding preferred stock. Shares of the Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to such shares. The transfer agent and registrar of the common stock is Securities Transfer Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248. PREFERRED STOCK The Company is authorized to issue one million (1,000,000) shares of preferred stock, par value $0.01 per share, none of which are issued and outstanding as of the date of this Prospectus. The Board of Directors of the Company may establish series of preferred stock with such rights and preferences as may be fixed and determined by the Board of Directors. UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement among the Company, the Selling Shareholder, and the Underwriter, the Underwriter has agreed to purchase from the Company and the Selling Shareholder, and the Company and the Selling Shareholder have agreed to sell to the Underwriter, 1,925,061 and 174,939 shares of Common Stock, respectively. The Underwriting Agreement provides that the obligations of the Underwriter thereunder are subject to the satisfaction of certain conditions precedent. The Underwriter is committed to purchase and pay for all 2,100,000 shares of Common Stock if any are purchased. The Company has been advised that the Underwriter proposes to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers at such price less a concession not in excess of $ per share, and that the Underwriter and such dealers may reallow to other dealers including any underwriter, a discount not in excess of $ per share. After commencement of this Offering, the offering price and concession and discounts may be changed by the Underwriter. The Company has agreed to pay the Underwriter an accountable expense allowance not to exceed 2% of the aggregate offering price. The Underwriter has obtained an option from the Company exercisable during a 30-day period after the date of this prospectus, under which the Underwriter may purchase up to 288,759 additional shares of Common Stock at the same price per share which the Company will receive for the shares offered herein. The Underwriter may exercise such option only once to cover over-allotments. 56 The Company and its executive officers and directors have agreed that they will not sell, contract to sell or otherwise dispose of any equity securities of the Company for a period of 180 days after the date of this prospectus without the written consent of the Underwriter. The Company and the Selling Shareholder have agreed to indemnify the Underwriter against certain liabilities, losses and expenses, including liabilities under the Securities Act, or to contribute to payments that the Underwriter may be required to make in respect thereof. LEGAL MATTERS Certain matters with respect to the validity of the shares have been passed upon by Secore & Waller, L.L.P., Dallas, Texas. Certain legal matters will be passed upon for the Underwriter by Bracewell & Patterson, L.L.P., Houston, Texas. EXPERTS The consolidated balance sheets of the Company as of December 31, 1994 and 1993 and the related consolidated Statements of Income, Shareholders' Equity, and Cash Flows for each of the three years in the period ended December 31, 1994, included in this prospectus and elsewhere in the Registration Statement, have been included herein in reliance on the report of Coopers & Lybrand, L.L.P. independent accountants, given on the authority of that firm as experts in accounting and auditing. The consolidated financial statements of the First Midlothian Corporation, Midlothian, Texas as of December 31, 1994 and for each of the two years in the period ended December 31, 1994, and as of September 30, 1995 and for the period then ended, also included in this prospectus and elsewhere in the Registration Statement have been included herein in reliance on the report of Samson, Robbins & Associates P.L.L.C., independent accountants, given on the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed a Registration Statement on Form S-1 under the Securities Act of 1933, as amended, with the Securities and Exchange Commission (the "Commission") with respect to the Common Stock offered pursuant to this prospectus. This prospectus, which forms a part of the Registration Statement, does not contain all of the information included in the Registration Statement and the exhibits thereto. In addition, the Company is subject to the informational requirements of the Securities Exchange Act of 1934 and in accordance therewith files reports and other information with the Commission. The Registration Statement filed with respect to this prospectus, and all other Company reports, proxy statements and other information can be inspected free of charge at the offices of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at 411 W. Seventh Street, Eighth Floor, Fort Worth, Texas 76102. Copies of such material may be obtained upon the payment of prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Company's common stock is traded on the AMEX and copies of the Company's periodic reports, proxy statements, and other information is also available for inspection at the AMEX at 86 Trinity Place, Fifth Floor Library, New York, NY 10006. The telephone number at the AMEX is (212) 306-1290. 57 INDEX TO FINANCIAL STATEMENTS
PAGE --------- Surety Capital Corporation: Report of Independent Accountants........................................................................ F-2 Consolidated Balance Sheets as of December 31, 1994, 1993 and September 30, 1995 (unaudited)............. F-3 Consolidated Statements of Income for the years ended December 31, 1994, 1993 and 1992 and the nine months ended September 30, 1995 (unaudited) and 1994 (unaudited)........................................ F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1994, 1993 and 1992 and for the nine months ended September 30, 1995 (unaudited)................................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1993 and 1992 and the nine months ended September 30, 1995 (unaudited) and 1994 (unaudited)........................................ F-6 Notes to Consolidated Financial Statements............................................................... F-7 First Midlothian Corporation: Report of Independent Accountants........................................................................ F-25 Consolidated Balance Sheets as of September 30, 1995 and December 31, 1994............................... F-26 Consolidated Statements of Income for the nine months ended September 30, 1995 and the years ended December 31, 1994 and 1993.............................................................................. F-27 Consolidated Statements of Shareholders' Equity as of December 31, 1992, 1993, 1994 and September 30, 1995.................................................................................................... F-28 Consolidated Statements of Cash Flows for the nine months ended September 30, 1995 and the years ended December 31, 1994 and 1993.............................................................................. F-29 Notes to Consolidated Financial Statements............................................................... F-30
F-1 REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders Surety Capital Corporation Fort Worth, Texas We have audited the accompanying consolidated balance sheets of Surety Capital Corporation as of December 31, 1994 and 1993, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1994. 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Surety Capital Corporation as of December 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, Surety Capital Corporation changed its method of accounting for investment securities and income taxes in 1994 and 1993, respectively. COOPERS & LYBRAND LLP Fort Worth, Texas January 27, 1995 F-2 SURETY CAPITAL CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995, DECEMBER 31, 1994 AND 1993 ASSETS
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 ------------- ------------ ------------ (UNAUDITED) Assets: Cash and due from banks....................................................... $ 4,997,517 $ 3,929,360 $ 2,436,487 Federal funds sold............................................................ 21,660,000 7,265,000 4,450,000 ------------- ------------ ------------ Cash and cash equivalents................................................... 26,657,517 11,194,360 6,886,487 Interest bearing deposits in financial institutions........................... 1,334,860 1,524,188 648,000 Investment securities......................................................... 17,017,258 19,504,254 8,218,029 Net loans..................................................................... 67,923,543 63,965,402 31,225,035 Premises and equipment, net................................................... 2,776,443 2,393,601 1,304,845 Accrued interest receivable................................................... 622,518 623,737 161,470 Other real estate and repossessed assets...................................... 92,830 121,359 34,676 Other assets.................................................................. 594,762 451,891 115,128 Excess of cost over fair value of net assets acquired, net of accumulated amortization of $312,411, $175,240 and $124,039 at September 30, 1995, and December 31, 1994 and 1993, respectively..................................... 2,534,050 2,515,519 442,588 ------------- ------------ ------------ Total assets................................................................ $ 119,553,781 $102,294,311 $ 49,036,258 ------------- ------------ ------------ ------------- ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits............................................................... $ 13,914,468 $ 12,191,183 $ 7,311,674 Savings, NOW and money markets................................................ 31,421,332 29,875,481 17,040,843 Time deposits, $100,000 and over.............................................. 13,885,925 7,942,882 5,639,734 Other time deposits........................................................... 48,986,950 42,017,576 13,603,668 ------------- ------------ ------------ Total deposits.............................................................. 108,208,675 92,027,122 43,595,919 Note payable.................................................................. 375,000 1,750,000 -- Federal income tax payable.................................................... 254,386 -- -- Accrued interest payable and other liabilities................................ 679,019 451,508 159,351 ------------- ------------ ------------ Total liabilities........................................................... 109,517,080 94,228,630 43,755,270 ------------- ------------ ------------ Commitments and contingent liabilities (Notes 9 & 14) Shareholders' equity: Common stock, $.01 par value, 20,000,000 shares authorized, 3,516,595, 3,040,829 and 2,273,487 shares issued and outstanding at September 30, 1995, December 31, 1994 and 1995, respectively..................................... 35,166 30,408 22,734 Additional paid-in capital.................................................... 9,364,515 8,113,214 5,806,116 Retained earnings/(deficit)................................................... 573,311 (75,102) (547,862) Treasury stock, 10,166 shares carried at cost................................. (50,830) -- -- Unrealized gain/(loss) on available-for-sale securities....................... 114,539 (2,839) -- ------------- ------------ ------------ Total shareholders' equity.................................................... 10,036,701 8,065,681 5,280,988 ------------- ------------ ------------ Total liabilities and shareholders' equity.................................... $ 119,553,781 $102,294,311 $ 49,036,258 ------------- ------------ ------------ ------------- ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. F-3 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND THE TWELVE MONTHS ENDED DECEMBER 31, 1994, 1993 AND 1992
SEPTEMBER 30, SEPTEMBER 30, 1995 1994 1994 1993 1992 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Interest income: Commercial and real estate loans....... $ 2,759,887 $ 898,537 $ 1,422,911 $ 1,034,793 $ 774,203 Consumer loans......................... 861,646 768,043 1,059,188 966,458 858,543 Insurance premium financing............ 2,080,915 1,597,634 2,172,038 1,302,854 1,471,226 Federal funds sold..................... 358,600 188,197 302,621 162,830 222,146 Investment securities and interest bearing deposits...................... 810,719 290,620 430,251 528,126 17,455 Other interest income.................. -- -- -- -- 395 ------------- ------------- ------------ ------------ ------------ Total interest income................ 6,871,767 3,743,031 5,387,009 3,995,061 3,343,968 ------------- ------------- ------------ ------------ ------------ Interest expense: Savings, NOW and money market................................ 569,783 305,732 353,123 306,899 240,057 Time deposits, $100,000 and over....... 579,022 206,173 362,700 198,151 207,547 Other time deposits.................... 1,276,222 459,659 760,833 618,534 530,111 Other interest expense................. 111,915 -- 11,075 -- -- ------------- ------------- ------------ ------------ ------------ Total interest expense............... 2,536,942 971,564 1,487,731 1,123,584 977,715 ------------- ------------- ------------ ------------ ------------ Net interest income before provision for loan losses......... 4,334,825 2,771,467 3,899,278 2,871,477 2,366,253 Provision for loan losses................ 60,000 66,898 106,899 90,584 299,555 ------------- ------------- ------------ ------------ ------------ Net interest income.................. 4,274,825 2,704,569 3,792,379 2,780,893 2,066,698 ------------- ------------- ------------ ------------ ------------ Noninterest income....................... 1,056,095 800,805 1,160,007 1,181,808 784,066 ------------- ------------- ------------ ------------ ------------ Noninterest expense: Salaries and employee benefits......... 2,143,694 1,577,591 2,201,188 1,715,952 1,194,179 Occupancy and equipment................ 668,483 473,588 669,936 495,055 411,587 General and administrative............. 1,569,753 1,152,961 1,590,814 1,380,971 1,228,574 ------------- ------------- ------------ ------------ ------------ Total noninterest expense............ 4,381,930 3,204,140 4,461,938 3,591,978 2,834,340 ------------- ------------- ------------ ------------ ------------ Income before income taxes......... 948,990 301,234 490,448 370,723 16,424 Income tax expenses: Current................................ 300,577 7,500 36,697 Deferred............................... (19,009) ------------- ------------- ------------ ------------ ------------ Net income........................... $ 648,413 $ 293,734 $ 472,760 $ 370,723 $ 16,424 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ Net income per share of common stock..... $.20 $.13 $.20 $.19 $.00 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ Weighted average shares outstanding............................. 3,208,319 2,344,491 2,393,841 2,001,689 1,951,873 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------
The accompanying notes are an integral part of the consolidated financial statements. F-4 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1995 (UNAUDITED)
UNREALIZED GAIN/ ACCUMULATED (LOSS) ON COMMON STOCK ADDITIONAL RETAINED AVAILABLE- --------------------- PAID-IN EARNINGS/ TREASURY FOR-SALE SHARES PAR VALUE CAPITAL (DEFICIT) STOCK SECURITIES TOTAL EQUITY ---------- --------- ----------- ------------ --------- ---------- ------------ Balance at December 31, 1991....... 1,767,062 $ 17,670 $ 4,180,134 $ (935,009) -- -- $ 3,262,795 Sale of common stock............... 214,385 2,144 776,999 779,143 Net income......................... 16,424 16,424 ---------- --------- ----------- ------------ --------- ---------- ------------ Balance at December 31, 1992....... 1,981,447 19,814 4,957,133 (918,585) -- -- 4,058,362 Sale of common stock............... 292,040 2,920 848,983 851,903 Net income......................... 370,723 370,723 ---------- --------- ----------- ------------ --------- ---------- ------------ Balance at December 31, 1993....... 2,273,487 22,734 5,806,116 (547,862) -- -- 5,280,988 Sale of Common Stock............... 767,342 7,674 2,307,098 2,314,772 Net Income......................... 472,760 472,760 Unrealized loss on available-for- sale securities, net of income taxes............................. $ (2,839) (2,839) ---------- --------- ----------- ------------ --------- ---------- ------------ Balance at December 31, 1994....... 3,040,829 30,408 8,113,214 (75,102) -- (2,839) 8,065,681 ---------- --------- ----------- ------------ --------- ---------- ------------ Sale of Common Stock............... 475,766 4,758 1,251,301 1,256,059 Purchase of Treasury Stock......... (50,830) (50,830) Net Income......................... 648,413 648,413 Unrealized gain on available- for-sale securities, net of income taxes............................. 117,378 117,378 ---------- --------- ----------- ------------ --------- ---------- ------------ Balance at September 30, 1995 (unaudited)....................... 3,516,595 $ 35,166 $ 9,364,515 $ 573,311 $ (50,830) $ 114,539 $ 10,036,701 ---------- --------- ----------- ------------ --------- ---------- ------------ ---------- --------- ----------- ------------ --------- ---------- ------------
The accompanying notes are an integral part of the consolidated financial statements. F-5 SURETY CAPITAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, ---------------------------------------- 1995 1994 1994 1993 1992 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income........................................... $ 648,413 $ 293,734 $ 472,760 $ 370,723 $ 16,424 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses.......................... 60,000 66,898 106,899 90,584 299,555 Depreciation and amortization...................... 433,373 286,398 381,845 247,501 230,532 Gain (loss) on sale or disposal of assets.......... 100 (15,508) (99,049) (5,587) Net change in other assets......................... (639,798) (293,047) (217,868) 216,152 (41,185) Net increase/(decrease) in accrued interest payable and other liabilities............................. 996,211 (38,312) (125,277) (2,424) (213,945) ------------- ------------- ------------ ------------ ------------ Net cash provided by operating activities........ 1,498,299 315,671 602,851 823,487 285,794 ------------- ------------- ------------ ------------ ------------ Cash flows from investing activities: Proceeds from the sale of available-for-sale securities.......................................... 4,736,538 Proceeds from the sale of held-to-maturity securities.......................................... 500,000 500,000 6,084,844 Proceeds from the maturity of held-to-maturity securities and interest bearing liabilities......... 2,716,665 4,885,510 5,269,724 2,799,980 Proceeds from the maturity of available-for-sale securities.......................................... 2,664,997 169,971 Purchase of premises and equipment................... (460,784) (351,371) (420,487) (560,529) (156,906) Net increase in loans................................ (2,534,748) (7,506,927) (7,624,058) (8,448,392) (401,553) Proceeds from sale of assets......................... 16,308 72,526 Purchase of available-for-sale securities............ (3,954,573) Purchase of held-to-maturity securities.............. (3,487,203) (94,429) (316,276) Purchase of investment securities.................... (3,532,926) (543,500) Payments received on purchased medical claims receivable.......................................... 12,961,663 9,195,279 12,290,141 11,585,316 11,120,480 Purchase of medical claims receivable................ (13,569,897) (7,249,097) (11,229,044) (12,564,026) (11,299,682) Direct cost incurred for bank acquisition............ (115,039) (71,935) Net cash acquired through purchase of bank........... 15,418,983 7,485,325 2,624,200 1,441,254 ------------- ------------- ------------ ------------ ------------ Net cash provided by (used in) investing activities........................................ 14,491,641 6,864,290 1,165,440 (3,194,479) (1,280,570) ------------- ------------- ------------ ------------ ------------ Cash flows from financing activities: Net change in deposits............................... (357,012) (1,602,783) (1,525,190) (1,298,634) 3,505,370 Payments on borrowings of note payable............... (1,375,000) Purchase of treasury stock........................... (50,830) Proceeds from the sale of common stock............... 1,256,059 394,713 2,314,772 851,903 779,143 Proceeds from borrowings on note payable............. 1,750,000 ------------- ------------- ------------ ------------ ------------ Net cash provided by (used in) financing activities........................................ (526,783) (1,208,070) 2,539,582 (446,731) 4,284,513 ------------- ------------- ------------ ------------ ------------ Net increase in cash................................... 15,463,157 5,971,891 4,307,873 (2,817,723) 3,289,737 Beginning cash and cash equivalents.................... 11,194,360 6,886,487 6,886,487 9,704,210 6,414,473 ------------- ------------- ------------ ------------ ------------ Ending cash and cash equivalents....................... $26,657,517 $12,858,378 $ 11,194,360 $ 6,886,487 $ 9,704,210 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ Supplemental disclosure: Cash paid during the period for interest............. $ 2,433,146 $ 951,084 $ 1,339,223 $ 1,074,507 $ 1,021,014 Cash paid during the period for federal income taxes............................................... $ 18,608 $ 7,500 $ 12,000 -- --
The accompanying notes are an integral part of the consolidted financial statements. F-6 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, Surety Bank, National Association, ("Bank"), which is 99% owned and was acquired on December 30, 1989. All significant intercompany accounts and transactions have been eliminated in consolidation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one day periods. INVESTMENT SECURITIES Effective January 1, 1994, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement addresses the accounting and reporting for investments in equity securities that have readily determined fair values for all investments in debt securities. Management determines the appropriate classification of securities at the time of purchase. If the securities are purchased with the positive intent and the ability to hold the securities until maturity, they are classified as held-to-maturity and carried at historical cost, adjusted for amortization of premiums and accretion of fees and discounts using a method that approximates the interest method. Securities to be held for indefinite periods of time are classified as available-for-sale and carried at fair value. Securities purchased and held principally for the purpose of selling them in the near term are classified as trading. The Company has no securities classified as trading as of December 31, 1994. The cost of securities sold is based on the specific identification method. The effect at September 30, 1995 was an increase in stockholders' equity of $117,378 (net of $56,219 of deferred income tax) to reflect the net unrealized holding gain on available-for-sale securities. The effect at December 31, 1994 was a decrease in stockholders' equity of $2,839 (net of $1,462 of deferred income tax) to reflect the net unrealized holding loss on available-for-sale securities. The available-for-sale classification includes securities which were acquired through the acquisition of the First National Bank of Whitesboro, which were marked to market as of the acquisition date at December 8, 1994. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are stated at the amount of unpaid principal, reduced by unearned interest and an allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against current earnings. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance for loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based upon evaluation of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Interest income on insurance premium financing loans and installment loans is recognized by a method which approximates the interest method. Interest income on commercial and real estate loans is accrued daily on the amount of outstanding principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that a borrower's financial condition is such that collection of interest and principal is doubtful. Management evaluates the book value (including accrued interest) and collateral value on loans placed on nonaccrual status and provides specific allowance for loan losses as deemed appropriate. F-7 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Certain fees and costs associated with the origination of loans are deferred and recognized over the estimated lives of the related loans as an adjustment to yield. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method at rates sufficient to amortize the cost over the estimated lives of the assets. Expenditures for repairs and maintenance are expensed as incurred, and renewals and betterments that extend the lives of assets are capitalized. Cost and accumulated depreciation are eliminated from the accounts when assets are sold or retired and any resulting gain or loss is reflected in operations in the year of disposition. OTHER REAL ESTATE AND REPOSSESSED ASSETS Foreclosed real estate and other assets are recorded at the lower of the unpaid balance of the related loan or the fair market value of the property. Any write down to fair market value at the date of acquisition is charged against the allowance for loan losses. Any subsequent write downs are reflected in operations. INCOME PER SHARE Net income per share of common stock is computed based upon the weighted average number of shares of common stock outstanding during the nine months ended September 30, 1995 and 1994 and the years ended December 31, 1994, 1993 and 1992. INCOME TAXES During 1993, the Company adopted STATEMENT OF ACCOUNTING STANDARDS (SAS) No. 109 whereby the method of accounting for income taxes utilized an asset and liability approach for financial statement purposes. Under SFAS No. 109, the types of differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to significant portions of deferred income tax liabilities or assets include: allowances for possible loan losses, property and equipment, investment securities and net operating loss carryforwards. The change in accounting did not have an effect on the Company's consolidated financial position or results of operations. PURCHASE METHOD OF ACCOUNTING Net assets acquired in purchase transactions are recorded at their fair value at the date of acquisition. The excess of purchase price over fair value of net assets acquired is amortized on a straight-line basis generally over a 15-year period. The Company continually re-evaluates the propriety of the carrying amount of such intangible assets, as well as their amortization period, to determine whether current events and circumstances warrant adjustments to the carrying value and/or revised estimates of the period of benefit. At this time, the Company believes that no significant impairment of such intangible assets has occurred and that no reduction of amortization period is warranted. RECLASSIFICATIONS Certain balances for the year ended December 31, 1994 and 1993 have been reclassified to conform to the presentation adopted for the nine months ended September 30, 1995. These reclassifications had no effect on net income, total assets, total liabilities, or shareholders' equity as previously reported. RECENT ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances F-8 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) indicate that the carrying amount of an asset may not be recoverable. Measurement of an impairment loss for long-lived assets and identifiable intangibles that an entity expects to hold and use should be based on the fair value of the asset. This Statement is effective for fiscal years beginning after December 15, 1995. In October 1995, the FASB issued Statement of Accounting Standards No. 123, "Accounting for Stock-Based Compensation." This Statement defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting method specified in Opinion 25 must make pro forma disclosures of net income and, if presented, earnings per share, as if the fair value method of accounting defined in this Statement had been applied. This Statement is effective for fiscal years beginning after December 15, 1995. In November 1995, the FASB issued a Financial Accounting Series Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The FASB concluded that concurrent with the initial adoption of this implementation guidance, but no latter than December 31, 1995, an enterprise may reassess the appropriateness of the classification of all securities held at that time and account for any resulting reclassifications at fair value and such reclassifications should be disclosed in accordance with the provisions of Statement 115. Management believes that the adoption of these pronouncements will not have a material impact on the financial statements of the Company. 3. ACQUISITIONS: FIRST NATIONAL BANK, WHITESBORO, TEXAS On May 24, 1994, Surety Bank entered into an agreement for the acquisition of First National Bank, a national banking association located in Whitesboro, Texas. The acquisition was effected through the merger of First National Bank with and into Surety Bank effective as of the close of business on December 8, 1994. Pursuant to the merger, Surety Bank paid $6,000,000 to the shareholders of First National Bank in exchange for all of the issued and outstanding shares of common stock of First National Bank. The purchase price of $30.00 per share was based on approximately 150% of the book value of First National Bank as of December 31, 1993. As a result of the earnings of First National Bank during the fiscal year 1994, the purchase price of $30.00 per share represented approximately 130% of the book value of First National Bank as of the date of consummation of the merger. In connection with the merger, Surety Bank purchased all of the assets and assumed all of the obligations of First National Bank. To finance the merger, Surety Bank received a $4,000,000 capital contribution from the Company. The Company raised $2,169,050 under a limited offering of its shares of common stock, pursuant to which it sold 667,400 shares of common stock at $3.25 per share and the Company obtained a $1,750,000, 90-day note payable to Overton Bank and Trust, N.A. After the note matured on June 7, 1995, the Company reduced the balance of the note to $500,000 and a new note was obtained for the remaining balance with a maturity of January 23, 1996. As of September 30, 1995, the note bore an interest at eleven and one-half percent (11.50%), had a balance of $375,000, and provided for quarterly interest payments and one principal payment at maturity. The acquisition has been accounted for as a purchase in the accompanying consolidated financial statements and the assets and liabilities of First National Bank were recorded at their fair values as of November 30, 1994. F-9 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS: (CONTINUED) Included in the accompanying unaudited consolidated financial statements are the following amounts for First National Bank as of September 30, 1995 and for the nine months ended September 30, 1995: Balance sheet data: Cash and due from banks.............................. $ 509,620 Federal funds sold................................... 4,310,000 Investment securities................................ 4,764,782 Net loans............................................ 22,225,087 Premises and equipment, net.......................... 836,314 Accrued interest receivable.......................... 290,723 Other assets......................................... 241,827 ---------- Total assets......................................... $33,178,353 ---------- ---------- Income statement data: Total interest income................................ $1,826,948 Total interest expense............................... 947,017 Other income......................................... 231,661 Noninterest expense.................................. 756,667 ---------- Net income........................................... $ 354,925 ---------- ----------
The consolidated results of operations include the operations of First National Bank subsequent to December 1, 1994. The unaudited information for the nine months ended September 30, 1995 and the unaudited pro forma information for the nine months ended September 30, 1994, presented below, reflect the acquisition of First National Bank, as if it had been acquired as of January 1, 1994. Pro forma adjustments consisting of a provision for income taxes and interest expense have been made to reflect the unaudited pro forma information. Interest expense on short-term debt of $1,750,000 is included as if the short-term debt had been incurred on January 1, 1994.
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, 1995 1994 ------------- ------------- (UNAUDITED) (UNAUDITED) Interest income..................................................................... $ 6,871,767 $ 5,931,128 Net income.......................................................................... 648,413 516,241 Net income per share of common stock................................................ $ 0.20 $ 0.17
BANK ONE, TEXAS, NATIONAL ASSOCIATION BRANCH IN WAXAHACHIE, TEXAS On June 16, 1995, Surety Bank entered into an agreement with Bank One, Texas, National Association ("Bank One") for the acquisition of certain assets (principally cash) and the assumption of certain liabilities (principally customer deposits) by Surety Bank relating to one branch of Bank One located in Waxahachie, Texas (the "Waxahachie Branch"). The acquisition was consummated on September 28, 1995. Surety Bank financed the acquisition through the use of internally-generated funds. At the closing, Surety Bank assumed deposits and other liabilities totaling approximately $16,642,000. In addition, Surety Bank acquired certain small business and consumer loans totaling approximately $875,000, certain real property, furniture and equipment related to the Waxahachie Branch totaling approximately $271,000, and cash and other assets totaling approximately $15,496,000. After paying a deposit premium of two percent (2%) on the deposits assumed totaling approximately $331,000, Surety Bank F-10 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS: (CONTINUED) received approximately $15,419,000 in cash from Bank One as consideration for the net deposit liabilities assumed. The Waxahachie Branch and deposits acquired in the acquisition have been incorporated into Surety Bank's existing branch network. 4. INVESTMENT SECURITIES: Investment securities consisted of the following at September 30, 1995 (unaudited) and December 31, 1994 and 1993: September 30, 1995 (Unaudited):
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------- ----------- ----------- ------------- HELD-TO-MATURITY: U.S. Treasury............................................ $ 99,205 $ 77 $ 99,128 Obligations of other U.S. Government agencies and corporations............................................ 5,476,904 $ 256 5,987 5,471,173 State and county municipals.............................. 4,735,574 263,040 4,998,614 ------------- ----------- ----------- ------------- 10,311,683 263,296 6,064 10,568,915 ------------- ----------- ----------- ------------- AVAILABLE-FOR-SALE: U.S. Treasury............................................ 483,490 11,510 495,000 Obligations of other U.S. Government agencies and corporations............................................ 5,747,766 179,219 17,185 5,909,800 Federal Reserve Bank Stock............................... 280,850 280,850 Other investment securities.............................. 19,925 19,925 ------------- ----------- ----------- ------------- 6,532,031 190,729 17,185 6,705,575 ------------- ----------- ----------- ------------- $ 16,843,714 $ 454,025 $ 23,249 $ 17,274,490 ------------- ----------- ----------- ------------- ------------- ----------- ----------- ------------- December 31, 1994 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------- ----------- ----------- ------------- HELD-TO-MATURITY: U.S. Treasury............................................ $ 2,123,659 $ 19,105 $ 2,104,554 Obligations of other U.S. Government agencies and corporations............................................ 2,668,466 170,865 2,497,601 State and county municipals.............................. 4,748,920 4,748,920 ------------- ----------- ----------- ------------- 9,541,045 189,970 9,351,075 ------------- ----------- ----------- ------------- AVAILABLE-FOR-SALE: U.S. Treasury............................................ 1,964,627 4,854 1,959,773 Obligations of other U.S. Government agencies and corporations............................................ 7,702,108 $ 553 7,702,661 Federal Reserve Bank stock............................... 280,850 280,850 Other investment securities.............................. 19,925 19,925 ------------- ----------- ----------- ------------- 9,967,510 553 4,854 9,963,209 ------------- ----------- ----------- ------------- $ 19,508,555 $ 553 $ 194,824 $ 19,314,284 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
F-11 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENT SECURITIES: (CONTINUED) December 31, 1993:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------- ----------- ----------- ------------- U.S. Treasury.............................................. $ 2,085,555 $ 10,345 $ 2,095,900 Obligations of other U.S. Government agencies and corporations.............................................. 6,023,774 21,537 $ 23,196 6,022,115 Federal Reserve Bank stock................................. 108,700 108,700 ------------- ----------- ----------- ------------- $ 8,218,029 $ 31,882 $ 23,196 $ 8,226,715 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
The amortized cost and estimated market value of investment securities at September 30, 1995 (unaudited) and December 31, 1994 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. September 30, 1995 (unaudited)
AMORTIZED ESTIMATED COST MARKET VALUE ------------- ------------- HELD-TO-MATURITY: Due within one year.............................................................. $ 1,232,093 $ 1,235,728 Due after one year through five years............................................ 5,085,377 5,163,506 Due after five years through ten years........................................... 3,482,659 3,664,114 Mortgage-backed securities....................................................... 511,554 505,567 ------------- ------------- Total.......................................................................... $ 10,311,683 $ 10,568,915 ------------- ------------- AVAILABLE-FOR-SALE: Due within one year.............................................................. $ 398,835 $ 401,703 Due after one year through five years............................................ 2,530,544 2,636,540 Due after five years through ten years........................................... 3,160,588 3,218,581 Mortgage-backed securities....................................................... 141,289 147,976 Other securities................................................................. 300,775 300,775 ------------- ------------- 6,532,031 6,705,575 ------------- ------------- Total.......................................................................... $ 16,843,714 $ 17,274,490 ------------- ------------- ------------- -------------
F-12 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENT SECURITIES: (CONTINUED) December 31, 1994
AMORTIZED ESTIMATED COST MARKET VALUE ------------- ------------- HELD-TO-MATURITY: Due within one year.............................................................. $ 3,144,762 $ 3,039,407 Due after one year through five years............................................ 2,606,346 2,606,346 Due after five years through ten years........................................... 2,121,471 2,121,471 Mortgage-backed securities....................................................... 1,668,466 1,583,851 ------------- ------------- 9,541,045 9,351,075 AVAILABLE-FOR-SALE: Due within one year.............................................................. 3,352,504 3,344,039 Due after one year through five years............................................ 4,475,799 4,482,206 Due after five years through ten years........................................... 1,520,328 1,522,789 Mortgage-backed securities....................................................... 318,104 313,400 Other securities................................................................. 300,775 300,775 ------------- ------------- 9,967,510 9,963,209 ------------- ------------- Total.......................................................................... $ 19,508,555 $ 19,314,284 ------------- ------------- ------------- -------------
Proceeds from sales of available-for-sale investment securities during the nine months ended September 30, 1995 were $4,736,538 with gross recognized gains of $100 and no losses. Proceeds from sales of held-to-maturity investment securities during the twelve months ended December 31, 1994 were $500,000 with no recognized gains or losses. These securities were sold within 90 days of the call date and were expected to be called. Proceeds from sales of investment securities during the twelve months ended December 31, 1993 were $6,084,844 with gross recognized gains and losses of $93,859 and $3,096, respectively. During the year ended December 31, 1992, there were no sales of investment securities. At September 30, 1995, December 31, 1994 and 1993 the carrying values of Federal Reserve Bank stock were $280,850, $280,050 and $108,700, respectively. The Federal Reserve Bank stock's market value was estimated to be the same as its carrying value at all dates. At September 30, 1995, December 31, 1994 and 1993, securities with a carrying amount of $12,871,040, $14,319,159 and $1,450,000, respectively, were pledged as collateral for public deposits, as required or permitted by law. F-13 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. NET LOANS: At September 30, 1995 and December 31, 1994 and 1993, the loan portfolio was composed of the following:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 ------------- ------------ ------------ (UNAUDITED) Insurance premium financing................................. $ 24,283,325 $ 20,931,642 $ 14,518,680 Commercial loans............................................ 15,590,320 13,205,698 5,204,120 Installment loans........................................... 11,519,839 12,029,243 9,016,179 Real estate loans........................................... 16,224,602 17,297,636 1,878,030 Medical claims receivable................................... 2,992,867 2,705,974 2,379,482 ------------- ------------ ------------ Total gross loans......................................... 70,610,953 66,170,193 32,996,491 Unearned interest........................................... (1,962,866) (1,506,843) (1,370,229) Allowance for loan losses................................... (724,544) (697,948) (401,227) ------------- ------------ ------------ Net loans................................................. $ 67,923,543 $ 63,965,402 $ 31,225,035 ------------- ------------ ------------ ------------- ------------ ------------
Activity in the allowance for loan losses for the nine months ended September 30, 1995 (unaudited) and for the years ended December 31, 1994, 1993 and 1992 were as follows:
SEPTEMBER DECEMBER DECEMBER DECEMBER 30, 1995 31, 1994 31, 1993 31, 1992 ----------- ----------- ----------- ----------- (UNAUDITED) Beginning balance................... $ 697,948 $ 401,227 $ 324,728 $ 343,206 Provision for loan losses........... 60,000 106,899 90,584 299,555 Bank acquisition.................... 10,181 340,832 71,976 Loans charged off................... (82,750) (212,266) (247,774) (672,313) Recoveries.......................... 39,165 61,256 161,713 354,280 ----------- ----------- ----------- ----------- Ending balance...................... $ 724,544 $ 697,948 $ 401,227 $ 324,728 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Loans on which the accrual of interest has been discontinued amounted to approximately $27,000, $83,000 and $48,000 at September 30, 1995, December 31, 1994 and 1993, respectively. 6. PREMISES AND EQUIPMENT: Premises and equipment at September 30, 1995, December 31, 1994 and 1993 are summarized as follows:
SEPTEMBER 30, 1995 1994 1993 ------------- ---------- ---------- (UNAUDITED) Land........................................................ $ 215,116 $ 145,116 $ 88,616 Building.................................................... 1,383,819 1,183,960 495,040 Furniture, fixtures and computers........................... 2,073,093 1,666,434 1,189,832 Automobiles................................................. 226,788 225,282 142,851 Leasehold improvements...................................... 92,118 92,118 ------------- ---------- ---------- 3,990,934 3,312,910 1,916,339 Less accumulated depreciation............................... (1,214,491) (919,309) (611,494) ------------- ---------- ---------- Net premises and equipment.................................. $2,776,443 $2,393,601 $1,304,845 ------------- ---------- ---------- ------------- ---------- ----------
F-14 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. SHAREHOLDERS' EQUITY: During the nine months ended September 30, 1995, 459,500 shares of the Company's common stock were sold in an offering for a total consideration, net of expenses, of $1,256,059. During the twelve months ended December 31, 1994, 767,342 shares of the Company's common stock were sold in private placements for a total consideration, net of expenses, of $2,314,772. During the year ended December 31, 1993, 292,040 shares of the Company's common stock were sold in private placements for total consideration, net of expenses, of $851,903. During the year ended December 31, 1992, 214,385 shares of the Company's common stock were sold in private placements for total consideration, net of expenses, of $779,143. On April 22, 1993, the Company's Board of Directors approved a one-for-ten reverse split of the Company's common stock. The reverse split was approved by the shareholders of the Company on May 27, 1993. This action became effective on June 14, 1993 for shareholders of record as of June 11, 1993. A total of $178,331 was reclassified from par value of common stock to additional paid-in capital in connection with the reverse stock split. The par value of common stock remains unchanged. All per share amounts have been adjusted to reflect the reverse stock split on a retroactive basis. 8. STOCK OPTIONS AND WARRANTS: Under the Company's 1988 Incentive Stock Option Plan (the "1988 Plan"), up to 100,000 shares of the Company's common stock have been reserved for issuance to key employees pursuant to the exercise of incentive stock options granted to such key employees under the 1988 Plan. Options granted under the 1988 Plan vest immediately on the date of grant and have a term of five years, subject to earlier termination upon the occurrence of certain events related to termination of employment. All options granted under the 1988 Plan were granted at 100% to 110% of fair market value. No additional options may be granted under the 1988 Plan.
SHARES UNDER OPTION PRICE PER SHARE --------- ---------------- Outstanding at December 31, 1991........................................... 25,895 $2.34 to $6.53 Granted during 1992........................................................ 9,096 $6.56 to $7.22 Exercised during 1992...................................................... (16,438) $2.58 to $6.53 Canceled during 1992....................................................... -- --------- Outstanding at December 31, 1992........................................... 18,553 $2.34 to $6.53 Granted during 1993........................................................ 10,000 $5.00 to $5.50 Exercised during 1993...................................................... -- Canceled during 1993....................................................... (1,840) $5.94 --------- Outstanding at December 31, 1993........................................... 26,713 $2.34 to $7.22 Granted during 1994........................................................ 10,000 $4.50 to $4.95 Exercised during 1994...................................................... -- Canceled during 1994....................................................... (5,000) $3.44 to $5.47 --------- Outstanding at December 31, 1994........................................... 31,713 $2.34 to $7.22 Granted during 1995........................................................ 39,769 $3.13 Exercised during 1995...................................................... (16,266) $3.13 Canceled during 1995....................................................... -- --------- Outstanding at September 30, 1995.......................................... 55,216 $2.34 to $7.22
On February 21, 1995 the Board of Directors of the Company adopted the 1995 Incentive Stock Option Plan (the "1995 Plan"), pursuant to which up to 100,000 shares of the Company's common stock have been reserved for issuance to key employees pursuant to the exercise of incentive stock options granted to such key employees under the 1995 Plan. The 1995 Plan was approved by the shareholders of the Company on F-15 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCK OPTIONS AND WARRANTS: (CONTINUED) April 28, 1995. Options granted under the 1995 Plan vest on the date of grant and have a term of ten years, subject to earlier termination upon the occurrence of certain events related to termination of employment. As of September 30, 1995 no options have been granted under the 1995 Plan. On April 1, 1994, the Company issued 4 warrants for the purchase of 355,000 shares of Surety Capital Corporation common stock at an exercise price of $4.50 per share. These warrants expired on March 31, 1995. These warrants were issued in connection with the private placement completed in 1993. On June 17, 1994, the Company issued 1 warrant for the purchase of 35,500 shares of Surety Capital Corporation common stock at an exercise price of $4.50 per share. This warrant expired on June 16, 1995. This warrant was issued in connection with the private placement completed in 1993. As of September 30, 1995, there were no warrants outstanding. 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK: The Company's subsidiary Bank is party to financial instruments with off-balance-sheet risk, entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. The subsidiary Bank's exposure to credit loss in the event of nonperformance by counterparties to loan commitments and letters of credit is represented by the contractual amount of those instruments. The subsidiary Bank uses the same credit policies in making commitments and conditional obligations as are used in underwriting on-balance sheet instruments. The total amounts of financial instruments with off-balance sheet risk at September 30, 1995, December 31, 1994 and 1993 are as follows:
DECEMBER 31, SEPTEMBER 30, -------------------- 1995 1994 1993 ------------- ---------- -------- (UNAUDITED) Unfunded loan commitments....................................................... $2,087,000 $1,833,000 $944,000 Letters of credit............................................................... 361,000 182,000 105,000 Credit card lines............................................................... -- 339,000 404,000
Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Loans are made in accordance with formal written loan policies. The subsidiary Bank evaluates each customer's credit worthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the subsidiary Bank, upon extension of credit is based on management's evaluation of the counterparty. Collateral held varies, but may include cash, accounts receivable, inventory, property, equipment and real estate. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The subsidiary Bank had certificates of deposit, or other deposit accounts, in the amount of $133,200, $254,400 and $90,000 at September 30, 1995, December 31, 1994 and 1993, respectively, as collateral supporting those letter of credit commitments for which collateral is deemed necessary. Credit card lines available at December 31, 1994 and 1993 were collaterialized by deposits held at the Company's subsidiary Bank. There were no credit card lines available at September 30, 1995. The subsidiary Bank sold $21,660,000, $7,265,000 and $4,450,000 in federal funds at September 30, 1995, December 31, 1994 and 1993, respectively. These funds represent uncollateralized loans made by the Bank, in varying amounts, to commercial banks with whom the subsidiary Bank has correspondent relationships. The subsidiary Bank maintains deposits with other financial institutions in amounts which exceed FDIC insurance coverage. F-16 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK: (CONTINUED) The subsidiary Bank has geographic concentrations of credit in its three principal trade areas, Grayson County, Angelina County and Tarrant County, Texas. Additionally, the subsidiary Bank has a significant concentration of credit, based upon like collateral, in its insurance premium finance portfolio. Insurance premium finance comprises approximately $23,724,000 or 35%, $20,496,000 or 32% and $14,200,000 or 45% of consolidated total loans net of unearned interest as of September 30, 1995, December 31, 1994 and 1993, respectively. 10. NET INCOME PER COMMON SHARE: Net income per common share for the nine months ended September 30, 1995 and for the years ended December 31, 1994, 1993 and 1992 was based upon 3,208,319, 2,393,841, 2,001,689, and 1,951,873 shares of common stock outstanding, respectively. The effects of the exercise of stock options and warrants are not material and have not been considered in the calculation of income per common share. 11. EMPLOYEE BENEFIT PLAN: Effective October 1, 1993, the Company adopted the Surety Bank 401(k) Plan ("Plan"). All full-time employees are eligible for participation. Under the terms of the Plan, eligible employees are allowed to contribute up to 10% of their base pay. The Company contributes amounts equal to 5% of the employee's contribution to a maximum of 5% of the employee's pay, subject to statutory limits. The expense for the Plan for the nine months ended September 30, 1995 and for 1994 and 1993 was $11,081, $13,650 and $2,889, respectively. Contributions to the plan during 1994 and 1993 were $30,000 and $25,000, respectively. 12. FEDERAL INCOME TAX: Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". In accordance with the provisions of this statement, the Company elected not to restate prior years and has determined that the cumulative effect of implementation was not significant. F-17 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. FEDERAL INCOME TAX: (CONTINUED) The components of the net deferred asset recognized at September 30, 1995 (unaudited), December 31, 1994 and 1993 are as follows:
SEPTEMBER DECEMBER DECEMBER 30, 1995 31, 1994 31, 1993 ----------- ----------- ----------- (UNAUDITED) Deferred tax liability: Depreciation and amortization......................... $ 365,599 $ 350,066 $ 135,696 Securities............................................ 34,286 34,286 34,286 Deferred loan costs................................... 24,772 18,700 -- Other................................................. 58,604 58,604 -- Net unrealized gain on available-for-sale investment securities........................................... 56,219 -- -- ----------- ----------- ----------- 539,480 461,656 169,982 Deferred tax asset: Tax net operating losses.............................. 40,373 163,366 270,558 Depreciation.......................................... 55,988 55,988 47,973 Allowance for loan losses............................. 148,480 128,080 26,307 Securities............................................ 83,667 224,238 -- Other................................................. 3,095 25,758 9,429 ----------- ----------- ----------- 331,603 597,430 354,267 Valuation allowance..................................... -- -- (184,285) ----------- ----------- ----------- 331,603 597,430 169,982 ----------- ----------- ----------- Net deferred tax asset/(liability).................. $(207,877) $ 135,774 $ -0- ----------- ----------- ----------- ----------- ----------- -----------
Gross net operating losses and the related valuation allowance disclosed in 1993 were adjusted to exclude net operating losses which the Company would not be able to utilize. This adjustment had no impact on the net deferred tax asset. The Company's effective tax rate on income before income taxes differs from the U.S. statutory tax rate as follows:
DECEMBER 31, SEPTEMBER 30, --------------------------- 1995 1994 1993 1992 ------------- ------- ------- ------- U.S. statutory rate (benefit)............................... 34.0% 34.0% 34.0% 34.0% Other....................................................... (.1) -- (2.9) -- Goodwill.................................................... 4.9 -- -- -- Valuation allowance......................................... -- (33.0) (31.1) -- Utilization of net operating losses......................... -- -- -- (34.0) Tax-exempt interest......................................... (7.1) (1.1) -- -- --- ------- ------- ------- Effective tax rate.......................................... 31.7% (.1)% -0- -0- --- ------- ------- ------- --- ------- ------- -------
As of December 31, 1994, the Company has a net operating loss carryforward of approximately $480,473 for income tax reporting purposes which expires, if not used, in 2002 through 2008. The utilization of approximately $353,652 of the net operating loss carryforward is limited by Section 382 of the Internal Revenue Code to approximately $59,000 annually until its expiration in 1999 and $15,000 thereafter through 2004. F-18 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. OTHER NONINTEREST INCOME AND EXPENSE: Other noninterest income and expense for the nine months ended September 30, 1995 (unaudited) and for the years ended December 31, 1994, 1993 and 1992 was composed of the following:
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1995 1994 1994 1993 1992 ------------- ------------- ------------ ------------ ------------ (UNAUDITED) Noninterest Income: Nonsufficient fund charges........... $ 214,501 $ 202,674 $ 263,315 $ 248,890 $ 145,365 Late fee charges..................... 366,356 293,582 426,476 304,354 278,520 Service charges...................... 163,648 119,684 163,336 120,143 47,717 Collection fees...................... 93,536 77,001 96,162 71,760 44,351 Credit life insurance................ 59,570 33,231 44,402 49,777 46,346 Premium finance servicing............ -- -- -- 161,310 101,853 Secured credit card annual fee....... 4,487 13,774 15,905 36,968 52,837 Other................................ 153,897 60,859 150,411 97,843 67,077 Gain on sale of investment........... 100 -- -- 90,763 -- ------------- ------------- ------------ ------------ ------------ Total.............................. $ 1,056,095 $ 800,805 $1,160,007 $1,181,808 $ 784,066 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------ General and administrative expense: Professional fees.................... $ 343,866 $ 264,627 $ 315,434 $ 362,571 $ 351,593 Office supplies...................... 193,466 150,187 201,028 165,416 126,880 Travel and entertainment............. 49,760 47,603 60,162 62,184 42,593 Telephone............................ 115,428 95,616 128,407 103,921 78,384 Advertising.......................... 65,216 43,146 54,683 60,302 88,589 Postage.............................. 150,301 97,349 133,887 125,092 105,229 Amortization of intangibles.......... 137,171 34,329 51,201 35,567 29,388 Dues and subscriptions............... 28,322 36,704 54,609 26,707 20,935 Insurance............................ 97,200 78,420 97,473 59,882 25,519 Credit cards......................... 14,707 44,698 59,573 63,298 83,941 Bank service charge.................. 29,914 18,901 25,808 29,018 17,922 FDIC assessment...................... 114,541 90,623 133,112 71,003 56,594 Credit reports....................... 40,911 15,025 17,714 48,495 27,256 Operational losses................... -- -- -- -- 62,044 Other................................ 188,950 135,733 257,723 167,515 111,707 ------------- ------------- ------------ ------------ ------------ $ 1,569,753 $ 1,152,961 $1,590,814 $1,380,971 $1,228,574 ------------- ------------- ------------ ------------ ------------ ------------- ------------- ------------ ------------ ------------
14. COMMITMENTS AND CONTINGENCIES: As of September 30, 1995 the Company leased its office space in Hurst, Texas under a noncancellable operating lease. The lease expires December 31, 1999. Future minimum lease payments are as follows: 1995...................................................... $ 94,713 1996...................................................... 109,324 1997...................................................... 114,253 1998...................................................... 114,253 1999...................................................... 119,181 --------- Total..................................................... $ 551,724 --------- ---------
F-19 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. COMMITMENTS AND CONTINGENCIES: (CONTINUED) Rent expense was $83,562 for the nine months ended September 30, 1995 and $62,297 for the nine months ended September 30, 1994, $83,062 for the year ended December 31, 1994, $56,982 for the year ended December 31, 1993, and $55,310 for the year ended December 31, 1992. The Company adopted an agreement which compensates certain executive officers at a rate of three times their annual salary for a change in control of approximately 20%. The Company is a defendant in two related cases: TENNESSEE EX REL. DOUGLAS SIZEMORE, COMMISSIONER OF COMMERCE AND INSURANCE FOR THE STATE OF TENNESSEE, ET AL. VS. SURETY BANK, N.A., filed in June 1995 in the Federal District Court for the Northern District of Texas, Dallas Division, (the "Anchorage Case"), and UNITED SHORTLINE INC. ASSURANCE SERVICES, N.A. ET AL. VS. MACGREGOR GENERAL INSURANCE COMPANY, LTD., ET AL., now pending in the 141st Judicial District Court of Tarrant County, Texas (the "MacGregor Case"). The claimant in the Anchorage Case is a liquidator (the "Liquidator") appointed by the Tennessee Commissioner of Commerce and Insurance to liquidate Anchorage Fire and Casualty Insurance Company ("Anchorage"). The Liquidator seeks to recover compensatory and punitive damages on various alleged causes of action, including violation of orders issued by a Tennessee court, fraudulent and preferential transfers, common law conversion, fraud, negligence, and bad faith, all of which are based on the same underlying facts and course of conduct. The plaintiff in the MacGregor Case, United Shortline Inc. Assurance Services, N.A. ("United Shortline"), is the holder of a Florida judgment against MacGregor General Insurance Company, Ltd. ("MacGregor") and seeks to recover funds allegedly belonging to MacGregor which were held by the Company. Both cases arise out of the Company's alleged exercise of control over funds held in accounts at the Company under agreements with Anchorage and MacGregor. The exercise of control included the setoff of approximately $570,000, and the interpleader, in the MacGregor Case, of approximately $600,000. The Company asserts that it had a right to exercise control over the funds, in the first instance under contractual agreements between the Company and the respective insurance companies or the Company and the policy holders, and in the second instance in order to protect the Company against the possibility of inconsistent orders regarding the same funds. The Liquidator also seeks to recover funds allegedly transferred from Anchorage/MacGregor accounts at the Bank during approximately a four month period in 1993, which exceed $2.6 million in the aggregate. The Company believes that the claims lack merit and intends to defend the cases vigorously. Anchorage Fire & Casualty Insurance Company, in Liquidation, is a shareholder of the Company. F-20 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. PARENT COMPANY FINANCIAL INFORMATION: CONDENSED PARENT COMPANY ONLY STATEMENTS OF CONDITION AS OF SEPTEMBER 30, 1995 (UNAUDITED), DECEMBER 31, 1994 AND 1993
DECEMBER 31, SEPTEMBER 30, ---------------------- 1995 1994 1993 ------------- ---------- ---------- (UNAUDITED) Assets: Cash.......................................................................... $ 122,849 $ 324,658 $1,010,573 Interest bearing deposits in financial institutions........................... -- -- 450,000 Receivable from subsidiary.................................................... -- 242,493 -- Investment in Subsidiary, at equity........................................... 10,211,874 9,211,212 3,820,415 Other assets.................................................................. 83,170 51,232 -- ------------- ---------- ---------- Total assets................................................................ $ 10,417,893 $9,829,595 $5,280,988 ------------- ---------- ---------- ------------- ---------- ---------- Liabilities: Note payable.................................................................. $ 375,000 $1,750,000 $ -- Accrued liabilities........................................................... 6,192 13,914 -- ------------- ---------- ---------- Total liabilities........................................................... 381,192 1,763,914 -- ------------- ---------- ---------- Shareholders' equity: Common stock.................................................................. 35,166 30,408 22,734 Additional paid-in capital.................................................... 9,364,515 8,113,214 5,806,116 Retained earnings (deficit)................................................... 573,311 (75,102) (547,862) Treasury stock................................................................ (50,830) Unrealized gain (loss) on available-for-sale securities....................... 114,539 (2,839) -- ------------- ---------- ---------- Total shareholders' equity.................................................. 10,036,701 8,065,681 5,280,988 ------------- ---------- ---------- Total liabilities and shareholders' equity................................ $ 10,417,893 $9,829,595 $5,280,988 ------------- ---------- ---------- ------------- ---------- ----------
F-21 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. PARENT COMPANY FINANCIAL INFORMATION: (CONTINUED) CONDENSED PARENT COMPANY ONLY STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 (UNAUDITED) AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SEPTEMBER 30, DECEMBER 31, -------------------- ------------------------------- 1995 1994 1994 1993 1992 --------- --------- --------- --------- --------- (UNAUDITED) (UNAUDITED) Interest income....................... $ 6,459 $ 20,912 $ 24,685 $ 12,813 $ 13,517 Interest expense...................... (111,915) -- (11,075) -- -- --------- --------- --------- --------- --------- Net interest income (expense) before provision for loan loss............ (105,456) 20,912 13,610 12,813 13,517 Recovery on loan loss................. -- 3,101 3,101 64,416 65,445 --------- --------- --------- --------- --------- Net interest income................. (105,456) 24,013 16,711 77,229 78,962 Noninterest expense................... (184,868) (163,487) (207,473) (255,999) (355,862) Equity in net income of subsidiary.... 886,123 430,105 390,797 549,493 293,324 --------- --------- --------- --------- --------- Net income before income taxes.... 595,799 290,631 200,035 370,723 16,424 Income tax expense (benefit): Current............................. (52,614) -- (242,493) -- -- Deferred............................ -- (3,103) (30,232) -- -- --------- --------- --------- --------- --------- Net income........................ $ 648,413 $ 293,734 $ 472,760 $ 370,723 $ 16,424 --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
F-22 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. PARENT COMPANY FINANCIAL INFORMATION: (CONTINUED) CONDENSED PARENT COMPANY ONLY STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994 AND FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
SEPTEMBER 30, DECEMBER 31, ------------------------ ---------------------------------- 1995 1994 1994 1993 1992 ----------- ----------- ----------- ---------- --------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net income................................................ $ 648,413 $ 293,734 $ 472,760 $ 370,723 $ 16,424 Adjustments to reconcile net income to net cash used in operating activities: Equity in net income of subsidiary...................... (886,123) (433,207) (390,797) (549,493) (293,324) Recovery on loan losses................................. -- -- -- (64,416) (65,445) Depreciation and amortization........................... -- -- -- -- 35,015 Net increase (decrease) in accrued liabilities.......... 109,656 -- 11,075 -- (155,648) Net increase in other assets............................ (31,938) (119,743) (51,232) -- -- ----------- ----------- ----------- ---------- --------- Net cash provided (used) in operating activities...... (159,992) (259,216) 41,806 (243,186) (462,978) ----------- ----------- ----------- ---------- --------- Cash flows from investing activities: Proceeds from the maturity of interest.................... -- 100,000 450,000 50,000 -- Purchase of interest bearing deposits..................... -- -- -- -- (500,000) Net (increase) decrease in receivable from subsidiary..... 242,493 -- (242,493) -- -- Net (increase) decrease in loans.......................... -- -- -- 207,582 185,480 Direct cost incurred for probable bank acquisition........ -- -- -- 71,935 (71,935) Investment in subsidiary.................................. (114,539) (1,000,000) (5,000,000) -- -- ----------- ----------- ----------- ---------- --------- Net cash (used) provided in investing activities...... 127,954 (900,000) (4,792,493) 329,517 (386,455) ----------- ----------- ----------- ---------- --------- Cash flows from financing activities: Sale of common stock...................................... 1,256,059 394,713 2,314,772 851,903 779,143 Short-term debt........................................... (1,375,000) -- 1,750,000 -- -- Purchase of Treasury Stock................................ (50,830) ----------- ----------- ----------- ---------- --------- Net cash provided in financing activities............. (169,771) 394,713 4,064,772 851,903 779,143 Net (decrease) increase in cash............................. (201,809) (764,503) (685,915) 938,234 (70,290) Beginning cash and cash equivalents......................... 324,658 1,010,573 1,010,573 72,339 142,629 ----------- ----------- ----------- ---------- --------- Ending cash and cash equivalents............................ $ 122,849 $ 246,070 $ 324,658 $1,010,573 $ 72,339 ----------- ----------- ----------- ---------- --------- ----------- ----------- ----------- ---------- ---------
F-23 SURETY CAPITAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. SUBSEQUENT EVENTS: On October 17, 1995 and as amended on January 16, 1996, the Company and Surety Bank entered into an agreement to acquire First National Bank, a national banking association located in Midlothian, Texas. Under the proposed structure of the transaction, a subsidiary of Surety Bank (to be organized by Surety Bank under the name of "Surety Acquisition, Inc.") will first merge with and into First National Bank's parent holding company, First Midlothian Corporation ("First Midlothian"), pursuant to which merger (the "Merger") the shareholders of First Midlothian will receive cash in exchange for their shares of capital stock of First Midlothian in an amount equal to one hundred and fifty percent (150%) of the book value of First National Bank. Surety Acquisition, Inc. will be a Texas corporation, and its proposed activities will be limited to facilitating Surety Bank's acquisition of First Midlothian and, indirectly, First National Bank. Immediately following the Merger, First National Bank and Surety Bank will consolidate under the charter of Surety Bank (the "Consolidation"). Upon consummation of the Consolidation, First Midlothian will be dissolved. The Company is in the process of preparing the various regulatory applications necessary to consummate the proposed acquisition. As of September 30, 1995 First Midlothian Corporation had total assets of $52,130,000, total deposits of $47,160,000, total net loans of $20,094,000, total equity of $3,763,000 and net income for the nine months ended September 30, 1995 of $306,000. The completion of the acquisition is subject to a number of contingencies, including regulatory approval by applicable banking authorities, the raising of sufficient funds by the Company to facilitate the acquisition, shareholder approval, and other matters. If consummated, the transactions are expected to occur during the first quarter of 1996. F-24 REPORT OF INDEPENDENT ACCOUNTANTS' Board of Directors and Shareholders First Midlothian Corporation Midlothian, Texas We have audited the accompanying consolidated balance sheets of First Midlothian Corporation as of September 30, 1995 and December 31, 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for the nine months ended September 30, 1995 and for each of the two years in the period ended December 31, 1994. 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Midlothian Corporation as of September 30, 1995 and December 31, 1994, and the consolidated results of their operations and their cash flows for the nine months ended September 30, 1995 and for each of the two years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 2 to the financial statements, First Midlothian Corporation changed its method of accounting for investment securities and income taxes in 1994 and 1993, respectively. SAMSON, ROBBINS & ASSOCIATES, P.L.L.C. November 1, 1995 Dallas, Texas F-25 FIRST MIDLOTHIAN CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1995 AND DECEMBER 31, 1994 ASSETS
SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------- Assets: Cash and due from banks.......................................................... $ 3,586,274 $ 2,150,392 Federal funds sold............................................................... 7,100,000 2,640,000 ------------- ------------- Cash and cash equivalents...................................................... 10,686,274 4,790,392 Investment securities.............................................................. 19,309,212 20,512,375 Net loans.......................................................................... 20,094,209 20,396,952 Premises and equipment, net........................................................ 861,532 854,488 Accrued interest receivable........................................................ 429,114 460,611 Other real estate and repossessed assets........................................... 653,035 1,046,724 Net deferred tax asset............................................................. 51,226 205,101 Other assets....................................................................... 45,640 48,423 ------------- ------------- Total assets................................................................. $ 52,130,242 $ 48,315,066 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Demand deposits.................................................................. $ 10,154,310 $ 9,191,492 Savings, NOW and money markets................................................... 16,729,861 16,766,651 Time deposits, $100,000 and over................................................. 1,963,600 1,546,147 Other time deposits.............................................................. 18,312,770 16,096,716 ------------- ------------- Total deposits................................................................. 47,160,541 43,601,006 Subordinated debentures............................................................ 674,707 674,707 Accrued interest payable and other liabilities..................................... 531,893 468,933 ------------- ------------- Total liabilities.............................................................. 48,367,141 44,744,646 Commitments and contingent liabilities............................................. -- -- Shareholders' equity: Common stock, $10 par value, 48,000 shares authorized, issued and outstanding.... 480,000 480,000 Additional paid-in capital......................................................... 679,493 679,493 Retained earnings.................................................................. 2,603,608 2,417,344 Unrealized loss on available-for-sale securities................................... 0 (6,417) ------------- ------------- Total shareholders' equity..................................................... 3,763,101 3,570,420 ------------- ------------- Total liabilities and shareholders' equity................................... $ 52,130,242 $ 48,315,066 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the consolidated financial statements. F-26 FIRST MIDLOTHIAN CORPORATION CONSOLIDATED STATEMENTS OF INCOME
FOR THE FOR THE FOR THE NINE MONTHS ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993 ------------------ ----------------- ----------------- Interest income: Commercial and real estate loans.................................... $1,240,594 $1,466,820 $1,555,773 Consumer loans...................................................... 296,496 351,874 299,759 Federal funds sold.................................................. 320,679 185,581 341,754 Investment securities and interest bearing deposits................. 866,236 963,043 659,231 Other interest income............................................... 1,757 32,621 35,923 ------------------ ----------------- ----------------- Total interest income............................................. 2,725,762 2,999,939 2,892,440 ------------------ ----------------- ----------------- Interest expense: Savings, NOW and money markets...................................... 368,646 327,632 363,056 Time deposits, $100,000 and over.................................... 202,403 134,369 121,505 Other time deposits................................................. 595,985 627,142 641,687 Other interest expense.............................................. 68,011 81,777 88,846 ------------------ ----------------- ----------------- Total interest expense............................................ 1,235,045 1,170,920 1,215,094 ------------------ ----------------- ----------------- Net interest income before provision for loan losses............ 1,490,717 1,829,019 1,677,346 Provision for loan losses............................................. 35,000 0 0 ------------------ ----------------- ----------------- Net interest income............................................. 1,455,717 1,829,019 1,677,346 ------------------ ----------------- ----------------- Noninterest income.................................................... 469,788 627,846 645,961 ------------------ ----------------- ----------------- Noninterest expense: Salaries and employee benefits...................................... 720,361 941,462 881,923 Occupancy and equipment............................................. 156,170 194,860 181,048 General and administrative.......................................... 592,140 936,371 1,035,401 ------------------ ----------------- ----------------- Total noninterest expense......................................... 1,468,671 2,072,693 2,098,372 ------------------ ----------------- ----------------- Income before income taxes...................................... 456,834 384,172 224,935 Income tax expense: Current............................................................. 0 0 0 Deferred............................................................ 150,570 109,229 57,632 ------------------ ----------------- ----------------- Total tax expense............................................... 150,570 109,229 57,632 ------------------ ----------------- ----------------- Net income...................................................... $ 306,264 $ 274,943 $ 167,303 ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Net income per share of common stock.................................. $ 6.38 $ 5.73 $ 3.49 ------------------ ----------------- ----------------- ------------------ ----------------- ----------------- Weighted average shares outstanding................................... 48,000 48,000 48,000 ------------------ ----------------- ----------------- ------------------ ----------------- -----------------
The accompanying notes are an integral part of the consolidated financial statements. F-27 FIRST MIDLOTHIAN CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
UNREALIZED GAIN/(LOSS) ON COMMON STOCK ADDITIONAL AVAILABLE TOTAL --------------------- PAID-IN RETAINED FOR SALE SHAREHOLDERS' SHARES PAR VALUE CAPITAL EARNINGS SECURITIES EQUITY --------- ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1992 as previously reported................. 48,000 $ 480,000 $ 679,493 $ 1,605,971 $ 0 $ 2,765,464 Cumulative effect on prior years of change in accounting principle...... 369,127 369,127 --------- ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1992 as restated............................ 48,000 480,000 679,493 1,975,098 0 3,134,591 Net income........................... 167,303 167,303 --------- ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1993......... 48,000 480,000 679,493 2,142,401 0 3,301,894 Net income 274,943 274,943 Unrealized (loss) on available- for-sale securities, net of income taxes............................... (6,417) (6,417) --------- ---------- ---------- ------------ ----------- ------------- Balance at December 31, 1994......... 48,000 480,000 679,493 2,417,344 (6,417) 3,570,420 Net income........................... 306,264 306,264 Dividends paid....................... (120,000) (120,000) Unrealized gain on available-for-sale securities, net of income taxes..... 6,417 6,417 --------- ---------- ---------- ------------ ----------- ------------- Balance at September 30, 1995........ 48,000 $ 480,000 $ 679,493 $ 2,603,608 $ 0 $ 3,763,101 --------- ---------- ---------- ------------ ----------- ------------- --------- ---------- ---------- ------------ ----------- -------------
The accompanying notes are an integral part of the consolidated financial statements. F-28 FIRST MIDLOTHIAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED FOR THE YEAR FOR THE YEAR SEPTEMBER 30, ENDED DECEMBER ENDED DECEMBER 1995 31, 1994 31, 1993 ------------- -------------- -------------- Cash flows from operating activities: Net income...................................................... $ 306,264 $ 274,943 $ 167,303 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan loss....................................... 35,000 0 0 Depreciation.................................................. 54,900 72,300 63,600 (Discount accretion)/premium amortization..................... (98,834) (19,895) 155,671 Loss on sale or disposal of other real estate................. 57,250 76,061 189,967 Loss on sale of investment securities......................... 0 15,548 0 Net change in accrued interest receivable..................... 31,497 (9,236) 4,123 Net change in other assets.................................... 2,137 24,696 15,224 Net change in deferred tax asset.............................. 150,570 109,227 57,632 Net change in accrued interest payable and other liabilities.................................................. 63,606 (13,800) (88,163) ------------- -------------- -------------- Net cash provided by operating activities................... 602,390 529,844 565,357 ------------- -------------- -------------- Cash flows from investing activities: Proceeds from the maturity of held-to-maturity securities and interest bearing deposits...................................... 11,320,000 18,365,125 20,822,000 Proceeds from maturity of available-for-sale securities......... 4,000,000 0 0 Purchase of premises and equipment.............................. (61,945) (87,408) (62,953) Net decrease in loans........................................... 267,743 307,459 59,028 Proceeds from sale of other real estate......................... 336,440 377,819 598,850 Purchase of held-to-maturity securities......................... (14,008,281) (15,906,164) (20,186,250) Purchase of available-for-sale securities....................... 0 (3,927,657) 0 ------------- -------------- -------------- Net cash provided by (used in) investing activities......... 1,853,957 (870,826) 1,230,675 ------------- -------------- -------------- Cash flows from financing activities: Net change in deposits.......................................... 3,559,535 (2,097,951) (4,622,469) Payments on debentures.......................................... 0 (99,040) (62,203) Dividends paid.................................................. (120,000) 0 0 ------------- -------------- -------------- Net cash provided by (used in) financing activities......... 3,439,535 (2,196,991) (4,684,672) ------------- -------------- -------------- Net increase (decrease) in cash................................... 5,895,882 (2,537,973) (2,888,640) Beginning cash and cash equivalents............................... 4,790,392 7,328,365 10,217,005 ------------- -------------- -------------- Ending cash and cash equivalents.................................. $ 10,686,274 $ 4,790,392 $ 7,328,365 ------------- -------------- -------------- ------------- -------------- -------------- Supplemental disclosure: Cash paid during the period for interest........................ $ 1,127,892 $ 1,182,505 $ 1,267,670 ------------- -------------- -------------- ------------- -------------- -------------- Cash paid during the period for income taxes.................... $ 0 $ 0 $ 0 ------------- -------------- -------------- ------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial statements F-29 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of the Company and its subsidiary, First National Bank in Midlothian ("Bank"), which is 100% owned. All significant intercompany transactions and balances have been eliminated in consolidation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and federal funds sold. Generally, federal funds are sold for one day periods. INVESTMENT SECURITIES Effective January 1, 1994, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). This statement addresses the accounting and reporting for investments in equity securities that have readily determined fair values for all investments in debt securities. Management determines the appropriate classification of securities at time of purchase. If the securities are purchased with the positive intent and the ability to hold the securities until maturity, they are classified as held-to-maturity and carried at historical cost, adjusted for amortization of premiums and accretion of fees and discounts using the effective interest method. Securities to be held for indefinite periods of time are classified as available-for-sale and carried at fair value. Securities purchased and held principally for the purpose of selling them in the near term are classified as trading. The Company has no securities classified as trading as of September 30, 1995. The cost of securities sold is based on the specific identification method. The Company has no securities classified as available-for-sale at September 30, 1995. LOANS AND ALLOWANCE FOR LOAN LOSSES Loans are stated at the amount of unpaid principal, reduced by unearned interest and an allowance for loan losses. The allowance for loan losses is established through a provision for loan losses charged against current earnings. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance for loan losses is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based upon evaluation of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. Interest income on installment loans is recognized by a method which approximates the interest method. Interest income on commercial and real estate loans is accrued daily on the amount of outstanding principal. Accrual of interest is discontinued on a loan when management believes, after considering economic and business conditions and collection efforts, that a borrower's financial condition is such that collection of interest and principal is doubtful. Management evaluates the book value (including accrued interest) and collateral value on loans placed on nonaccrual status and provides specific allowance for loan losses as deemed appropriate. Certain fees and costs associated with the origination of loans are recognized when received. Management has determined that fees collected offset actual expenses incurred to process the subject loans. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method at rates sufficient to amortize the cost over the estimated lives of the assets. Expenditures for repairs and maintenance are expensed as incurred, and renewals and betterments that F-30 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) extend the lives of assets are capitalized. Cost and accumulated depreciation are eliminated from the accounts when assets are sold or retired and any resulting gain or loss is reflected in operations in the year of disposition. OTHER REAL ESTATE AND REPOSSESSED ASSETS Foreclosed real estate and other assets are recorded at the lower of the unpaid balance of the related loan or the fair market value of the property. Any write down to fair market value at the date of acquisition is charged against the allowance for loan losses. Any subsequent write downs are reflected in operations. INCOME PER SHARE Net income per share of common stock is computed based upon the weighted average number of shares of common stock outstanding during the years ended December 31, 1994 and 1993 and for the nine months ended September 30, 1995. INCOME TAXES During 1993, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) No. 109 whereby the method of accounting for income taxes utilized an asset and liability approach for financial statement purposes. Under SFAS No. 109, the types of differences between the tax bases of assets and liabilities and their financial reporting amounts that give rise to significant portions of deferred income tax liabilities or assets include: allowances for possible loan losses, property and equipment, investment securities and net operating loss carryforwards. The change in accounting did not have an effect on the Company's consolidated financial position or results of operations. First Midlothian Corporation and its subsidiary will file a consolidated tax return for 1995. The Company has a tax sharing arrangement with its subsidiary. 3. INVESTMENT SECURITIES: At September 30, 1995 the amortized cost and estimated market values of investment securities are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------- ----------- ----------- ------------- Held-to-Maturity: U.S. Treasury............................................ $ 18,000,874 $ 45,676 $ 5,340 $ 18,041,210 Obligations of other U.S. Government agencies and corporations............................................ 1,000,000 2,190 0 1,002,190 State and county municipals.............................. 263,938 2,964 0 266,902 Federal Reserve Bank stock............................... 44,400 0 0 44,400 ------------- ----------- ----------- ------------- $ 19,309,212 $ 50,830 $ 5,340 $ 19,354,702 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
F-31 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT SECURITIES: (CONTINUED) At December 31, 1994 the amortized cost and estimated market values of investment securities are as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES MARKET VALUE ------------- ----------- ----------- ------------- Held-to-Maturity: U.S. Treasury............................................ $ 16,258,839 $ 0 $ 170,257 $ 16,088,582 Obligations of other U.S. Government agencies and corporations............................................ 0 0 0 0 State and county municipals.............................. 283,736 1,623 0 285,359 Federal Reserve Bank stock............................... 44,400 0 0 44,400 ------------- ----------- ----------- ------------- 16,586,975 1,623 170,257 16,418,341 ------------- ----------- ----------- ------------- Available-for-Sale: U.S. Treasury............................................ 3,935,122 0 9,722 3,925,400 Obligations of other U.S. Government agencies and corporations............................................ 0 0 0 0 ------------- ----------- ----------- ------------- 3,935,122 0 9,722 3,925,400 ------------- ----------- ----------- ------------- $ 20,522,097 $ 1,623 $ 179,979 $ 20,343,741 ------------- ----------- ----------- ------------- ------------- ----------- ----------- -------------
The amortized cost and estimated market value of investment securities at September 30, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED ESTIMATED COST MARKET VALUE ------------- ------------- Held-to-Maturity: Due within one year.................................................... $ 6,990,206 $ 6,999,510 Due after one year through five years.................................. 12,249,938 12,285,792 Due after five years through ten years................................. 24,668 25,000 Other Securities....................................................... 44,400 44,400 ------------- ------------- Total................................................................ $ 19,309,212 $ 19,354,702 ------------- ------------- ------------- -------------
Proceeds from maturities of investment securities during the nine months ended September 30, 1995 were $15,320,000 with no gross recognized gains or losses. Proceeds from maturities of investment securities during the twelve months ended December 31, 1994 were $18,365,125 with gross recognized losses of $15,548. These securities were sold within ninety (90) days of the maturity dates and did not impact the classification of other held-to-maturity securities. Proceeds from maturities of investment securities during the twelve months ended December 31, 1993 were $20,822,000 with no gross recognized gains or losses. At September 30, 1995, and December 31, 1994, the carrying value of Federal Reserve Bank stock was $44,400. The Federal Reserve Bank stock's market value was estimated to be the same as its carrying value at both September 30, 1995 and December 31, 1994. At September 30, 1995 and December 31, 1994, securities with a carrying amount of approximately $6,550,000 and $7,537,000, respectively, were pledged as collateral for public deposits, as required or permitted by law. F-32 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENT SECURITIES: (CONTINUED) At September 30, 1995, there were no investment securities classified as available-for-sale securities. The gross unrealized loss on the available-for-sale securities at December 31, 1994 was $9,722. 4. NET LOANS: The loan portfolio was composed of the following:
SEPTEMBER 30, DECEMBER 31, 1995 1994 ------------- ------------- Commercial loans......................................................... $ 4,210,529 $ 5,505,238 Real estate loans........................................................ 12,378,272 11,550,776 Installment loans........................................................ 3,958,983 3,659,907 Overdrafts............................................................... 5,613 122,934 ------------- ------------- Total loans............................................................ 20,553,397 20,838,855 Deduct: Unearned interest...................................................... (228,573) (185,320) Allowance for loan losses.............................................. (230,615) (256,583) ------------- ------------- Net loans............................................................ $ 20,094,209 $ 20,396,952 ------------- ------------- ------------- -------------
A summary of the changes in the allowance for loan losses for the nine months ended September 30, 1995 and years ended December 31, 1994 and 1993 are as follows:
1995 1994 1993 ---------- ---------- ---------- Beginning balance.................................................. $ 256,583 $ 317,372 $ 346,582 Provision for loan losses.......................................... 35,000 0 0 Loans charged off.................................................. (82,919) (84,079) (45,416) Recoveries......................................................... 21,951 23,290 16,206 ---------- ---------- ---------- $ 230,615 $ 256,583 $ 317,372 ---------- ---------- ---------- ---------- ---------- ----------
Note that no provision for loan losses was recorded during the two years ended December 31, 1993 and 1994, respectively. During 1991, the Company was required to increase the allowance for loan loss significantly based upon actual experience levels at that time. Subsequent to 1991, the Company's experience relative to loan loss has improved such that no material provision has been required. Loans on which the accrual of interest has been discontinued amounted to approximately $128,621 and $52,663 at September 30, 1995 and December 31, 1994, respectively. Included in commercial and installment loans at September 30, 1995 and December 31, 1994, are approximately $934,378 and $1,414,804, respectively, of loans to employees, officers, and/or directors, or their interests. 5. OTHER REAL ESTATE AND REPOSSESSED ASSETS: Other real estate and repossessed assets consisted of the following at:
SEPTEMBER 30, DECEMBER 31, 1995 1994 1993 ------------- ------------ ------------ Other real estate............................................ $ 713,268 $ 1,173,812 $ 1,511,764 Allowance for possible loss: Beginning balance.......................................... (127,088) (140,151) (250,613) Charge offs................................................ 69,441 13,063 123,285 Provision charged to expense............................... (2,586) -- (12,823) ------------- ------------ ------------ Ending balance............................................. (60,233) (127,088) (140,151) ------------- ------------ ------------ Net other real estate........................................ $ 653,035 $ 1,046,724 $ 1,371,613 ------------- ------------ ------------
F-33 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. PREMISES AND EQUIPMENT: Premises and equipment at September 30, 1995 and December 31, 1994 are summarized as follows:
1995 1994 ------------ ------------ Land........................................................................ $ 64,277 $ 64,277 Building.................................................................... 989,222 971,697 Furniture, fixtures and computers........................................... 399,200 646,761 Automobiles................................................................. 53,289 53,289 ------------ ------------ 1,505,988 1,736,024 Less accumulated depreciation............................................... (644,456) (881,536) ------------ ------------ Net premises and equipment.................................................. $ 861,532 $ 854,488 ------------ ------------ ------------ ------------
During 1995, the Company adjusted premises and equipment to reflect obsolete, non-utilized items that were fully depreciated in prior years. The effect was to reduce the asset cost and accumulated depreciation by approximately $291,000. Depreciation expense was $54,900, $72,300 and $63,600 for the period ended September 30, 1995 and the years ended December 31, 1994 and 1993, respectively. 7. SUBORDINATED DEBENTURES: Subordinated Debentures at September 30, 1995 and December 31, 1994 are summarized as follows:
1995 1994 ---------- ---------- 1982 Subordinated Debentures......................................... 12% $ 339,707 $ 339,707 1991 Subordinated Debentures: Series D........................................................... 9.75% 55,000 55,000 Series E........................................................... 9.75% 70,000 70,000 Series F........................................................... 10.00% 70,000 70,000 Series G........................................................... 10.00% 70,000 70,000 Series H........................................................... 10.00% 70,000 70,000 ---------- ---------- $ 674,707 $ 674,707 ---------- ---------- ---------- ----------
Interest is payable semiannually with the principle due at maturity. The following is a summary of maturities of Subordinated Debentures at September 30, 1995. Due within one year....................................................... $ 55,000 Due after one year through five years..................................... 619,707 --------- $ 674,707 --------- ---------
The 1982 Subordinated Debentures are held by several shareholders of the Company. The 1991 Subordinated Debentures are held by shareholders with the exception of $100,000 which is held by two (2) significant customers of the Bank. 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: The Company's subsidiary Bank is party to financial instruments with off-balance sheet risk, entered into in the normal course of business to meet the financing needs of its customers. These financial instruments include loan commitments and letters of credit. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. F-34 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK: (CONTINUED) The subsidiary Bank's exposure to credit loss in the event of nonperformance by counterparties to loan commitments and letters of credit is represented by the contractual amount of those instruments. The subsidiary Bank uses the same credit policies in making commitments and conditional obligations as are used in underwriting on-balance sheet instruments. The total amounts of financial instruments with off-balance sheet risk at September 30, 1995 and December 31, 1994 are as follows:
1995 1994 ---------- ---------- Unfunded loan commitments....................................................... $ 708,561 $ 761,132 Letters of credit............................................................... 79,597 80,602
Since many of the loan commitments may expire without being drawn upon, the total commitment amount does not necessarily represent future cash requirements. Loans are made in accordance with formal written loan policies. The subsidiary Bank evaluates each customer's credit worthiness on a case by case basis. The amount of collateral obtained, if deemed necessary by the subsidiary Bank, upon extension of credit is based on management's evaluation of the counterparty. Collateral held varies, but may include cash, accounts receivable, inventory, property, equipment and real estate. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There was no collateral required by management for the letters of credit. The subsidiary Bank sold $7,100,000 and $2,640,000 in federal funds at September 30, 1995 and December 31, 1994, respectively. These funds represent uncollateralized loans made by the Bank, in varying amounts, to commercial banks with whom the subsidiary Bank has correspondent relationships. The subsidiary Bank maintains deposits with other financial institutions in amounts which exceed FDIC insurance coverage. At September 30, 1995 and December 31, 1994, approximately $1,998,006 and $0, respectively, of such balances were uninsured. 9. SHAREHOLDERS' EQUITY: In 1982, the Company acquired all of the common stock of the subsidiary Bank. Shareholders of the Bank stock were issued the same number of shares of common stock of the Company as they had held in the Bank. The Company does not have any warrants or options issued or outstanding. The Company is not subject to any restrictions on the amount of dividends that it may declare by any regulatory agency, however dividends must be paid out of retained earnings. On June 30, 1995, the Company declared and paid a $2.50 per share dividend for the shareholders of record as of that date. 10. NET INCOME PER COMMON SHARE: Net income per common share for the periods ended September 30, 1995 and December 31, 1994 and 1993 was based upon the weighted average shares of common stock outstanding of 48,000 shares, respectively. 11. FEDERAL INCOME TAX: Effective January 1, 1993, the Company adopted STATEMENT OF FINANCIAL ACCOUNTING STANDARDS (SFAS) No. 109, "Accounting for Income Taxes". In accordance with the provisions of this statement, the Company elected to restate prior years by recording the cumulative effect of this restatement as an increase to retained earnings of approximately $370,000 at January 1, 1993. F-35 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. FEDERAL INCOME TAX: (CONTINUED) The components of the net deferred asset recognized at September 30, 1995 and December 31, 1994 are as follows:
1995 1994 --------- ---------- Deferred tax liability: Allowance for loan losses...................................................... $ 20,477 $ 32,379 --------- ---------- 20,477 32,379 --------- ---------- Deferred tax asset: Tax net operating losses....................................................... 51,195 203,006 Depreciation................................................................... 1,115 1,115 Securities..................................................................... 8,945 12,250 Allowance for real estate losses............................................... 10,448 21,109 --------- ---------- 71,703 237,480 --------- ---------- Valuation allowance.............................................................. 0 0 --------- ---------- Net deferred tax asset....................................................... $ 51,226 $ 205,101 --------- ---------- --------- ----------
The Company's effective tax rate on income before income taxes differs from the U.S. statutory tax rate as follows:
DECEMBER 31, SEPTEMBER 30, --------------- 1995 1994 1993 ------------- ------ ------ U.S. statutory rate......................................... 34.0% 34.0% 34.0% Tax-exempt interest......................................... (1.0)% (5.6)% (8.4)% --- ------ ------ Effective tax rate.......................................... 33.0% 28.4% 25.6% --- ------ ------ --- ------ ------
As of September 30, 1995, the Company has a net operating loss carryforward of approximately $150,000 for income tax reporting purposes which expires, if not used, in 2005 through 2008. F-36 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. OTHER NONINTEREST INCOME AND EXPENSE: Other noninterest income and expense for the nine months ended September 30, 1995, and the years ended December 31, 1994, 1993 were composed of the following:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1995 1994 1993 ------------- ------------ ------------ Noninterest income: Service charges.................................................... $ 396,109 $ 513,834 $ 517,836 Other fees......................................................... 39,772 50,559 51,940 Other.............................................................. 33,907 63,453 76,185 ------------- ------------ ------------ Total............................................................ $ 469,788 $ 627,846 $ 645,961 ------------- ------------ ------------ ------------- ------------ ------------ General and administrative expense: Data processing.................................................... $ 150,706 $ 207,875 $ 195,821 FDIC and exam assessments.......................................... 38,078 134,600 154,201 ORE expense........................................................ 85,147 122,097 288,128 Office expense..................................................... 80,410 119,314 121,804 Directors fees..................................................... 58,600 64,095 67,820 Advertising........................................................ 50,026 53,939 58,645 Professional fees.................................................. 43,137 49,895 27,941 Loss on maturity of securities..................................... -- 15,548 -- Other.............................................................. 86,036 169,008 121,041 ------------- ------------ ------------ Total............................................................ $ 592,140 $ 936,371 $1,035,401 ------------- ------------ ------------ ------------- ------------ ------------
13. COMMITMENTS AND CONTINGENCIES: In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. Management does not anticipate any material adverse effect on the financial condition of the Company as a result of these commitments. The Company is party to various operating leases and contracts. The Company has a contract with Electronic Data Systems (EDS) to provide data processing services for the subsidiary Bank. This contract, which expires February 28, 1997, is based on usage and items processed. The average cost of this contract over the past past three years is approximately $10,000 -- $12,000 per month. This agreement can be canceled with a six month notice but requires the Bank to pay for the remaining term of the contract at 80% of the normal usage. In addition, the Company has a maintenance agreement for the drive-in turbo lanes and leases offsite storage facilities. The maintenance agreement is for a term of seven years and expires in March, 1996. The storage lease is for a term of two years and expires in March, 1997. These agreements cost $1,800 per year and $550 per month, respectively. The following is a schedule of future estimated minimum payments required under these operating leases: 1996...................................................... $ 112,650 1997...................................................... 19,250 --------- Total minimum payment..................................... $ 131,900 --------- ---------
In the normal course of business, the subsidiary Bank may become involved in routine claims and lawsuits. While the results of litigation cannot be predicted with certainty, management, in consultation with legal counsel, believes that the final outcome of any of these matters, or of any unasserted claims, will not have a material adverse effect on the Company's financial condition or results of operations. F-37 FIRST MIDLOTHIAN CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. RESTRICTIONS ON RETAINED EARNINGS: The primary source of funds for cash distributions by the Company to its shareholders is dividends received from its subsidiary Bank. The amount of dividends that the subsidiary Bank may declare in a calendar year without approval by the OCC is the Bank's net profits for that year combined with its net retained profits, as defined, for the two preceding years. At September 30, 1995, approximately $465,000 of the Bank's retained earnings were available for dividend distribution to the Company without prior regulatory approval. 15. REGULATORY MATTERS: The Company's subsidiary Bank is subject to various regulatory capital requirements administered by the 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 Bank's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under the regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. The Bank must maintain a minimum of qualifying total capital and core capital to risk-weighted assets of 8% and 4%, respectively. Management believes, as of September 30, 1995, that the Bank meets all capital requirements to which it is subject. The following is a summary of the Bank's capital ratios at September 30, 1995 and December 31, 1994:
SEPTEMBER 30, DECEMBER 31, 1995 1994 --------------- -------------- Total capital to risk-weighted assets................. 19.67% 19.30% Core capital to risk-weighted assets.................. 18.66% 18.15% Capital to total assets (leverage).................... 8.28% 8.56%
16. SUBSEQUENT EVENT: The Company has entered into a contract to be acquired by Surety Capital, a bank holding company located in Hurst, Texas. Surety Capital intends to merge the sole subsidiary of the Company, First National Bank of Midlothian, with and into Surety Capital's subsidiary, Surety Bank, National Association. It is anticipated that First Midlothian Corporation will be dissolved upon completion of the merger of the two banks. The current shareholders of the Company will receive cash in exchange for the stock held in the Company as a result of this transaction. The Board of Directors of the Company has approved this transaction. However, the completion of the purchase is subject to a number of contingencies, including approval by the applicable banking authorities, due diligence review of the Company's business operations, the raising of sufficient funds by Surety Capital to facilitate the acquisition, shareholder approval by the Company's shareholders and Surety Bank shareholders, and other matters. Assuming all activities are satisfactorily completed, the transaction is expected to close during the first quarter of 1996. F-38 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH JURISDICTION. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING SHAREHOLDER. NEITHER THE DELIVERY OF THIS PROSPECTUS OR ANY PROSPECTUS SUPPLEMENT NOR ANY SALE MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION. ------------------- TABLE OF CONTENTS
PAGE --------- Prospectus Summary............................. 3 Summary Consolidated Financial Data............ 5 Recent Unaudited Selected Consolidated Financial Data................................ 6 Investment Considerations...................... 7 Use of Proceeds................................ 8 Capitalization................................. 9 Market Price and Dividend Policy............... 9 The Midlothian Bank Acquisition................ 10 Selected Consolidated Financial Data........... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 16 Business....................................... 37 Regulation and Supervision..................... 43 Management..................................... 49 Selling Shareholder............................ 54 Beneficial Stock Ownership..................... 54 Description of Securities...................... 56 Underwriting................................... 56 Legal Matters.................................. 57 Experts........................................ 57 Available Information.......................... 57 Index to Financial Statements.................. F-1
2,100,000 Shares Surety Capital Corporation COMMON STOCK ----------------- PROSPECTUS ----------------- HOEFER & ARNETT Incorporated , 1996 - ------------------------------------------- ------------------------------------------- - ------------------------------------------- ------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses to be borne by the Company in connection with the sale and distribution of the securities being registered other than underwriting discounts and commissions. All of the amounts shown are estimates, except the Securities and Exchange Commission registration fee. Registration Fee.................................................. $ 2,704 Printing and Electronic Filing Expenses........................... 50,000 Legal Fees and Expenses........................................... 50,000 Accounting Fees and Expenses...................................... 30,000 Underwriting Expenses............................................. 172,000 Miscellaneous..................................................... 20,000 --------- Total......................................................... $ 324,704 --------- ---------
Expenses of the Selling Shareholder in connection with the sale and distribution of its securities being registered other than underwriting discounts and commissions are estimated to be approximately $30,000, reflecting underwriting, legal, and miscellaneous expenses. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the General Corporation Law of the State of Delaware (the "Act") empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity as directors and officers. The Act further provides that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's bylaws, any agreement, vote of the shareholders, or otherwise. Section 6.04 of the Company's Bylaws provides that the Company shall indemnify all persons to the full extent allowable by law who, by reason of the fact that they are or were a director of the Company, become a party or are threatened to be made a party to any indemnifiable action, suit or proceeding. The Company shall pay, in advance of the final disposition of any indemnifiable action, suit or proceeding under this bylaw, all reasonable expenses incurred by a director, upon receipt of an undertaking by or on behalf of a director to repay such amount if it is ultimately determined that he is not entitled to be indemnified by the Company under the law. The Company may indemnify persons other than directors, such as officers and employees, as permitted by law. The Company may purchase and maintain insurance on behalf of directors, officers and other persons against any liability asserted against him, whether or not the Company would have the power to indemnify such person against such liability, as permitted by law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. 1. REGULATION S OFFERING. In April 1994, Surety Capital Corporation offered up to 1,555,555 shares of common stock in an offering conducted pursuant to Regulation S promulgated under the Securities Act of 1933, as amended. The sum of 355,000 shares was ultimately sold to four investors $4.50 per share, resulting in aggregate sale proceeds of $1,597,500. For each share of common stock acquired in the Regulation S offering, purchasers also received one warrant giving the holder thereof the right to acquire one additional share of the Company's common stock at a price of $4.50 per share. All of such warrants expired on April 1, 1994 without exercise. The shares were sold on a best efforts basis by Masters Financial Group, Inc., a broker-dealer, registered with the National Association of Securities Dealers, Inc., which received commissions of 10% of the gross proceeds from sales. In addition to commissions, Masters Financial Group, Inc. also received a warrant to acquire 35,500 shares of the Company's common stock at an exercise price of $4.50. This warrant expired unexercised on June 17, 1995. 2. REGULATION D OFFERING. In December 1994, the Company offered up to 1,538,462 shares of common stock in an offering conducted pursuant to Rule 506 of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended. The Company ultimately sold 667,400 shares at a price of $3.25 per share to seven investors, resulting in aggregate sales proceeds of approximately II-1 $2,169,050. The shares were sold on a best efforts basis by Bentley Securities Corporation, a broker-dealer registered with the National Association of Securities Dealers, Inc., which received commissions of 5% of gross proceeds from sales. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. The exhibits and financial statement schedules listed on the accompanying Exhibit Index are filed as part of this Registration Statement and such Exhibit Index is hereby incorporated by reference. ITEM 17. UNDERTAKINGS. The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (7) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hurst, Texas on the 30th of January 1996. SURETY CAPITAL CORPORATION By: /s/ C. JACK BEAN ------------------------------------------ C. Jack Bean, Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE - ----------------------------------------- ------------------------------------------------ -------------------- /s/ C. JACK BEAN Chairman of the Board and Director (Principal January 30, 1996 -------------------------------- Executive Officer) C. Jack Bean /s/ BOB HACKLER Senior Vice President, January 30, 1996 -------------------------------- Secretary and Director Bob Hackler /s/ B.J. CURLEY Vice President and Chief Financial Officer January 30, 1996 -------------------------------- (Principal Financial Officer and B.J. Curley Chief Accounting Officer) /s/ CULLEN W. TURNER Director January 30, 1996 -------------------------------- Cullen W. Turner /s/ G. M. HEINZELMANN Director January 30, 1996 -------------------------------- G. M. Heinzelmann /s/ GARRETT MORRIS Director January 30, 1996 -------------------------------- Garrett Morris
II-3 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- 1.01 Form of underwriting Agreement between Surety Capital Corporation, Hoefer & Arnett, Incorporated and Anchorage Fire & Casualty Insurance Company, in Liquidation with respect to the firm commitment underwriting of shares of the Company's common stock and the shares owned by Anchorage Fire & Casualty Insurance Company, in Liquidation.*** 2.01 Reorganization Agreement by and between Bancwell Financial Corp; Dan W. Brent, Jody Person and Joe M. Pearson; Texas Bank, N.A.; and Surety Capital Corporation dated July 23, 1992; and Agreement to Merge Bank of East Texas with and into Texas Bank, N.A. under the Charter of Texas Bank, N.A. and under the Title of Texas Bank, N.A., dated July 23, 1992. (4) 2.02 Reorganization Agreement by and between Newell Bancshares, Inc.; Dan W. Brent, Jody Pearson and Joe M. Pearson; Texas Bank, N.A.; and Surety Capital Corporation, dated July 23, 1992; and Agreement to Merge First State Bank with and into Texas Bank, N.A. under the Charter of Texas Bank, N.A. and under the Title of Texas Bank, N.A., dated July 23, 1992. (4) 2.03 Reorganization Agreement by and between The Farmers Guaranty State Bank of Kennard; Dr. Frank A. Smith, III; Surety Bank, National Association; and Surety Capital Corporation, dated February 4, 1994; and Agreement to Merge The Farmers Guaranty State Bank of Kennard with and into Surety Bank, National Association under the Charter of Surety Bank, National Association and under the title of Surety Bank, National Association, dated February 4, 1994. (6) 2.04 Reorganization agreement by and between First National Bank, N.A.; Lloyd W. Butts; D.C. Deegan; Norman Denton; Murriel Gilbreath; Robert S. Light; Joe B. Turner, Jr. (the "Shareholders"); Surety Bank, National Association; and Surety Capital Corporation; dated May 24, 1994; and Agreement to Merge between Surety Bank, National Association, First National Bank and Joined in by the Shareholders and Surety Capital Corporation, dated May 24, 1994. (7) 2.05 Reorganization Agreement by and between First Midlothian Corporation, First National Bank, N.A., certain individual shareholders and directors of First Midlothian Corporation, Surety Bank, National Association, and Surety Capital Corporation dated October 17, 1995; and form of Amendment Number One thereto.* 2.06 Agreement to Merge SCC Acquisition, Inc. with and into First Midlothian Corporation Under the Charter of First Midlothian Corporation and Under the Title of First Midlothian Corporation between First Midlothian Corporation; SCC Acquisition, Inc.; and joined in by Surety Bank, National Association and the directors of First Midlothian Corporation and First National Bank, dated October 17, 1995.* 2.07 Agreement to Consolidate First National Bank and Surety Bank, National Association under the Charter of Surety Bank, National Association and under the Title of Surety Bank, National Association between Surety Bank, National Association and First National Bank and joined in by SCC Acquisition, Inc. and Surety Capital Corporation, dated October 17, 1995.* 3.01 Certificate of Incorporation of the Company. (1) 3.02 Amendment to the Certificate of Incorporation, dated April 8, 1987. (2) 3.03 Certificate of Amendment to the Company's Certificate of Incorporation, as filed with the Delaware Secretary of State on April 4, 1988. (3) 3.04 Certificate of Designations Establishing Series of Shares of Preferred Stock, as filed with the Delaware Secretary of State on April 4, 1988. (3) 3.05 Certification of Elimination of Series of Shares of Preferred Stock of the Company as filed with the Delaware Secretary of State on January 31, 1992. (5) 3.06 Certificate of Amendment to Company's Certificate of Incorporation as filed with Delaware Secretary of State on June 14, 1993. (6) 3.07 Form of Common Stock certificate (specimen). (6) 3.08 Restated Bylaws of the Company. (8)
EXHIBIT NUMBER EXHIBIT DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- 5.01 Opinion of Secore & Waller, L.L.P. with respect to the validity of the shares to be registered and issued.* 10.01 Pledge Agreement by and between Surety Capital Corporation and Overton Bank and Trust, N.A., dated December 9, 1994. (9) 10.02 Guaranty Agreement entered into by C. Jack Bean with Overton Bank and Trust, N.A. with respect to the repayment by Surety Capital Corporation of loan from Overton Bank and Trust, N.A., dated December 9, 1994. (9) 10.03 Uniform Commercial Code Financing Statement UCC-1 completed with respect to Overton Bank & Trust, N.A.'s security interest in the Shares of Stock of Surety Bank, N.A., owned by Surety Capital Corporation. (9) 10.04 Promissory Note in the original principal amount of $500,000.00 with Surety Capital Corporation as borrower and Overton Bank and Trust, N.A. as lender with maturity date of June 23, 1996, dated June 23, 1995; and related Security Agreement (collateral Pledge Agreement) dated June 23, 1995. *** 10.05 Surety Capital Corporation 1988 Incentive Stock Option Plan of Surety. (5) 10.06 Form of Change in Control Agreement dated August 16, 1994, as entered into between the Company and C. Jack Bean with schedule identifying parties to substantially similar agreements. (8) 10.07 Lease agreement between Precinct Campus, Inc., as landlord, and Surety Capital Corporation, as tenant, regarding offices located in Hurst, Texas, dated February 14, 1994. (6) 10.08 Surety Capital Corporation 1995 Incentive Stock Option Plan. (8) 10.09 Form of Executive Deferred Compensation Agreement and related Adoption Agreement entered into between Surety Capital Corporation and Bobby W. Hackler and G.M. Heinzelmann, III, dated August 15, 1995.*** 10.10 Form of Letter Agreements between Surety Capital Corporation and Bobby W. Hackler and G. M. Heinzelmann, III, regarding the provision by the Company of term life insurance coverage, dated August 15, 1995.*** 21.01 Subsidiaries of the Registrant.*** 23.01 Consent of Coopers & Lybrand, L.L.P., dated November 28, 1995, with respect to the use of its January 27, 1995 Report.*** 23.02 Consent of Samson, Robbins & Associates, P.L.L.C. with respect to the use of its November 1, 1995 Report.*** 23.03 Consent of Secore & Waller, L.L.P.* 23.04 Consent of Coopers & Lybrand, L.L.P., dated February 2, 1996, with respect to the use of its January 27, 1995 report.*
- ------------------------ (1) Filed with Registration Statement No. 33-1983 on Form S-1 and incorporated by reference herein. (2) Filed with the Company's Form 10-K dated October 31, 1987 and incorporated by reference herein. (3) Filed with the Company's Form 10-Q for the quarter ended April 30, 1988 and incorporated by reference herein. (4) Filed with Registration Statement No. 33-44893 on Form S-3 and incorporated by reference herein. (5) Filed with the Company's Form 10-K dated December 31, 1991 and incorporated by reference herein. (6) Filed with the Company's Form 10-K dated December 31, 1993 and incorporated by reference herein. (7) Filed with the Company's Form 8-K dated December 8, 1994 and incorporated by reference herein. (8) Filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated by reference herein. (9) Filed with Registration Statement No. 33-89264 on Form S-2 and incorporated by reference herein. * Filed herein. ** To be filed. *** Filed previously. EX-2.05 2 EXHIBIT 2.05 EXHIBIT 2.05 REORGANIZATION AGREEMENT REORGANIZATION AGREEMENT dated as of October 17, 1995 (the "Plan"), by and between FIRST MIDLOTHIAN CORPORATION, a Texas corporation located in Midlothian, Texas ("First Midlothian"); FIRST NATIONAL BANK, a national banking association located in Midlothian, Texas ("First Bank"); all those individuals who have subscribed their names hereto individually and as a director (hereinafter referred to singly as a "Director" and collectively as the "Directors"); SURETY BANK, NATIONAL ASSOCIATION, a national banking association located in Lufkin, Texas ("Surety Bank"); and SURETY CAPITAL CORPORATION, a Delaware corporation located in Hurst, Texas ("Surety"). WITNESSETH: WHEREAS, the Directors are the record and beneficial owners of 20,228 and 1/3rd of the issued and outstanding shares of common stock of First Midlothian and are the entire Board of Directors of First Midlothian; WHEREAS, First Midlothian is the record and beneficial owner of all of the issued and outstanding shares of common stock of First Bank; WHEREAS, Surety is the record and beneficial owner of over ninety-nine percent (99%) of the issued and outstanding shares of common stock of Surety Bank; WHEREAS, First Midlothian, First Bank, Surety Bank and Surety each desire to effect (a) the merger (the "Holding Company Merger") of a Texas corporation ("Newco"), which will be formed by Surety Bank as an operating subsidiary of Surety Bank, with and into First Midlothian, pursuant to which the shareholders of First Midlothian will receive cash, in the amount as herein described, in exchange for all of their shares of common stock of First Midlothian, (b) immediately upon consummation of the Holding Company Merger, the merger (the "Bank Merger") of First Bank with and into Surety Bank (the Holding Company Merger and the Bank Merger are hereinafter referred to collectively as the "Mergers"), and (c) immediately or within three (3) months after the consummation of the Mergers, the dissolution of First Midlothian; WHEREAS, the Boards of Directors of First Midlothian, Surety, Surety Bank and First Bank have approved the Holding Company Merger pursuant to the Texas corporate laws whereby the outstanding common stock of First Midlothian shall, in accordance with the terms and conditions set forth in this Plan and in the Merger Agreement in the form attached hereto as EXHIBIT A (the "Holding Company Merger Agreement"), be converted into the right to receive the Consideration (as defined in the Holding Company Merger Agreement); and WHEREAS, the Boards of Directors of First Midlothian, Surety, Surety Bank and First Bank have approved the Bank Merger pursuant to the national banking laws whereby the outstanding common stock of First Bank shall, in accordance with the terms and conditions set forth in this Plan and in the Merger Agreement in the form attached hereto as EXHIBIT B (the "Bank Merger Agreement") (the Holding Company Merger Agreement and the Bank Merger Agreement are hereinafter referred to collectively as the "Merger Agreements"), be cancelled and be of no further force and effect. NOW, THEREFORE, in consideration of the mutual promises, representations and warranties herein contained, and on the terms and subject to the conditions herein set forth, the Directors, First Midlothian, First Bank, Surety Bank and Surety agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE DIRECTORS, FIRST MIDLOTHIAN AND FIRST BANK. The Directors, each in their individual and representative capacities, First Midlothian and First Bank, jointly and severally, represent and warrant to Surety and Surety Bank as follows (the representations and warranties of the Directors being to their best knowledge, information and belief only): (a) ORGANIZATION. (i) First Midlothian is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, which is the only jurisdiction in which the property owned or leased or the business conducted by it makes such qualification necessary, and is duly authorized to carry on its business as it is now being conducted. (ii) First Bank is a national banking association duly organized, validly existing and in good standing under the laws of the United States of America. First Bank (a) is duly authorized to conduct a general banking business, in accordance with its charter, subject to the supervision of the Office of the Comptroller of the Currency (the "Comptroller"); (b) is a member of the Board of Governors of the Federal Reserve System (the "Federal Reserve") and is a stockholder of the Federal Reserve Bank of Dallas; (c) is an insured bank as defined in the Federal Deposit Insurance Act; and (d) has full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own, lease and operate its properties and to engage in the business and activities now conducted by it. (b) CAPITAL STOCK. (i) The authorized capital stock of First Midlothian consists of 48,000 shares of common stock, par value $10.00 per share ("First Midlothian Common Stock"), of which 48,000 shares have been duly issued and are validly outstanding, fully paid and nonassessable, and not issued or disposed of in violation of the preemptive rights of any shareholder. As of the date of this Plan: -2- (1) there were outstanding no securities convertible into or exchangeable for ("First Midlothian Convertible Securities") (x) any shares of First Midlothian Common Stock, or (y) any capi- tal notes, debentures or other corporate securities of First Midlothian ("First Midlothian Debt Securities"), (2) there were outstanding no subscriptions, warrants, options or other arrangements or commitments ("First Midlothian Rights") obligating First Midlothian to issue or dispose of any shares of First Midlothian Common Stock or any First Midlothian Debt Securities, and (3) there were no existing agreements, arrangements or commitments obligating First Midlothian to issue, dispose of or grant any First Midlothian Convertible Securities, First Midlothian Debt Securities or First Midlothian Rights. Since the date of this Plan, First Midlothian has not: (1) issued, disposed of or granted, or made any agreement, arrangement or commitment obligating First Midlothian to issue, dispose of or grant, any shares of First Midlothian Common Stock, any First Midlothian Convertible Securities, any First Midlothian Debt Securities, or any First Midlothian Rights, (2) redeemed or acquired, or made any agreement, arrangement or commitment obligating First Midlothian to redeem or acquire, any shares of First Midlothian Common Stock, any First Midlothian Convertible Securities, any First Midlothian Debt Securities, or any First Midlothian Rights, or (3) declared, paid, made or set aside, or agreed, arranged or committed to declare, pay, make or set aside, any dividend, payment or distribution to shareholders. (ii) The authorized capital stock of First Bank consists of 48,000 shares of common stock, par value $10.00 per share ("First Bank Common Stock"), of which 48,000 shares have been duly issued and are validly outstanding, fully paid and nonassessable, and not issued or disposed of in violation of the preemptive rights of any shareholder. As of the date of this Plan: (1) there were outstanding no securities convertible into or exchangeable for ("First Bank Convertible Securities") (x) any shares of First -3- Bank Common Stock, or (y) any capital notes, debentures or other corporate securities of First Bank ("First Bank Debt Securities"), (2) there were outstanding no subscriptions, warrants, options or other arrangements or commitments ("First Bank Rights") obligating First Bank to issue or dispose of any shares of First Bank Common Stock or any First Bank Debt Securities, and (3) there were no existing agreements, arrangements or commitments obligating First Bank to issue, dispose of or grant any First Bank Convertible Securities, First Bank Debt Securities or First Bank Rights. Since the date of this Plan, First Bank has not: (1) issued, disposed of or granted, or made any agreement, arrangement or commitment obligating First Bank to issue, dispose of or grant, any shares of First Bank Common Stock, any First Bank Convertible Securities, any First Bank Debt Securities, or any First Bank Rights, or (2) redeemed or acquired, or made any agreement, arrangement or commitment obligating First Bank to redeem or acquire, any shares of First Bank Common Stock, any First Bank Convertible Securities, any First Bank Debt Securities, or any First Bank Rights. (c) STOCK OWNERSHIP. (i) The Directors are as of the date of this Plan, and on the Closing Date shall be, the beneficial and record owners of 20,228 and 1/3rd of the issued and outstanding shares of First Midlothian Common Stock and have good and marketable title to such First Midlothian Common Stock, which on the Closing Date will be free and clear of any interests, security interests, claims, liens, pledges, penalties, charges, encumbrances, voting trust agreements, buy-sell agreements, preemptive rights or other rights of any party whatsoever of any kind or character. To the extent any of such First Midlothian Common Stock was pledged to secure any extensions of credit by First Bank to the Directors, such extensions of credit shall on the Closing Date either be repaid in full or recollateralized in a commercially reasonable manner satisfactory to Surety and Surety Bank. (ii) First Midlothian is as of the date of this Plan, and on the Closing Date shall be, the beneficial and record owner of all of the issued and outstanding shares of First Bank Common Stock, and has good and marketable title to such common -4- stock, which on the Closing Date will be free and clear of any interests, security interests, claims, liens, pledges, penalties, charges, encumbrances, voting trust agreements, buy-sell agreements, preemptive rights or other rights of any party whatsoever of any kind or character. (d) SUBSIDIARIES. (i) First Midlothian has no subsidiaries other than First Bank and will not on or before the Closing Date create or acquire any additional subsidiary without the consent of Surety. (ii) First Bank neither has nor is it obligated to make any material investment, direct or indirect, in any person, corporation, association, partnership, joint venture, trust or other entity, except for investments in prime rated commercial paper and other debt instruments made by First Bank in the ordinary course of its banking business consistent with its past practice which do not empower First Bank to direct or cause the direction of the management and policies of the maker of such commercial paper or other debt instrument. (e) CONDITION AND RESULTS OF OPERATIONS. Within fifteen (15) days following the date of this Plan, First Midlothian will deliver to Surety true, correct and complete copies of the following consolidated financial statements of First Midlothian (these financial statements together with those referred to in SECTIONS 3(f) AND 3(k) hereof are collectively referred to herein as the "First Midlothian Financial Statements"): statement of condition at December 31, 1994, statement of income for the year ended as of December 31, 1994 and statements of cash flow and of shareholders' equity for the years ended as of December 31, 1994, together with the notes thereto, as certified by the independent public accountants of First Midlothian. The First Midlothian Financial Statements shall be in accordance with the books and records of First Midlothian, shall present fairly the financial position and results of operations of First Midlothian, as of the dates and for the periods indicated, shall be prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except that the unaudited First Midlothian Financial Statements shall be subject to normal year-end adjustments), and shall be prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission. (f) LIABILITIES AND OBLIGATIONS. (i) As of the date of the First Midlothian Financial Statements, First Midlothian had no obligation or liability which was material or which, when combined with all other non-material obligations or liabilities, would have been material, except for the Debentures (as hereinafter defined) and except as otherwise set forth in the First Midlothian Financial Statements or as set forth in any of the schedules referred to herein, nor does -5- there exist a set of circumstances resulting from transactions effected or events occurring on or prior to the date of the First Midlothian Financial Statements or from any action omitted to be taken during such period which could reasonably be expected to result in any such material obligation or liability. The amounts set up as liabilities for taxes in the First Midlothian Financial Statements are sufficient for the payment of all taxes (including without limitation federal, state, county, local and other excise, franchise, real and personal property, payroll, income, capital stock, and sales and use taxes) accrued in accordance with generally accepted accounting principles and unpaid as of the date of such First Midlothian Financial Statements. Since the date of the First Midlothian Financial Statements, First Midlothian has not incurred or paid any obligation or liability, except for obligations incurred or paid by First Midlothian in the ordinary course of its business consistent with its past practices or as otherwise contemplated by this Plan. (ii) Attached hereto as SCHEDULE 1(f) is a copy of each Debenture issued and outstanding as of the date of this Plan. SCHEDULE 1(f) sets forth with respect to each Debenture, the name of each holder, the date thereof, the original principal amount thereof, the outstanding principal thereof, and accrued interest thereon, as of the date of this Plan, the applicable interest rate, the repayment provisions and maturity date, and the amount and date of the next payment of interest and, if applicable, principal. Each Debenture is an unsecured obligation of First Midlothian and may be prepaid at any time without penalty. None of the Debentures are now in default, and neither First Midlothian nor the Directors are aware of any fact or condition that with the giving of notice or the passage of time, or both, would create or cause there to be a default under any Debenture. (iii) As of the date of the First Midlothian Financial Statements, First Bank had no obligation or liability which was material or which, when combined with all non-material obligations or liabilities, would have been material, except as disclosed in the First Midlothian Financial Statements or as set forth in any of the schedules referred to herein, nor does there exist a set of circumstances resulting from transactions effected or events occurring on or prior to the date of the First Midlothian Financial Statements or from any action omitted to be taken during such period which could reasonably be expected to result in any such material obligation or liability, except as disclosed or provided for in the First Midlothian Financial Statements or except as disclosed in one or more of the schedules referred to herein. The amounts set up as liabilities for taxes in the First Midlothian Financial Statements are sufficient for the payment of all taxes (including without limitation federal, state, county, local and other excise, franchise, real and personal property, payroll, income, capital stock, and sales and use taxes) accrued in accordance with generally accepted accounting principles and unpaid as of the date of such First Midlothian Financial Statements. Since -6- the date of the Midlothian Financial Statements First Bank has not incurred or paid any obligation or liability, except for obligations incurred or paid by First Bank in the ordinary course of its business consistent with its past practices. Except for endorsements made in connection with the deposit of items for collection made by First Bank in the ordinary course of its business consistent with its past practices and except as set forth in the First Midlothian Financial Statements or in any of the schedules referred to herein, First Bank is not obligated (by discount, loan participation agreement, repurchase agreement or letter of credit) to provide funds in respect of or to guarantee or assume any debt or obligation which is either material or which, when combined with all similar debts or obligations, would be material. (g) LOANS. All loans of First Bank reflected in the First Midlothian Financial Statements and all loans originated since the date of the First Midlothian Financial Statements were made in the ordinary course of business. A true, complete and accurate list of all (i) loans classified by examiners as "Other Loans Especially Mentioned," "Substandard," "Doubtful," or "Loss," (ii) past due loans, (iii) loans to the directors, officers and shareholders of First Bank, First Midlothian, or any of them, and (iv) loans to other parties which have been guaranteed by the directors, officers and shareholders of First Bank or First Midlothian, or any of them, or for which the directors, officers and shareholders of First Bank or First Midlothian, or any of them, are otherwise responsible as of the date of this Plan are set forth on SCHEDULE 1(g). (h) RESERVE FOR POSSIBLE LOAN LOSSES. The reserve for possible loan losses, as shown on the First Midlothian Financial Statements, is adequate in all respects to provide for all losses, net of recoveries relating to loans previously charged-off, on loans outstanding as of the date of such First Midlothian Financial Statements. (i) INVESTMENT SECURITIES. Except for pledges to secure public and trust deposits, none of the investments reflected in the First Midlothian Financial Statements under the heading "Investment Securities" and none of the investments made since said date by First Bank is subject to any "investment" or other restriction, whether contractual or statutory, which materially impairs the ability of the holder thereof freely to dispose of such investment at any time. (j) EVIDENCES OF INDEBTEDNESS. Each evidence of indebtedness reflected as an asset in the First Midlothian Financial Statements, or acquired since that date, is the legal, valid and binding obligation of the obligor named therein, enforceable in accordance with its terms (subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws from time to time in effect). No evidence of indebtedness having an unpaid balance (principal and accrued -7- interest) in excess of $25,000 is subject to any defense, offset or counterclaim. (k) TANGIBLE PROPERTIES. (i) First Midlothian neither owns nor leases any tangible properties, real and personal. (ii) SCHEDULE 1(k) describes all tangible properties, real and personal (showing the gross book values, accumulated depreciation and net book values), owned or leased by First Bank as of the date of the First Midlothian Financial Statements, having an original cost in excess of $25,000 (exclusive of supplies consumable in the ordinary course of business, which need not be scheduled). First Bank has good and indefeasible fee simple title to all material real estate owned by it, has a valid leasehold interest in each of the leased properties and owns outright all other assets and properties, whether real, personal or mixed, tangible or intangible, described in SCHEDULE 1(k) or reflected in the First Midlothian Financial Statements or acquired after said date (other than properties sold, and supplies consumed, by First Bank in the ordinary course of its banking business consistent with its past practice), free and clear of all liens, pledges, mortgages, security interests, charges, burdens, encumbrances, options and adverse claims ("Burdens"), except in each case as set forth in SCHEDULE 1(k) and except for liens for current taxes not yet due and payable and such imperfections of title, covenants and easements as do not materially detract from or interfere with the present use of the asset or property subject thereto or affected thereby. Since the date of the First Midlothian Financial Statements, First Bank has not satisfied or discharged, or become obligated to satisfy or discharge, any Burden affecting First Bank or any asset of First Bank, except in the ordinary course of First Bank's banking business consistent with its past practice. The operation of the properties of First Bank and the business of First Bank in the manner in which they are now operated does not violate any zoning ordinances or municipal regulations in such a way as could, if such ordinances or regulations were enforced, result in any material impairment of the uses of the respective properties for the purposes for which they are now operated, and no covenants, easements, rights-of-way or regulations of record materially impair such uses. (l) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as set forth on SCHEDULE 1(l), (i) First Midlothian, First Bank and their respective predecessors and affiliates have complied with all Environmental, Health and Safety Laws (as defined below), and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, or notice has been filed or commenced against any of them alleging any failure so to comply. Without limiting the generality of the preceding sentence, First Midlothian and First Bank and -8- their respective predecessors and affiliates have obtained and been in compliance with all of the terms and conditions of all permits, licenses, and other authorizations which are required under, and has complied with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables which are contained in, all Environmental, Health and Safety Laws. "Environmental, Health and Safety Laws" means the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Resource Conservation and Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each as amended, together with all other laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof) concerning pollution or protection of the environment, public health and safety, or employee health and safety, including laws relating to emissions, discharges, releases, or threatened releases of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes into ambient air, surface water, ground water, or lands or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling of pollutants, contaminants, or chemical, industrial, hazardous, or toxic materials or wastes. (ii) Neither First Midlothian nor First Bank has any liability (and neither First Midlothian nor First Bank has handled or disposed of any substance, arranged for the disposal of any substance, exposed any employee or other individual to any substance or condition, or owned or operated any property or facility in any manner that could form the basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand against First Midlothian or First Bank giving rise to any liability) for damage to any site, location, or body of water (surface or subsurface), for any illness of or, personal injury to any employee or other individual, or for any reason under any Environmental, Health and Safety Law. (iii) All properties and equipment used in the business of First Midlothian and First Bank and their respective predecessors and affiliates have been free of asbestos, PCB's, methylene chloride, trichloroethylene,1,2-trans- dichloroethylene, dioxins, dibenzofurans, and Extremely Hazardous Substances (as defined below). "Extremely Hazardous Substance" has the meaning set forth in Sec. 302 of the Emergency Planning and Community Right-to-Know Act of 1986, as amended. (iv) Neither First Midlothian nor First Bank has placed any underground storage tanks, as that term is defined at 40 C.F.R. Section 280.1, on any part of the real property owned, -9- leased or otherwise utilized by First Midlothian and First Bank (the "Real Property"), and neither First Midlothian nor First Bank has any knowledge or has received any notice that any such underground storage tanks were placed on the Real Property by any prior owner or user. (v) Neither First Midlothian nor First Bank has ever been refused insurance coverage and no insurance coverage has ever been cancelled as a result of the presence of hazardous waste, solid waste or hazardous substances on the Real Property. (vi) First Bank has not installed or maintained any active or inactive hazardous waste management units on the Real Property, and neither First Midlothian nor First Bank has any knowledge or has received any notice that any active or inactive hazardous waste management units have been installed or maintained on the Real Property by any prior owner or user, that require deed recordation by First Bank. (vii) There have been no spills, discharges or other releases of hydrocarbons or hazardous or toxic substances onto or from the Real Property or onto or from any other real property heretofore owned or leased by First Bank and utilized in the conduct of any of its businesses, and neither First Midlothian nor First Bank has any knowledge or has received any notice of any such spills, discharges or releases by any prior owner or user of the Real Property. (viii) There are no environmental liens or security interests against the Real Property nor are there any environmental liens or actions pending or threatened which would result in the creation of any lien relating to environmental conditions of the Real Property. (m) CONDITION OF PERSONAL PROPERTIES. All personal properties owned or leased by First Bank are used by First Bank in the ordinary course of its banking business and are in good condition and repair and are suitable for the purposes intended. (n) PATENTS, TRADEMARKS, ETC. Except as set forth on SCHEDULE 1(n), there are no: (i) patents, trademarks, trade names or copyrights or applications therefor owned by or registered in the name of First Midlothian or First Bank or in which First Midlothian or First Bank have rights, (ii) license agreements to which First Midlothian or First Bank is a party, either as licensor or licensee, with respect to any patents, trademarks, trade names or copyrights, or (iii) claims, to the knowledge of First Midlothian or First Bank, that, in the conduct of First Midlothian's or First -10- Bank's business as now conducted, either First Midlothian or First Bank is infringing any patents, trademarks, trade names or copyrights of others. (o) COMPLIANCE WITH LAWS. First Midlothian and First Bank: (i) have each complied with all laws and governmental regulations pertaining to consumer credit in all material respects, (ii) have each complied with all other laws, regulations, licensing requirements and orders applicable to their respective businesses, the breach or violation of which could have a material adverse effect on their respective businesses (including without limitation licensing requirements with respect to personnel), (iii) have each filed with the proper authorities all statements and reports required by the laws, regulations, licensing requirements and orders to which it or any of its employees (because of his activities on behalf of his employer) are subject, and (iv) each possesses all necessary licenses, franchises, permits and governmental authorizations to conduct their respective businesses in all material respects in the manner in which and in the jurisdictions and places where such businesses are now conducted. (p) INSURANCE. SCHEDULE 1(p) contains a brief description of all policies of fire, liability and other forms of insurance and all fidelity bonds held by First Midlothian and First Bank. (q) MATERIAL CONTRACTS. Except as set forth in SCHEDULE 1(q), neither First Midlothian nor its assets, business or operations, nor First Bank nor its assets, business or operations, is a party to or are bound or affected by or receive benefits under any written or oral agreement, arrangement or commitment relating to: (i) the employment of any person other than personnel employed at the pleasure of First Midlothian or First Bank, as the case may be, in the ordinary course of their respective businesses at rates of compensation and on terms consistent with their respective past practices, (ii) the election or retention in office of any director or officer, (iii) collective bargaining with, or any representation of any employees by, any labor union or association, -11- (iv) the acquisition of services, supplies, equipment or other personal property involving, in any particular case, more than $5,000 or for a quantity in excess of its requirements for normal operating purposes, (v) the purchase or sale of real property, (vi) distribution, agency, public relations, advertising, printing, construction, accounting or legal services, except for agreements, arrangements and commitments subject to cancellation without liability on notice of thirty (30) days or less and involving a liability for each such agreement, arrangement or commitment of less than $5,000, (vii) the lease of real or personal property as lessor or lessee, or sublessor or sublessee, providing for annual payments in the aggregate in excess of $2,500, (viii) bonuses, pensions, profit-sharing, retirement, stock options, stock purchases, employee discounts or other employee benefits, (ix) lending or advancing of funds, other than in the ordinary course of First Bank's banking business consistent with its past practice, (x) borrowing of funds or receipt of credit other than in the ordinary course of First Bank's banking business consistent with its past practice, (xi) incurring of any material obligation or liability except for transactions engaged in by First Midlothian or First Bank in the ordinary course of their respective businesses consistent with their respective past practices, (xii) the sale of personal property or services under which payments due after the date of this Plan exceed $5,000, (xiii) any transaction or series of transactions, including loans, in which any "affiliate" of First Midlothian or First Bank, as that term is used in the Rules and Regulations of the Securities and Exchange Commission (the "Commission") under the Securities Act of 1933 (the "1933 Act"), any officer or director of First Midlothian or First Bank, any officer or director of any "affiliate" of First Midlothian or First Bank, or any "associate" of any such officer or director, as that term is defined in Regulation 14A of the General Rules and Regulations under the Securities Exchange Act of 1934 (the "1934 Act"), has an interest if such transaction or series of transactions would be required to be disclosed in a proxy statement filed by a non-banking corporation under the 1934 Act, or -12- (xiv) any material transaction not in the ordinary course of First Midlothian's or First Bank's respective businesses consistent with their respective past practices. Except as set forth in SCHEDULE 1(q), since the date of the First Midlothian Financial Statements, neither First Midlothian nor First Bank has made or permitted, or agreed to make or permit, any material modification or termination of any material agreement, commitment or arrangement, except in the ordinary course of their respective businesses consistent with their respective past practices. (r) ABSENCE OF ADVERSE AGREEMENTS. Neither First Midlothian nor First Bank is a party to any agreement or instrument or any judgment, order or decree or any rule or regulation of any court or other governmental agency or authority which materially and adversely affects or in the future may materially and adversely affect the assets, properties, business, financial condition, operations or prospects of First Midlothian or First Bank. (s) STATUS OF EMPLOYEE BENEFIT PLANS. Except as set forth on SCHEDULE 1(q), neither First Midlothian nor First Bank has an employee benefit plan presently in effect. (t) MATERIAL CONTRACT DEFAULTS. Except as set forth in SCHEDULE 1(t), neither First Midlothian nor First Bank is in default in any material respect under any of the agreements, commitments, arrangements, leases, insurance policies or other instruments set forth or described herein or in the schedules referred to herein or otherwise disclosed in writing to Surety by First Midlothian or First Bank; such agreements, commitments, arrangements, leases, insurance policies and other instruments are legal, valid and binding obligations of the respective parties thereto in accordance with their terms; and there are no defenses, offsets or counterclaims thereto which may be made by any party thereto other than First Midlothian or First Bank, nor have either First Midlothian or First Bank waived any substantial rights thereunder, except as set forth in the schedules referred to herein or otherwise disclosed in writing to Surety by First Midlothian or First Bank on or before the date of this Plan. (u) LITIGATION AND OTHER PROCEEDINGS. Except to the extent indicated in SCHEDULE 1(u), there is not pending or threatened, against either First Midlothian or First Bank, or affecting or which would affect the assets of First Midlothian or First Bank, any action, suit, proceeding or investigation which: (i) involves a claim for an amount exceeding the amount recoverable by First Midlothian or First Bank from insurance companies under policies described in SCHEDULE 1(p), subject to the deductible amounts under said policies as set forth in said schedule, -13- (ii) has resulted or might result in any material adverse change in the business, operations or assets or the condition, financial or otherwise (including without limitation changes in the value of investments), or results of operations of First Midlothian or First Bank, (iii) has affected or might affect the right or ability of First Midlothian or First Bank to carry on their businesses substantially as now conducted, or (iv) has affected or might affect the consummation of the transactions contemplated by this Plan or the Merger Agreements, or any circumstances which would give rise to any such action, suit, proceeding or investigation. Except as set forth in SCHEDULE 1(u), neither First Midlothian nor First Bank is (x) subject to any continuing court or other order, writ, injunction or decree, applicable specifically to it or to its business, property or employees, or (y) in default with respect to any order, writ, injunction or decree of any nature. (v) TAXES. First Midlothian and First Bank have each filed with the appropriate governmental agencies all federal, state and local income, franchise, excise, real and personal property and other tax returns and reports which are required to be filed, and have paid all taxes shown thereon to be due and payable. There are no unpaid taxes of First Midlothian or First Bank which are or may become a lien on the properties or assets of First Midlothian or First Bank, except liens for taxes not yet due and payable. All taxes not yet due and payable which require accrual under generally accepted accounting principles have been properly accrued on the books of First Midlothian and First Bank, and where applicable, reflected in the First Midlothian Financial Statements. All accruals shown in the First Midlothian Financial Statements in respect of taxes are adequate, and there is not pending a proposed assessment by any taxing authority against either First Midlothian or First Bank for additional taxes which have not been disclosed in this Plan and for which First Midlothian or First Bank does not have adequate reserves. No income tax liability of First Midlothian nor First Bank has been asserted by the Internal Revenue Service for taxes in excess of those already paid, and no audit or notice of audit is pending. Neither First Midlothian nor First Bank has executed or filed with the Internal Revenue Service any agreement extending the period for assessment and collection of any tax, nor are either First Midlothian or First Bank a party to any action or proceeding by any governmental authority for assessment or collection of taxes, nor has any claim for assessment or collection of taxes been asserted against either First Midlothian or First Bank. (w) COMMUNITY REINVESTMENT ACT. First Bank has not received any notice of non-compliance with the Community Reinvest- -14- ment Act ("CRA") from any regulatory agency, and First Bank has supplied Surety with copies of the CRA Statement for First Bank, all supporting papers therefor, all letters and comments received by First Bank pertaining thereto, and any responses by First Bank to such comments. (x) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in SCHEDULE 1(x), since the date of the First Midlothian Financial Statements, neither First Midlothian nor First Bank has (i) issued or sold any of its capital stock or any corporate debt obligations (except certificates of deposit, letters of credit, cashier's checks and other documents and instruments issued in the ordinary course of the banking business of First Bank); (ii) granted any option for the purchase of any shares of its capital stock; (iii) except as otherwise contemplated by this Plan, declared or set aside any dividend or other distribution in respect of its capital stock, or directly or indirectly, purchased, redeemed or otherwise acquired any such capital stock; (iv) made or authorized any change in its outstanding capital stock or in its Articles of Association or bylaws; (v) made any material change in its mode of management or operation or method of accounting; (vi) incurred any obligations or liabilities (absolute or contingent), except any obligations or liabilities incurred in the ordinary course of business and any obligations or liabilities less than $2,500 but not exceeding $10,000 in the aggregate, or mortgaged, pledged or subjected to lien or encumbrance (other than statutory liens not yet delinquent) any of its assets or properties; (vii) discharged or satisfied any lien or encumbrance or paid any obligation or liability (absolute or contingent), other than current liabilities included in the First Midlothian Financial Statements and current liabilities incurred since the date thereof in the ordinary course of business; (viii) sold, exchanged or otherwise disposed of any of its assets other than in the ordinary course of business; (ix) made or become obligated to make any capital expenditure other than an expenditure or commitment which does not exceed $5,000 per occurrence; -15- (x) engaged in any transaction affecting its business or properties not in the ordinary course of business or suffered any extraordinary loss; (xi) paid or become obligated to pay any general wage or salary increase, bonus, severance or termination pay to any officer or employee, entered into any employment contract with any officer or employee, instituted any employee welfare, bonus, stock option, profit-sharing, retirement or similar plan or arrangement, or granted or agreed to grant any increase in compensation to any director, except to the extent permitted under SECTION 1(z); (xii) suffered any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting its properties; (xiii) waived any rights of value which in the aggregate are material; (xiv) experienced any material adverse change in its assets, properties, business, financial condition, operations, or prospects; (xv) suffered the occurrence of any event or condition of any character which may materially and adversely affect its assets, properties, business, financial condition, operations, or prospects; or (xiv) entered into any material transactions outside the ordinary course of business except as expressly contemplated by this Plan. (y) POWER AND AUTHORITY. (i) Each Director has the right, power and authority to enter into this Plan and to consummate the transactions contemplated by this Plan. This Plan has been duly executed and delivered by each Director and constitutes a valid and binding obligation enforceable against each Director in accordance with its terms. (ii) The respective Boards of Directors of First Midlothian and First Bank have duly approved this Plan, the Merger Agreements and the transactions contemplated hereby and thereby, and have authorized the execution and delivery of this Plan and the Merger Agreements by First Midlothian and First Bank, as applicable, and such agreements constitute the valid and binding obligations of First Midlothian and First Bank, enforceable against them according to their terms and provisions. First Midlothian and First Bank have full power, authority and legal right to enter into such agreements and, upon approval of such agreements by regulatory authorities having jurisdiction in the premises, to consummate the transactions contemplated hereby and thereby. The execution, -16- delivery and performance of this Plan, the Merger Agreements and the consummation of the transactions contemplated hereby and thereby in accordance with said agreements will not: (1) conflict with the Articles of Association or the bylaws of First Midlothian or First Bank, (2) result in any breach or termination of, or constitute a default under, or constitute an event which with notice or lapse of time, or both, would become a default under, or result in the creation of any Burden upon any asset of First Midlothian or First Bank, any agreement, arrangement or commitment, or violate any order, writ, injunction or decree, to which First Midlothian or First Bank is a party or by or under which First Midlothian or First Bank or their respective assets, businesses or operations may be bound or affected or receive benefits, or (3) result in the loss or adverse modification of any license, franchise, permit or other authorization granted to or otherwise held by First Midlothian or First Bank. (z) COMPENSATION. SCHEDULE 1(z) contains the name and position of each person employed by First Midlothian and First Bank whose aggregate annual compensation from First Midlothian and First Bank (including bonuses and similar remuneration) exceeds $15,000 and sets forth his total annual compensation. Neither First Midlothian nor First Bank have any knowledge of facts which would indicate that employees of either First Midlothian or First Bank will not continue in First Midlothian's or First Bank's employment on an acceptable basis, subject to normal turnover. Since the date of the First Midlothian Financial Statements, except as set forth in SCHEDULE 1(z) neither First Midlothian nor First Bank has granted or become obligated to grant any increases in the wages or salary of, or paid or become obligated to pay any bonus or made or become obligated to make any similar payment to, any officer or employee (including, without limitation, any increase in the rate of compensation payable to any of the personnel listed in SCHEDULE 1(z) over the rate shown in SCHEDULE 1(z) in an aggregate amount that, computed on an annual basis, would exceed ten percent (10%) of such officer's or employee's annual rate of compensation prior to all such increases, bonuses or similar payments). In addition, since the date of the First Midlothian Financial Statements, except as set forth in SCHEDULE 1(z), neither First Midlothian nor First Bank has, directly or indirectly, paid or become obligated to pay any severance or termination pay to any officer or employee. (aa) LABOR RELATIONS. No employee of either First Midlothian or First Bank is represented, for purposes of collective bargaining, by a labor organization of any type. There have been no efforts during the past three years to unionize or organize any -17- employees of First Midlothian or First Bank, and no material claim related to employees of First Midlothian or First Bank under the Fair Labor Standards Act, National Labor Relations Act, Civil Rights of 1964, Walsh-Healy Act, Davis Bacon Act, Civil Rights Act of 1866, Age Discrimination in Employment Act, Equal Pay Act of 1963, Executive Order No. 11246, Federal Unemployment Tax Act, Vietnam Era Veterans Readjustment Act, Occupational Safety and Health Act, Americans with Disabilities Act or any state or local employment related law, order, ordinance or regulation, and no unfair labor practice, discrimination or wage- and-hour claim is pending or threatened against or with respect to First Midlothian or First Bank. (bb) AVAILABILITY OF DOCUMENTS. First Midlothian and First Bank have each heretofore made available for inspection by Surety at the offices of First Midlothian and First Bank true, correct and complete copies of their respective Articles of Association and bylaws and all agreements, arrangements, commitments and documents referred to herein or in the schedules referred to herein, in each case together with all amendments and supplements thereto. (cc) NON-DEPOSIT CLAIMS. Neither the Directors nor First Midlothian have any non-deposit claims against First Bank except as otherwise disclosed in SCHEDULE 1(cc). (dd) SCHEDULES. All schedules referred to herein furnished or to be furnished by First Midlothian or First Bank to Surety are (or will be when furnished) true, correct and complete in all material respects, as supplemented on the Closing Date. (ee) FULL DISCLOSURE. No representation or warranty contained in this SECTION 1 contains any untrue statement of a material fact or omits to state any material fact necessary to make any such representation, warranty or statement not misleading. 2. REPRESENTATIONS AND WARRANTIES OF SURETY BANK. Surety and Surety Bank, jointly and severally, represent and warrant to the Directors, First Midlothian, and First Bank, as follows: (a) ORGANIZATION. (i) Surety is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly qualified to do business and is in good standing as a foreign corporation in the State of Texas, which are the only jurisdictions in which the property owned or leased or the business conducted by it makes such qualification necessary, and is duly authorized to carry on its business as it is now being conducted. (ii) Surety Bank is a national banking association duly organized, validly existing and in good standing under the -18- laws of the United States of America. Surety Bank (a) is duly authorized to conduct a general banking business, in accordance with its charter, subject to the supervision of the Comptroller; (b) is a member of the Federal Reserve and is a stockholder of the Federal Reserve Bank of Dallas; (c) is an insured bank as defined in the Federal Deposit Insurance Act; and (d) has full power and authority (including all licenses, franchises, permits and other governmental authorizations which are legally required) to own, lease and operate its properties and to engage in the business and activities now conducted by it. (iii) On or before the Closing Date, Newco will be a corporation duly organized, validly existing and in good standing under the laws of the State of Texas, which is the only jurisdiction in which the property to be owned or leased or the business to be conducted by it will make such qualification necessary, and will be duly authorized to carry on its business as it will be conducted. (b) CORPORATE POWER AND AUTHORITY. (i) The Boards of Directors of Surety and Surety Bank have duly approved this Plan, the Merger Agreements and the transactions contemplated hereby and thereby and have authorized the execution and delivery of this Plan and the Merger Agreements by Surety and Surety Bank. Surety and Surety Bank have full power, authority and legal right to enter into such agreements and, upon approval of such agreements by regulatory authorities having jurisdiction in the premises, to consummate the transactions contemplated hereby and thereby. The making and performance of this Plan, the Merger Agreements and the consummation of the transactions contemplated hereby and thereby in accordance with such agreements will not conflict with the Articles of Association or bylaws of Surety or Surety Bank. (ii) On or before the Closing Date, the Board of Directors of Newco will have duly approved this Plan, the Merger Agreements and the transactions contemplated hereby and thereby and will have authorized the execution and delivery of this Plan and the Merger Agreements by Newco. Newco will have full power, authority and legal right to enter into such agreements and, upon approval of such agreements by regulatory authorities having jurisdiction in the premises, to consummate the transactions contemplated hereby and thereby. The making and performance of this Plan, the Merger Agreements and the consummation of the transactions contemplated hereby and thereby in accordance with such agreements will not conflict with the Articles of Incorporation or bylaws of Newco. 3. COVENANTS OF THE DIRECTORS, FIRST MIDLOTHIAN AND FIRST BANK. The Directors, each in their individual and representative capacity, First Midlothian and First Bank each hereby covenant and -19- agree with Surety and Surety Bank that, unless the prior written consent of Surety shall have been obtained: (a) CONDUCT OF BUSINESS. Prior to the Effective Time (as defined in the Merger Agreements), First Midlothian and First Bank will each operate their respective businesses only in the usual, regular and ordinary course, and First Midlothian and First Bank will each use their best efforts to (i) preserve intact their business organization and assets, (ii) except as provided in SCHEDULE 1(x), keep available the services of its present officers and employees, (iii) maintain and keep its properties in as good repair and condition as at present, except for depreciation due to ordinary wear and tear and damage due to casualty, (iv) maintain in full force and effect insurance comparable in amount and scope of coverage to that now maintained by it, (v) preserve its present relationships with depositors, customers and others having business dealings with it, (vi) fully comply with and perform all obligations and duties imposed upon it by all federal, state and other applicable laws, rules, regulations and orders imposed by federal, state and other governmental authorities, (vii) perform all of its obligations under contracts, leases and documents relating to or affecting its assets, properties and business, (viii) cause either First Midlothian or First Bank to take any action described in SECTION 1(x), and (ix) prevent the occurrence of any change or event which would render any of the representations and warranties of the Directors, First Midlothian and First Bank contained herein and the Merger Agreements untrue in any material respect at and as of the Closing Date with the same effect as though such representations and warranties (in the exact language contained in this Plan or the Merger Agreements with appropriate modifications of tense in the case of representations and warranties relating to statements of fact as of specific dates) had been made at and as of the Closing Date, except as otherwise contemplated by this Plan. (b) ACCESS TO PROPERTIES AND RECORDS. First Midlothian will keep Surety and Surety Bank closely advised of all material developments relevant to the consummation of the Mergers and will cooperate fully in permitting Surety and Surety Bank to make a full -20- investigation of the business, properties, financial condition and investments of First Midlothian and First Bank and in bringing about the consummation of the Mergers. Prior to the Closing Date and at the request of Surety, First Midlothian and First Bank will update by amendment or supplement any of the schedules referred to herein and any other disclosure in writing from First Midlothian or First Bank to Surety; and the Directors, First Midlothian and First Bank hereby represent and warrant (the representations and warranties of the Directors being to their best knowledge, information and belief only) that such schedules and such written disclosures, as so amended or supplemented, shall be true, correct and complete in all material respects as of the Closing Date; PROVIDED, HOWEVER, that the inclusion of any information in any such amendment or supplement, not included in the original schedule or written disclosure at or prior to the date of this Plan, shall not (except to the extent such information was not required to be included in the original schedule or written disclosure) limit or impair any right which Surety or Surety Bank might otherwise have respecting the representations or warranties of the Directors, First Midlothian and First Bank contained in this Plan. (c) FURTHER ASSURANCES. Upon request of Surety, First Midlothian and First Bank, and each of them, will at any time, whether before or after the Closing Date, and from time to time, duly execute and deliver to Surety all such further instruments and documents as may be necessary or advisable, in the opinion of Surety, to obtain the full benefit of this Plan, the Merger Agreements and the transactions contemplated hereby and thereby. (d) CHANGED CIRCUMSTANCES. The Directors, First Midlothian and First Bank shall promptly notify Surety if, prior to the Closing Date, the Directors, First Midlothian or First Bank discover that any of the representations or warranties of the Directors, First Midlothian or First Bank contained in this Plan or the Merger Agreements were not true and correct as of the date hereof, or by reason of changed circumstances, or otherwise, are no longer true and correct. (e) PERIODIC REPORTS AND FINANCIAL STATEMENTS. From the date hereof to the Closing Date, First Midlothian and First Bank will deliver to Surety promptly after they become available all periodic reports filed by First Midlothian and First Bank pursuant to any applicable federal or state securities laws, any report of First Midlothian to its shareholders, all proxy statements and other written materials furnished to the shareholders of First Midlothian, and all press releases issued by First Midlothian and First Bank. (f) AUDITS. (i) Within sixty (60) days following the date of this Plan, First Midlothian will deliver to Surety true, correct and complete copies of the following consolidated financial state- -21- ments of First Midlothian: statement of condition at December 31, 1993, statement of income for the year ended as of December 31, 1993, and statements of cash flow and of shareholders' equity for the year ended as of December 31, 1993, together with the notes thereto, as certified by the independent public accountants of First Midlothian satisfactory to Surety. The First Midlothian Financial Statements shall be in accordance with the books and records of First Midlothian, shall present fairly the financial position and results of operations of First Midlothian, as of the dates and for the periods indicated, shall be prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, and shall be prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission. (ii) Prior to the Closing Date, First Midlothian will deliver to Surety true, correct and complete copies of the following consolidated financial statements of First Midlothian: statement of condition at December 31, 1995, statement of income for the year ended as of December 31, 1995, and statements of cash flow and of shareholders' equity for the year ended as of December 31, 1995, together with the notes thereto, as certified by the independent public accountants of First Midlothian satisfactory to Surety. The First Midlothian Financial Statements shall be in accordance with the books and records of First Midlothian, shall present fairly the financial position and results of operations of First Midlothian, as of the dates and for the periods indicated, shall be prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, and shall be prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission. (g) PERSONNEL CHANGES. From the date of this Plan and until the Closing, neither First Midlothian nor First Bank shall cause any changes to be made in the officers or directors of First Midlothian or First Bank, except with the prior written approval of Surety, which approval shall not be unreasonably withheld. (h) OFFICERS' CERTIFICATE. At the Closing Date, First Midlothian will furnish to Surety a certificate executed in its corporate name by an officer of First Midlothian, dated the Closing Date, which shall state whether (i) First Midlothian and First Bank have complied in all material respects with their respective agreements contained herein and in the Merger Agreements to be performed at or prior to the Closing Date, and (ii) the representations and warranties of First Midlothian and First Bank contained herein and in the Merger Agreements are true in all material respects at and as of the Closing Date with the same effect as though such representations and warranties (in the exact language contained in this Plan or in the Merger Agreements with appropriate modification of tense in the case of representations and warranties relating to statements of fact as of specified dates) had been made at and as -22- of the Closing Date, except as otherwise contemplated by this Plan or the Merger Agreements. (i) DIRECTORS' CERTIFICATE. (i) At the Closing Date, the Directors will each furnish to Surety a certificate dated the Closing Date which shall state whether (i) the Directors have complied in all material respects with their respective agreements contained herein and in the Merger Agreements to be performed at or prior to the Closing Date, and (ii) the representations and warranties of the Directors, First Midlothian, and First Bank contained herein and in the Merger Agreements are true in all material respects at and as of the Closing Date with the same effect as though such representations and warranties (in the exact language contained in this Plan or in the Merger Agreements with appropriate modification of tense in the case of representations and warranties relating to statements of fact as of specified dates) had been made at and as of the Closing Date, except as otherwise contemplated by this Plan or the Merger Agreements. (ii) At the Closing Date, the shareholders of First Midlothian who are not Directors will each furnish to Surety a certificate executed in each such shareholder's individual or representative capacity dated the Closing Date, pursuant to which such shareholder shall warrant and represent that such shareholder has good and marketable title to and the absolute right to sell, assign, and transfer the shares of First Midlothian Common Stock registered in such shareholder's name free and clear of any interests, security interests, claims, liens, pledges, penalties, charges, encumbrances, buy-sell agreements, preemptive rights or rights of any shareholder of First Midlothian or any party whatsoever of every kind and character and that such shareholder has the right, power, and authority to ability to transfer such shares of First Midlothian Common Stock in accordance with the terms and provisions of this Plan and the Merger Agreements. (j) APPROVALS OF THIRD PARTIES. As soon as practicable after the date of this Plan, First Midlothian and First Bank will use their best efforts to provide Surety and Surety Bank such information concerning First Midlothian and First Bank as Surety and Surety Bank may request in order to secure the approval of the Mergers by regulatory authorities having jurisdiction over bank holding companies and banks, and will otherwise use their best efforts to cause the consummation of the Mergers in accordance with the terms and conditions of this Plan and the Merger Agreements. (k) FINANCIAL INFORMATION. First Midlothian will deliver, or will cause to be delivered, to Surety, as soon as available, but in any event concurrently with the delivery thereof to the Board of Directors of First Bank, commencing with the month of October 1995, the monthly financial statements and other information, financial or otherwise, of First Bank and First Midlothian -23- which First Bank furnishes to its Board of Directors in connection with the meetings of its Board of Directors and such other information as Surety may reasonably require. Additionally, First Midlothian will deliver to Surety on at least a monthly basis a schedule of past due loans, a schedule reflecting First Bank's investment portfolio at book and market values, a schedule of First Bank's ORE property, and such other information as may be requested by Surety. (l) PROXY MATERIAL AND MEETING OF SHAREHOLDERS. As soon as practicable after the date of this Plan, First Midlothian and First Bank will submit this Plan and the Merger Agreements to their respective shareholders for approval at a meeting of shareholders called for the purpose of voting thereon. (m) VOTING. The Directors each hereby covenant and agree to vote all of their First Midlothian Common Stock in favor of the Holding Company Merger at the meeting of the shareholders of First Midlothian called to consider and vote upon the Holding Company Merger Agreement. First Midlothian hereby covenants and agrees to vote all of its First Bank Common Stock in favor of the Bank Merger at the meeting of the shareholders of First Bank called to consider and vote upon the Bank Merger Agreement. (n) ATTENDANCE AT MEETINGS OF THE BOARDS OF DIRECTORS. From the date hereof until the Closing, First Midlothian and First Bank shall give Surety and Surety Bank at least three (3) days' prior written notice of any regular or special meeting of the Boards of Directors of First Midlothian and First Bank (or of any committee thereof) and permit a representative of Surety or Surety Bank approved by First Bank to attend each of such meetings. First Midlothian and First Bank acknowledge that C. Jack Bean, Bobby W. Hackler, G. M. Heinzelmann, III, B. J. Curley and Robert E. Crews are each approved as individuals that may attend any of such meetings. (o) DEBENTURES. First Midlothian shall pay all principal of, and interest on, the Debentures as and when such payments shall become due and payable under the Debentures. First Midlothian shall not enter into any amendment or modification of any of the Debentures without the prior written consent of Surety. 4. COVENANTS OF SURETY AND SURETY BANK. Surety and Surety Bank each hereby covenant and agree with First Midlothian as follows: (a) OFFICERS' CERTIFICATE. At the Closing Date, Surety will furnish to First Midlothian a certificate of Surety executed in its corporate name by the president of Surety, dated the Closing Date, which shall state whether (i) Surety, Surety Bank and Newco have complied in all material respects with their agreements contained herein and in the Merger Agreements to be performed at or prior to the Closing Date, and (ii) the representations and -24- warranties of Surety and Surety Bank contained herein and in the Merger Agreements are true in all material respects at and as of the Closing Date with the same effect as though such representations and warranties (in the exact language contained in this Plan or the Merger Agreements with appropriate modification of tense in the case of representations and warranties relating to statements of fact as of specified dates) had been made at and as of the Closing Date, except as otherwise contemplated by this Plan or the Merger Agreements. (b) PROXY MATERIAL AND MEETING OF SHAREHOLDERS. As soon as practicable after the date of this Plan, Surety and Surety Bank will cause Newco to submit this Plan and the Holding Company Merger Agreement to its shareholders for approval at a meeting of shareholders called for the purpose of voting thereon. Additionally, as soon as practicable after the date of this Plan, Surety Bank will prepare a proxy statement, notice of meeting and form of proxy to be used in connection with a meeting of its shareholders to consider and vote upon the transactions contemplated in this Plan and the Bank Merger Agreement, to use its best efforts to obtain the authorization of the Comptroller for Surety Bank to furnish such proxy material to its shareholders, to thereafter duly call and hold said meeting of its shareholders, to submit and recommend to its shareholders the approval of the transactions contemplated in this Plan and the Bank Merger Agreement and to cause to be furnished to each such shareholder a copy of such proxy material. (c) VOTING. Surety Bank hereby covenants and agrees to vote all of its shares of common stock of Newco in favor of the Holding Company Merger at the meeting of the shareholders of Newco called to consider and vote upon the Holding Company Merger Agreement. Surety hereby covenants and agrees to vote all of its shares of common stock of Surety Bank in favor of the Bank Merger at the meeting of the shareholders of Surety Bank to consider and vote upon the Bank Merger Agreement. (d) APPROVALS OF THIRD PARTIES. As soon as practicable after the date of this Plan, Surety and Surety Bank will use their best efforts to secure all necessary approvals of third parties, including without limitation regulatory authorities having jurisdiction over banks and bank holding companies, that shall be required in order to form Newco as an operating subsid- iary of Surety Bank and to effect the Mergers and will otherwise use their best efforts to cause the consummation of the Mergers in accordance with the terms and conditions of this Plan and the Merger Agreements. (e) PAYMENT. As and when required by the provisions of the Holding Company Merger Agreement, Surety Bank shall pay to the shareholders of First Midlothian such sums to which such shareholders are entitled under SECTION 5(a) of the Holding Company Merger Agreement. -25- (f) NOTIFICATION AS TO MATERIAL DEVELOPMENTS. Surety will keep First Midlothian and First Bank closely advised of all material developments relevant to the consummation of the Mergers. (g) FURTHER ASSURANCES. Upon request of First Midlothian, Surety and Surety Bank, and each of them, will at any time, whether before or after the Closing Date, and from time to time, duly execute and deliver to First Midlothian all such further instruments and documents as may be necessary or advisable, in the opinion of First Midlothian, to obtain the full benefit of this Plan, the Merger Agreements, and the transactions contemplated hereby and thereby. (h) CHANGED CIRCUMSTANCES. Surety and Surety Bank shall promptly notify First Midlothian if Surety or Surety Bank discover that any of the representations or warranties of Surety or Surety Bank contained in this Plan or the Merger Agreements were not true and correct as of the date hereof, or by reason of changed circumstances, or otherwise, are no longer true and correct. 5. MUTUAL REPRESENTATIONS AND COVENANTS. Surety, Surety Bank, the Directors, each in their individual and representative capacity, First Midlothian and First Bank mutually represent and covenant as follows: (a) FURNISHING INFORMATION AND INDEMNIFICATION. The parties to this Plan have furnished, or will furnish as soon as practicable after the date of this Plan, to each other such information as the other has requested or may request concerning itself required for inclusion in (i) applications (or waivers therefrom) to be filed on behalf of Newco with the Federal Reserve for authority to consummate the Holding Company Merger and applications to be filed on behalf of Surety Bank with the Comptroller for authority to consummate the Bank Merger, and (ii) any other request, application, statement, report or material to be made or filed by Surety, Surety Bank, Newco, First Midlothian or First Bank to or with any governmental agency, department or instrumentality in connection with the transactions contemplated in this Plan, in the Merger Agreements, or otherwise. Surety, Surety Bank, the Directors, First Midlothian and First Bank each represent and warrant to the other that, to their best knowledge, information and belief, all information so furnished for such requests, statements, applications, reports and material shall be true and correct in all material respects without omissions of any material fact required to be stated to make the information not misleading. Surety and Surety Bank, on the one hand, and the Directors, First Midlothian and First Bank, on the other hand, will indemnify and hold harmless each other, each of the other's -26- directors and officers, and each person, if any, who controls the other within the meaning of the 1933 Act, from and against any and all losses, damages, expenses or liabilities to which the other, or any such director, officer or controlling person may become subject under applicable laws (including the Bank Holding Company Act of 1956, as amended) and rules and regulations thereunder and will reimburse the other, and any such director, officer or controlling person for any legal or other expenses reasonably incurred in connection with investigating or defending any actions whether or not resulting in liability, insofar as such losses, damages, expenses, liabilities, or actions arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in any such request, statement, application, report or material or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary in order to make the statements therein not misleading, but only insofar as any such statement or omission was made in reliance upon and in conformity with information furnished in writing in connection therewith by such indemnifying party expressly for use therein. (b) NO AGENT'S FEE. Each party hereto represents to and covenants that there is no agent's, broker's or finder's fee or commission payable or that will be payable in connection with the transactions contemplated in this Plan or the Merger Agreements by virtue of or resulting from any action or agreement by it other than a fee in the amount of approximately $170,000 payable to Service Asset Management Company ("Agent") upon the consummation of the transactions contemplated by this Plan. If, but only if, the transactions are consummated pursuant to this Plan and the Merger Agreements, First Midlothian shall pay Agent such fee. Surety Bank and Surety, on the one hand, and the Directors, First Midlothian and First Bank, on the other hand, hereby agree to indemnify and hold harmless each other from and against any claim, demand, liability, loss, cost or expense (including court costs and attorneys' fees) on account of or in connection with any agent's, broker's or finder's fees or commissions payable or alleged to be payable in connection with this Plan, the Merger Agreements or the transactions contemplated hereby or thereby by virtue of or resulting from any action or agreement on the part of such indemnifying party. 6. CONDITIONS TO OBLIGATIONS OF PARTIES. The obligations of Surety, Surety Bank, the Directors, First Midlothian and First Bank to cause the Mergers to be consummated shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions, unless such condition shall, on or prior to the Closing Date, have been waived in writing by Surety and First Midlothian: (a) APPROVALS OF THIRD PARTIES. All orders, consents, waivers, and approvals necessary in order for the transactions contemplated hereby to be lawfully accomplished shall have been -27- entered by each regulatory authority having jurisdiction in the premises, including the Comptroller and the Federal Reserve, upon terms and conditions satisfactory to First Midlothian and Surety; all applicable statutory waiting periods shall have expired; and all necessary orders, consents and approvals referred to in SECTION 3(j) and SECTION 4(d) hereof shall have been given by third parties, upon terms and conditions satisfactory to First Midlothian and Surety. (b) LITIGATION. At the Closing Date, there shall not be pending or threatened any litigation in any court or any proceeding before or by any governmental department, agency or instrumentality, (i) in which it is sought to restrain or prohibit or obtain damages in respect of the consummation of the Mergers, or (ii) as a result of which, in the reasonable judgment of Surety or First Midlothian, either Surety, Surety Bank, First Midlothian, First Bank, or their respective shareholders could be deprived of any of the material benefits of the Mergers. 7. CONDITIONS TO SURETY AND SURETY BANK'S OBLIGATIONS. The obligations of Surety and Surety Bank to cause the Mergers to be consummated shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions, unless Surety and Surety Bank shall have waived such condition in writing: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE DIRECTORS, FIRST MIDLOTHIAN AND FIRST BANK. The Directors, First Midlothian and First Bank shall each have complied in all material respects with each agreement or covenant made by it in this Plan or in the Merger Agreements and to be performed by it at or prior to the Closing Date, and each representation or warranty of the Directors, First Midlothian and First Bank contained in this Plan or the Merger Agreements shall be accurate in all material respects at and as of the Closing Date with the same effect as though such representation or warranty (in the exact language contained in this Plan or the Merger Agreements with appropriate modification of tense in the case of representations and warranties relating to statements of fact as of specified dates) had been made at and as of the Closing Date, except as otherwise contemplated by this Plan or the Merger Agreements. (b) FURTHER ACTION. Each and every action required of the Directors, First Midlothian and First Bank by this Plan to effect the Merger shall have been taken. (c) OTHER CERTIFICATES. (i) First Midlothian shall have furnished to Surety -28- (1) a certificate from the Secretary of State of the State of Texas dated not more than thirty (30) days prior to the Closing Date attesting to First Midlothian's existence as a Texas corporation and certifying as to all charter documents on file with respect to First Midlothian, (2) a certificate from the Secretary of State of the State of Texas dated not more than thirty (30) days prior to the Closing Date attesting to First Midlothian's good standing as a Texas corporation, (3) copies, certified by the Secretary of State of the State of Texas as of a date not more than thirty (30) days prior to the Closing Date, of the Articles of Incorporation and all amendments thereto of First Midlothian, (4) copies, certified by the Secretary of First Midlothian as of the Closing Date, of the bylaws of First Midlothian as amended as of the Closing Date, (5) a certificate of the Secretary of First Midlothian dated the Closing Date attesting to the adoption of all resolutions by its directors and shareholders and the taking of all such other corporate action by First Midlothian as shall have been required for consummation of the Mergers, and (6) the shareholders certificates provided for in SUBSECTION (ii) OF SECTION 3(i). (ii) First Bank shall have furnished to Surety (1) a certificate from the Comptroller dated not more than thirty (30) days prior to the Closing Date attesting to First Bank's existence as a national banking association and certifying as to all charter documents on file with respect to First Bank, (2) a certificate from the Comptroller dated not more than thirty (30) days prior to the Closing Date attesting to First Bank's good standing as a national banking association, (3) copies, certified by the Comptroller as of a date not more than thirty (30) days prior to the Closing Date, of the Charter and all amendments thereto of First Bank, -29- (4) copies, certified by the Cashier of First Bank as of the Closing Date, of the Articles of Association and bylaws of First Bank as amended as of the Closing Date, and (5) a certificate of the Cashier of First Bank dated the Closing Date attesting to the adoption of all resolutions by its directors and shareholders and the taking of all such other corporate action by First Bank as shall have been required for consummation of the Bank Merger. (iii) Each of the Directors and the other shareholders of First Midlothian shall have furnished to Surety the certificate provided for in SUBSECTION (i) OF SECTION 3(i). (d) SHAREHOLDER APPROVAL. (i) At a meeting of the shareholders of First Midlothian duly called and held for such purpose, the transactions contemplated in this Plan and the Holding Company Merger Agreement shall have been duly approved by the requisite vote of such shareholders. (ii) At a meeting of the shareholders of First Bank duly called and held for such purpose, the transactions contemplated in this Plan and the Bank Merger Agreement shall have been duly approved by First Midlothian as the sole shareholder of First Bank. (e) FINANCIAL RESOURCES. Surety shall have sufficient financial resources available, in the sole opinion of Surety, to consummate the transactions contemplated by this Plan and the Merger Agreements. (f) MATERIAL ADVERSE CHANGE. Neither First Midlothian nor First Bank shall have, in the opinion of Surety and Surety Bank, suffered any material adverse change in their financial condition, business, operations, prospects, properties or assets. (g) EDS CONTRACT. First Midlothian shall have calculated the cost of terminating that certain data processing agreement between First Bank and Electronic Data Systems ("EDS") dated April 1, 1992 (the "EDS Contract") as of the conversion date selected by Surety, which date shall not be before the Closing Date (the "Termination Fee"), and shall have advised Surety of the amount thereof. Additionally, if requested by Surety, Surety shall have received written confirmation from EDS, satisfactory to Surety, that the Termination Fee, as calculated by First Midlothian, is correct and that upon payment thereof to EDS, the EDS Contract shall be terminated and be of no further force and effect. (h) EXPENSES. First Midlothian shall have paid, or retained as of the Closing Date sufficient cash to pay, all -30- expenses accrued or incurred on or before the Closing Date, including those expenses related to the transactions contemplated by this Plan to be paid by First Midlothian, as provided for in SECTION 9 of this Plan. (i) DISSENTERS' RIGHTS. Holders of no more than five percent (5%) of the issued and outstanding shares of First Midlothian Common Stock shall have exercised their right to dissent from the Holding Company Merger. (j) SCHEDULES. The schedules provided for in this Plan shall have been prepared and delivered to Surety by First Midlothian pursuant to SECTION 17 of this Plan and shall be satisfactory in all respects to Surety. 8. CONDITIONS TO OBLIGATIONS OF THE DIRECTORS, FIRST MIDLOTHIAN AND FIRST BANK. The obligations of the Directors, each in their individual and representative capacity, First Midlothian and First Bank to cause the Mergers to be consummated shall be subject to the satisfaction on or prior to the Closing Date of each of the following conditions, unless First Midlothian shall have waived such condition in writing: (a) REPRESENTATIONS, WARRANTIES AND COVENANTS OF SURETY AND SURETY BANK. Surety, Surety Bank and Newco shall each have complied in all material respects with each agreement or covenant made by it in this Plan or in the Merger Agreements and to be performed by it at or prior to the Closing Date, and each representation or warranty of Surety and Surety Bank contained in this Plan or in the Merger Agreements shall be accurate in all material respects at and as of the Closing Date with the same effect as though such representation or warranty (in the exact language contained in this Plan or the Merger Agreements with appropriate modification of tense in the case of representations and warranties relating to statements of fact as of specified dates) had been made at and as of the Closing Date, except as otherwise contemplated by this Plan or the Merger Agreements. (b) FURTHER ACTION. Each and every action required of Surety and Surety Bank to effect the Mergers shall have been taken. (c) OTHER CERTIFICATES. Surety Bank shall have furnished to First Midlothian (i) a certificate of the Comptroller dated not more than thirty (30) days prior to the Closing Date attesting to Surety Bank's organization and good standing as a national banking association, (ii) copies, certified by the Comptroller as of a date not more than thirty (30) days prior to the Closing Date, of the Charter and all amendments thereto of Surety Bank, and -31- (iii) a certificate of the Cashier of Surety Bank, dated the Closing Date, attesting to the adoption of all resolutions by the directors and shareholders and the taking of all other corporate action by Surety Bank as shall have been required for consummation of the Bank Merger. (d) APPROVAL BY SHAREHOLDERS. (i) At a meeting of the shareholders of Surety Bank duly called and held for such purpose, the transactions contemplated in this Plan and the Bank Merger Agreement shall have been duly approved by the requisite vote of such shareholders. (ii) At a meeting of the shareholders of Newco duly called and held for such purpose, the transactions contemplated in this Plan and the Holding Company Merger Agreement shall have been duly approved by the requisite vote of Surety Bank as the sole shareholder of Newco. 9. EXPENSES. The Directors, First Midlothian and First Bank, on the one hand, and Surety and Surety Bank, on the other hand, shall each bear and pay all costs and expenses incurred by such parties on their own behalf in connection with the proceedings relating to this Plan, the Mergers, including, without limiting the generality of the foregoing, fees and expenses of its own financial consultants, accountants and legal counsel. Surety shall pay all reasonable expenses and costs incurred by Surety in connection with its efforts to obtain any necessary approvals or waivers of any governmental regulatory authority having control or jurisdiction over any transactions contemplated by this Plan, including applicable filings with the Comptroller and the Federal Reserve, and one-half (1/2) of the appraisal fees, if any, pursuant to SECTION 5 of the Holding Company Merger Agreement and one-half of the Termination Fee pursuant to SECTION 7(g) of this Plan. First Midlothian shall pay all expenses and costs related to the audits provided for in SECTION 3(f) of this Plan, the agent's fee provided for in SECTION 5(b) of this Plan, one-half (1/2) of the Termination Fee pursuant to SECTION 7(g) of this Plan, and one-half (1/2) of the appraisal fees, if any, pursuant to SECTION 5 of the Holding Company Merger Agreement. 10. WARRANTIES AT CLOSING: SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the warranties and representations of each party to this Plan and the Merger Agreements are not only true and correct as of the date of this Plan, but also shall be true and correct as of the Closing Date with the same force and effect as if made on and as of the Closing Date. All of the warranties, representations, covenants and agreements made by the parties in this Plan or in any schedule, exhibit, list or other instrument delivered pursuant to or in connection with this Plan, shall survive for one (1) year (except for all warranties, representations, covenants and agreements relating to taxes, which shall survive for four (4) years after the filing of the return to which same relates) -32- following the Closing and remain operative and in full force and effect during such period of time regardless of any investigation at any time made by or on behalf of the party to whom or with whom the warranty, representation, covenant or agreement is made and shall not be deemed merged into any document or instrument executed or delivered at Closing; PROVIDED, HOWEVER, that no party to this Plan and/or the Merger Agreements shall have a continuing duty after the Closing Date to update any representation or warranty contained herein or there- in. 11. INDEMNIFICATION BY THE DIRECTORS, FIRST MIDLOTHIAN AND FIRST BANK. (a) The Directors, each in their individual and representative capacity, First Midlothian and First Bank shall each, jointly and severally, indemnify and hold Newco, Surety Bank, Surety and their respective officers, directors, employees, agents, successors and assigns (collectively, the "Indemnified Parties") harmless from and against any and all claims, demands, losses, damages, suits, judgments and expenses of any description whatever (including without limitation all costs and expenses, including attorneys' fees, incurred in investigating into or defending against any such claim, demand or suit) which an Indemnified Party may at any time suffer, sustain or have asserted against it, and which in any manner arises out of or in connection with any breach by the Directors, First Midlothian or First Bank of any warranty or representation contained in this Plan or in any instrument given pursuant to this Plan, including those deemed to have been made on the Closing Date under SECTION 7(a), or any breach or failure by the Directors, First Midlothian or First Bank to keep or perform any of their respective covenants, agreement or undertakings contained in this Plan or in any instrument given by the Directors, First Midlothian or First Bank pursuant to this Plan. (b) Surety and Surety Bank shall each, jointly and severally, indemnify and hold the Directors, First Midlothian and First Bank, and their respective officers, directors, employees, agents, successors and assigns (collectively, the "Indemnified Parties") harmless from and against any and all claims, demands, losses, damages, suits, judgments and expenses of any description whatever (including without limitation all costs and expenses, including attorneys' fees, incurred in investigating into or defending against any such claim, demand or suit) which an Indemnified Party may at any time suffer, sustain or have asserted against it, and which in any manner arises out of or in connection with any breach by Surety Bank or Surety of any warranty or representation contained in this Plan or in any instrument given pursuant to this Plan, including those deemed to have been made on the Closing Date under SECTION 8(a), or any breach or failure by Surety Bank or Surety to keep or perform any of Surety Bank's or Surety's covenants, agreement or undertakings contained in this Plan or in any instrument given by Surety Bank and Surety pursuant to this Plan. -33- (c) If any warranty or representation made by any of the parties hereto in this Plan or in any instrument given pursuant to this Plan shall be determined to be untrue, then such party or parties (the "Indemnifying Party") shall pay the Indemnified Party an amount equal to the amount which it would cost, at the time the untruth is discovered, to put each Indemnified Party in the position that each would have been in had the warranty or representation been true. (d) Any payments becoming due to the Indemnified Party under this SECTION 11 shall be payable by the Indemnifying Party to the Indemnified Party upon demand at the Indemnified Party's offices together with interest thereon at the highest lawful rate per annum from date of loss until date of payment. The Indemnifying Party shall pay to the Indemnified Party reasonable attorneys' fees incurred by the Indemnified Party in enforcing the Indemnifying Party's obligations under this SECTION 11. 12. INCOME TAXES, AUDITS, LITIGATION, AND INDEMNITIES. For purposes of this SECTION 12, Newco, Surety Bank, Surety and their respective officers, directors, employees, agents, successors and assigns shall be collectively referred to as the "Surety Group." (a) The Directors, each in their individual and representative capacity, jointly and severally, shall be responsible for all federal, state, and local income, franchise, and other tax liabilities of either First Midlothian or First Bank for all periods prior to the consummation of the Mergers and for solely federal income and Texas franchise tax liabilities that are incurred by Surety, Surety Bank, Newco, First Midlothian, or First Bank as a result of any of the transactions contemplated by the Mergers and/or the subsequent liquidation of First Midlothian being held to be a taxable acquisition or disposition of assets or other taxable transaction (collectively the "Tax Liabilities"). (b) The Directors, each in their individual and representative capacity, agree that the certified public accounting firm retained by First Midlothian shall provide to Surety in final form all tax reporting information for First Midlothian and First Bank for the period ending with and at the completion of the Mergers, and Surety agrees to prepare and timely file all income, franchise, and other tax returns for the tax reporting periods of First Midlothian and First Bank that include the periods for which such information was furnished. Each party shall pay its own expense in this regard. In addition, Surety agrees to provide the Directors with a copy of any tax return or report at least thirty (30) days prior to the final filing date for same. (c) Except to the extent the Tax Liabilities were reflected in the First Midlothian Financial Statements, the Directors shall pay to the appropriate party in the Surety Group (within five (5) days prior to the applicable due date, taking into account any applicable extensions) the Tax Liabilities and any -34- deficiencies, assessments, penalties, interest, and other costs attributable to the Tax Liabilities, together with the costs of contesting same, and the Directors, each in their individual and their representative capacity, hereby agree, jointly and severally, to indemnify and hold the Surety Group harmless for same. Any such payments owed under the foregoing shall be paid within fifteen (15) days after a written notice is given to the Directors of such amount being due and, if not so paid, such amount shall accrue interest at the rate of fourteen percent (14%) per annum from the end of such fifteen (15) day period to the date paid. (d) Upon receipt of any notices, letters, or adjustments relating to periods for which Tax Liabilities may be calculated, the party receiving such notice agrees to immediately send a copy of any such notices, letters, or adjustments to the other party. Furthermore, the parties agree to cooperate in the handling of any audit with the appropriate taxing authority or in tax litigation for such periods. (e) Each party will preserve all records relating to tax reporting requirements for periods through the consummation of the Mergers for a period of seven (7) years after the date on which the tax return or information report was or is filed, and shall permit the other party to have access to and the right to photocopy these records. (f) Each party agrees to cooperate with the other in carrying out the provisions of this SECTION 12 by furnishing to the other all information and documentation necessary to comply with the purpose and intent of the parties' agreements contained in this SECTION 12. (g) If any deficiencies are proposed or assessed against the Surety Group with respect to the Tax Liabilities, the Directors desire to defend against such proposed or assessed deficiencies, and the Directors pay for the expenses of any audits, court proceedings, tax deficiencies, interest, penalties, etc., the Surety Group hereby agrees that the Directors and counsel of its choosing may defend and compromise such proposed or assessed deficiencies. In such event, the Surety Group shall receive, in a timely manner, copies of (1) all correspondence and other written communications with the taxing authority and from counsel, (2) all items filed with the court, administrative review or appeal officer, or other deciding body, and (3) any supporting information that the Directors may have in their possession or that the Directors can reasonably obtain from other sources. (h) If any deficiencies are proposed or assessed against the Surety Group concerning the Tax Liabilities and the Directors elect to defend same, the Directors agree to pursue such defense with due diligence, and they further agree to pay all costs of a tax audit or tax litigation, including all past due taxes, interest, deficiencies, penalties, and other costs associated therewith, -35- including direct costs incurred by the Surety Group in connection with providing information and support for such defense. (i) Surety, as the parent of that group of affiliate companies filing a federal consolidated income tax return, and as the party responsible for the filing or causing to be filed any Texas franchise tax returns for itself or for its affiliates, shall be obligated to pay to the shareholders of First Midlothian any decrease in federal income taxes or Texas franchise tax realized by Surety and its affiliates because of either an audit adjustment, amended tax return or claim for refund that is directly attributable to the activities of First Midlothian and/or First Bank for the pre-merger period for which such shareholders have not been previously compensated. If statutory interest is received by Surety in connection with such audit adjustment, amended tax return, or claim for refund, this amount shall also be paid to such shareholders. Any amounts owed to the shareholders of First Midlothian shall be paid within fifteen (15) days of Surety's receipt of same. 13. NOTICES. Any notice, request, instruction or other document to be given hereunder or under the Merger Agreements by any party hereto shall be in writing and delivered personally or sent by certified mail, return receipt requested, postage prepaid, if to Surety Bank or Surety to: Mr. C. Jack Bean Surety Capital Corporation 1845 Precinct Line Road, Suite 100 Hurst, Texas 76054 with a copy to: Ms. Margaret E. Holland Tracy & Holland 306 W. Seventh St., Suite 500 Fort Worth, Texas 76102 and if to the Directors, First Midlothian or First Bank to: Mr. Jim Rodgers First Midlothian Corporation 310 N. Ninth Midlothian, Texas 76065 with a copy to: Mr. Sanford M. Brown Bracewell & Patterson, L.L.P. 4000 Lincoln Plaza Dallas, Texas 75201 -36- or at such other address for a party as shall be specified by like notice. 14. SPECIFIC PERFORMANCE. The parties hereby declare that it is impossible to measure in money the damages which will accrue to a party hereto, his heirs, executors, administrators, legal representatives, successors or assigns, by reason of the failure of any other party to perform any of the obligations hereunder. Therefore, if a party hereto, his heirs, executors, administrators, legal representatives, successors or assigns, shall institute any action or proceeding to enforce the provisions hereof, any party against whom such action or proceeding is brought hereby agrees that specific performance may be sought and obtained for any breach of this Plan or the Merger Agreements without the necessity of proving actual damages; PROVIDED, HOWEVER, that any party hereto may, at its option, waive his right to specific performance and collect damages resulting from any breach or failure to perform hereunder. 15. CONFIDENTIALITY. Except as necessary or appropriate in connection with any statement, application or other document filed with applicable governmental authorities in connection with the transactions contemplated by this Plan and the Merger Agreements, the parties hereto will, and will cause their respective officers and authorized representatives to, hold in confidence all, and not disclose to others for any reason whatsoever any, nonpublic information received by it from the other parties hereto, or any of them, in connection with the transactions contemplated by this Plan and the Merger Agreements. 16. ATTORNEYS' FEES. If any action at law or in equity, including any action for declaratory relief, is brought to enforce or interpret the provisions of this Plan or the Merger Agreements, the prevailing party shall be entitled to recover reasonable attorneys' fees from the other party or parties, which fees may be set by the court in the trial of such action or may be enforced in a separate action brought for that purpose. 17. MISCELLANEOUS. This Plan and the Merger Agreements constitute the entire contract and shall supersede all prior agreements and understandings, both written and oral, between the parties hereto and thereto with respect to the subject matter hereof and thereof and no party shall be liable or bound to the other in any manner by any warranties or representations except as specifically set forth herein or in the Merger Agreements or expressly required to be made or delivered pursuant hereto or thereto. Each of the attachments, schedules, lists and exhibits called for by this Plan and the Merger Agreements is made a part of this Plan and the Merger Agreements the same as if set out verbatim at each point where reference is made to it. The schedules to be prepared by First Midlothian in connection with this Plan shall be delivered to Surety within ten (10) days of the date of this Plan. The terms and conditions of this Plan and the Merger Agreements -37- shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto and thereto, but nothing contained herein shall be construed as a consent to any assignment of this Plan or the Merger Agreements by the parties hereto or thereto, or any of them. Nothing in this Plan or in the Merger Agreements, express or implied, is intended to confer upon any party, other than the parties hereto and thereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of such agreements, except as expressly provided herein or therein. The provisions of SECTIONS 9, 10, 11 AND 12 of the Holding Company Merger Agreement and SECTIONS 8, 9, 10 AND 11 of the Bank Merger Agreement are hereby incorporated into this Plan for all purposes. This Plan may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. The headings of the Sections and Subsections of this Plan are inserted for convenience only and shall not be deemed to constitute part of this Plan or to affect the construction hereof. As used in this Plan, the words "herein", "hereof", and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular section, subsection or other subdivision. Unless context otherwise requires, words in the singular number include the plural and the plural include the singular, and words of the masculine gender include the feminine and neuter genders and words of the neuter gender referred to any gender. In case any one or more of the provisions contained in this Plan or the Merger Agreements shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions hereof or thereof, and this Plan and the Merger Agreements shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein and therein. This Plan shall be construed in accordance with the laws of the State of Texas. All disputes arising out of this Plan and/or the Merger Agreements shall be litigated in Tarrant County, Texas and, to the extent such a dispute relates to the alleged breach of a warranty or representation by a party to this Plan, any suit initiated with respect to such a dispute shall be commenced on or before the expiration of such warranty or representation pursuant to SECTION 10 of this Plan. No term or condition of this Plan or the Merger Agreements shall be deemed to have been waived, nor shall there be any estoppel to enforce any provision of this Plan or the Merger Agreements, except by written instrument signed by the party charged with such waiver or estoppel. 18. BREAKUP FEE. In the event Surety elects to abandon the Merger Plan by written notice to such effect to First Midlothian -38- (the "Election") pursuant to SECTION 7(e) of this Plan, as a result of Surety's inability to have sufficient financial resources available, in the sole opinion of Surety, to consummate the transactions contemplated by the this Plan and the Merger Agreements, Surety shall pay to First Midlothian a break-up fee, as follows, and upon payment thereof, none of the parties to this Plan nor the Merger Agreements shall have any further obligations to each other, except as expressly set forth in this SECTION 18: (a) If Surety makes the Election on or before December 31, 1995, Surety shall pay to First Midlothian the sum of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000) concurrently with the mailing of the notice of such Election. (b) If Surety makes the Election on or before March 31, 1996, Surety shall pay to First Midlothian the sum of THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($35,000) concurrently with the mailing of the notice of such Election. (c) If Surety makes the Election on or before June 30, 1996, Surety shall pay to First Midlothian the sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000) concurrently with the mailing of the notice of such Election. IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be signed in counterparts all as of the date first above written. FIRST MIDLOTHIAN CORPORATION, a Texas corporation By:/s/ Danny D. Rodgers ------------------------------------------ Danny D. Rodgers, Vice President FIRST NATIONAL BANK, a national banking association By:/s/ Danny D. Rodgers ------------------------------------------ Danny D. Rodgers, President /s/ Billie Jo Duran --------------------------------------------- Billie Jo Duran, Individually and as a Director of First Midlothian Corporation and First National Bank -39- /s/ Charles L. Duran --------------------------------------------- Charles L. Duran, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ V. H. Easterwood, Jr. --------------------------------------------- V. H. Easterwood, Jr., Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Lou E. Rodgers --------------------------------------------- Lou E. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Danny D. Rodgers --------------------------------------------- Danny D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. C. Rodgers --------------------------------------------- J. C. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. D. Rodgers --------------------------------------------- J. D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ E. L. Webb --------------------------------------------- E. L. Webb, Individually and as a Director of First Midlothian Corporation and First National Bank -40- SURETY BANK, NATIONAL ASSOCIATION, a national banking association By:/s/ Bobby W. Hackler ------------------------------------------ Its: President & C.E.O. ----------------------------------------- SURETY CAPITAL CORPORATION, a Delaware corporation By:/s/ Bobby W. Hackler ------------------------------------------ Its: Vice President & C.F.O. ----------------------------------------- -41- AGREEMENT TO MERGE SURETY ACQUISITION, INC. WITH AND INTO FIRST MIDLOTHIAN CORPORATION UNDER THE CHARTER OF FIRST MIDLOTHIAN CORPORATION AND UNDER THE TITLE OF FIRST MIDLOTHIAN CORPORATION MERGER AGREEMENT made this _____ day of _____________, 1995, between FIRST MIDLOTHIAN CORPORATION, a Texas corporation registered as a bank holding company, located in Midlothian, Texas ("First Midlothian"); SURETY ACQUISITION, INC. a Texas corporation ("Newco") which has been approved as a wholly-owned operating subsidiary of SURETY BANK, NATIONAL ASSOCIATION, a national banking association located in Lufkin, Texas ("Surety Bank"); and joined in by Surety Bank and all those individuals and entities who have subscribed their names hereto individually and as a Director (hereinafter referred to individually as a "Director" and collectively as the "Directors"). WITNESSETH: A. First Midlothian is a corporation duly organized and existing under the laws of the State of Texas with authorized common stock of 48,000 shares, par value $10.00 per share ("First Midlothian Common Stock"), of which 48,000 shares are issued and outstanding; B. Newco is a corporation duly organized and existing under the laws of the State of Texas with authorized common stock of ______ shares, par value $____ per share ("Newco Common Stock") of which ______ shares are issued and outstanding; C. The Boards of Directors and shareholders of First Midlothian and of Newco have approved this Merger Agreement under which Newco shall be merged with and into First Midlothian (the "Holding Company Merger") and have authorized the execution hereof; and the Board of Directors of Surety Bank has approved this Merger Agreement, authorized Surety Bank to join in and be bound by this Merger Agreement, and authorized the undertakings herein made by Surety Bank; D. Surety Capital Corporation, a Delaware corporation which owns of record and beneficially over ninety-nine percent (99%) of the issued and outstanding shares of common stock of Surety Bank ("Surety"); Surety Bank; First Midlothian; First National Bank, a national banking association located in Midlothian, Texas ("First Bank)", all of the issued and outstanding shares of common stock of which are owned of record and beneficially by First Midlothian; and the Directors have entered into a Reorganization Agreement dated ________, 1995 (the "Reorganization Agreement") which contemplates the Holding Company Merger provided for in this Merger Agreement. All terms not defined in this Merger Agreement shall have the meaning set forth in the Reorganization Agreement; E. As and when required by the provisions of this Merger Agreement or the Reorganization Agreement (hereinafter referred to EXHIBIT A collectively as the "Merger Plan"), all such action as may be necessary or appropriate shall be taken by Newco, Surety Bank, First Midlothian and the Directors in order to consummate the Holding Company Merger. NOW, THEREFORE, in consideration of the premises, Newco and First Midlothian, joined in by Surety Bank and the Directors, in their individual and representative capacity, hereby agree that Newco shall be merged with and into First Midlothian on the following terms and conditions: 1. At the Effective Time (as defined herein), Newco shall be merged with and into First Midlothian to do business and be governed by the laws of the State of Texas. Said Holding Company Merger shall be pursuant to the provisions of and with the effect provided in the Texas Business Corporation Act. 2. At the Effective Time, the name of First Midlothian (hereinafter referred to as "Resulting Entity" whenever reference is made to it as of the time of the Holding Company Merger or thereafter) shall be changed to "Surety Acquisition, Inc."; the Articles of Incorporation of Resulting Entity shall be as set forth in ANNEX A attached hereto and made a part hereof; the bylaws of Resulting Entity shall be as set forth in ANNEX B hereto and made a part hereof; and the established office and facilities of Newco immediately prior to the Holding Company Merger shall become the established office and facilities of Resulting Entity. 3. At the Effective Time, the corporate existence of First Midlothian and Newco shall be merged into and continued in Resulting Entity and Resulting Entity shall be deemed to be the same corporation as First Midlothian and Newco. All rights, franchises and interests of First Midlothian and Newco, respec- tively, in and to every type of property (real, personal and mixed) and choses in action shall be transferred to and vested in Resulting Entity by virtue of such Holding Company Merger without any deed or other transfer. Resulting Entity at the Effective Time and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent and registrar of stocks and bonds, guardian of estates, assignee, receiver, and in every other fiduciary capacity, and in every agency capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by First Midlothian and Newco, respectively, at the Effective Time. 4. At the Effective Time, Resulting Entity shall be liable for all liabilities of First Midlothian and Newco, respectively; and all deposits, debts, liabilities, obligations and contracts of First Midlothian and Newco, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of First Midlothian or Newco, as the case may -2- be, including all liabilities of First Midlothian and Newco for taxes, whether existing at the Effective Time or arising as a result of or pursuant to the Holding Company Merger, shall be those of Resulting Entity and shall not be released or impaired by the Holding Company Merger; and all rights of creditors and other obligees and all liens on property of either First Midlothian or Newco shall be preserved unimpaired. 5. At the Effective Time: (a) All shares of First Midlothian Common Stock outstanding at the Effective Time held by the shareholders shall, without any action on the part of the shareholders, be converted into and exchanged for the right to receive cash (the "Consideration") equal to (i) one hundred fifty percent (150%) of the Book Value of First Bank as of the Closing Date (as defined herein), to the extent such Book Value does not exceed $4,500,000 plus (ii) one hundred percent (100%) of the Book Value of First Bank as of the Closing Date in excess of $4,500,000 minus (iii) the outstanding principal of, and accrued interest on, the Debentures as of the Closing Date. (b) Book Value shall mean the sum of First Bank's total stockholders' equity (defined as capital stock, surplus, undivided profits and retained earnings) determined in accordance with generally accepted accounting principles applied on a consistent basis, with reserves acceptable to First Midlothian and Surety. The Book Value shall be determined pursuant to an audit or other specified review procedure prepared by Coopers & Lybrand, and the Book Value of First Bank shall be based on the results of that audit or specified review procedure. (c) In the event the Book Value, as determined pursuant to SUBSECTION (b), is unsatisfactory to either First Midlothian or Surety, the parties agree that they will first attempt in good faith to resolve their dispute with respect to Book Value through direct negotiation within fifteen (15) days of the date either party notifies the other of the existence of such a dispute. If a shorter time period is indicated by the circumstances, the parties agree that the time period shall be reduced accordingly. (d) In the event the parties are unable to resolve their dispute through direct negotiation within the applicable time period, either party may notify the other party of its decision to submit the dispute to resolution by appraisal. In this event, the parties shall unanimously select an appraiser within fifteen (15) days after the end of the fifteen (15) day period. The appraiser unanimously selected shall determine Book Value within thirty (30) days after the appraiser is appointed and such determination shall be conclusive. If the parties do not unanimously agree upon a single appraiser within the fifteen (15) day period, Surety shall select one appraiser and First Midlothian shall select another appraiser within five (5) days after the end of the fifteen (15) day period. Upon appointment of the two appraisers, the two -3- appraisers shall within five (5) days jointly select a third appraiser. Book Value shall then be determined within thirty (30) days after the date of the appointment of the third appraiser and such determination shall be conclusive. Book Value shall be the average of the two closest values determined by the three (3) appraisers. The total cost of the appraisers shall be paid one-half by Surety and one-half by First Midlothian. (e) Each share of Newco Common Stock issued and outstanding at the Effective Time shall be converted into and become one share of common stock of Resulting Entity. 6. After the Effective Time: (a) The holders of the outstanding certificate or certificates which prior thereto represented shares of First Midlothian Common Stock may surrender same to Resulting Entity, and each shall be entitled upon such surrender to receive from Surety Bank in exchange therefor, without cost to such holders, the amount determined by dividing the Consideration by the number of shares of First Midlothian Common Stock outstanding at the Effective Time and multiplying such result by the number of shares of First Midlothian Common Stock represented by such outstanding certificate or certificates surrendered. (b) Until so surrendered, each such outstanding certificate which, prior to the Effective Time, represented shares of First Midlothian Common Stock shall be deemed for all purposes to evidence solely the right to receive the amount of cash into and for which such shares of First Midlothian Common Stock shall have been converted pursuant to SECTION 6(a) hereof. No interest shall be payable with respect to any such cash payments. If a shareholder is unable to locate any of his certificates which prior to the Effective Time represented shares of First Midlothian Common Stock, Resulting Entity shall issue a check to such shareholder in the amount to which such shareholder would otherwise be entitled to receive hereunder without surrendering such certificate, upon receipt by Resulting Entity of an indemnity agreement to Resulting Entity in form and substance satisfactory in all respects to Resulting Entity. (c) The stock transfer books of First Midlothian shall be closed as of the close of business on the Closing Date, and no transfer of record of any of the shares of First Midlothian Common Stock shall take place thereafter. From and after the close of business on the Closing Date, shares of First Midlothian Common Stock shall cease to be shares of First Midlothian, irre- spective of whether such shares are ultimately surrendered. 7. The directors, advisory directors, and officers, respectively, of Resulting Entity at the Effective Time shall be those persons who are directors, advisory directors, and officers, respectively, of Newco immediately before the Effective Time. The committees of the Board of Directors of Resulting Entity at the -4- Effective Time shall be the same as, and shall be composed of the same persons who are serving on, committees of the Board of Directors of Newco as they exist immediately before the Effective Time. 8. This Merger Agreement shall be submitted to the shareholders of First Midlothian, at a meeting called to be held as promptly as practicable in accordance with the Reorganization Agreement. This Merger Agreement shall be approved by Surety Bank, the sole shareholder of Newco, pursuant to a unanimous consent executed and delivered by such sole shareholder in accordance with the Reorganization Agreement. Upon approval of the shareholders of First Midlothian and the sole shareholder of Newco, this Merger Agreement shall be made effective as soon as practicable thereafter in the manner provided in SECTION 11 hereof. 9. The Merger Plan may be terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of First Midlothian and the sole shareholder of Newco: (a) By the mutual consent in writing of First Midlothian and Newco; (b) By First Midlothian in writing if any of the conditions to the obligations of the Directors, First Midlothian or First Bank contained herein or in the Reorganization Agreement shall not have been satisfied or, if unsatisfied, waived as of the Closing Date; (c) By Surety in writing if any of the conditions to the obligations of Surety or Surety Bank contained herein or in the Reorganization Agreement shall not have been satisfied or, if unsatisfied, waived as of the Closing Date; or (d) By either First Midlothian or Newco in writing if the Closing Date shall not have occurred by June 30, 1996, unless the date is extended by mutual agreement of First Midlothian and Newco. 10. Except as provided in the next succeeding sentence, in the event of the termination and abandonment of the Merger Plan pursuant to the provisions of SECTION 9 hereof, the same shall be of no further force or effect except that the indemnification provisions set forth in SECTION 11 and the provisions relating to expenses set forth in SECTION 9 of the Reorganization Agreement shall survive any such termination and abandonment. Additionally, in the event Surety elects to abandon the Merger Plan by written notice to such effect to First Midlothian (the "Election") pursuant to SECTION 7(e) of the Reorganization Agreement, as a result of Surety's inability to have sufficient financial resources available, in the sole opinion of Surety, to consummate the transactions contemplated by the Reorganization Plan and the Merger Agreements, Surety shall pay to First Midlothian a break-up fee, as follows, -5- and upon payment thereof, none of the parties to the Reorganization Agreement nor the Merger Agreements shall have any further obligations to each other, except as expressly set forth in this SECTION 10: (a) If Surety makes the Election on or before December 31, 1995, Surety shall pay to First Midlothian the sum of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000) concurrently with the mailing of the notice of such Election. (b) If Surety makes the Election on or before March 31, 1996, Surety shall pay to First Midlothian the sum of THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($35,000) concurrently with the mailing of the notice of such Election. (c) If Surety makes the Election on or before June 30, 1996, Surety shall pay to First Midlothian the sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000) concurrently with the mailing of the notice of such Election. 11. The closing date (the "Closing Date") shall be a date to be selected by mutual agreement of the parties immediately following the satisfaction of all requirements of law and the conditions specified in the Merger Plan, including receipt of all applicable regulatory approvals or waivers therefrom and expira- tion of applicable waiting periods relating thereto. The closing (the "Closing") shall be held at the offices of Surety located in Hurst, Texas on the Closing Date. At the Closing, Surety Bank shall deliver to the shareholders of First Midlothian cash in the amount of the Consideration and the shareholders of First Midlothian shall deliver to Surety Bank all of the stock certificates evidencing issued and outstanding shares of common stock of First Midlothian. The Holding Company Merger shall become effective at the time specified in the certificate to be issued by the Secretary of State of the State of Texas, such time being herein called the "Effective Time." 12. For the convenience of the parties hereto and to facilitate the filing and recording of this Merger Agreement, any number of counterparts hereof may be executed, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, First Midlothian and Newco have each caused this Merger Agreement to be executed in counterparts on its behalf as of the date first above written. -6- FIRST MIDLOTHIAN CORPORATION By: ------------------------------------------ Its: -------------------------------------- SURETY ACQUISITION, INC. By: ------------------------------------------ Its: -------------------------------------- Surety Bank hereby joins in the foregoing Merger Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Surety Bank has caused this undertaking to be made in counterparts by its duly authorized officer and its corporate seal to be hereunto affixed as of the date first above written. SURETY BANK, NATIONAL ASSOCIATION By: ------------------------------------------ Its: -------------------------------------- The Directors hereby join in the foregoing Merger Agreement, and undertake that they will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by them. --------------------------------------------- Billie Jo Duran, Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- Charles L. Duran, Individually and as a Director of First Midlothian Corporation and First National Bank -7- --------------------------------------------- V. H. Easterwood, Jr., Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- Lou E. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- Danny D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- J. C. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- J. D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank --------------------------------------------- E. L. Webb, Individually and as a Director of First Midlothian Corporation and First National Bank -8- AGREEMENT TO MERGE FIRST NATIONAL BANK WITH AND INTO SURETY BANK, NATIONAL ASSOCIATION UNDER THE CHARTER OF SURETY BANK, NATIONAL ASSOCIATION AND UNDER THE TITLE OF SURETY BANK, NATIONAL ASSOCIATION MERGER AGREEMENT made this _____ day of _________, 199___, between Surety Bank, National Association ("Surety Bank") and FIRST NATIONAL BANK ("First Bank") and joined in by SURETY ACQUISITION, INC., a Texas corporation ("Newco") (prior to the Holding Company Merger known as "First Midlothian Corporation") and SURETY CAPITAL CORPORATION, a Delaware corporation ("Surety"). WITNESSETH: A. Surety Bank is a national banking association duly organized and existing under the laws of the United States of America having its principal offices in the City of Lufkin, County of Angelina, State of Texas. B. First Bank is a national banking association duly organized and existing under the laws of the United States having its principal offices in the City of Midlothian, County of Ellis, State of Texas. C. First Bank has, and will have as of the Effective Time, (i) authorized capital stock of $480,000 consisting of 48,000 shares of common stock, $10.00 par value ("First Bank Common Stock"), of which 48,000 shares are, or will be as of the Effective Time, issued and outstanding and (ii) surplus of not less than $1,000,000. D. All issued and outstanding shares of First Bank Common Stock are and will be as of the Effective Time held of record and beneficially by Newco. E. A majority of the Boards of Directors of First Bank and of Surety Bank has approved this Merger Agreement under which First Bank shall be merged into Surety Bank (the "Bank Merger") and has authorized the execution hereof; the Board of Directors of Newco has approved this Merger Agreement, authorized Newco to join in and be bound by this Merger Agreement, and authorized the undertakings herein made by Newco; and the Board of Directors of Surety has approved this Merger Agreement, authorized Surety to join in and be bound by this Merger Agreement, and authorized the undertakings herein made by Surety. F. Surety; Surety Bank; First Midlothian Corporation, a Texas corporation registered as a bank holding company located in Midlothian, Texas ("First Midlothian"); certain of the shareholders of First Midlothian (the "Shareholders"); and First Bank have entered into a Reorganization Agreement dated ___________, 1995 (the "Reorganization Agreement") which contemplates the Bank Merger provided for in this Merger Agreement. All terms not defined in EXHIBIT B this Merger Agreement shall have the meaning set forth in the Reorganization Agreement. G. As and when required by the provisions of this Merger Agreement or the Reorganization Agreement (hereinafter referred to collectively as the "Merger Plan"), all such action as may be necessary or appropriate shall be taken by Surety Bank, First Bank, Newco and Surety in order to consummate the Bank Merger. NOW, THEREFORE, in consideration of the premises, Surety Bank and First Bank, joined by Newco and Surety, hereby agree that First Bank shall be merged with and into Surety Bank on the following terms and conditions: 1. At the Effective Time, First Bank shall be merged with and into Surety Bank under the Articles of Association and Charter of Surety Bank. Said Bank Merger shall be pursuant to the provisions of and with the effect provided in 12 U.S.C. Section 215(a). 2. At the Effective Time, the name of Surety Bank (hereinafter referred to as "Continuing Bank" whenever reference is made to it as of the time of Bank Merger or thereafter) shall continue to be "Surety Bank, National Association"; the Articles of Association of Continuing Bank shall be as set forth in ANNEX A attached hereto and made a part hereof; the bylaws of Surety Bank in effect immediately prior to the Bank Merger shall become the bylaws of Continuing Bank; the established office and facilities of First Bank immediately prior to the Bank Merger shall become the established office and facilities of Continuing Bank; and the established office and facilities of Surety Bank immediately prior to the Bank Merger shall continue and be operated as a branch of Continuing Bank. 3. At the Effective Time, the corporate existence of Surety Bank and First Bank shall, as provided in 12 U.S.C. Section 215(a), be merged into and continued in Continuing Bank; and Continuing Bank shall be deemed to be the same corporation as Surety Bank and First Bank. All rights, franchises and interests of Surety Bank and First Bank, respectively, in and to every type of property (real, personal and mixed) and choses in action shall be transferred to and vested in Continuing Bank by virtue of such Bank Merger without any deed or other transfer. Continuing Bank at the Effective Time and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent and registrar of stocks and bonds, guardian of estates, assignee, receiver, and in every other fiduciary capacity, and in every agency capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by Surety Bank and First Bank, respectively, at the Effective Time. -2- 4. At the Effective Time, Continuing Bank shall be liable for all liabilities of Surety Bank and of First Bank, respectively; and all deposits, debts, liabilities, obligations and contracts of Surety Bank and of First Bank, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of Surety Bank or First Bank, as the case may be, including all liabilities of Surety Bank and First Bank for taxes, whether existing at the Effective Time or arising as a result of or pursuant to the Bank Merger, shall be those of Continuing Bank and shall not be released or impaired by the Bank Merger; and all rights of creditors and other obligees and all liens on property of either Surety Bank or First Bank shall be preserved unimpaired. 5. At the Effective Time: (a) All shares of First Bank Common Stock outstanding at the Effective Time held by Newco shall, without any action on the part of Newco, be cancelled and be of no further force and effect. (b) All shares of capital stock of Surety Bank issued and outstanding at the Effective Time shall continue to be issued and outstanding shares of capital stock of Continuing Bank. 6. The directors, advisory directors and officers, respectively, of Continuing Bank at the Effective Time shall be those persons who are directors, advisory directors and officers, respectively, of Surety Bank immediately before the Effective Time. The committees of the Board of Directors of Continuing Bank at the Effective Time shall be the same as, and shall be composed of the same persons who are serving on, committees of the Board of Directors of Surety Bank as they exist immediately before the Effective Time. 7. This Merger Agreement shall be approved by Newco, the sole shareholder of First Bank pursuant to a Unanimous Consent executed and delivered by such sole shareholder in accordance with the Reorganization Agreement. This Merger Agreement shall be submitted to the shareholders of Surety Bank, at a meeting called to be held as promptly as practicable in accordance with the Reorganization Agreement. Upon approval of the shareholders of Surety Bank and First Bank, this Merger Agreement shall be made effective as soon as practicable thereafter in the manner provided in SECTION 10 hereof. 8. The Merger Plan shall be automatically terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank or First Bank, in the event the Holding Company Merger is not consummated, for any reason whatsoever, and may be terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank -3- or First Bank by the mutual consent in writing of Surety Bank and First Bank. 9. In the event of the termination and abandonment of the Merger Plan pursuant to the provisions of SECTION 8 hereof, the same shall be of no further force or effect except that the indemnification provisions set forth in SECTION 11 and the provisions relating to expenses set forth in SECTION 9 of the Reorganization Agreement shall survive any such termination and abandonment. 10. The "Closing Date" shall have the meaning set forth in the Holding Company Merger Agreement. The closing (the "Closing") shall be held at the offices of Surety located in Hurst, Texas on the Closing Date. At the Closing, Newco shall deliver to Surety Bank all of the stock certificates evidencing issued and outstanding shares of common stock of First Bank. Subject to the terms, and upon satisfaction on or before the Closing Date of all requirements of law and the conditions specified in the Merger Plan, including receipt of the approval of the Comptroller of the Currency specified in 12 U.S.C. Section 215(a), the Bank Merger shall become effective at the time specified in the cer- tificate to be issued by the Comptroller of the Currency under the seal of his office approving the Bank Merger, such time being herein called the "Effective Time." 11. For the convenience of the parties hereto and to facilitate the filing and recording of this Merger Agreement, any number of counterparts thereof may be executed, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, Surety Bank has caused this Merger Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION By: ------------------------------------------ Bobby W. Hackler, President ATTEST: - ----------------------------------- , Cashier - ---------------------- -4- ALL OF THE DIRECTORS OF SURETY BANK, NATIONAL ASSOCIATION --------------------------------------------- C. Jack Bean --------------------------------------------- William B. Byrd --------------------------------------------- Bobby W. Hackler --------------------------------------------- Joseph S. Hardin --------------------------------------------- G. M. Heinzelmann, III --------------------------------------------- Michael L. Milam --------------------------------------------- Garrett Morris --------------------------------------------- Cullen W. Turner THE STATE OF TEXAS ) ) COUNTY OF _____________ ) On this _______ day of ______________, 199___, before me, a Notary Public for the State and County aforesaid, personally came Bobby W. Hackler, as President and ___________________ as Cashier, of Surety Bank, National Association, a national banking association, and each in his said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal -5- affixed thereto to be its seal; and came also C. Jack Bean, William B. Byrd, Bobby W. Hackler, Joseph S. Hardin, G. M. Heinzelmann, III, Michael L. Milam, Garrett Morris and Cullen W. Turner, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself as director thereof. WITNESS my official seal and signature this day and year aforesaid. --------------------------------------------- Notary Public, State of Texas --------------------------------------------- (Print or Type Notary's Name) My Commission Expires: - ---------------------------- IN WITNESS WHEREOF, First Bank has caused this Merger Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. FIRST BANK: FIRST NATIONAL BANK By: ------------------------------------------ , President ------------------------------ ATTEST: - ----------------------------------- , Cashier - ---------------------- ALL OF THE DIRECTORS OF FIRST NATIONAL BANK --------------------------------------------- --------------------------------------------- -6- --------------------------------------------- --------------------------------------------- --------------------------------------------- THE STATE OF TEXAS ) ) COUNTY OF ____________ ) On this _______ day of _________________, 199___, before me, a Notary Public for the State and County aforesaid, personally came _________________ as President and ________________ as Cashier, of FIRST NATIONAL BANK, a national banking association, and each in his/her said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its seal; and came also ________________________________ __________________________________ ________________, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself or herself as director thereof. WITNESS my official seal and signature this day and year aforesaid. --------------------------------------------- Notary Public, State of Texas --------------------------------------------- (Print or Type Notary's Name) My Commission Expires: - ---------------------------- Newco hereby joins in the foregoing Merger Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Newco has caused this undertaking to be made in counterparts by its duly authorized officers and its -7- corporate seal to be hereunto affixed as of the date first above written. NEWCO: SURETY ACQUISITION, INC. By: ------------------------------------------ , President ------------------------------- ATTEST: - ----------------------------------- , Secretary - ---------------------- Surety hereby joins in the foregoing Merger Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Surety has caused this undertaking to be made in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written. SURETY: SURETY CAPITAL CORPORATION By: ------------------------------------------ G. M. Heinzelmann, III, President ATTEST: - ----------------------------------- Bobby W. Hackler, Secretary -8- AMENDMENT NUMBER ONE TO REORGANIZATION AGREEMENT THIS AMENDMENT NUMBER ONE TO REORGANIZATION AGREEMENT is made and entered into this 16th day of January, 1996 by and between FIRST MIDLOTHIAN CORPORATION, a Texas corporation located in Midlothian, Texas ("First Midlothian"); FIRST NATIONAL BANK, a national banking association located in Midlothian, Texas ("First Bank"); all those individuals who have subscribed their names hereto individually and as a director (hereinafter referred to singly as a "Director" and collectively as the "Directors"); SURETY BANK, NATIONAL ASSOCIATION, a national banking association located in Lufkin, Texas ("Surety Bank"); and SURETY CAPITAL CORPORATION, a Delaware corporation located in Hurst, Texas ("Surety") (sometimes collectively referred to herein as the "parties"). WHEREAS, the parties have agreed to amend the October 17, 1995 Reorganization Agreement by and between First Midlothian, First Bank, the Directors, Surety Bank and Surety (the "Reorganization Agreement"), to provide for the consolidation of First Bank and Surety Bank. For and in consideration of the covenants, terms and conditions of the Reorganization Agreement and the mutual benefits to the parties established by this Amendment Number One to Reorganization Agreement, the parties agree that the following sections of the Reorganization Agreement are hereby amended as follows: 1. The Agreement to Consolidate First National Bank and Surety Bank, National Association Under the Charter of Surety Bank, National Association and Under the Title of Surety Bank, National Association, in the form attached hereto as EXHIBIT A, shall be attached to the Reorganization Agreement as though it was an original part thereof. 2. The fourth WHEREAS paragraph is revised to read in full as follows: WHEREAS, First Midlothian, First Bank, Surety Bank and Surety each desire to effect (a) the merger (the "Holding Company Merger") of a Texas corporation ("Newco"), which will be formed by Surety Bank as an operating subsidiary of Surety Bank, with and into First Midlothian, pursuant to which the shareholders of First Midlothian will receive cash, in the amount as herein described, in exchange for all of their shares of common stock of First Midlothian, (b) immediately upon consummation of the Holding Company Merger, the consolidation (the "Bank Consolidation") of First Bank and Surety Bank under the charter of Surety Bank (the Holding Company Merger and the Bank Consolidation are here- inafter referred to collectively as the "Mergers"), and (c) immediately or within three (3) months after the consummation of the Mergers, the dissolution of First Midlothian; 3. The sixth WHEREAS paragraph is revised to read in full as follows: WHEREAS, the Boards of Directors of First Midlothian, Surety, Surety Bank and First Bank have approved the Bank Consolidation pursuant to the national banking laws whereby the outstanding common stock of First Bank and Surety Bank shall, in accordance with the terms and conditions set forth in this Plan and in the Agreement to Consolidate in the form attached hereto as EXHIBIT B (the "Bank Consolidation Agreement") (the Holding Company Merger Agreement and the Bank Consolidation Agreement are hereinafter referred to collectively as the "Merger Agreements"), be cancelled, converted or exchanged, as more fully set forth in the Bank Consolidation Agreement. 4. Paragraph 3(m) is revised to read in full as follows: (m) VOTING. The Directors each hereby covenant and agree to vote all of their First Midlothian Common Stock in favor of the Holding Company Merger at the meeting of the shareholders of First Midlothian called to consider and vote upon the Holding Company Merger Agreement. First Midlothian hereby covenants and agrees to vote all of its First Bank Common Stock in favor of the Bank Consolidation at the meeting of the shareholders of First Bank called to consider and vote upon the Bank Consolidation Agreement. 5. Paragraph 4(b) is revised to read in full as follows: (b) PROXY MATERIAL AND MEETING OF SHAREHOLDERS. As soon as practicable after the date of this Plan, Surety and Surety Bank will cause Newco to submit this Plan and the Holding Company Merger Agreement to its shareholders for approval at a meeting of shareholders called for the purpose of voting thereon. Additionally, as soon as practicable after the date of this Plan, Surety Bank will prepare a proxy statement, notice of meeting and form of proxy to be used in connection with a meeting of its shareholders to consider and vote upon the transactions contemplated in this Plan and the Bank Consolidation Agreement, to use its best efforts to obtain the authorization of the Comptroller for Surety Bank to furnish such proxy material to its shareholders, to thereafter duly call and hold said meeting of its shareholders, to submit and recommend to its shareholders the approval of the transactions contemplated in this Plan and the Bank Consolidation Agreement and to cause to be furnished to each such shareholder a copy of such proxy material. 6. Paragraph 4(c) is revised to read in full as follows: (c) VOTING. Surety Bank hereby covenants and agrees to vote all of its shares of common stock of Newco in favor of the Holding Company Merger at the meeting of the shareholders of Newco called to consider and vote upon the Holding Company Merger Agreement. Surety hereby covenants and agrees to vote all of its shares of common stock of Surety Bank in favor of the Bank Consoli- -2- dation at the meeting of the shareholders of Surety Bank to consider and vote upon the Bank Consolidation Agreement. 7. Paragraph 5(a)(i) is revised to read in full as follows: (i) applications (or waivers therefrom) to be filed on behalf of Newco with the Federal Reserve for authority to consummate the Holding Company Merger and applications to be filed on behalf of Surety Bank with the Comptroller for authority to consummate the Bank Consolidation, and 8. Paragraph 7(c)(ii)(5) is revised to read in full as follows: (5) a certificate of the Cashier of First Bank dated the Closing Date attesting to the adoption of all resolutions by its directors and shareholders and the taking of all such other corporate action by First Bank as shall have been required for consummation of the Bank Consolidation. 9. Paragraph 7(d)(ii) is revised to read in full as follows: (ii) At a meeting of the shareholders of First Bank duly called and held for such purpose, the transactions contemplated in this Plan and the Bank Consolidation Agreement shall have been duly approved by First Midlothian as the sole shareholder of First Bank. 10. Paragraph 8(c)(iii) is revised to read in full as follows: (iii) a certificate of the Cashier of Surety Bank, dated the Closing Date, attesting to the adoption of all resolutions by the directors and shareholders and the taking of all other corporate action by Surety Bank as shall have been required for consummation of the Bank Consolidation. 11. Paragraph 8(d)(i) is revised to read in full as follows: (i) At a meeting of the shareholders of Surety Bank duly called and held for such purpose, the transactions contemplated in this Plan and the Bank Consolidation Agreement shall have been duly approved by the requisite vote of such shareholders. 12. Paragraph 12(i) is revised to read in full as follows: (i) Surety, as the parent of that group of affiliate companies filing a federal consolidated income tax return, and as the party responsible for the filing or causing to be filed any Texas franchise tax returns for itself or for its affiliates, shall be obligated to pay to the shareholders of First Midlothian any decrease in federal income taxes or Texas franchise tax realized by Surety and its affiliates because of either an audit adjustment, -3- amended tax return or claim for refund that is directly attributable to the activities of First Midlothian and/or First Bank for the pre-merger/ consolidation period for which such shareholders have not been previously compensated. If statutory interest is received by Surety in connection with such audit adjustment, amended tax return, or claim for refund, this amount shall also be paid to such shareholders. Any amounts owed to the shareholders of First Midlothian shall be paid within fifteen (15) days of Surety's receipt of same. 13. Paragraph 17 is revised to read in full as follows: 17. MISCELLANEOUS. This Plan and the Merger Agreements constitute the entire contract and shall supersede all prior agreements and understandings, both written and oral, between the parties hereto and thereto with respect to the subject matter hereof and thereof and no party shall be liable or bound to the other in any manner by any warranties or representations except as specifically set forth herein or in the Merger Agreements or expressly required to be made or delivered pursuant hereto or thereto. Each of the attachments, schedules, lists and exhibits called for by this Plan and the Merger Agreements is made a part of this Plan and the Merger Agreements the same as if set out verbatim at each point where reference is made to it. The schedules to be prepared by First Midlothian in connection with this Plan shall be delivered to Surety within ten (10) days of the date of this Plan. The terms and conditions of this Plan and the Merger Agreements shall inure to the benefit of and be binding upon the respective successors and assigns of the parties hereto and thereto, but nothing contained herein shall be construed as a consent to any assignment of this Plan or the Merger Agreements by the parties hereto or thereto, or any of them. Nothing in this Plan or in the Merger Agreements, express or implied, is intended to confer upon any party, other than the parties hereto and thereto, and their respective successors and assigns, any rights, remedies, obligations or liabilities under or by reason of such agreements, except as expressly provided herein or therein. The provisions of SECTIONS 9, 10, 11 AND 12 of the Holding Company Merger Agreement and SECTIONS 8, 9, 10 AND 11 of the Bank Consolidation Agreement are hereby incorporated into this Plan for all purposes. This Plan may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. The headings of the Sections and Subsections of this Plan are inserted for convenience only and shall not be deemed to constitute part of this Plan or to affect the construction hereof. As used in this Plan, the words "herein", "hereof", and "hereunder" and other words of similar import refer to this Plan as a whole and not to any particular section, subsection or other subdivision. Unless context otherwise requires, words in the singular number include the plural and the plural include the singular, and words of the masculine gender include the feminine and neuter genders and words of the neuter gender referred to any gender. In case any one or more of the provisions contained in this Plan or the Merger -4- Agreements shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions hereof or thereof, and this Plan and the Merger Agreements shall be construed as if such invalid, illegal or unenforceable provisions had never been contained herein and therein. This Plan shall be construed in accordance with the laws of the State of Texas. All disputes arising out of this Plan and/or the Merger Agreements shall be litigated in Tarrant County, Texas and, to the extent such a dispute relates to the alleged breach of a warranty or representation by a party to this Plan, any suit initiated with respect to such a dispute shall be commenced on or before the expiration of such warranty or representation pursuant to SECTION 10 of this Plan. No term or condition of this Plan or the Merger Agreements shall be deemed to have been waived, nor shall there be any estoppel to enforce any provision of this Plan or the Merger Agreements, except by written instrument signed by the party charged with such waiver or estoppel. 14. Paragraph 18 is revised to read in full as follows: 18. BREAKUP FEE. In the event Surety elects to terminate this Plan and the Merger Agreements by written notice to such effect to First Midlothian (the "Election") pursuant to SECTION 7(e) of this Plan, as a result of Surety's inability to have sufficient financial resources available, in the sole opinion of Surety, to consummate the transactions contemplated by the this Plan and the Merger Agreements, Surety shall pay to First Midlothian a break-up fee, as follows, and upon payment thereof, none of the parties to this Plan nor the Merger Agreements shall have any further obligations to each other, except as expressly set forth in this SECTION 18: (a) If Surety makes the Election on or before December 31, 1995, Surety shall pay to First Midlothian the sum of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000) concurrently with the mailing of the notice of such Election. (b) If Surety makes the Election on or before March 31, 1996, Surety shall pay to First Midlothian the sum of THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($35,000) concurrently with the mailing of the notice of such Election. (c) If Surety makes the Election on or before June 30, 1996, Surety shall pay to First Midlothian the sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000) concurrently with the mailing of the notice of such Election. 15. Except as specifically amended by this Amendment Number One to Reorganization Agreement, the Reorganization Agreement by and between the parties shall remain in full force and effect. -5- IN WITNESS WHEREOF, each of the parties hereto has caused this Plan to be signed in counterparts all as of the date first above written. FIRST MIDLOTHIAN CORPORATION, a Texas corporation By: /s/ Danny D. Rodgers ------------------------------------------ Danny D. Rodgers, Vice President FIRST NATIONAL BANK, a national banking association By: /s/ Danny D. Rodgers ------------------------------------------ Danny D. Rodgers, President /s/ Billie Jo Duran --------------------------------------------- Billie Jo Duran, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Charles L. Duran --------------------------------------------- Charles L. Duran, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ V. H. Easterwood, Jr. --------------------------------------------- V. H. Easterwood, Jr., Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Lou E. Rodgers --------------------------------------------- Lou E. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank -6- /s/ Danny D. Rodgers --------------------------------------------- Danny D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. C. Rodgers --------------------------------------------- J. C. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. C. Rodgers --------------------------------------------- J. D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ E. L. Webb --------------------------------------------- E. L. Webb, Individually and as a Director of First Midlothian Corporation and First National Bank SURETY BANK, NATIONAL ASSOCIATION, a national banking association By: /s/ Bobby Hackler ------------------------------------------ Its: ----------------------------------------- SURETY CAPITAL CORPORATION, a Delaware corporation By: /s/ G. M. Heinzelmann, III ------------------------------------------ Its: ----------------------------------------- -7- EXHIBIT A AGREEMENT TO CONSOLIDATE FIRST NATIONAL BANK AND SURETY BANK, NATIONAL ASSOCIATION UNDER THE CHARTER OF SURETY BANK, NATIONAL ASSOCIATION AND UNDER THE TITLE OF SURETY BANK, NATIONAL ASSOCIATION CONSOLIDATION AGREEMENT made this 16th day of January, 1996, between SURETY BANK, NATIONAL ASSOCIATION ("Surety Bank") and FIRST NATIONAL BANK ("First Bank") and joined in by SCC ACQUISITION, INC., a Texas corporation ("Newco") (prior to the Holding Company Merger known as "First Midlothian Corporation") and SURETY CAPITAL CORPORATION, a Delaware corporation ("Surety"). WITNESSETH: A. Surety Bank is a national banking association duly organized and existing under the laws of the United States of America having its principal offices in the City of Lufkin, County of Angelina, State of Texas. B. First Bank is a national banking association duly organized and existing under the laws of the United States having its principal offices in the City of Midlothian, County of Ellis, State of Texas. C. First Bank has, and will have as of the Effective Time, (i) authorized capital stock of $480,000 consisting of 48,000 shares of common stock, $10.00 par value ("First Bank Common Stock"), of which 48,000 shares are, or will be as of the Effective Time, issued and outstanding and (ii) surplus of not less than $1,000,000. D. All of the issued and outstanding shares of First Bank Common Stock are and will be as of the Effective Time held of record and beneficially by Newco. E. Surety Bank has, and will have as of the Effective Time, (i) authorized capital stock of $5,460,000 consisting of 6,000,000 shares of common stock, $0.91 par value ("Surety Bank Common Stock"), of which 3,708,195 shares are, or will be as of the Effective Time, issued and outstanding and (ii) surplus of not less than $5,330,000. F. Over ninety-nine percent (99%) of all of the issued and outstanding shares of Surety Bank Common Stock are and will be as of the Effective Time held of record and beneficially by Surety. G. A majority of the Boards of Directors of First Bank and of Surety Bank has approved this Consolidation Agreement under which First Bank and Surety Bank shall be consolidated (the "Bank Consolidation") under the charter of Surety Bank and has authorized the execution hereof; the Board of Directors of Newco has approved this Consolidation Agreement, authorized Newco to join in and be bound by this Consolidation Agreement, and authorized the undertakings herein made by Newco; and the Board of Directors of Surety has approved this Consolidation Agreement, authorized Surety to join in and be bound by this Consolidation Agreement, and authorized the undertakings herein made by Surety. H. Surety; Surety Bank; First Midlothian Corporation, a Texas corporation registered as a bank holding company located in Midlothian, Texas ("First Midlothian"); certain of the shareholders of First Midlothian (the "Shareholders"); and First Bank have entered into a Reorganization Agreement dated October 17, 1995 (the "Reorganization Agreement") which contemplates the Bank Consolidation provided for in this Consolidation Agreement. All terms not defined in this Consolidation Agreement shall have the meaning set forth in the Reorganization Agreement. I. As and when required by the provisions of this Consolidation Agreement or the Reorganization Agreement (hereinafter referred to collectively as the "Consolidation Plan"), all such action as may be necessary or appropriate shall be taken by Surety Bank, First Bank, Newco and Surety in order to consummate the Bank Consolidation. NOW, THEREFORE, in consideration of the premises, Surety Bank and First Bank, joined by Newco and Surety, hereby agree that First Bank and Surety Bank shall be consolidated under the charter of Surety Bank on the following terms and conditions: 1. At the Effective Time, First Bank and Surety Bank shall be consolidated under the Articles of Association and Charter of Surety Bank. Said Bank Consolidation shall be pursuant to the provisions of and with the effect provided in 12 U.S.C. Section 215. 2. At the Effective Time, the name of Surety Bank (hereinafter referred to as "Continuing Bank" whenever reference is made to it as of the time of Bank Consolidation or thereafter) shall continue to be "Surety Bank, National Association"; the Articles of Association of Continuing Bank shall be as set forth in ANNEX A attached hereto and made a part hereof; the bylaws of Surety Bank in effect immediately prior to the Bank Consolidation shall become the bylaws of Continuing Bank; the established office and facilities of First Bank immediately prior to the Bank Consolidation shall become the established office and facilities of Continuing Bank; and the established office and facilities of Surety Bank immediately prior to the Bank Consolidation shall continue and be operated as a branch of Continuing Bank. 3. At the Effective Time, the corporate existence of Surety Bank and First Bank shall, as provided in 12 U.S.C. Section 215, be merged into and continued in Continuing Bank; and Continuing Bank shall be deemed to be the same corporation as Surety Bank and First Bank. All rights, franchises and interests of Surety Bank and First Bank, respectively, in and to every type of property (real, personal and mixed) and choses in action shall be transferred to and vested in Continuing Bank by virtue of such Bank Consolidation without any deed or other transfer. Continuing Bank at the -2- Effective Time and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent and registrar of stocks and bonds, guardian of estates, assignee, receiver, and in every other fiduciary capacity, and in every agency capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by Surety Bank and First Bank, respectively, at the Effective Time, subject, however, to the provisions of 12 U.S.C. Section 215(f). 4. At the Effective Time, Continuing Bank shall be liable for all liabilities of Surety Bank and of First Bank, respectively; and all deposits, debts, liabilities, obligations and contracts of Surety Bank and of First Bank, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of Surety Bank or First Bank, as the case may be, including all liabilities of Surety Bank and First Bank for taxes, whether existing at the Effective Time or arising as a result of or pursuant to the Bank Consolidation, shall be those of Continuing Bank and shall not be released or impaired by the Bank Consolidation; and all rights of creditors and other obligees and all liens on property of either Surety Bank or First Bank shall be preserved unimpaired. 5. At the Effective Time: (a) All shares of First Bank Common Stock outstanding at the Effective Time held by Newco shall, without any action on the part of Newco, be cancelled and be of no further force and effect. (b) Each share of Surety Bank Common Stock outstanding at the Effective Time held by the shareholders of Surety Bank, other than shares of Surety Bank Common Stock held of record by Surety and Dissenting Shares (as hereinafter defined), without any action on the part of the shareholders of Surety Bank, shall be converted into and exchanged for the right to receive cash equal to: (i) the product obtained by multiplying the number of shares of common stock of Surety (the "Surety Common Stock") issued and outstanding on the date of approval of the Bank Consolidation by the Office of the Comptroller of the Currency (the "Approval Date") by the average of the high and low prices of such Surety Common Stock on the American Stock Exchange, Inc. on the Approval Date, divided by (ii) the number of shares of Surety Bank Common Stock issued and outstanding on the Approval Date (the "Exchange Price"). (c) Each share of Surety Bank Common Stock issued and outstanding at the Effective Time and held of record by Surety shall be converted into one share of common stock of Continuing Bank. -3- (d) For purposes of this Merger Agreement, "Dissenting Shares" shall refer to those shares of Surety Bank Common Stock owned by shareholders of Surety Bank who, pursuant to 12 U.S.C. Section 215, (i) vote against the Bank Consolidation at the meeting of the shareholders of Surety Bank to consider and vote on the Bank Consolidation referred to in Section 4(b) of the Reorganization Agreement, or who give notice in writing at or prior to such meeting to the presiding officer of Surety Bank that he dissents from the Bank Consolidation and (ii) within thirty (30) days after the date of consummation of the Bank Consolidation, request in writing from Continuing Bank payment of the value of their shares of Surety Bank Common Stock, accompanied by the surrender of the stock certificates evidencing such Surety Bank Common Stock. Notwithstanding anything in this Consolidation Agreement to the contrary, Dissenting Shares shall not be converted into the right to receive, or be exchangeable for, cash as provided in SECTION 5(b) hereof, but, instead, the holders thereof shall be entitled to payment of the value of such Dissenting Shares on the Approval Date determined in accordance with the provisions of 12 U.S.C. Sections 215(c) and (d). 6. After the Effective Time: (a) The shareholders of Surety Bank, other than Surety and the holders of Dissenting Shares, as the holders of the outstanding certificate or certificates which prior thereto represented shares of Surety Bank Common Stock, may surrender same to Continuing Bank, and such shareholders of Surety Bank shall be entitled upon such surrender to receive from Continuing Bank in exchange therefor, without cost to such holder, the Exchange Price for each share of Surety Bank Common Stock represented by such outstanding certificate or certificates surrendered. (b) Until so surrendered, each such outstanding certificate which, prior to the Effective Time, represented shares of Surety Bank Common Stock shall be deemed for all purposes to evidence solely the right to receive the amount of cash into and for which such shares of Surety Bank Common Stock shall have been converted pursuant to SECTION 5(b) hereof. No interest shall be payable with respect to any such cash payments. If a shareholder of Surety Bank is unable to locate any of his certificates which prior to the Effective Time represented shares of Surety Bank Common Stock, Continuing Bank shall issue a check to such shareholder in the amount which such shareholder would otherwise be entitled to receive hereunder without surrendering such certificate, upon receipt by Continuing Bank of an indemnity bond in favor of Continuing Bank and satisfactory in all respects to Continuing Bank. (c) The stock transfer books of Surety Bank shall be closed as of the close of business on the Closing Date (hereinafter defined), and no transfer of record of any of the shares of Surety Bank Common Stock shall take place thereafter. From and after the close of business on the Closing Date, shares of Surety Bank Common -4- Stock shall cease to be shares of Surety Bank, irrespective of whether such shares are ultimately surrendered. 7. The directors, advisory directors and officers, respectively, of Continuing Bank at the Effective Time shall be those persons who are directors, advisory directors and officers, respectively, of Surety Bank immediately before the Effective Time. The committees of the Board of Directors of Continuing Bank at the Effective Time shall be the same as, and shall be composed of the same persons who are serving on, committees of the Board of Directors of Surety Bank as they exist immediately before the Effective Time. 8. This Consolidation Agreement shall be approved by Newco, the sole shareholder of First Bank pursuant to a Unanimous Consent executed and delivered by such sole shareholder in accordance with the Reorganization Agreement. This Consolidation Agreement shall be submitted to the shareholders of Surety Bank, at a meeting called to be held as promptly as practicable in accordance with the Reorganization Agreement. Upon approval of the shareholders of Surety Bank and First Bank, this Consolidation Agreement shall be made effective as soon as practicable thereafter in the manner provided in SECTION 12 hereof. 9. The Consolidation Plan shall be automatically terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank or First Bank, in the event the Holding Company Merger is not consummated, for any reason whatsoever, and may be terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank or First Bank by the mutual consent in writing of Surety Bank and First Bank. 10. In the event of the termination and abandonment of the Consolidation Plan pursuant to the provisions of SECTION 9 hereof, the same shall be of no further force or effect except that the indemnification provisions set forth in Section 11 and the provisions relating to expenses set forth in Section 9 of the Reorganization Agreement shall survive any such termination and abandonment. 11. Any of the terms or conditions of the Consolidation Plan may be waived at any time, whether before or after action thereon by the shareholders of Surety Bank or First Bank, by the party which is entitled to the benefits thereof; and this Consolidation Agreement or the Reorganization Agreement may be modified or amended at any time, whether before or after action thereon by the shareholders of Surety Bank or First Bank; provided, however, that such action shall be taken only if, in the judgment of Surety Bank and First Bank, such waiver, modification or amendment will not have a materially adverse effect on Surety Bank, First Bank or their respective shareholders. Any waiver, modification or amendment shall be in writing. -5- 12. The "Closing Date" shall have the meaning set forth in the Holding Company Merger Agreement. The closing (the "Closing") shall be held at the offices of Surety located in Hurst, Texas on the Closing Date. At the Closing, Newco shall deliver to Surety Bank all of the stock certificates evidencing issued and outstanding shares of common stock of First Bank. Subject to the terms, and upon satisfaction on or before the Closing Date of all requirements of law and the conditions specified in the Consolidation Plan, including receipt of the approval of the Comptroller of the Currency specified in 12 U.S.C. Section 215, the Bank Consolidation shall become effective at the time specified in the certificate to be issued by the Comptroller of the Currency under the seal of his office approving the Bank Consolidation, such time being herein called the "Effective Time." 13. For the convenience of the parties hereto and to facilitate the filing and recording of this Consolidation Agreement, any number of counterparts thereof may be executed, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, Surety Bank has caused this Consolidation Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION By:______________________________ Bobby W. Hackler, President ATTEST: _____________________________ Robert E. Crews, Cashier ALL OF THE DIRECTORS OF SURETY BANK, NATIONAL ASSOCIATION __________________________________ C. Jack Bean -6- __________________________________ William B. Byrd __________________________________ Bobby W. Hackler __________________________________ Joseph S. Hardin __________________________________ G. M. Heinzelmann, III __________________________________ Michael L. Milam __________________________________ Garrett Morris __________________________________ Cullen W. Turner THE STATE OF TEXAS ) ) COUNTY OF _____________ ) On this _______ day of ______________, 199___, before me, a Notary Public for the State and County aforesaid, personally came Bobby W. Hackler as President and Robert E. Crews as Cashier, of SURETY BANK, NATIONAL ASSOCIATION, a national banking association, and each in his said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its seal; and came also C. Jack Bean, William B. Byrd, Bobby W. Hackler, Joseph S. Hardin, G. M. Heinzelmann, III, Michael L. Milam, Garrett Morris and Cullen W. Turner, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself as director thereof. -7- WITNESS my official seal and signature this day and year aforesaid. _____________________________________ Notary Public, State of Texas _____________________________________ (Print or Type Notary's Name) My Commission Expires: ____________________________ IN WITNESS WHEREOF, First Bank has caused this Consolidation Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. FIRST BANK: FIRST NATIONAL BANK By:_________________________________ Danny D. Rodgers, President ATTEST: _____________________________ Patsy Melton, Cashier ALL OF THE DIRECTORS OF FIRST NATIONAL BANK __________________________________ Billie Jo Duran __________________________________ Charles L. Duran __________________________________ V. H. Easterwood, Jr. -8- __________________________________ Danny D. Rodgers __________________________________ J. C. Rodgers __________________________________ J. D. Rodgers __________________________________ Lou E. Rodgers __________________________________ E. L. Webb THE STATE OF TEXAS ) ) COUNTY OF ____________ ) On this _______ day of _________________, 199___, before me, a Notary Public for the State and County aforesaid, personally came Danny D. Rodgers as President and Patsy Melton as Cashier, of FIRST NATIONAL BANK, a national banking association, and each in his/her said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its seal; and came also Billie Jo Duran, Charles L. Duran, V. H. Easterwood, Jr., Danny D. Rodgers, J. C. Rodgers, J. D. Rodgers, Lou E. Rodgers and E. L. Webb, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself or herself as director thereof. WITNESS my official seal and signature this day and year aforesaid. __________________________________ Notary Public, State of Texas __________________________________ (Print or Type Notary's Name) My Commission Expires: ____________________________ -9- Newco hereby joins in the foregoing Consolidation Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Newco has caused this undertaking to be made in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written. NEWCO: SCC ACQUISITION, INC. By:_____________________________________________ __________________________________, President ATTEST: ______________________________ ____________________, Secretary Surety hereby joins in the foregoing Consolidation Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Surety has caused this undertaking to be made in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written. SURETY: SURETY CAPITAL CORPORATION By:_________________________________ G. M. Heinzelmann, III, President ATTEST: _____________________________ Bobby W. Hackler, Secretary -10- ANNEX A ARTICLES OF ASSOCIATION 1995 FIRST. The title of the association shall be Surety Bank, National Association. SECOND. The main office of the association shall be in Midlothian, County of Ellis, State of Texas. The general business of the association shall be conducted at its main office and its branches. THIRD. The board of directors of the association shall consist of not less than 5 nor more than 25 persons, the exact number to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of a majority of the shareholders at any annual or special meeting thereof. Each director shall own common or preferred stock of the association with an aggregate par value of not less than $1,000, or common or preferred stock of a bank holding company owning the association with an aggregate par, fair market or equity value of not less than $1,000, as of either (i) the date of purchase, (ii) the date the person became a director, or (iii) the date of that person's most recent election to the board of directors, whichever is greater. Any combination of common or preferred stock of the association or holding company may be used. Any vacancy in the board of directors may be filled by action of a majority of the remaining directors between meetings of shareholders. The board of directors may not increase the number of directors between meetings of shareholders to a number which: (1) exceeds by more than 2 the number of directors last elected by shareholders where the number was 15 or less; and (2) exceeds by more than 4 the number of directors last elected by shareholders where the number was 16 or more, but in no event shall the number of directors exceed 25. Terms of directors, including directors selected to fill vacancies, shall expire at the next regular meeting of shareholders at which directors are elected, unless the directors resign or are removed from office. Despite the expiration of a director's term, the director shall continue to serve until his or her successor is elected and qualifies or until there is a decrease in the number of directors and his or her position is eliminated. Honorary or advisory members of the board of directors, without voting power or power of final decision in matters concerning the business of the association, may be appointed by resolution of a majority of the full board of directors, or by resolution of shareholders at any annual or special meeting. Honorary or advisory directors shall not be counted for purposes of determining the number of directors of the association or the presence of a quorum in connection with any board action, and shall not be required to own qualifying shares. FOURTH. There shall be an annual meeting of the shareholders to elect directors and transact whatever other business may be brought before the meeting. It shall be held at the main office or any other convenient place the board of directors may designate, on the day of each year specified therefore in the bylaws, or if that day falls on a legal holiday in the state in which the association is located, on the next following banking day. If no election is held on the day fixed or in event of a legal holiday, an election may be held on any subsequent day within 60 days of the day fixed, to be designated by the board of directors, or, if the directors fail to fix the day, by shareholders representing two-thirds of the shares issued and outstanding. In all cases at least 10 days' advance notice of the meeting shall be given to the shareholders by first class mail. In all elections of directors, the number of votes each common shareholder may cast will be determined by multiplying the number of shares he or she owns by the number of directors to be elected. Those votes may be cumulated and cast for a single candidate or may be distributed among two or more candidates in the manner selected by the shareholder. On all other questions, each common shareholder shall be entitled to one vote for each share of stock held by him or her. Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of capital stock of the association entitled to vote for election of directors. Nominations other than those made by or on behalf of the existing management shall be made in writing and be delivered or mailed to the president of the association and to the Comptroller of the Currency, Washington, D.C., not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the president of the association and to the Comptroller of the Currency not later than the close of business on the seventh day following the date on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (1) The name and address of each proposed nominee. (2) The principal occupation of each proposed nominee. (3) The total number of shares of capital stock of the association that will be voted for each proposed nominee. (4) The name and residence address of the notifying shareholder, and (5) The number of shares of capital stock of the association owned by the notifying shareholder. -2- Nominations not made in accordance herewith may, in his/her discretion, be disregarded by the chairperson of the meeting, and the vote tellers may disregard all votes cast for each such nominee. No bylaw may unreasonably restrict the nomination of directors by shareholders. A director may resign at any time by delivering written notice to the board of directors, its chairperson, or to the association, which resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. A director may be removed by shareholders at a meeting called to remove him or her, when notice of the meeting stating that the purpose or one of the purposes is to remove him or her is provided, if there is a failure to fulfill one of the affirmative requirements for qualification, or for cause; provided, however, that a director may not be removed if the number of votes sufficient to elect him or her under cumulative voting is voted against his or her removal. FIFTH. The authorized amount of capital stock of this association shall be 6,000,000 shares of common stock with a par value of ninety-one cents ($0.91) each; but said capital stock may be increased or decreased from time to time, according to the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the association, whether now or hereafter authorized, or to any obligations convertible into stock of the association, issued, or sold, nor any right of subscription to any thereof other than such, if any, as the board of directors, in its discretion may from time to time determine and at such price as the board of directors may from time to time fix. Unless otherwise specified in the articles of association or required by law, (1) all matters requiring shareholder action, including amendments to the articles of association must be approved by shareholders owning a majority voting interest in the outstanding voting stock, and (2) each shareholder shall be entitled to one vote per share. Unless otherwise specified in the articles of association or required by law, all shares of voting stock shall be voted together as a class on any matters requiring shareholder approval. If a proposed amendment would affect two or more classes or series in the same or a substantially similar way, all the classes or series so affected must vote together as a single voting group on the proposed amendment. Shares of the same class or series may be issued as a dividend on a pro rata basis and without consideration. Shares of another class or series may be issued as a share dividend in respect of a -3- class or series of stock if approved by a majority of the votes entitled to be cast by the class or series to be issued unless there are no outstanding shares of the class or series to be issued. Unless otherwise provided by the board of directors, the record date for determining shareholders entitled to a share dividend shall be the date the board of directors authorizes the share dividend. Unless otherwise provided in the bylaws, the record date for determining shareholders entitled to notice of and to vote at any meeting is the close of business on the day before the first notice is mailed or otherwise sent to the shareholders, provided that in no event may a record date be more than 70 days before the meeting. If a shareholder is entitled to fractional shares pursuant to a stock dividend, consolidation or merger, reverse stock split or otherwise, the association may (a) issue fractional shares; (b) in lieu of the issuance of fractional shares, issue script or warrants entitling the holder to receive a full share upon surrendering enough script or warrants to equal a full share; (c) if there is an established and active market in the association's stock, make reasonable arrangements to provide the shareholder with an opportunity to realize a fair price through sale of the fraction, or purchase of the additional fraction required for a full share; (d) remit the cash equivalent of the fraction to the shareholder; or (e) sell full shares representing all the fractions at public auction or to the highest bidder after having solicited and received sealed bids from at least 3 licensed stock brokers; and distribute the proceeds pro rata to shareholders who otherwise would be entitled to the fractional shares. The holder of a fractional share is entitled to exercise the rights of a shareholder, including the right to vote, to receive dividends, and to participate in the assets of the association upon liquidation, in proportion to the fractional interest. The holder of script or warrants is not entitled to any of these rights unless the script or warrants explicitly provide for such rights. The script or warrants may be subject to such additional conditions as: (1) that the script or warrants will become void if not exchanged for full shares before a specified date; and (2) that the shares for which the script or warrants are exchangeable may be sold at the option of the association and the proceeds paid to scriptholders. The association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. Obligations classified as debt, whether or not subordinated, which may be issued by the association without the approval of shareholders, do not carry voting rights on any issue, including an increase or decrease in the aggregate number of the securities, or the exchange or reclassification of all or part of securities into securities of another class or series. SIXTH. The board of directors shall appoint one of its members as president of this association, and one of its members as -4- chairperson of the board and shall have the power to appoint one or more vice presidents, a secretary who shall keep minutes of the directors' and shareholders' meetings and be responsible for authenticating the records of the association, and such other officers and employees as may be required to transact the business of this association. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the board of directors in accordance with the bylaws. The board of directors shall have the power to: (1) Define the duties of the officers, employees and agents of the association. (2) Delegate the performance of its duties, but not the responsibility for its duties, to the officers, employees and agents of the association. (3) Fix the compensation and enter into employment contracts with its officers and employees upon reasonable terms and conditions consistent with applicable law. (4) Dismiss officers and employees. (5) Require bonds from officers and employees and fix the penalty thereof. (6) Ratify written policies authorized by the association's management or committees of the board. (7) Regulate the manner in which any increase or decrease of the capital of the association shall be made, provided that nothing herein shall restrict the power of shareholders to increase or decrease the capital of the association in accordance with law, and nothing shall raise or lower from two-thirds the percentage required for shareholder approval to increase or reduce the capital. (8) Manage and administer the business and affairs of the association. (9) Adopt initial bylaws, not inconsistent with law or the articles of association, for managing the business and regulating the affairs of the association. (10) Amend or repeal bylaws, except to the extent that the articles of association reserve this power in whole or in part to shareholders. (11) Make contracts. (12) Generally perform all acts that are legal for a board of directors to perform. -5- SEVENTH. The board of directors shall have the power to change the location of the main office to any other place within the limits of Midlothian, Texas without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of the association to any other location permitted under applicable law, without the approval of the shareholders subject to approval by the Office of the Comptroller of the Currency. EIGHTH. The corporate existence of this association shall continue until terminated according to the laws of the United States. NINTH. The board of directors of this association, or any 3 or more shareholders owning, in the aggregate, not less than 10% of the stock of this association, may call a special meeting of shareholders at any time. Unless otherwise provided by the bylaws or the laws of the United States, or waived by shareholders, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least 10, and no more than 60, days prior to the date of the meeting to each shareholder of record at his/her address as shown upon the books of this association. Unless otherwise provided by the bylaws, any action requiring approval of shareholders must be effected at a duly called annual or special meeting. TENTH. The association shall indemnify to the fullest extent permitted under the Texas Business Corporation Act any person who is made a named defendant or respondent in any action, suit or proceeding, other than in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil monetary penalties or requiring affirmative action by such person in the form of payments to the association, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of the association, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director, advisory director or officer in connection with any such action, suit or proceeding. The association may indemnify other persons, as permitted by the Texas Business Corporation Act and other applicable laws. The association may purchase and maintain insurance on behalf of directors, advisory directors, officers or other persons against any liability asserted against such persons in their capacities as directors, advisory directors, officers or otherwise, other than for liability asserted against such persons pursuant to a formal order assessing civil monetary penalties. ELEVENTH. No director of the association shall be liable to the association or its shareholders for monetary damages for an act or omission in such director's capacity as a director of the -6- association, except that this Article Eleventh shall not eliminate or limit the liability of a director of the association for: (i) a breach of such director's duty of loyalty to the association or its shareholders; (ii) an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (iv) an act or omission for which the liability of a director is expressly provided for by statute. Any repeal or amendment of this Article Eleventh by the shareholders of the association shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the association existing at the time of such repeal or amendment. Anything herein to the contrary notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended after approval by the shareholders of this Article Eleventh to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the association shall be eliminated or limited to the full extent then permitted by the Texas Miscellaneous Corporation Laws Act, as so amended from time to time. TWELFTH. These articles of association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The association's board of directors may propose one or more amendments to the articles of association for submission to the shareholders. -7- List of schedules to Reorganization Agreement by and between First Midlothian Corporation; First National Bank; the directors of First Midlothian Corporation and First National Bank; Surety Bank, National Association; and Surety Capital Corporation, dated October 17, 1995 which are not filed herewith: SCHEDULE DESCRIPTION - -------------------------------------------------------------------------------- 1(f) Debentures 1(g) Loans 1(k) All tangible properties, real and personal owned or leased by First National Bank having an original cost in excess of $25,000 1(l) Compliance with environmental laws 1(n) Patents, trademarks, etc. 1(p) All policies of fire, liability and other forms of insurance and all fidelity bonds held by First Midlothian Corporation and First National Bank 1(q) Material contracts 1(t) Material contract defaults 1(u) Litigation and other proceedings 1(x) Absence of certain changes or events 1(z) Name, position and annual compensation of each person employed by First Midlothian and First Bank whose aggregate annual compensation from First Midlothian and First Bank (including bonuses and similar remuneration) exceeds $15,000 1(cc) Non-deposit claims The registrant will furnish supplementally a copy of any omitted schedule to the Securities and Exchange Commission upon request. EX-2.06 3 EXHIBIT 2.06 EXHIBIT 2.06 AGREEMENT TO MERGE SCC ACQUISITION, INC. WITH AND INTO FIRST MIDLOTHIAN CORPORATION UNDER THE CHARTER OF FIRST MIDLOTHIAN CORPORATION AND UNDER THE TITLE OF FIRST MIDLOTHIAN CORPORATION MERGER AGREEMENT made this 17th day of October, 1995, between FIRST MIDLOTHIAN CORPORATION, a Texas corporation registered as a bank holding company, located in Midlothian, Texas ("First Midlothian"); SURETY ACQUISITION, INC. a Texas corporation ("Newco") which has been approved as a wholly-owned operating subsidiary of SURETY BANK, NATIONAL ASSOCIATION, a national banking association located in Lufkin, Texas ("Surety Bank"); and joined in by Surety Bank and all those individuals and entities who have subscribed their names hereto individually and as a Director (hereinafter referred to individually as a "Director" and collectively as the "Directors"). WITNESSETH: A. First Midlothian is a corporation duly organized and existing under the laws of the State of Texas with authorized common stock of 48,000 shares, par value $10.00 per share ("First Midlothian Common Stock"), of which 48,000 shares are issued and outstanding; B. Newco is a corporation duly organized and existing under the laws of the State of Texas with authorized common stock of 100,000 shares, par value $0.01 per share ("Newco Common Stock") of which 1,000 shares are issued and outstanding; C. The Boards of Directors and shareholders of First Midlothian and of Newco have approved this Merger Agreement under which Newco shall be merged with and into First Midlothian (the "Holding Company Merger") and have authorized the execution hereof; and the Board of Directors of Surety Bank has approved this Merger Agreement, authorized Surety Bank to join in and be bound by this Merger Agreement, and authorized the undertakings herein made by Surety Bank; D. Surety Capital Corporation, a Delaware corporation which owns of record and beneficially over ninety-nine percent (99%) of the issued and outstanding shares of common stock of Surety Bank ("Surety"); Surety Bank; First Midlothian; First National Bank, a national banking association located in Midlothian, Texas ("First Bank)", all of the issued and outstanding shares of common stock of which are owned of record and beneficially by First Midlothian; and the Directors have entered into a Reorganization Agreement dated October 17, 1995 (the "Reorganization Agreement") which contemplates the Holding Company Merger provided for in this Merger Agreement. All terms not defined in this Merger Agreement shall have the meaning set forth in the Reorganization Agreement; E. As and when required by the provisions of this Merger Agreement or the Reorganization Agreement (hereinafter referred to collectively as the "Merger Plan"), all such action as may be necessary or appropriate shall be taken by Newco, Surety Bank, First Midlothian and the Directors in order to consummate the Holding Company Merger. NOW, THEREFORE, in consideration of the premises, Newco and First Midlothian, joined in by Surety Bank and the Directors, in their individual and representative capacity, hereby agree that Newco shall be merged with and into First Midlothian on the following terms and conditions: 1. At the Effective Time (as defined herein), Newco shall be merged with and into First Midlothian to do business and be governed by the laws of the State of Texas. Said Holding Company Merger shall be pursuant to the provisions of and with the effect provided in the Texas Business Corporation Act. 2. At the Effective Time, the name of First Midlothian (hereinafter referred to as "Resulting Entity" whenever reference is made to it as of the time of the Holding Company Merger or thereafter) shall be changed to "SCC Acquisition, Inc."; the Articles of Incorporation of Resulting Entity shall be as set forth in ANNEX A attached hereto and made a part hereof; the bylaws of Resulting Entity shall be as set forth in ANNEX B hereto and made a part hereof; and the established office and facilities of Newco immediately prior to the Holding Company Merger shall become the established office and facilities of Resulting Entity. 3. At the Effective Time, the corporate existence of First Midlothian and Newco shall be merged into and continued in Resulting Entity and Resulting Entity shall be deemed to be the same corporation as First Midlothian and Newco. All rights, franchises and interests of First Midlothian and Newco, respectively, in and to every type of property (real, personal and mixed) and choses in action shall be transferred to and vested in Resulting Entity by virtue of such Holding Company Merger without any deed or other transfer. Resulting Entity at the Effective Time and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent and registrar of stocks and bonds, guardian of estates, assignee, receiver, and in every other fiduciary capacity, and in every agency capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by First Midlothian and Newco, respectively, at the Effective Time. 4. At the Effective Time, Resulting Entity shall be liable for all liabilities of First Midlothian and Newco, respectively; and all deposits, debts, liabilities, obligations and contracts of First Midlothian and Newco, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of First Midlothian or Newco, as the case may -2- be, including all liabilities of First Midlothian and Newco for taxes, whether existing at the Effective Time or arising as a result of or pursuant to the Holding Company Merger, shall be those of Resulting Entity and shall not be released or impaired by the Holding Company Merger; and all rights of creditors and other obligees and all liens on property of either First Midlothian or Newco shall be preserved unimpaired. 5. At the Effective Time: (a) All shares of First Midlothian Common Stock outstanding at the Effective Time held by the shareholders shall, without any action on the part of the shareholders, be converted into and exchanged for the right to receive cash (the "Consideration") equal to (i) one hundred fifty percent (150%) of the Book Value of First Bank as of the Closing Date (as defined herein), to the extent such Book Value does not exceed $4,500,000 plus (ii) one hundred percent (100%) of the Book Value of First Bank as of the Closing Date in excess of $4,500,000 minus (iii) the outstanding principal of, and accrued interest on, the Debentures as of the Closing Date. (b) Book Value shall mean the sum of First Bank's total stockholders' equity (defined as capital stock, surplus, undivided profits and retained earnings) determined in accordance with generally accepted accounting principles applied on a consistent basis, with reserves acceptable to First Midlothian and Surety. The Book Value shall be determined pursuant to an audit or other specified review procedure prepared by Coopers & Lybrand, and the Book Value of First Bank shall be based on the results of that audit or specified review procedure. (c) In the event the Book Value, as determined pursuant to SUBSECTION (b), is unsatisfactory to either First Midlothian or Surety, the parties agree that they will first attempt in good faith to resolve their dispute with respect to Book Value through direct negotiation within fifteen (15) days of the date either party notifies the other of the existence of such a dispute. If a shorter time period is indicated by the circumstances, the parties agree that the time period shall be reduced accordingly. (d) In the event the parties are unable to resolve their dispute through direct negotiation within the applicable time period, either party may notify the other party of its decision to submit the dispute to resolution by appraisal. In this event, the parties shall unanimously select an appraiser within fifteen (15) days after the end of the fifteen (15) day period. The appraiser unanimously selected shall determine Book Value within thirty (30) days after the appraiser is appointed and such determination shall be conclusive. If the parties do not unanimously agree upon a single appraiser within the fifteen (15) day period, Surety shall select one appraiser and First Midlothian shall select another appraiser within five (5) days after the end of the fifteen (15) day period. Upon appointment of the two appraisers, the two -3- appraisers shall within five (5) days jointly select a third appraiser. Book Value shall then be determined within thirty (30) days after the date of the appointment of the third appraiser and such determination shall be conclusive. Book Value shall be the average of the two closest values determined by the three (3) appraisers. The total cost of the appraisers shall be paid one-half by Surety and one-half by First Midlothian. (e) Each share of Newco Common Stock issued and outstanding at the Effective Time shall be converted into and become one share of common stock of Resulting Entity. 6. After the Effective Time: (a) The holders of the outstanding certificate or certificates which prior thereto represented shares of First Midlothian Common Stock may surrender same to Resulting Entity, and each shall be entitled upon such surrender to receive from Surety Bank in exchange therefor, without cost to such holders, the amount determined by dividing the Consideration by the number of shares of First Midlothian Common Stock outstanding at the Effective Time and multiplying such result by the number of shares of First Midlothian Common Stock represented by such outstanding certificate or certificates surrendered. (b) Until so surrendered, each such outstanding certificate which, prior to the Effective Time, represented shares of First Midlothian Common Stock shall be deemed for all purposes to evidence solely the right to receive the amount of cash into and for which such shares of First Midlothian Common Stock shall have been converted pursuant to Section 6(a) hereof. No interest shall be payable with respect to any such cash payments. If a shareholder is unable to locate any of his certificates which prior to the Effective Time represented shares of First Midlothian Common Stock, Resulting Entity shall issue a check to such shareholder in the amount to which such shareholder would otherwise be entitled to receive hereunder without surrendering such certificate, upon receipt by Resulting Entity of an indemnity agreement to Resulting Entity in form and substance satisfactory in all respects to Resulting Entity. (c) The stock transfer books of First Midlothian shall be closed as of the close of business on the Closing Date, and no transfer of record of any of the shares of First Midlothian Common Stock shall take place thereafter. From and after the close of business on the Closing Date, shares of First Midlothian Common Stock shall cease to be shares of First Midlothian, irrespective of whether such shares are ultimately surrendered. 7. The directors, advisory directors, and officers, respectively, of Resulting Entity at the Effective Time shall be those persons who are directors, advisory directors, and officers, respectively, of Newco immediately before the Effective Time. The committees of the Board of Directors of Resulting Entity at the -4- Effective Time shall be the same as, and shall be composed of the same persons who are serving on, committees of the Board of Directors of Newco as they exist immediately before the Effective Time. 8. This Merger Agreement shall be submitted to the shareholders of First Midlothian, at a meeting called to be held as promptly as practicable in accordance with the Reorganization Agreement. This Merger Agreement shall be approved by Surety Bank, the sole shareholder of Newco, pursuant to a unanimous consent executed and delivered by such sole shareholder in accordance with the Reorganization Agreement. Upon approval of the shareholders of First Midlothian and the sole shareholder of Newco, this Merger Agreement shall be made effective as soon as practicable thereafter in the manner provided in SECTION 11 hereof. 9. The Merger Plan may be terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of First Midlothian and the sole shareholder of Newco: (a) By the mutual consent in writing of First Midlothian and Newco; (b) By First Midlothian in writing if any of the conditions to the obligations of the Directors, First Midlothian or First Bank contained herein or in the Reorganization Agreement shall not have been satisfied or, if unsatisfied, waived as of the Closing Date; (c) By Surety in writing if any of the conditions to the obligations of Surety or Surety Bank contained herein or in the Reorganization Agreement shall not have been satisfied or, if unsatisfied, waived as of the Closing Date; or (d) By either First Midlothian or Newco in writing if the Closing Date shall not have occurred by June 30, 1996, unless the date is extended by mutual agreement of First Midlothian and Newco. 10. Except as provided in the next succeeding sentence, in the event of the termination and abandonment of the Merger Plan pursuant to the provisions of SECTION 9 hereof, the same shall be of no further force or effect except that the indemnification provisions set forth in SECTION 11 and the provisions relating to expenses set forth in SECTION 9 of the Reorganization Agreement shall survive any such termination and abandonment. Additionally, in the event Surety elects to abandon the Merger Plan by written notice to such effect to First Midlothian (the "Election") pursuant to SECTION 7(e) of the Reorganization Agreement, as a result of Surety's inability to have sufficient financial resources available, in the sole opinion of Surety, to consummate the transactions contemplated by the Reorganization Plan and the Merger Agreements, Surety shall pay to First Midlothian a break-up fee, as follows, -5- and upon payment thereof, none of the parties to the Reorganization Agreement nor the Merger Agreements shall have any further obligations to each other, except as expressly set forth in this SECTION 10: (a) If Surety makes the Election on or before December 31, 1995, Surety shall pay to First Midlothian the sum of TWENTY-FIVE THOUSAND AND NO/100 DOLLARS ($25,000) concurrently with the mailing of the notice of such Election. (b) If Surety makes the Election on or before March 31, 1996, Surety shall pay to First Midlothian the sum of THIRTY-FIVE THOUSAND AND NO/100 DOLLARS ($35,000) concurrently with the mailing of the notice of such Election. (c) If Surety makes the Election on or before June 30, 1996, Surety shall pay to First Midlothian the sum of FIFTY THOUSAND AND NO/100 DOLLARS ($50,000) concurrently with the mailing of the notice of such Election. 11. The closing date (the "Closing Date") shall be a date to be selected by mutual agreement of the parties immediately following the satisfaction of all requirements of law and the conditions specified in the Merger Plan, including receipt of all applicable regulatory approvals or waivers therefrom and expiration of applicable waiting periods relating thereto. The closing (the "Closing") shall be held at the offices of Surety located in Hurst, Texas on the Closing Date. At the Closing, Surety Bank shall deliver to the shareholders of First Midlothian cash in the amount of the Consideration and the shareholders of First Midlothian shall deliver to Surety Bank all of the stock certificates evidencing issued and outstanding shares of common stock of First Midlothian. The Holding Company Merger shall become effective at the time specified in the certificate to be issued by the Secretary of State of the State of Texas, such time being herein called the "Effective Time." 12. For the convenience of the parties hereto and to facilitate the filing and recording of this Merger Agreement, any number of counterparts hereof may be executed, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, First Midlothian and Newco have each caused this Merger Agreement to be executed in counterparts on its behalf as of the date first above written. -6- FIRST MIDLOTHIAN CORPORATION By: /s/ Danny D. Rodgers ------------------------------------- Its: --------------------------------- SCC ACQUISITION, INC. By: /s/ Bobby W. Hackler ------------------------------------- Its: President --------------------------------- Surety Bank hereby joins in the foregoing Merger Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Surety Bank has caused this undertaking to be made in counterparts by its duly authorized officer and its corporate seal to be hereunto affixed as of the date first above written. SURETY BANK, NATIONAL ASSOCIATION By:/s/ Bobby W. Hackler ------------------------------------- Its:President & C.E.O. --------------------------------- The Directors hereby join in the foregoing Merger Agreement, and undertake that they will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by them. /s/ Billie Jo Duran ---------------------------------------- Billie Jo Duran, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Charles L. Duran ---------------------------------------- Charles L. Duran, Individually and as a Director of First Midlothian Corporation and First National Bank -7- /s/ V. H. Easterwood, Jr. ---------------------------------------- V. H. Easterwood, Jr., Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Lou E. Rodgers ---------------------------------------- Lou E. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ Danny D. Rodgers ---------------------------------------- Danny D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. C. Rodgers ---------------------------------------- J. C. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ J. D. Rodgers ---------------------------------------- J. D. Rodgers, Individually and as a Director of First Midlothian Corporation and First National Bank /s/ E. L. Webb ---------------------------------------- E. L. Webb, Individually and as a Director of First Midlothian Corporation and First National Bank -8- EX-2.07 4 EXHIBIT 2.07 EXHIBIT 2.07 AGREEMENT TO CONSOLIDATE FIRST NATIONAL BANK AND SURETY BANK, NATIONAL ASSOCIATION UNDER THE CHARTER OF SURETY BANK, NATIONAL ASSOCIATION AND UNDER THE TITLE OF SURETY BANK, NATIONAL ASSOCIATION CONSOLIDATION AGREEMENT made this 16th day of January, 1996, between SURETY BANK, NATIONAL ASSOCIATION ("Surety Bank") and FIRST NATIONAL BANK ("First Bank") and joined in by SCC, INC., a Texas corporation ("Newco") (prior to the Holding Company Merger known as "First Midlothian Corporation") and SURETY CAPITAL CORPORATION, a Delaware corporation ("Surety"). WITNESSETH: A. Surety Bank is a national banking association duly organized and existing under the laws of the United States of America having its principal offices in the City of Lufkin, County of Angelina, State of Texas. B. First Bank is a national banking association duly organized and existing under the laws of the United States having its principal offices in the City of Midlothian, County of Ellis, State of Texas. C. First Bank has, and will have as of the Effective Time, (i) authorized capital stock of $480,000 consisting of 48,000 shares of common stock, $10.00 par value ("First Bank Common Stock"), of which 48,000 shares are, or will be as of the Effective Time, issued and outstanding and (ii) surplus of not less than $1,000,000. D. All of the issued and outstanding shares of First Bank Common Stock are and will be as of the Effective Time held of record and beneficially by Newco. E. Surety Bank has, and will have as of the Effective Time, (i) authorized capital stock of $5,460,000 consisting of 6,000,000 shares of common stock, $0.91 par value ("Surety Bank Common Stock"), of which 3,708,195 shares are, or will be as of the Effective Time, issued and outstanding and (ii) surplus of not less than $5,330,000. F. Over ninety-nine percent (99%) of all of the issued and outstanding shares of Surety Bank Common Stock are and will be as of the Effective Time held of record and beneficially by Surety. G. A majority of the Boards of Directors of First Bank and of Surety Bank has approved this Consolidation Agreement under which First Bank and Surety Bank shall be consolidated (the "Bank Consolidation") under the charter of Surety Bank and has authorized the execution hereof; the Board of Directors of Newco has approved this Consolidation Agreement, authorized Newco to join in and be bound by this Consolidation Agreement, and authorized the undertakings herein made by Newco; and the Board of Directors of Surety has approved this Consolidation Agreement, authorized Surety to join in and be bound by this Consolidation Agreement, and authorized the undertakings herein made by Surety. H. Surety; Surety Bank; First Midlothian Corporation, a Texas corporation registered as a bank holding company located in Midlothian, Texas ("First Midlothian"); certain of the shareholders of First Midlothian (the "Shareholders"); and First Bank have entered into a Reorganization Agreement dated October 17, 1995 (the "Reorganization Agreement") which contemplates the Bank Consolidation provided for in this Consolidation Agreement. All terms not defined in this Consolidation Agreement shall have the meaning set forth in the Reorganization Agreement. I. As and when required by the provisions of this Consolidation Agreement or the Reorganization Agreement (hereinafter referred to collectively as the "Consolidation Plan"), all such action as may be necessary or appropriate shall be taken by Surety Bank, First Bank, Newco and Surety in order to consummate the Bank Consolidation. NOW, THEREFORE, in consideration of the premises, Surety Bank and First Bank, joined by Newco and Surety, hereby agree that First Bank and Surety Bank shall be consolidated under the charter of Surety Bank on the following terms and conditions: 1. At the Effective Time, First Bank and Surety Bank shall be consolidated under the Articles of Association and Charter of Surety Bank. Said Bank Consolidation shall be pursuant to the provisions of and with the effect provided in 12 U.S.C. Section 215. 2. At the Effective Time, the name of Surety Bank (hereinafter referred to as "Continuing Bank" whenever reference is made to it as of the time of Bank Consolidation or thereafter) shall continue to be "Surety Bank, National Association"; the Articles of Association of Continuing Bank shall be as set forth in ANNEX A attached hereto and made a part hereof; the bylaws of Surety Bank in effect immediately prior to the Bank Consolidation shall become the bylaws of Continuing Bank; the established office and facilities of First Bank immediately prior to the Bank Consolidation shall become the established office and facilities of Continuing Bank; and the established office and facilities of Surety Bank immediately prior to the Bank Consolidation shall continue and be operated as a branch of Continuing Bank. 3. At the Effective Time, the corporate existence of Surety Bank and First Bank shall, as provided in 12 U.S.C. Section 215, be merged into and continued in Continuing Bank; and Continuing Bank shall be deemed to be the same corporation as Surety Bank and First Bank. All rights, franchises and interests of Surety Bank and First Bank, respectively, in and to every type of property (real, personal and mixed) and choses in action shall be transferred to and vested in Continuing Bank by virtue of such Bank Consolidation without any deed or other transfer. Continuing Bank at the -2- Effective Time and without any order or other action on the part of any court or otherwise, shall hold and enjoy all rights of property, franchises and interests, including appointments, designations and nominations, and all other rights and interests as trustee, executor, administrator, transfer agent and registrar of stocks and bonds, guardian of estates, assignee, receiver, and in every other fiduciary capacity, and in every agency capacity, in the same manner and to the same extent as such rights, franchises and interests were held or enjoyed by Surety Bank and First Bank, respectively, at the Effective Time, subject, however, to the provisions of 12 U.S.C. Section 215(f). 4. At the Effective Time, Continuing Bank shall be liable for all liabilities of Surety Bank and of First Bank, respectively; and all deposits, debts, liabilities, obligations and contracts of Surety Bank and of First Bank, respectively, matured or unmatured, whether accrued, absolute, contingent or otherwise, and whether or not reflected or reserved against on balance sheets, books of account or records of Surety Bank or First Bank, as the case may be, including all liabilities of Surety Bank and First Bank for taxes, whether existing at the Effective Time or arising as a result of or pursuant to the Bank Consolidation, shall be those of Continuing Bank and shall not be released or impaired by the Bank Consolidation; and all rights of creditors and other obligees and all liens on property of either Surety Bank or First Bank shall be preserved unimpaired. 5. At the Effective Time: (a) All shares of First Bank Common Stock outstanding at the Effective Time held by Newco shall, without any action on the part of Newco, be cancelled and be of no further force and effect. (b) Each share of Surety Bank Common Stock outstanding at the Effective Time held by the shareholders of Surety Bank, other than shares of Surety Bank Common Stock held of record by Surety and Dissenting Shares (as hereinafter defined), without any action on the part of the shareholders of Surety Bank, shall be converted into and exchanged for the right to receive cash equal to: (i) the product obtained by multiplying the number of shares of common stock of Surety (the "Surety Common Stock") issued and outstanding on the date of approval of the Bank Consolidation by the Office of the Comptroller of the Currency (the "Approval Date") by the average of the high and low prices of such Surety Common Stock on the American Stock Exchange, Inc. on the Approval Date, divided by (ii) the number of shares of Surety Bank Common Stock issued and outstanding on the Approval Date (the "Exchange Price"). (c) Each share of Surety Bank Common Stock issued and outstanding at the Effective Time and held of record by Surety shall be converted into one share of common stock of Continuing Bank. -3- (d) For purposes of this Merger Agreement, "Dissenting Shares" shall refer to those shares of Surety Bank Common Stock owned by shareholders of Surety Bank who, pursuant to 12 U.S.C. Section 215, (i) vote against the Bank Consolidation at the meeting of the shareholders of Surety Bank to consider and vote on the Bank Consolidation referred to in Section 4(b) of the Reorganization Agreement, or who give notice in writing at or prior to such meeting to the presiding officer of Surety Bank that he dissents from the Bank Consolidation and (ii) within thirty (30) days after the date of consummation of the Bank Consolidation, request in writing from Continuing Bank payment of the value of their shares of Surety Bank Common Stock, accompanied by the surrender of the stock certificates evidencing such Surety Bank Common Stock. Notwithstanding anything in this Consolidation Agreement to the contrary, Dissenting Shares shall not be converted into the right to receive, or be exchangeable for, cash as provided in SECTION 5(b) hereof, but, instead, the holders thereof shall be entitled to payment of the value of such Dissenting Shares on the Approval Date determined in accordance with the provisions of 12 U.S.C. Sections 215(c) and (d). 6. After the Effective Time: (a) The shareholders of Surety Bank, other than Surety and the holders of Dissenting Shares, as the holders of the outstanding certificate or certificates which prior thereto represented shares of Surety Bank Common Stock, may surrender same to Continuing Bank, and such shareholders of Surety Bank shall be entitled upon such surrender to receive from Continuing Bank in exchange therefor, without cost to such holder, the Exchange Price for each share of Surety Bank Common Stock represented by such outstanding certificate or certificates surrendered. (b) Until so surrendered, each such outstanding certificate which, prior to the Effective Time, represented shares of Surety Bank Common Stock shall be deemed for all purposes to evidence solely the right to receive the amount of cash into and for which such shares of Surety Bank Common Stock shall have been converted pursuant to SECTION 5(b) hereof. No interest shall be payable with respect to any such cash payments. If a shareholder of Surety Bank is unable to locate any of his certificates which prior to the Effective Time represented shares of Surety Bank Common Stock, Continuing Bank shall issue a check to such shareholder in the amount which such shareholder would otherwise be entitled to receive hereunder without surrendering such certificate, upon receipt by Continuing Bank of an indemnity bond in favor of Continuing Bank and satisfactory in all respects to Continuing Bank. (c) The stock transfer books of Surety Bank shall be closed as of the close of business on the Closing Date (hereinafter defined), and no transfer of record of any of the shares of Surety Bank Common Stock shall take place thereafter. From and after the close of business on the Closing Date, shares of Surety Bank Common -4- Stock shall cease to be shares of Surety Bank, irrespective of whether such shares are ultimately surrendered. 7. The directors, advisory directors and officers, respectively, of Continuing Bank at the Effective Time shall be those persons who are directors, advisory directors and officers, respectively, of Surety Bank immediately before the Effective Time. The committees of the Board of Directors of Continuing Bank at the Effective Time shall be the same as, and shall be composed of the same persons who are serving on, committees of the Board of Directors of Surety Bank as they exist immediately before the Effective Time. 8. This Consolidation Agreement shall be approved by Newco, the sole shareholder of First Bank pursuant to a Unanimous Consent executed and delivered by such sole shareholder in accordance with the Reorganization Agreement. This Consolidation Agreement shall be submitted to the shareholders of Surety Bank, at a meeting called to be held as promptly as practicable in accordance with the Reorganization Agreement. Upon approval of the shareholders of Surety Bank and First Bank, this Consolidation Agreement shall be made effective as soon as practicable thereafter in the manner provided in SECTION 12 hereof. 9. The Consolidation Plan shall be automatically terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank or First Bank, in the event the Holding Company Merger is not consummated, for any reason whatsoever, and may be terminated and abandoned at any time prior to or on the Closing Date, whether before or after action thereon by the shareholders of Surety Bank or First Bank by the mutual consent in writing of Surety Bank and First Bank. 10. In the event of the termination and abandonment of the Consolidation Plan pursuant to the provisions of SECTION 9 hereof, the same shall be of no further force or effect except that the indemnification provisions set forth in Section 11 and the provisions relating to expenses set forth in Section 9 of the Reorganization Agreement shall survive any such termination and abandonment. 11. Any of the terms or conditions of the Consolidation Plan may be waived at any time, whether before or after action thereon by the shareholders of Surety Bank or First Bank, by the party which is entitled to the benefits thereof; and this Consolidation Agreement or the Reorganization Agreement may be modified or amended at any time, whether before or after action thereon by the shareholders of Surety Bank or First Bank; provided, however, that such action shall be taken only if, in the judgment of Surety Bank and First Bank, such waiver, modification or amendment will not have a materially adverse effect on Surety Bank, First Bank or their respective shareholders. Any waiver, modification or amendment shall be in writing. -5- 12. The "Closing Date" shall have the meaning set forth in the Holding Company Merger Agreement. The closing (the "Closing") shall be held at the offices of Surety located in Hurst, Texas on the Closing Date. At the Closing, Newco shall deliver to Surety Bank all of the stock certificates evidencing issued and outstanding shares of common stock of First Bank. Subject to the terms, and upon satisfaction on or before the Closing Date of all requirements of law and the conditions specified in the Consolidation Plan, including receipt of the approval of the Comptroller of the Currency specified in 12 U.S.C. Section 215, the Bank Consolidation shall become effective at the time specified in the certificate to be issued by the Comptroller of the Currency under the seal of his office approving the Bank Consolidation, such time being herein called the "Effective Time." 13. For the convenience of the parties hereto and to facilitate the filing and recording of this Consolidation Agreement, any number of counterparts thereof may be executed, each of which shall for all purposes be deemed to be an original and all of which shall constitute the same instrument, but only one of which need be produced. IN WITNESS WHEREOF, Surety Bank has caused this Consolidation Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION By: /s/ Bobby W. Hackler ------------------------------ Bobby W. Hackler, President ATTEST: /s/ Robert E. Crews - ---------------------------- Robert E. Crews, Cashier ALL OF THE DIRECTORS OF SURETY BANK, NATIONAL ASSOCIATION /s/ C. Jack Bean ---------------------------------- C. Jack Bean -6- /s/ William B. Byrd ---------------------------------- William B. Byrd /s/ Bobby W. Hackler ---------------------------------- Bobby W. Hackler /s/ Joseph S. Hardin ---------------------------------- Joseph S. Hardin /s/ G. M. Heinzelmann, III ---------------------------------- G. M. Heinzelmann, III /s/ Michael L. Milam ---------------------------------- Michael L. Milam /s/ Garrett Morris ---------------------------------- Garrett Morris /s/ Cullen W. Turner ---------------------------------- Cullen W. Turner THE STATE OF TEXAS ) ) COUNTY OF TARRANT ) On this 16th day of January, 1996, before me, a Notary Public for the State and County aforesaid, personally came Bobby W. Hackler as President and Robert E. Crews as Cashier, of SURETY BANK, NATIONAL ASSOCIATION, a national banking association, and each in his said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its seal; and came also C. Jack Bean, William B. Byrd, Bobby W. Hackler, Joseph S. Hardin, G. M. Heinzelmann, III, Michael L. Milam, Garrett Morris and Cullen W. Turner, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself as director thereof. -7- WITNESS my official seal and signature this day and year aforesaid. /s/ Margaret E. Holland ----------------------------------------------- Notary Public, State of Texas /s/ Margaret E. Holland ----------------------------------------------- (Print or Type Notary's Name) My Commission Expires: 12/11/97 IN WITNESS WHEREOF, First Bank has caused this Consolidation Agreement to be executed in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written, and the directors constituting all of the Board of Directors of such banking association have hereunto subscribed their names. FIRST BANK: FIRST NATIONAL BANK By: /s/ Danny D. Rodgers -------------------------------------------- Danny D. Rodgers, President ATTEST: /s/ Patsy Melton - ---------------------------------- Patsy Melton, Cashier ALL OF THE DIRECTORS OF FIRST NATIONAL BANK /s/ Billie Jo Duran ----------------------------------------------- Billie Jo Duran /s/ Charles L. Duran ----------------------------------------------- Charles L. Duran /s/ V. H. Easterwood, Jr. ----------------------------------------------- V. H. Easterwood, Jr. -8- /s/ Danny D. Rodgers ----------------------------------------------- Danny D. Rodgers /s/ J. C. Rodgers ----------------------------------------------- J. C. Rodgers /s/ J. D. Rodgers ----------------------------------------------- J. D. Rodgers /s/ Lou E. Rodgers ----------------------------------------------- Lou E. Rodgers /s/ E. L. Webb ----------------------------------------------- E. L. Webb THE STATE OF TEXAS ) ) COUNTY OF ELLIS ) On this 16th day of November, 1995, before me, a Notary Public for the State and County aforesaid, personally came Danny D. Rodgers as President and Patsy Melton as Cashier, of FIRST NATIONAL BANK, a national banking association, and each in his/her said capacity acknowledged the foregoing instrument to be the act and deed of said association and the seal affixed thereto to be its seal; and came also Billie Jo Duran, Charles L. Duran, V. H. Easterwood, Jr., Danny D. Rodgers, J. C. Rodgers, J. D. Rodgers, Lou E. Rodgers and E. L. Webb, being all of the Board of Directors of said association and each of them acknowledged said instrument to be the act and deed of said association and of himself or herself as director thereof. WITNESS my official seal and signature this day and year aforesaid. /s/ Myla McClinton ----------------------------------------------- Notary Public, State of Texas /s/ Myla McClinton ----------------------------------------------- (Print or Type Notary's Name) My Commission Expires: 11-3-96 -9- Newco hereby joins in the foregoing Consolidation Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Newco has caused this undertaking to be made in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written. NEWCO: SCC, INC. By: /s/ SCC, Inc. ----------------------------------------------- /s/ Bobby W. Hackler, President ATTEST: /s/ G. M. Heinzelmann, III, Secretary Surety hereby joins in the foregoing Consolidation Agreement, and undertakes that it will be bound thereby and will do and perform all acts and things therein referred to or provided to be done by it. IN WITNESS WHEREOF, Surety has caused this undertaking to be made in counterparts by its duly authorized officers and its corporate seal to be hereunto affixed as of the date first above written. SURETY: SURETY CAPITAL CORPORATION By: /s/ G. M. Heinzelmann, III ---------------------------------------------- G. M. Heinzelmann, III, President ATTEST: /s/ Bobby W. Hackler - ---------------------------- Bobby W. Hackler, Secretary -10- ANNEX A ARTICLES OF ASSOCIATION 1995 FIRST. The title of the association shall be Surety Bank, National Association. SECOND. The main office of the association shall be in Midlothian, County of Ellis, State of Texas. The general business of the association shall be conducted at its main office and its branches. THIRD. The board of directors of the association shall consist of not less than 5 nor more than 25 persons, the exact number to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of a majority of the shareholders at any annual or special meeting thereof. Each director shall own common or preferred stock of the association with an aggregate par value of not less than $1,000, or common or preferred stock of a bank holding company owning the association with an aggregate par, fair market or equity value of not less than $1,000, as of either (i) the date of purchase, (ii) the date the person became a director, or (iii) the date of that person's most recent election to the board of directors, whichever is greater. Any combination of common or preferred stock of the association or holding company may be used. Any vacancy in the board of directors may be filled by action of a majority of the remaining directors between meetings of shareholders. The board of directors may not increase the number of directors between meetings of shareholders to a number which: (1) exceeds by more than 2 the number of directors last elected by shareholders where the number was 15 or less; and (2) exceeds by more than 4 the number of directors last elected by shareholders where the number was 16 or more, but in no event shall the number of directors exceed 25. Terms of directors, including directors selected to fill vacancies, shall expire at the next regular meeting of shareholders at which directors are elected, unless the directors resign or are removed from office. Despite the expiration of a director's term, the director shall continue to serve until his or her successor is elected and qualifies or until there is a decrease in the number of directors and his or her position is eliminated. Honorary or advisory members of the board of directors, without voting power or power of final decision in matters concerning the business of the association, may be appointed by resolution of a majority of the full board of directors, or by resolution of shareholders at any annual or special meeting. Honorary or advisory directors shall not be counted for purposes of determining the number of directors of the association or the presence of a quorum in connection with any board action, and shall not be required to own qualifying shares. FOURTH. There shall be an annual meeting of the shareholders to elect directors and transact whatever other business may be brought before the meeting. It shall be held at the main office or any other convenient place the board of directors may designate, on the day of each year specified therefore in the bylaws, or if that day falls on a legal holiday in the state in which the association is located, on the next following banking day. If no election is held on the day fixed or in event of a legal holiday, an election may be held on any subsequent day within 60 days of the day fixed, to be designated by the board of directors, or, if the directors fail to fix the day, by shareholders representing two-thirds of the shares issued and outstanding. In all cases at least 10 days' advance notice of the meeting shall be given to the shareholders by first class mail. In all elections of directors, the number of votes each common shareholder may cast will be determined by multiplying the number of shares he or she owns by the number of directors to be elected. Those votes may be cumulated and cast for a single candidate or may be distributed among two or more candidates in the manner selected by the shareholder. On all other questions, each common shareholder shall be entitled to one vote for each share of stock held by him or her. Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of capital stock of the association entitled to vote for election of directors. Nominations other than those made by or on behalf of the existing management shall be made in writing and be delivered or mailed to the president of the association and to the Comptroller of the Currency, Washington, D.C., not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nominations shall be mailed or delivered to the president of the association and to the Comptroller of the Currency not later than the close of business on the seventh day following the date on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder: (1) The name and address of each proposed nominee. (2) The principal occupation of each proposed nominee. (3) The total number of shares of capital stock of the association that will be voted for each proposed nominee. (4) The name and residence address of the notifying shareholder, and (5) The number of shares of capital stock of the association owned by the notifying shareholder. -2- Nominations not made in accordance herewith may, in his/her discretion, be disregarded by the chairperson of the meeting, and the vote tellers may disregard all votes cast for each such nominee. No bylaw may unreasonably restrict the nomination of directors by shareholders. A director may resign at any time by delivering written notice to the board of directors, its chairperson, or to the association, which resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. A director may be removed by shareholders at a meeting called to remove him or her, when notice of the meeting stating that the purpose or one of the purposes is to remove him or her is provided, if there is a failure to fulfill one of the affirmative requirements for qualification, or for cause; provided, however, that a director may not be removed if the number of votes sufficient to elect him or her under cumulative voting is voted against his or her removal. FIFTH. The authorized amount of capital stock of this association shall be 6,000,000 shares of common stock with a par value of ninety-one cents ($0.91) each; but said capital stock may be increased or decreased from time to time, according to the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the association, whether now or hereafter authorized, or to any obligations convertible into stock of the association, issued, or sold, nor any right of subscription to any thereof other than such, if any, as the board of directors, in its discretion may from time to time determine and at such price as the board of directors may from time to time fix. Unless otherwise specified in the articles of association or required by law, (1) all matters requiring shareholder action, including amendments to the articles of association must be approved by shareholders owning a majority voting interest in the outstanding voting stock, and (2) each shareholder shall be entitled to one vote per share. Unless otherwise specified in the articles of association or required by law, all shares of voting stock shall be voted together as a class on any matters requiring shareholder approval. If a proposed amendment would affect two or more classes or series in the same or a substantially similar way, all the classes or series so affected must vote together as a single voting group on the proposed amendment. Shares of the same class or series may be issued as a dividend on a pro rata basis and without consideration. Shares of another class or series may be issued as a share dividend in respect of a -3- class or series of stock if approved by a majority of the votes entitled to be cast by the class or series to be issued unless there are no outstanding shares of the class or series to be issued. Unless otherwise provided by the board of directors, the record date for determining shareholders entitled to a share dividend shall be the date the board of directors authorizes the share dividend. Unless otherwise provided in the bylaws, the record date for determining shareholders entitled to notice of and to vote at any meeting is the close of business on the day before the first notice is mailed or otherwise sent to the shareholders, provided that in no event may a record date be more than 70 days before the meeting. If a shareholder is entitled to fractional shares pursuant to a stock dividend, consolidation or merger, reverse stock split or otherwise, the association may (a) issue fractional shares; (b) in lieu of the issuance of fractional shares, issue script or warrants entitling the holder to receive a full share upon surrendering enough script or warrants to equal a full share; (c) if there is an established and active market in the association's stock, make reasonable arrangements to provide the shareholder with an opportunity to realize a fair price through sale of the fraction, or purchase of the additional fraction required for a full share; (d) remit the cash equivalent of the fraction to the shareholder; or (e) sell full shares representing all the fractions at public auction or to the highest bidder after having solicited and received sealed bids from at least 3 licensed stock brokers; and distribute the proceeds pro rata to shareholders who otherwise would be entitled to the fractional shares. The holder of a fractional share is entitled to exercise the rights of a shareholder, including the right to vote, to receive dividends, and to participate in the assets of the association upon liquidation, in proportion to the fractional interest. The holder of script or warrants is not entitled to any of these rights unless the script or warrants explicitly provide for such rights. The script or warrants may be subject to such additional conditions as: (1) that the script or warrants will become void if not exchanged for full shares before a specified date; and (2) that the shares for which the script or warrants are exchangeable may be sold at the option of the association and the proceeds paid to scriptholders. The association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. Obligations classified as debt, whether or not subordinated, which may be issued by the association without the approval of shareholders, do not carry voting rights on any issue, including an increase or decrease in the aggregate number of the securities, or the exchange or reclassification of all or part of securities into securities of another class or series. SIXTH. The board of directors shall appoint one of its members as president of this association, and one of its members as -4- chairperson of the board and shall have the power to appoint one or more vice presidents, a secretary who shall keep minutes of the directors' and shareholders' meetings and be responsible for authenticating the records of the association, and such other officers and employees as may be required to transact the business of this association. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the board of directors in accordance with the bylaws. The board of directors shall have the power to: (1) Define the duties of the officers, employees and agents of the association. (2) Delegate the performance of its duties, but not the responsibility for its duties, to the officers, employees and agents of the association. (3) Fix the compensation and enter into employment contracts with its officers and employees upon reasonable terms and conditions consistent with applicable law. (4) Dismiss officers and employees. (5) Require bonds from officers and employees and fix the penalty thereof. (6) Ratify written policies authorized by the association's management or committees of the board. (7) Regulate the manner in which any increase or decrease of the capital of the association shall be made, provided that nothing herein shall restrict the power of shareholders to increase or decrease the capital of the association in accordance with law, and nothing shall raise or lower from two-thirds the percentage required for shareholder approval to increase or reduce the capital. (8) Manage and administer the business and affairs of the association. (9) Adopt initial bylaws, not inconsistent with law or the articles of association, for managing the business and regulating the affairs of the association. (10) Amend or repeal bylaws, except to the extent that the articles of association reserve this power in whole or in part to shareholders. (11) Make contracts. (12) Generally perform all acts that are legal for a board of directors to perform. -5- SEVENTH. The board of directors shall have the power to change the location of the main office to any other place within the limits of Midlothian, Texas without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of the association to any other location permitted under applicable law, without the approval of the shareholders subject to approval by the Office of the Comptroller of the Currency. EIGHTH. The corporate existence of this association shall continue until terminated according to the laws of the United States. NINTH. The board of directors of this association, or any 3 or more shareholders owning, in the aggregate, not less than 10% of the stock of this association, may call a special meeting of shareholders at any time. Unless otherwise provided by the bylaws or the laws of the United States, or waived by shareholders, a notice of the time, place and purpose of every annual and special meeting of the shareholders shall be given by first-class mail, postage prepaid, mailed at least 10, and no more than 60, days prior to the date of the meeting to each shareholder of record at his/her address as shown upon the books of this association. Unless otherwise provided by the bylaws, any action requiring approval of shareholders must be effected at a duly called annual or special meeting. TENTH. The association shall indemnify to the fullest extent permitted under the Texas Business Corporation Act any person who is made a named defendant or respondent in any action, suit or proceeding, other than in an administrative proceeding or action instituted by an appropriate bank regulatory agency which proceeding or action results in a final order assessing civil monetary penalties or requiring affirmative action by such person in the form of payments to the association, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of the association, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such director, advisory director or officer in connection with any such action, suit or proceeding. The association may indemnify other persons, as permitted by the Texas Business Corporation Act and other applicable laws. The association may purchase and maintain insurance on behalf of directors, advisory directors, officers or other persons against any liability asserted against such persons in their capacities as directors, advisory directors, officers or otherwise, other than for liability asserted against such persons pursuant to a formal order assessing civil monetary penalties. ELEVENTH. No director of the association shall be liable to the association or its shareholders for monetary damages for an act or omission in such director's capacity as a director of the -6- association, except that this Article Eleventh shall not eliminate or limit the liability of a director of the association for: (i) a breach of such director's duty of loyalty to the association or its shareholders; (ii) an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law; (iii) a transaction from which a director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of the director's office; or (iv) an act or omission for which the liability of a director is expressly provided for by statute. Any repeal or amendment of this Article Eleventh by the shareholders of the association shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the association existing at the time of such repeal or amendment. Anything herein to the contrary notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended after approval by the shareholders of this Article Eleventh to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the association shall be eliminated or limited to the full extent then permitted by the Texas Miscellaneous Corporation Laws Act, as so amended from time to time. TWELFTH. These articles of association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The association's board of directors may propose one or more amendments to the articles of association for submission to the shareholders. -7- EX-5.01 5 EXHIBIT 5.01 SECORE & WALLER, L.L.P. ATTORNEYS AND COUNSELORS ONE GALLERIA TOWER, 2290 13355 NOEL ROAD, LB 75 DALLAS, TEXAS 75240-6657 (214) 776-0200 January 26, 1996 Surety Capital Corporation 1845 Precinct Line Road Suite 100 Hurst, TX 76054 Gentlemen: We refer to the registration statement on Form S-1, File No. 33-64789 (the "Registration Statement") of Surety Capital Corporation, a Delaware corporation (the "Company"), filed under the Securities Act of 1933 covering the proposed issuance and sale of up to 2,100,000 shares of common stock of the Company. In connection therewith, we have reviewed originals or copies authenticated to our satisfaction of (i) the Certificate of Incorporation and Bylaws of the Company, (ii) the Minute Books of the Company containing the minutes of directors' and shareholders' meetings and actions, (iii) the Registration Statement and the exhibits thereto, and (iv) such other information as we deemed necessary as a basis for the opinions expressed herein. Based upon the foregoing, we are of the opinion that: 1. The Company is a corporation duly incorporated and validly existing under the laws of the State of Delaware. 2. The common stock offered pursuant to the Registration Statement will, when sold, issued and delivered as contemplated by the Registration Statement, be duly authorized, legally issued, fully paid and nonassessable. Sincerely, SECORE & WALLER, L.L.P. /s/ Secore & Waller, L.L.P. EX-23.03 6 EXHIBIT 23.03 EXHIBIT 23.03 CONSENT TO LEGAL COUNSEL TO THE REGISTRANT We consent to the incorporation by reference in the registration statement of Surety Capital Corporation on Form S-1 of our opinion dated January 26, 1996 and also consent to the reference to our firm under the caption "Legal Opinion". /s/ SECORE & WALLER, L.L.P. - ------------------------------- SECORE & WALLER, L.L.P. Dallas, Texas January 26, 1996 EX-23.04 7 EXHIBIT 23.04 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in the registration statement of Surety Capital Corporation on Form S-1 of our report, which includes an explanatory paragraph concerning a change in the method of accounting for investment securities and income taxes, dated January 27, 1995, on our audits of the consolidated financial statements of Surety Capital Corporation as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994. We also consent to the reference to our firm under the caption "Experts." [SIG CUT] COOPERS & LYBRAND L.L.P. Fort Worth, Texas February 2, 1996 -----END PRIVACY-ENHANCED MESSAGE-----