-----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, Vpsq3WNeTb5m7Jq33dYQiyzyHJDiP2wCBzhgDHCNyURtJvwIg3D4KQsRG5wGmaY4 gmF/7/JDsJtDtz40EEX4Nw== 0001051622-98-000057.txt : 19981007 0001051622-98-000057.hdr.sgml : 19981007 ACCESSION NUMBER: 0001051622-98-000057 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980401 ITEM INFORMATION: FILED AS OF DATE: 19981006 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: 8-K/A SEC ACT: SEC FILE NUMBER: 001-12818 FILM NUMBER: 98721643 BUSINESS ADDRESS: STREET 1: 1845 PRECINCT LINE RD STE 100 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174982749 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 8-K/A 1 FORM 8-K/A #3 FORM 8-K/A (Amendment No. 3) Securities and Exchange Commission Washington, D.C. 20549 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): April 1, 1998 Surety Capital Corporation ------------------------------------------------------ (exact name of registrant as specified in its charter) Delaware 33-1983 75-2065607 - --------------- ------------------------ -------------- (State or other (Commission File Number) (IRS Employer jurisdiction of Identification incorporation) Number) 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054 ------------------------------------------------------- (address of principal executive offices) Registrant's telephone number, including area code: 817-498-2749 Not applicable ------------------------------------------------------------- (Former name or former address, if changed since last report) PAGE Item 7. Financial Statements and Exhibits (a) Financial Statements The following audited financials statements of the acquired bank are included with this Form 8-K in accordance with the provisions of Rule 3-05 of Regulation S-X: TexStar National Bank Report of Independent Accountants F-1 Balance Sheets as of December 31, 1997 and 1996 F-2 Statements of Income for the Years Ended F-3 December 31, 1997 and 1996 Statements of Changes in Stockholders' Equity F-4 for the Years Ended December 31, 1997 and 1996 Statements of Cash Flows for the Years Ended F-5 December 31, 1997 and 1996 Notes to Financial Statements F-6 Independent Accountants' Report on Supplemental F-22 Schedules Financial Highlights for the Years Ended F-23 December 31, 1997 and 1996 The following unaudited financials statements of the acquired bank are included with this Form 8-K in accordance with the provisions of Rule 3-05 of Regulation S-X: TexStar National Bank Consolidated Balance Sheets as of March 31, F-24 1998 (unaudited) and December 31, 1997 Consolidated Statements of Income for the F-25 Three Months Ended March 31, 1998 and 1997 (unaudited) Statement of Comprehensive (Loss) Income for F-26 the Three Months Ended March 31, 1998 and 1997 (unaudited) Consolidated Statements of Shareholders' Equity F-27 for the Three Months Ended March 31, 1998 (unaudited) and for the Years Ended December 31, 1997, 1996 and 1995 -1- PAGE Consolidated Statements of Cash Flows for the F-28 Three Months Ended March 31, 1998 and 1997 (unaudited) Notes to Consolidated Financial Statements F-29 (b) The following pro forma financial statements are included with this Form 8-K: Pro Forma Balance Sheet as of March 31, 1998 F-34 (unaudited) Pro Forma Income Statement for the Three F-35 Months Ended March 31, 1998 (unaudited) Pro Forma Income Statement for the Twelve F-36 Months Ended December 31, 1997 (unaudited) (c) Exhibits The following exhibits are included with this Form 8-K in accordance with the provisions of Item 601 of Regulation S-K: 2.11 Agreement and Plan of Reorganization by and among Surety Bank, National Association, TexStar National Bank, Surety Capital Corporation, and certain shareholders of TexStar National Bank, dated as of October 10, 1997; and Agreement to Merge TexStar 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, between Surety Bank, National Association and TexStar National Bank and joined in by Surety Capital Corporation and certain shareholders of TexStar National Bank, dated as of October 10, 1997 (1) 20 Press Release dated April 6, 1998 (2) 23 Consent of Independent Accountants (3) _______________ (1) Filed with the Company's Form 10-K for the fiscal year ended December 31, 1997 and incorporated by reference herein. (2) Filed with the Company's Current Report on Form 8-K for an event dated April 1, 1998 and incorporated by reference herein. (3) Filed with the Company's Current Report on Form 8-K/A (Amendment No. 1) for an event dated April 1, 1998 and incorporated by reference herein. -2- PAGE SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. SURETY CAPITAL CORPORATION Date: October 2, 1998 By: /s/ B. J. Curley ---------------------------- B. J. Curley, Vice President and Chief Financial Officer -3- PAGE INDEPENDENT AUDITORS' REPORT - ---------------------------- The Board of Directors TexStar National Bank We have audited the accompanying balance sheets of TexStar National Bank (the "Bank") as of December 31, 1997 and 1996, and the related statements of income, changes in stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TexStar National Bank as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Burnside & Rishebarger January 23, 1998 F-1 PAGE TEXSTAR NATIONAL BANK - --------------------- BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------
Notes 1997 1996 ----- ----------- ---------- ASSETS: Cash and due from banks $ 3,685,214 $2,463,424 Federal funds sold 5,300,000 155,000 Investment securities: 1,2 Available-for-sale 15,200,663 16,343,497 Held-to-maturity 9,577,720 8,654,714 ----------- ---------- Total investment securities 24,778,383 24,998,211 Loans - Net of allowance for loan losses 3,9 32,559,659 31,238,143 Bank premises and equipment - Net 4 2,729,822 1,793,815 Premiums receivable 121,000 Accrued interest receivable 577,273 516,802 Prepaid expenses and other assets 234,822 395,244 Other real estate and repossessed assets 484,986 521,200 Deferred federal income tax asset 5 70,738 180,799 Excess of cost over fair value of net assets acquired - Net of accumulated amortization of $13,119 15 577,253 ----------- ---------- TOTAL ASSETS $71,119,150 $62,262,638 =========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY: Deposits: Demand $12,346,275 $11,714,622 Savings, NOW, and money market accounts 17,044,070 15,168,876 Time, $100,000 and over 19,254,716 16,308,289 Other time 16,288,967 14,648,540 ----------- ---------- Total deposits 64,934,028 57,840,327 Note payable 143,811 198,113 Accrued interest payable and other liabilities 253,473 373,507 ----------- ---------- TOTAL LIABILITIES 65,331,312 58,411,947 ----------- ---------- COMMITMENTS AND CONTINGENT LIABILITIES 6,7,8,9,10,11,16 Stockholders' equity: Common stock - $5 par; 775,000 shares authorized, 485,000 issued and outstanding in 1997, 375,000 in 1996 11,15 2,425,000 1,875,000 Additional paid-in capital 2,357,616 1,682,616 Unrealized investment holding (losses) on available-for-sale securities - Net of tax 1,2 (14,349) (141,863) Retained earnings 1,019,571 434,938 ----------- ---------- Total stockholders' equity 5,787,838 3,850,691 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $71,119,150 $62,262,638 =========== ==========
See notes to financial statements. - ------------------------------------------------------------------------------- F-2 PAGE TEXSTAR NATIONAL BANK - --------------------- STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------- Notes 1997 1996 ----- ---------- ---------- INTEREST INCOME: Commercial loans $1,815,472 $1,796,097 SBA loans 1,081,719 772,346 Real estate loans 519,964 371,822 Consumer loans 320,801 261,559 Federal funds sold 110,556 49,927 Investment securities: Taxable 1,571,676 1,368,013 Tax-exempt 60,640 471 ---------- ---------- Total interest income 5,480,828 4,620,235 ---------- ---------- INTEREST EXPENSE: Interest on savings, NOW, and money market accounts 553,174 496,250 Interest on time deposits 1,953,025 1,789,581 ---------- ---------- Total interest expense 2,506,199 2,285,831 ---------- ---------- NET INTEREST INCOME 2,974,629 2,334,404 ---------- ---------- PROVISION FOR LOAN LOSSES 1,3 97,000 215,000 ---------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,877,629 2,119,404 ---------- ---------- OTHER INCOME: Service charges on deposit accounts 429,926 437,212 Other service charges, collection and exchange charges, commissions, and fees 184,612 99,308 Gain on sale of other real estate owned and repossessions, net 5,326 Gain on sale of securities, net 2 29,624 18,799 ---------- ---------- Total other income 644,162 560,645 ---------- ---------- OTHER EXPENSES: Salaries and wages 1,057,635 876,358 Employee benefits 149,663 124,876 Occupancy expense 226,319 144,906 Furniture and equipment expense 199,765 133,736 Other operating expenses 15 963,535 731,878 Amortization of goodwill 13,119 ---------- ---------- Total other expenses 2,610,036 2,011,754 ---------- ---------- INCOME BEFORE INCOME TAXES 911,755 668,295 Income tax expense 5 327,122 121,006 ---------- ---------- NET INCOME $ 584,633 $ 547,289 ========== ========== EARNINGS PER SHARE 1 $1.38 $1.46 ===== ===== WEIGHTED AVERAGE SHARES OUTSTANDING 422,357 375,000 ======= ======= See notes to financial statements. - ------------------------------------------------------------------------------- F-3 PAGE TEXSTAR NATIONAL BANK - --------------------- STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------
Unrealized Additional Investment Retained Common Paid-In Holding Earnings Notes Stock Capital Gains(Losses) (Deficit) Total ----- ---------- ---------- ------------- ------------ ---------- BALANCE JANUARY 1, 1996 $1,875,000 $1,682,616 $ 63,545 $ (112,351) $3,508,810 Change in unrealized investment holding gains (losses), net of tax 1,2,5 (205,408) (205,408) Net income 547,289 547,289 ---------- ---------- ---------- ------------ ----------- BALANCE DECEMBER 31, 1996 1,875,000 1,682,616 (141,863) 434,938 3,850,691 Sale of common stock 15 550,000 675,000 1,225,000 Change in unrealized investment holding gains (losses), net of tax 1,2,5 127,514 127,514 Net income 584,633 584,633 ---------- ---------- ---------- ------------ ----------- BALANCE DECEMBER 31, 1997 $2,425,000 $2,357,616 $(14,349) $1,019,571 $5,787,838 ========== ========== ========== ============ ===========
See notes to financial statements. - ------------------------------------------------------------------------------- F-4 PAGE TEXSTAR NATIONAL BANK - --------------------- STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - -------------------------------------------------------------------------------
Notes 1997 1996 ----- ------------ ------------ OPERATING ACTIVITIES: Net income $ 584,633 $ 547,289 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3 97,000 215,000 Depreciation and amortization 142,401 60,332 Premium amortization - Net of discount accretion on investment securities 47,587 64,221 Gain on sale of other real estate owned and repossessions, net (5,326) (Gain) on sales, calls, or maturities of available-for-sale securities 2 (29,624) (18,799) Increase in premium receivable (121,000) Increase in accrued interest receivable (60,471) (38,506) (Increase) decrease in prepaid expenses and other assets 160,422 (392,358) (Increase) decrease in deferred federal income tax 5 110,061 (180,799) Increase (decrease) in accrued interest payable and other liabilities (120,035) 44,734 ------------ ------------ Net cash provided by (used in) operating activities 810,974 295,788 ------------ ------------ INVESTING ACTIVITIES: Purchases of held-to-maturity securities 2 (2,998,412) (1,031,268) Purchases of available-for-sale securities 2 (10,764,191) (10,781,596) Proceeds from sales, calls, or maturities of held-to-maturity securities 2 1,745,000 2,000,000 Proceeds from sales, calls, or maturities of available-for-sale securities 2 12,346,983 6,851,282 Proceeds from the sale of other real estate owned and repossessed assets - Net of gain/loss 17,959 (Increase) decrease in other real estate owned and repossessions 36,214 (6,000) Increase in loans 3 (1,418,516) (3,288,950) (Increase) decrease in federal funds sold (5,145,000) 1,745,000 Purchases of premises and equipment 4 (1,078,408) (928,978) Excess of cost over fair value of net assets acquired 15 (577,253) Proceeds from sale of fixed asset - Net of gain 4,961 ------------ ------------ Net cash used by investing activities (7,853,583) (5,417,590) ------------ ------------ FINANCING ACTIVITIES: Net increase in noninterest bearing deposits, savings, NOW and money market accounts 2,506,847 4,111,286 Net increase in time deposits 4,586,854 1,142,136 Proceeds from issuance of notes payable 1,379,660 Payments on notes payable (1,433,962) Proceeds from sale of stock 15 1,225,000 ------------ ------------ Net cash provided by financing activities 8,264,399 5,253,422 ------------ ------------ NET INCREASE IN CASH AND DUE FROM BANKS 1,221,790 131,620 CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 1 2,463,424 2,331,804 ------------ ------------ CASH AND DUE FROM BANKS AT END OF YEAR 1 $ 3,685,214 $ 2,463,424 ============ ============
See notes to financial statements. - ------------------------------------------------------------------------------- F-5 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - TexStar National Bank (the "Bank") is engaged in the business of banking, including the acceptance of deposits and the making of loans to customers in Bexar and surrounding counties and in Texas. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their loans is dependent upon the economic conditions in the area, especially in the business sector. The Bank competes for deposits and loans principally with other commercial banks, savings and loan associations and credit unions. In addition, the Bank is subject to the regulations of certain Federal agencies and undergoes periodic examinations by those regulatory authorities. BASIS OF PRESENTATION - The accounting and reporting policies of the Bank conform to generally accepted accounting principles and to general practices within the banking industry. CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows, cash and cash equivalents include cash on hand and amounts due from banks. INVESTMENT SECURITIES - During 1993 the Bank adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"). SFAS 115 addresses the accounting for and reporting of investments in debt and equity securities. In accordance with SFAS 115, each of the Bank's investment securities are classified in one of the three following categories: HELD TO MATURITY - Debt securities that the Bank has the positive intent and ability to hold to maturity. These securities are reported at amortized cost. TRADING SECURITIES - Debt and equity securities that are bought and held principally for the purpose of selling in the near term. These securities are reported at fair value, with any unrealized gains or losses included in earnings. The Bank held no trading securities at December 31, 1997 or 1996. AVAILABLE FOR SALE - Debt and equity securities not included in either of the two categories above. These securities are reported at fair value, with any unrealized gains or losses excluded from earnings and included as a separate component of stockholders' equity. MORTGAGE-BACKED SECURITIES - Mortgage-backed securities represent participating interests in pools of long-term first mortgage loans originated and serviced by issuers of the securities. Mortgage-backed securities are carried as government agency securities at unpaid principal balances, adjusted for unamortized premiums and unearned discounts. Premiums and discounts are amortized using methods approximating the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Management intends and has the ability to hold such securities to maturity. Should any be sold, cost of securities sold is determined using the specific identification method. F-6 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- LOANS AND ALLOWANCE FOR CREDIT LOSSES - Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for credit losses, and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Loans are stated at the amount of unpaid principal, reduced by any unearned interest and an allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged against current earnings. A loan is considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, according to the contracted terms of the loan agreement. 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 borrower's ability to pay. The measurement of impaired loans and the related allowance for credit losses is generally based on the fair value of the collateral. Smaller balance homogenous loans consisting of residential mortgages and consumer loans are evaluated for reserves collectibility based on historical loss experience. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. 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 credit losses as deemed appropriate. BANK PREMISES AND EQUIPMENT - Bank premises and equipment are stated at cost, net of accumulated depreciation. Depreciation is recognized on the straight-line method over the estimated useful lives of the assets. The estimated useful lives range from 3 to 40 years. CHANGE IN ACCOUNTING ESTIMATE - Effective January 1, 1996, the Bank increased the estimated useful lives of certain assets. These revisions were made to more properly reflect true economic lives of the assets. This change did not have a material effect on the financial statements. RECLASSIFICATIONS - Certain reclassifications have been made to conform prior years' data to the current format. F-7 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- OTHER REAL ESTATE OWNED - Real estate acquired by foreclosure is carried at the lower of the recorded investment in the property or its fair value. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Any subsequent write-downs are charged against operating expenses. Operating expenses of such properties, net of related income, and gains and losses on their disposition are included in other expenses. INCOME TAX - The Bank follows Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"). This statement requires the use of an asset and liability method of accounting for deferred income taxes. This standard specifies criteria for the recognition and measurement of deferred tax assets or liabilities. Under SFAS 109 these items are to be calculated based on the estimated future tax effects of differences between the financial statement and tax bases of the Bank's assets and liabilities. STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption "cash and due from banks." EARNINGS PER SHARE - Earnings per share are calculated on the basis of the weighted average number of shares outstanding. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of business, the Bank has entered into off-balance-sheet financial instruments including commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable. POSTRETIREMENT BENEFITS - In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under SFAS 106, beginning in 1993, postretirement benefits other than pensions must be accounted for in a manner similar to current standards for accounting for pensions. SFAS No. 106 will require that the accumulated postretirement benefit obligation be either charged in the income statement as a cumulative effect of a change in accounting in the period of adoption or delayed and amortized over future periods as part of future postretirement benefit costs. Since the Company did not provide postretirement benefits during 1997 or 1996, SFAS No. 106 is not applicable. ESTIMATES AND ASSUMPTIONS - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-8 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- HEDGING CONTRACTS - In October 1994, the Financial Accounting Standards Board issued SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." Under SFAS No. 119, beginning in 1994, disclosures are required in connection with certain off-balance sheet derivative financial instruments, including interest rate floors and swaps. These contracts are divided between the following categories: HELD FOR TRADING PURPOSES - Including dealing and other trading activities measured at fair value with gains and losses recognized in earnings, and HELD FOR PURPOSES OTHER THAN TRADING - Including hedges of anticipated transactions, any gains and losses of which may be deferred. At December 31, 1997, management of the Bank believes the Bank had no contracts that qualify as off-balance sheet derivative financial instruments for purposes of SFAS 119. ACCOUNTING FOR LONG-LIVED ASSETS - In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which became effective for years beginning after January 1, 1996. SFAS 121 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Under SFAS 121, a loss is to be recognized to the extent that the fair value of an impaired asset is less than the asset's carrying amount. The Bank's adoption of SFAS 121 as of January 1, 1996 did not have any material current effect on the financial condition or results of operations. RECENT ACCOUNTING PRONOUNCEMENTS: In June 1996, the FASB issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 125). This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement requires that after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. In December 1996, the FASB issued Statement of Financial Accounting Standards No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." This Statement deferred the effective date of FASB Statement No. 125 for secured lending, repurchase agreement, dollar-roll, securities lending, and similar transactions to transactions occurring after December 31, 1997. (continued) F-9 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS - continuation: In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards for computing earnings per share (EPS) previously found in APB Opinion No. 15, "Earnings per Share" (Opinion 15), and make them comparable to international EPS standards. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15. SFAS 128 also requires dual presentation of basic and diluted EPS on the face of the income statement for entities with complex capital structures and a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 is effective for financial statements issued for periods ending after December 31, 1997, including interim periods; earlier application is not permitted. SFAS 128 requires restatement of all prior-period EPS data presented. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 129, "Disclosure of Information About Capital Structure" ("SFAS 129"). SFAS 129 establishes standards for disclosing information about an entity's capital structure, including the pertinent rights and privileges of various securities outstanding. SFAS 129 is effective for financial statements issued for periods ending after December 15, 1997. In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management believes that the adoption of these pronouncements will not have a material impact on the financial statements of the Bank. F-10 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 2. INVESTMENT SECURITIES Carrying amounts and approximate fair values of investment securities are summarized as follows:
Gross Gross Approximate Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value ----------------- ----------- ---------- ---------- ----------- Investment Securities Expected to be Held at Maturity: U.S. Government agency securities $ 8,974,791 $ 32,355 $ 8,942,436 Federal Reserve Bank stock 143,500 143,500 Federal Home Loan Bank stock 487,200 487,200 ----------- ---------- ---------- ----------- Total held to maturity $ 9,605,491 $ 32,355 $ 9,573,136 =========== ========== ========== =========== Investment Securities Available for Sale: U.S. Government agency securities $15,218,172 $19,403 $ 36,912 $15,200,663 U.S. Treasury securities ----------- ---------- ---------- ----------- Total available for sale $15,218,172 $19,403 $ 36,912 $15,200,663 =========== ========== ========== =========== December 31, 1996 ----------------- Investment Securities Expected to be Held at Maturity: U.S. Government agency securities $ 8,088,464 $212,729 $ 7,875,735 Federal Reserve Bank stock 106,750 106,750 Federal Home Loan Bank stock 459,500 459,500 ----------- ---------- ---------- ----------- Total held to maturity $ 8,654,714 $212,729 $ 8,441,985 =========== ========== ========== =========== Investment Securities Available for Sale: U.S. Government agency securities $15,539,912 $11,091 $209,928 $15,341,075 U.S. Treasury securities 1,007,402 4,980 1,002,422 ----------- ---------- ---------- ----------- Total available for sale $16,547,314 $11,091 $214,908 $16,343,497 =========== ========== ========== ===========
F-11 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- During 1994, the Bank transferred from investment securities available for sale to investment securities held to maturity, securities with an amortized cost of $4,800,327 and a market value at the date of transfer of $4,773,765. The unrealized holding loss of $26,562 was reported in the unrealized investment holding gains (losses) section of stockholders' equity and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The unamortized unrealized holding loss at December 31, 1997 and 1996 was $2,793 and $7,343, respectively. The Bank did not transfer any securities from investment securities available for sale during 1996 or 1997. At December 31, 1997 the balance of the cumulative unrealized investment holding gains or losses on securities available for sale have been reduced by deferred taxes as follows: 1997 1996 --------- ---------- Gross unrealized gains on securities available for sale $ 19,403 $ 11,091 Gross unrealized losses on securities available for sale (36,912) (214,909) --------- ---------- Subtotal, net gains (losses) (17,509) (203,818) Gross unrealized holding loss on securities transferred (2,793) (7,343) Deferred federal income tax (34% of subtotal) 5,953 69,298 --------- ---------- Net effect on stockholders' equity $(14,349) $(141,863) ========= ========== The carrying value of investment securities pledged as collateral for public funds amounted to approximately $7,493,952 and $9,747,086 at December 31, 1997 and 1996, respectively. The market value of investment securities pledged to secure public funds amounted to approximately $7,425,138 and $9,512,031 at December 31, 1997 and 1996, respectively. The Bank has pledged additional securities in the amount of $2,357,613 and $4,617,147 to large depositors at December 31, 1997 and 1996, respectively. The market value of these securities is $2,353,107 and $4,581,861 at December 31, 1997 and 1996, respectively. The carrying amount and approximate fair value of investment securities at December 31, 1996, 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. F-12 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- December 31, 1997 -------------------------- Approximate Carrying Fair Securities Expected to be Held to Maturity: Amount Value ------------------------------------------- ---------- ----------- Due in one year or less $ 3,523,834 $ 3,497,577 Due after one year through five years 1,007,731 982,947 Due after five years through ten years 1,000,000 1,000,160 Due after ten years of greater 1,990,784 2,018,772 Federal Reserve Bank stock 143,500 143,500 Federal Home Loan Bank stock 487,200 487,200 ----------- ----------- Subtotal 8,153,049 8,130,156 Mortgage-backed securities and collateralized mortgage obligations 1,452,374 1,442,911 ----------- ----------- Total $ 9,605,423 $ 9,573,067 =========== =========== Securities Available for Sale: ------------------------------ Due after one year through five years $ 6,002,589 $ 5,981,095 Due after five years through ten years 5,015,314 5,013,430 ----------- ----------- Subtotal 11,017,903 10,994,525 Mortgage-backed securities and collateralized mortgage obligations 4,200,269 4,206,138 ----------- ----------- Total $15,218,172 $15,200,663 =========== =========== Gross realized losses on sales of investment securities in 1997 were $9,370, which is comprised of losses on U.S. Treasury securities. Gross realized gains on sales of investment securities in 1997 were $38,994, which is comprised of gains of $13,542 on U.S. Treasury securities and $25,452 on U.S. Government agency securities. Gross realized losses on sales of investment securities in 1996 were $10,764, which is comprised of gains on U.S. Government agency securities. Gross realized gains on sales of investment securities in 1996 were $29,563, which was comprised of gains of $19,954 on U.S. Treasury securities and $9,609 on U.S. Government agency securities. 3. LOANS AND ALLOWANCE FOR LOAN LOSSES Major classifications of loans are as follows: 1997 1996 ----------- ----------- Commercial $10,414,003 $12,602,552 Mortgage 18,152,805 13,797,958 Construction 688,232 1,899,194 Installment 3,768,988 3,392,493 ----------- ----------- 33,024,028 31,692,197 Allowance for loan losses (464,369) (454,054) ----------- ----------- Total $32,559,659 $31,238,143 =========== =========== F-13 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- Nonperforming loans at December 31, 1997 and 1996 were composed of nonaccrual loans totaling $189,685 and $234,748, respectively. The reduction in interest income associated with nonaccrual loans amounted to $18,221 and $27,373 for the years ended December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, there were no commitments to lend additional funds to borrowers whose loans were classified as nonperforming. The loan portfolio consists of $17,345,829 and $16,735,816 of variable rate loans and $15,372,012 and $14,956,381 of fixed rate loans at December 31, 1997 and December 31, 1996, respectively. Changes in the allowance for loan losses were as follows: 1997 1996 -------- -------- Balance at beginning of year $454,054 $297,259 Provision charged to operations 97,000 215,000 Loans charged-off (86,685) (100,511) Recoveries 42,306 -------- -------- Balance at end of year $464,369 $454,054 ======== ======== At December 31, 1997 and December 31, 1996, the Bank's recorded investment in loans for which impairment has been recognized in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan," ("SFAS 114") consists primarily of commercial loans and installment loans as follows: December 31, December 31, 1997 1996 ------------ ------------ Impaired loans $2,188,960 $1,010,257 Impaired loans with related allowance calculated under SFAS 114 $1,213,223 $ 534,363 Allowance on impaired loans calculated under SFAS 114 $ 290,000 $ 128,000 Impaired loans with no allowance calculated under SFAS 114 $ 905,737* $ 475,894* *Represents the guaranteed portion of SBA guaranteed loans and that portion of impaired loans secured by TexStar National Bank certificates of deposit. F-14 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- For the year ended December 31, ------------------------------- 1997 1996 ---------- -------- Average impaired loans $1,291,635 $871,768 Interest income recognized on impaired loans $ 124,389 $ 74,449 As of December 31, 1997 and December 31, 1996, there were no commitments to lend additional funds for loans considered impaired. 4. BANK PREMISES AND EQUIPMENT Bank premises and equipment consist of the following: 1997 1996 ---------- ---------- Land $ 712,460 $ 712,460 Buildings and improvements 1,307,583 797,832 Leasehold improvements 133,482 176,851 Furniture 168,627 120,501 Equipment 813,438 372,361 Automobiles 19,718 19,718 ---------- ---------- Total 3,155,308 2,199,723 Less accumulated depreciation 425,486 405,908 ---------- ---------- Total - Net $2,729,822 $1,793,815 ========== ========== F-15 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 5. INCOME TAXES Net operating loss carryforwards (which differ for financial statement and federal tax reporting purposes) amounted to $622,872 for tax purposes at December 31, 1997. The net operating loss carryforwards are subject to annual limitations because of a change in Bank ownership (see Note 11). The tax net operating loss carryforwards expire in varying amounts between 2001 and 2006. 1997 1996 -------- -------- Current income tax expense $295,459 $232,541 Deferred income tax expense 31,663 (111,535) -------- -------- Total income tax expense $327,122 $121,006 ======== ======== The reason income taxes for financial reporting purposes differ from the amount computed by applying the statutory federal income tax rate at December 31, 1997 and 1996 are as follows: 1997 1996 -------- -------- Tax provision computed at the statutory rate $309,997 $227,220 Tax benefit including utilization of net operating loss carryforward for financial statement purposes (Note 11) (151,949) Tax exempt interest income - Net of disallowed interest expense of $60,640 and $46,515 (14,125) (63) Meals and entertainment disallowance 5,578 2,446 Nondeductible dues 6,312 1,604 Other 19,360 41,748 -------- -------- Provision for federal income tax $327,122 $121,006 ======== ======== F-16 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- Statement of Financial Accounting Standards No. 109 ("SFAS 109") was effective in 1994 and requires the recognition of deferred tax assets and liabilities for both the expected future tax impact of differences between the financial statement and tax bases of assets and liabilities, and for the expected future tax benefit to be derived from tax loss and tax credit carryforwards. SFAS 109 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. As of December 31, 1997, the Bank had total deferred tax liabilities and total deferred tax assets as follows: Accrued income $(326,532) Fixed asset depreciation (46,181) Net operating loss carryforwards (see Note 11) 211,776 Unrealized investment holding losses (5,953) Accrued expenses 70,890 Other real estate owned 56,308 Allowance for loan losses 127,349 Accrued interest on short-term loans (17,337) Contribution carryforward 418 -------- Net deferred asset 70,738 Valuation allowance -------- Deferred tax asset $ 70,738 ======== 6. COMMITMENTS AND CONTINGENT LIABILITIES The Bank leases its branch banking premises under a noncancellable agreement. A portion of the lease payments for 1997 were prepaid at December 31, 1996. Future minimum lease payments at December 31, 1997 are as follows: Year Ending December 31, 1998 $18,720 ======= Rental expense for the branch banking premises was $17,400 and $42,775 in 1997 and 1996, respectively. The Bank has commitments and contingencies in the normal course of business and lawsuits pending that are not expected to result in material adverse effects. The Bank is a defendant in a case: Mitchell Coach Manufacturing Company, Inc. vs. Ronny Stephens and TexStar National Bank, pending in the United States District Court for the Northern District of Oklahoma. This is an action for declaratory judgment to determine the ownership and title to one Vogue Motor Coach, the original purchase price of which was approximately $305,000. Ronny Stephens purchased the motor coach from a company which has since gone bankrupt. Ronny Stephens financed the purchase price in large part through a loan from the Bank. Plaintiff claims that it was not paid for the motor coach and as a result, it maintains title. Ronny Stephens claims title and the Bank claims a purchase money security interest in the motor coach. The matter is set for trial in February 1998. The Bank believes this case lacks merit and intends to defend it vigorously. F-17 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 7. RELATED-PARTY TRANSACTIONS The Bank has entered into transactions with its directors, significant shareholders, and their affiliates. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans to such related parties at December 31, 1997 and 1996 was $2,780,674 and $2,946,218, respectively. During 1997 and 1996, new loans to such related parties amounted to $482,759 and $466,534, respectively, and repayments amounted to $783,533 and $231,751, respectively. Of the loans to related parties at December 31, 1997 and 1996, $1,765,000 and $1,760,000, respectively, were secured by time deposits at the Bank. 8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on- balance-sheet instruments. The amount of commitments at December 31, 1997 are as follows: Unused lines of credit - Real estate and commercial loans $3,764,403 Standby letters of credit 271,858 ---------- Total $4,036,261 ========== Unused lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. F-18 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 9. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The Bank grants loans to customers in Bexar and surrounding counties and elsewhere in Texas. Many of such customers are depositors of the Bank. Investment in state and municipal securities also includes governmental entities, some within the Bank's market area. As shown in Note 3, the Bank has a diversified loan portfolio, although approximately 54% of its loans are secured by real estate. 10. REGULATORY MATTERS The Bank, as a National Bank, is subject to the dividend restrictions set forth by the Comptroller of the Currency. Under such restrictions, the Bank may not, without the prior approval of the Comptroller of the Currency, declare dividends in excess of the sum of the current year's earnings (as defined) plus the retained earnings (as defined) from the prior two years. No dividends were declared in 1997. Risk-based capital guidelines require a bank to maintain Tier 1 capital at a minimum of 4.0% of total risk-adjusted assets. Tier 1 capital consists primarily of common equity, excluding the effects of net unrealized gains or losses on securities available-for-sale net of taxes. Risk-adjusted assets are the sum of total assets and specific off-balance-sheet items after the appropriate risk weights and/or credit conversion factors ranging from 0% to 100% have been applied. Total capital, consisting of Tier 1 capital plus Tier 2 capital, must be maintained at a minimum of 8.0% of risk-adjusted assets. Tier 2 capital generally consists of the allowance for loan losses limited to a maximum of 1.25% of gross risk-weighted assets. Tier 2 capital may not exceed Tier 1 capital. The leverage ratio is required to be equal to or greater than 3.0% depending on each bank's particular regulatory rating. The leverage ratio is computed as Tier 1 capital divided by average assets outstanding for the quarter, excluding the effects of net unrealized gains or losses on securities available-for-sale net of taxes. The following summarizes certain capital ratios for the Bank at December 31, 1997 and 1996 as compared to the regulatory minimums: Regulatory Minimum 1997 1996 ---------- ------ ------ Tier 1 capital ratio 4.0% 13.29% 11.37% Total capital ratio 8.0% 14.45% 12.62% Tier 1 leverage ratio 3.0% 7.31% 6.61% The Bank did not extend credit to any single borrower or group of related borrowers in excess of its legal lending limit of $900,066 and $666,991 at December 31, 1997 and 1996, respectively. F-19 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 11. FACTOR THAT LIMITS RATE OF UTILIZATION OF NET OPERATING LOSS In October 1994, the Bank issued 75,000 shares of its common stock at $7.70 per share in a common stock offering. Proceeds from the offering, net of legal expenses of $19,884, were $557,616. In February 1994, approximately 50% of the outstanding shares of the Bank's stock were purchased by one individual, which gave this individual controlling interest. In a letter dated December 10, 1992, the Office of the Comptroller of the Currency stated that they did not disapprove of this transaction. This change in control is a factor that limits the rate of utilization of the Bank's net operating loss for income tax purposes which has been recognized in full as a deferred tax asset (see Note 5). 12. EMPLOYEE BENEFIT PLAN During 1994, the Bank adopted a 401(k) employee benefit plan that covers all employees who meet certain age and service requirements. Employees may make contributions to the plan through salary deferrals. Additionally, the Bank will match employee contributions in an amount equal to 25% of employee contributions with a limitation not to exceed 10% of compensation. The Bank contributed $12,489 and $6,107 of matching contributions to the plan in 1997 and 1996, respectively. 13. CASH FLOW INFORMATION 1997 1996 ------------ ----------- Supplemental schedule of noncash investing and financing activities: Transfers of repossessed collateral to land $ - $ 100,667 Additions to loans to facilitate the sale of other real estate and other assets $ - $ 13,840 Net cash acquired through acquisitions: Net loans $ 199,397 Premises and equipment, net 8,179 Other assets 12,378 Excess of cost over fair value of net assets acquired 590,372 Deposits (14,455,320) ------------- Net cash acquired through acquisitions $(13,644,994) ============= Cash paid during the period for interest $ 2,581,543 $ 2,247,325 Cash paid during the period for federal income taxes 232,600 72,400 F-20 PAGE TEXSTAR NATIONAL BANK - --------------------- NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued) - ------------------------------------------------------------------------------- 14. ADVERTISING EXPENSES The Bank accounts for its advertising as prepaid assets and it charges a monthly amount to expense over the life of the asset not exceeding one year. The Bank's advertising charged to expense was $22,319 and $12,505 during 1997 and 1996, respectively. 15. ACQUISITION AND SALE OF STOCK During August 1997, the Bank consummated the acquisition of certain assets and assumption of certain liabilities relating to the branch of Pacific Southwest Bank Savings and Loan Association ("Pacific Southwest Bank") located in Schertz, Texas (the "Schertz Branch"). In June 1997, the Bank administered a primary offering of its common stock. A total of 110,000 shares of common stock were sold at a price of $11.50 per share. All proceeds were received by September 23, 1997 and were used to finance the retirement of liabilities incurred in connection with the purchase of the Schertz Branch. At the closing of the purchase of the Schertz Branch, the Bank assumed deposits and other liabilities totaling approximately $14,455,000. In addition, the Bank acquired certain small business and consumer loans totaling approximately $199,000, certain real property, furniture and equipment related to the Schertz Branch totaling approximately $8,000, other assets totaling approximately $13,000, and cash totaling approximately $13,645,000. After paying a deposit premium, of approximately four percent (4%) on the deposits assumed, totaling approximately $590,000, the Bank received approximately $13,645,000 in cash from Pacific Southwest Bank as consideration for the net deposit liabilities assumed. The Schertz Branch and deposits acquired in the acquisition have been incorporated into the Bank's existing branch network. 16. PENDING MERGER On October 10, 1997 the Bank and Surety Bank, N.A. entered into an agreement under which Surety Bank will acquire TexStar National Bank. The purchase price for TexStar is projected to be approximately $19.59 per share of TexStar common stock outstanding (total cash consideration: approximately $9,500,000), which will be paid to the shareholders of TexStar in connection with the merger of TexStar with and into Surety Bank. The completion of the merger is subject to a number of contingencies, including regulatory approvals by applicable banking authorities, due diligence review by Surety Bank of TexStar's business operations, the raising of sufficient funds by its parent Surety Capital Corporation to facilitate the transaction, approval by TexStar's shareholders, and other matters. If consummated, the transaction is expected to close in April 1998. F-21 PAGE INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULES The Board of Directors TexStar National Bank Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying financial highlights of TexStar National Bank (the "Bank") are presented for supplementary analysis purposes and are not a required part of the basic financial statements. The financial highlights have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the financial statements taken as a whole. /s/ Burnside & Rishebarger January 23, 1998 F-22 PAGE TEXSTAR NATIONAL BANK - --------------------- FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 - ------------------------------------------------------------------------------- Percent 1997 1996 Increase (000's Omitted) (Decrease) ------------------------ ---------- FOR THE YEAR: Interest income $ 5,481 $ 4,620 18.64% Interest expense $ 2,506 $ 2,286 9.62% Net interest income $ 2,975 $ 2,334 27.46% Provision for loan losses $ 97 $ 215 (54.88)% Other income and expense - Net $ 1,984 $ 1,451 36.73% Income tax expense $ 309 $ 121 155.37% Net income $ 585 $ 547 6.95% AT YEAR END: Total assets $ 71,119 $ 62,263 14.22% Total loans $ 32,560 $ 31,238 4.23% Total deposits $ 64,934 $ 57,840 12.26% Stockholders' equity $ 5,788 $ 3,851 50.30% See independent accountants' report on supplemental schedules. - ------------------------------------------------------------------------------- F-23 PAGE TEXSTAR NATIONAL BANK CONSOLIDATED BALANCE SHEETS March 31, 1998 (unaudited) and December 31, 1997 March 31, December 31, 1998 1997 (unaudited) ------------ ------------ Assets: Cash and due from banks $2,928,011 $3,685,214 Federal funds sold 9,800,000 5,300,000 Investment securities: Available-for-sale 9,680,481 15,200,663 Held-to-maturity 9,691,922 9,577,720 ------------ ------------ Total investment securities 19,372,403 24,778,383 Loans 34,659,902 33,024,028 Less: Allowance for credit losses (820,625) (464,369) ------------ ------------ Net loans 33,839,277 32,559,659 Premises and equipment, net 2,681,300 2,729,822 Premiums receivable - 121,000 Accrued interest receivable 451,002 577,273 Prepaid expenses and other assets 189,094 234,822 Other real estate and repossessed assets 459,486 484,986 Deferred federal income tax asset 47,441 70,738 Excess of cost over fair value of net assets acquired, net of Accumulated amortization of $22,959 and $13,119 at March 31, 1998 and December 31, 1997, respectively 567,413 577,253 ------------ ------------ Total assets $70,335,427 $71,119,150 ============ ============ Liabilities and shareholders' equity: Demand deposits $13,775,458 $12,346,275 Savings, NOW and money markets 16,852,742 17,044,070 Time deposits, $100,000 and over 15,417,413 19,254,716 Other time deposits 18,716,026 16,288,967 ------------ ------------ Total deposits 64,761,639 64,934,028 Note payable 129,584 143,811 Accrued interest payable and other liabilities 478,090 253,473 ------------ ------------ Total liabilities 65,369,313 65,331,312 ------------ ------------ Shareholders' equity: Common stock, $5 par value, 575,000 shares authorized, and 485,000 shares issued at March 31, 1998 and December 31, 1997 2,425,000 2,425,000 Additional paid-in capital 2,357,616 2,357,616 Retained earnings 187,713 1,019,571 Unrealized gain (loss) on available-for-sale securities, net of tax (4,215) (14,349) ------------ ------------ Total shareholders' equity 4,966,114 5,787,838 ------------ ------------ Total liabilities and shareholders' equity $70,335,427 $71,119,150 ============ ============ F-24 PAGE TEXSTAR NATIONAL BANK CONSOLIDATED STATEMENTS OF INCOME for the three Months Ended March 31, 1998 and 1997 (unaudited) Three Months Ended March 31, 1998 March 31, 1997 -------------- -------------- Interest income: Commercial loans $482,337 $453,692 SBA loans 149,544 295,075 Real estate loans 95,738 86,561 Consumer loans 83,588 69,852 Federal funds sold 111,497 12,497 Investment securities: Taxable 247,507 356,783 Tax-exempt 30,771 381 Interest bearing deposits - - ---------- ---------- Total interest income 1,200,982 1,274,841 ---------- ---------- Interest expense: Savings, NOW and money market 133,907 113,196 Time deposits, $100,000 and over 224,659 248,659 Other time deposits 245,911 213,039 Other interest expense 2,598 4,744 ---------- ---------- Total interest expense 607,075 579,638 ---------- ---------- Net interest income before provision for credit losses 593,907 695,203 ---------- ---------- Provision for credit losses 356,000 57,000 ---------- ---------- Net interest income 237,907 638,203 ---------- ---------- Noninterest income 171,533 149,798 ---------- ---------- Noninterest expense: Salaries and employee benefits 319,302 281,640 Occupancy and equipment 179,938 85,813 General and administrative 718,901 202,607 ---------- ---------- Total non interest expense 1,218,141 570,060 ---------- ---------- Income before income taxes (808,701) 217,941 Income tax expense: Current 23,157 44,102 ---------- ---------- Net income $(831,858) $173,839 ========== ========== Net income per share of common stock $ (2.16) $ 0.46 ========== ========== Weighted average shares outstanding 485,000 375,000 ========== ========== F-25 PAGE TEXSTAR NATIONAL BANK STATEMENT OF COMPREHENSIVE (LOSS) INCOME for the three months ended March 31, 1998 and 1997 (unaudited) Three Months Ended March 31, March 31, 1998 1997 ---------- --------- Net (loss) income $(831,858) $499,824 Other comprehensive (loss) income, net of income tax Unrealized holding (losses) gains 10,134 9,517 ---------- --------- Comprehensive (loss) income $(821,724) $509,341 ========== ========= Disclosure of reclassification amount: Unrealized holding (losses) gains arising during period $ (3,927) $(61,299) Reclassification adjustment for (losses) gains included in net (loss) income, net of income tax 14,061 (3,882) ---------- --------- Net unrealized (losses) gains on securities $ 10,134 $(65,181) ========== ========= F-26 PAGE TEXSTAR NATIONAL BANK CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY for the three months Ended March 31, 1998 (unaudited) and for the years ended December 31, 1997, 1996 and 1995
Unrealized Gain/ (Loss) on Common Stock Additional Retained Available- Par Paid-in Earnings/ for-Sale Total Shares Value Capital (Deficit) Securities Equity ------- --------- ---------- --------- ---------- --------- Balance at December 31, 1996 375,000 1,875,000 1,682,616 434,938 (141,863) 3,850,691 ------- --------- ---------- --------- ---------- --------- Sale of Common Stock 110,000 550,000 675,000 1,225,000 Net Income 584,633 584,633 Change in unrealized investment holding gains (losses), net of tax 127,514 127,514 ------- --------- ---------- --------- ---------- --------- Balance at December 31, 1997 485,000 2,425,000 2,357,616 1,019,571 (14,349) 5,787,838 ------- --------- ---------- --------- ---------- --------- Net loss (831,858) (831,858) Change in unrealized investment holding gains (losses), net of tax 10,134 10,134 ------- --------- ---------- --------- ---------- --------- Balance at March 31, 1998 485,000 $2,425,000 $2,357,616 $187,713 $(4,215) $4,966,114 ======= ========= ========== ========= ========== =========
F-27 PAGE TEXSTAR NATIONAL BANK CONSOLIDATED STATEMENTS OF CASH FLOWS for the three months Ended March 31, 1998 and 1997 (unaudited)
March 31, ------------------------- 1998 1997 ----------- ----------- Cash flows from operating activities: Net income $(831,858) $173,869 Adjustments to reconcile net income to net cash provided by operating activities: Provision for credit losses 356,000 57,000 Provision for depreciation and amortization 59,770 16,642 (Gain) loss on sale of available-for-sale securities (13,665) 4,865 Net increase (decrease) in prepaid expenses and other assets 71,228 (227,732) Net decrease in accrued interest payable and other liabilities 224,692 (351,852) Net increase(decrease) in deferred federal income tax 23,297 180,799 Net (decrease) in accrued interest receivable 126,271 5,850 Net (decrease) in premiums receivable 121,000 - Net increase (decrease) on unrealized gains on available-for-sale securities 10,314 (65,181) ----------- ----------- Net cash provided by operating activities 147,049 (205,770) ----------- ----------- Cash flows from investing activities: Net increase in loans (1,635,874) 1,216,452 Purchases of available-for-sale securities - (498,906) Proceeds from sales of available-for-sale securities 5,607,024 1,843,636 Purchases of held-to-maturity securities (187,379) (248,633) Purchases of bank premises and equipment (1,407) (92,380) Net (increase) in federal funds sold (4,500,000) (2,375,000) ----------- ----------- Net cash used in investing activities (717,636) (154,830) ----------- ----------- Cash flows from financing activities: Net decrease in deposits (172,389) 16,563 Principal (payments) borrowings on notes payable (14,227) 184,919 ----------- ----------- Net cash (used in) provided by financing activities (186,616) 201,482 ----------- ----------- Net decrease in cash and cash equivalents (757,203) (159,119) Beginning cash and cash equivalents 3,685,214 2,463,424 ----------- ----------- Ending cash and cash equivalents $2,928,011 $2,304,305 =========== ===========
F-28 PAGE TEXSTAR NATIONAL BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies: ------------------------------------------- Organization TexStar National Bank (the "Bank") is engaged in the business of banking, including the acceptance of deposits and the making of loans to customers in Bexar and surrounding counties and in Texas. Although the loan portfolio is diversified, a substantial portion of its debtors' ability to honor their loans is dependent upon the economic conditions in the area, especially in the business sector. The Bank competes for deposits and loans principally with other commercial banks, savings and loan associations and credit unions. In addition, the Bank is subject to the regulations of certain federal agencies and undergoes periodic examination by those regulatory authorities. Basis of Presentation The accounting and reporting policies of the Bank conform to generally accepted accounting principles and to general practices within the banking industry. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Bank believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Bank, all adjustments consisting only of normal recurring adjustments necessary to present fairly the financial position of the Bank as of March 31, 1998, and the results of its operations and its cash flows for the indicated periods have been included. The results of operations for such interim period are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 1998. Investment Securities During 1993 the Bank adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"). This statement addresses the accounting and reporting for investments in equity securities that have readily determined fair values of 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 an 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 Bank has no securities classified as trading as of March 31, 1998 and 1997. The cost of securities sold is based on the specific identification method. Loans and Allowance for Credit Losses Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal adjusted for any charge-offs, the allowance for credit losses, and deferred fees or costs on originated loans. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Loans are stated at the amount of unpaid principal, reduced by unearned interest and an allowance for credit losses. The allowance for credit losses is established through a provision for credit losses charged against current earnings. F-29 PAGE 1. Summary of Significant Accounting Policies, continued: ------------------------------------------ A loan is considered impaired if, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due, according to the contracted terms of the loan agreement. 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 borrower's ability to pay. The measurement of impaired loans and the related allowance for credit losses is generally based on the fair value of the collateral. Smaller balance homogenous loans consisting of residential mortgages and consumer loans are evaluated for reserves collectibility based on historical loss experience. Loans are charged against the allowance for credit losses when management believes that the collectibility of the principal is unlikely. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income subsequently recognized only to the extent cash payments are received. 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 credit losses as deemed appropriate. 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 Real estate properties acquired through, or in lieu, of loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Any write down to fair market value at the date of acquisition is charged against the allowance for credit 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 three months ended March 31, 1998 and 1997. Income Taxes The Bank's method of accounting for income taxes utilized an asset and liability approach for financial statement purposes. 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 credit losses, property and equipment, investment securities and net operating loss carryforwards. F-30 PAGE 1. Summary of Significant Accounting Policies, continued: ------------------------------------------ Purchase Method of Accounting Net assets acquired in purchase transactions are recorded at their fair value at the date of acquisition. The excess of the purchase price over the fair value of net assets acquired is amortized on a straight-line basis, generally over a 10-year period. The Bank continually re-evaluates the propriety of the carrying amount of such intangible assets as well as its 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 Bank believes that no significant impairment of such intangible asset has occurred and that no reduction of amortization period is warranted. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recent Accounting Pronouncements In June 1997, FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for the financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. Management believes that the adoption of these pronouncements will not have a material impact on the financial statements of the Bank. 2. Acquisition: Pacific Southwest Bank, Savings and Loan Association Branch in Schertz, Texas During August 1997, the Bank consummated the acquisition of certain assets and assumption of certain liabilities relating to the branch of Pacific Southwest Bank, Savings and Loan Association ("Pacific Southwest Bank") located in Schertz, Texas (the "Schertz Branch"). In June 1997, the Bank administered a primary offering of its common stock. A total of 110,000 shares of Common Stock were sold in the offering at a price of $ 11.50 per share. All proceeds were received by September 23, 1997 and were used to finance the retirement of liabilities in connection with the purchase of the Schertz Branch. F-31 PAGE 2. Acquisition continued: ----------- At the closing, the Bank assumed deposits and other liabilities totaling approximately $14,455,000. In addition, the Bank acquired certain small business and consumer loans totaling approximately $199,000, certain real property, furniture and equipment related to the Schertz Branch totaling approximately $8,000, other assets totaling approximately $13,000, and cash totaling approximately $13,645,000. After paying a deposit premium of approximately four- percent (4%) on the deposits assumed totaling approximately $590,000, the Bank received approximately $13,645,000 in cash from Pacific Southwest Bank as consideration for the net deposit liabilities assumed. The Schertz Branch and deposits acquired in the acquisition have been incorporated into the Bank's existing branch network. 3. Loans, net: At March 31, 1998 and 1997, the loan portfolio was composed of the following: March 31 March 31 1998 1997 ----------- ----------- Commercial loans $10,928,789 $10,702,888 Real estate loans 19,704,943 15,938,995 Consumer loans 4,026,170 3,777,396 ----------- ----------- Total loans 34,659,902 30,419,279 Allowance for credit losses (820,625) (454,588) ----------- ----------- Loans, net $33,839,277 $29,964,691 =========== =========== Activity in the allowance for credit losses is as follows: Three Months Three Months Ended Ended March 31, 1998 March 31, 1997 -------------- -------------- Beginning balance $464,369 $454,054 Provision for credit losses 356,000 57,000 Loans charged off, net of Recoveries 256 (56,466) -------- -------- Ending balance $820,625 $454,588 Loans on which the accrual of interest has been discontinued amounted to approximately $220,000 and $178,000 at March 31, 1998 and 1997, respectively. 4. Subsequent Event: On April 1, 1998, Surety Capital Corporation completed the acquisition of the Bank through the merger of the Bank into Surety Bank, N.A., a wholly-owned subsidiary of Surety Capital Corporation. Shareholders of the Bank received cash in exchange for all the outstanding common stock of the Bank. The transaction was accounted for as a purchase by Surety Capital Corporation. F-32 PAGE 5. Year 2000: The Year 2000 issue is the result of the widespread use of computer programs written using two digits (rather than four) to define the applicable year. Such programming was a common industry practice designed to avoid the significant costs associated with additional mainframe capacity necessary to accommodate a four digit year field. As a result, any of the Bank's computer systems that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major systems failure or miscalculations. The Bank has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the Year 2000 issue and has developed and implemented a plan to resolve this issue. The Bank currently believes that, with modifications to existing software and converting to new software, the Year 2000 issue will not pose significant operational problems for the Bank's computer systems. However, if such modifications and conversions are not completed on a timely basis, the Year 2000 issue may have a material impact on the operations of the Bank. Furthermore, even if the Bank completes such modifications and conversions on a timely basis, there can be no assurance that the failure by customers or other third parties to solve the Year 2000 problem will not have a material impact on the operations of the Bank. As discussed in Note 4, Management expected the Bank to be sold on April 1, 1998. The acquirer, Surety Bank, has requested that Management delay confirmation of the Bank's Year 2000 compliance until after the sale has closed. Surety Bank has indicated that it will be installing its own data processing system and upgrading the Bank's equipment upon completion of the sale. F-33 PAGE PRO FORMA BALANCE SHEET as of March 31, 1998
Surety TexStar Capital National Pro Forma Corporation Bank Debits Credits Combined ----------- ----------- ---------- ---------- ------------ (unaudited) (unaudited) (unaudited) Assets: Cash and due from banks $ 6,959,708 $ 2,928,011 $ - $9,772,000(A) $ 115,719 Federal funds sold 32,319,522 9,800,000 42,119,522 ----------- ----------- ---------- ---------- ------------ Cash and cash equivalents 39,279,230 12,728,011 9,772,000 42,235,241 Interest bearing deposits in financial institutions 94,939 - 94,939 Investment securities 24,559,359 19,372,403 110,696(A) 43,821,066 Net loans 98,603,542 33,839,277 132,442,819 Medical claims receivables, net 2,531,874 - 2,531,874 Premises and equipment, net 3,650,054 2,681,300 1,164,535(A) 7,495,889 Accrued interest receivable 798,392 451,002 1,249,394 Other real estate and repossessed assets 174,639 459,486 634,125 Deferred tax asset 1,622,394 47,441 47,441(A) 1,622,394 Other assets 1,928,748 189,094 2,117,842 Excess of cost over fair value of net assets acquired, net 4,627,719 567,413 3,817,209(A) 9,012,341 ----------- ----------- ---------- ---------- ------------ Total assets $ 177,870,890 $70,335,427 $4,981,744 $9,930,137 $243,257,924 =========== =========== ========== ========== ============ Liabilities: Demand deposits $ 23,096,665 $13,775,458 $ - $ - $ 36,872,123 Savings, NOW and money markets 44,277,731 16,852,742 61,130,473 Time deposits, $100,000 and over 24,202,845 15,417,413 39,620,258 Other time deposits 64,551,690 18,716,026 83,267,716 ----------- ----------- ---------- ---------- ------------ Total deposits 156,128,931 64,761,639 220,890,570 Accrued interest payable and other liabilities 1,235,429 607,674 75,000(A) 1,918,103 Convertible subordinated debt 4,350,000 - 4,350,000 ----------- ----------- ---------- ---------- ------------ Total liabilities 161,714,360 65,369,313 75,000 227,158,673 ----------- ----------- ---------- ---------- ------------ Shareholders' equity: Common stock 57,922 2,425,000 2,425,000(A) 57,922 Additional paid in capital 16,876,119 2,357,616 2,357,616(A) 16,876,119 Retained earnings (692,069) 187,713 244,992(A) (749,348) Stock rights issuable 57,902 - 57,902 Treasury stock (172,828) - (172,828) Unrealized gain/(loss) on available-for-sale securities 29,484 (4,215) 4,215(A) 29,484 ----------- ----------- ---------- ---------- ------------ Total equity 16,156,530 4,966,114 5,027,608 79,215 16,099,251 ----------- ----------- ---------- ---------- ------------ Total liabilities and equity $ 177,870,890 $70,335,427 $5,027,608 $ 79,215 $243,257,924 =========== =========== ========== ========== ============
(A) To record purchase of TexStar National Bank, Universal City, Texas. The purchase price for TexStar National Bank was based on a fixed price of $9,500,000 subject to adjustments. The purchase accounting for the acquisition of TexStar National Bank includes an adjustment to investment securities to estimated fair market value in the amount of $(110,696), an adjustment to fixed assets to estimated fair market value in the amount of $1,164,535, an adjustment to eliminate a deferred tax asset in the amount of $47,441, an adjustment to other liabilities to accrue for estimated unrecorded liabilities in the amount of $75,000, and an adjustment to eliminate the equity of TexStar National Bank at closing in the amount of $5,027,608. The difference of $3,817,209 is recorded as goodwill and is amortized over a 15 year period. F-34 PAGE PRO FORMA INCOME STATEMENT for the three months ended March 31, 1998
Surety TexStar Pro Forma Capital National Adjustments Pro Forma Corporation Bank Debits Credits Combined ------------ ----------- ----------- --------- ----------- (unaudited) (unaudited) (unaudited) Interest Income: Interest and fees on loans $ 2,434,307 $ 811,207 $ - $ - $ 3,245,514 Medical claims receivable factoring 636,366 - 636,366 Interest on federal funds sold 350,202 111,497 - - 461,699 Interest on securities and interest Bearing deposits 390,040 278,278 - - 668,318 ------------ ----------- ----------- --------- ----------- Total interest income 3,810,915 1,200,982 - - 5,011,897 ------------ ----------- ----------- --------- ----------- Interest expense: Interest on deposits 1,427,548 604,478 - - 2,032,026 Interest expense on borrowings - 2,597 97,875 (F) - 100,472 ------------ ----------- ----------- --------- ----------- Total interest expense 1,427,548 607,075 97,875 2,132,498 ------------ ----------- ----------- --------- ----------- Net interest income before provision for credit losses 2,383,367 593,907 (97,875) - 2,879,399 Provision for credit losses and medical claims receivables losses 25,000 356,000 - - 381,000 ------------ ----------- ----------- --------- ----------- Net interest income 2,358,367 237,907 (97,875) - 2,498,399 ------------ ----------- ----------- --------- ----------- Non interest income 570,970 171,533 - - 742,503 ------------ ----------- ----------- --------- ----------- Non interest expense: Salaries and empoyee benefits 1,196,262 319,302 - - 1,515,564 Occupancy & equipment 402,308 179,938 29,113 (C) - 611,359 General & administrative 805,440 718,901 63,620 (B) 13,000 (A) 1,574,961 ------------ ----------- ----------- --------- ----------- Total noninterest expense 2,404,010 1,218,141 92,733 13,000 3,701,884 ------------ ----------- ----------- --------- ----------- Income before income taxes 525,327 (808,701) (190,608) (13,000) (460,982) Income tax expense: 192,981 23,157 (68,619)(E) (4,680)(E) 152,199 ------------ ----------- ----------- --------- ----------- Net income $ 332,346 $ (831,858) $ (121,989)(D) $ (8,320)(D) $ (613,181) ============ =========== =========== ========= =========== Basic earnings (loss) per share of Common stock $ 0.06 $ (0.11) Weighted average shares outstanding 5,756,838 5,756,838 Diluted earnings per share of common stock $ 0.06 $ (0.11) Weighted average shares outstanding and common stock equivalents 5,991,740 5,991,740
(A) To record savings to be realized by merger. These adjustments are a direct result of the elimination of director fees which will not continue after the merger. (B) To record amortization of the goodwill added through the acquisition of the TexStar National Bank (C) To record the additional depreciation to premises and equipment as a result of the write up to estimated fair market value for TexStar National Bank. (D) This pro forma income statement does not reflect all adjustments to, or projected changes in, income Surety Bank expects to realize following consummation of the acquisition. (E) To record tax effect of adjustments. (F) To record debt expense on 9% convertible subordinated debt of $4,350,000. F-35 PAGE PRO FORMA INCOME STATEMENT for the twelve months ended December 31, 1997
Surety TexStar Pro Forma Capital National Adjustments Pro Forma Corporation Bank Debits Credits Combined ------------ ----------- ----------- --------- ----------- (unaudited) (unaudited) (unaudited) Interest Income: Interest and fees on loans 11,119,540 3,737,956 - - 14,857,496 Medical claims receivable factoring 1,477,510 - 1,477,510 Interest on federal funds sold 516,340 110,556 - - 626,896 Interest on securities and interest bearing deposits 2,319,295 1,632,316 - - 3,951,611 ------------ ----------- ----------- --------- ----------- Total interest income 15,432,685 5,480,828 - - 20,913,513 ------------ ----------- ----------- --------- ----------- Interest expense: Interests on deposits 5,749,798 2,506,199 - - 8,255,997 Interest expense on borrowings - - 391,500 (F) - 391,500 ------------ ----------- ----------- --------- ----------- Total interest expense 5,749,798 2,506,199 391,500 8,647,497 ------------ ----------- ----------- --------- ----------- Net interest income before provision for credit losses 9,682,887 2,974,629 (391,500) - 12,266,016 Provision for credit losses and medical claims receivables losses 6,384,996 97,000 - - 6,481,996 ------------ ----------- ----------- --------- ----------- Net interest income 3,297,891 2,877,629 (391,500) - 5,784,020 ------------ ----------- ----------- --------- ----------- Non interest income 2,538,918 644,162 - - 3,183,080 ------------ ----------- ----------- --------- ----------- Non interest expense: Salaries and empoyee benefits 4,748,097 1,207,298 - - 5,955,395 Occupancy & equipment 1,517,662 426,084 116,454 (C) - 2,060,200 General & administrative 3,649,136 976,654 254,481 (B) 44,800 (A) 4,835,471 Impairment of long lived assets 1,198,288 - - 1,198,288 ------------ ----------- ----------- --------- ----------- Total noninterest expense 11,113,183 2,610,036 370,935 44,800 14,049,354 ------------ ----------- ----------- --------- ----------- Income before income taxes (5,276,374) 911,755 (762,435) (44,800) (5,082,254) Income tax expense: (1,800,070) 327,122 (274,477)(E) (16,128)(E) (1,731,297) ------------ ----------- ----------- --------- ----------- Net income $ (3,476,304) $ 584,633 $ (487,958)(D) $(28,672)(D) (3,350,957) ============ =========== =========== ========= =========== Basic earnings (loss) per share of common stock $ (0.60) $ (0.58) Weighted average shares outstanding 5,751,847 5,751,847 Diluted earnings per share of common stock $ (0.60) $ (0.58) Weighted average shares outstanding and common stock equivalents 5,990,815 5,990,815
(A) To record savings to be realized by merger. These adjustments are a direct result of the elimination of director fees which will not continue after the merger. (B) To record amortization of the goodwill added through the acquisition of the TexStar National Bank. (C) To record the additional depreciation to premises and equipment as a result of the write up to estimated fair market value for TexStar National Bank. (D) This pro forma income statement does not reflect all adjustments to, or projected changes in, income Surety Bank expects to realize following consummation of the acquisition. (E) To record tax effect of adjustments. (F) To record debt expense on 9% convertible subordinated debt of $4,350,000. F-36 -----END PRIVACY-ENHANCED MESSAGE-----