SURETY CAPITAL CORP /DE/, S-1, 1996-03-07

SURETY CAPITAL CORP /DE/
S-1, 1996-03-07
NATIONAL COMMERCIAL BANKS

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<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1996

REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

SURETY CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C> <C>
DELAWARE 6021 75-2065607
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
</TABLE>

<TABLE>
<S> <C>
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)
</TABLE>

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

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

<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C>
Common stock, $0.01 per share par
value............................ 288,759 $3.75 $1,082,846 $374
</TABLE>

(1) The Registration fee is based upon the offering price for the Common Stock
of the Registrant registered hereby.

This Registration Statement relates to the prior Registration Statement,
filed by the Registrant with respect to 2,100,000 shares of its Common Stock,
which was declared effective February 22, 1996 (Registration No. 33-64789).

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SURETY CAPITAL CORPORATION
FORM S-1
CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM NO. ITEM PROSPECTUS CAPTION OR PAGE
- --------- -------------------------------------------------- -------------------------------------------------------
<C> <S> <C>
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
</TABLE>

ii
<PAGE>
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 February 21, 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.
-------------------

<TABLE>
<CAPTION>
PROCEEDS TO
UNDERWRITING PROCEEDS TO SELLING
PRICE TO PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDER(3)
<S> <C> <C> <C> <C>
Per Share..................... $3.75 $.26 $3.49 $3.49
Total(4)...................... $7,875,000 $546,000 $6,718,463 $610,537
</TABLE>

(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 $8,957,846, $621,077 and
$7,726,232, 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 February 27, 1996 in Dallas, Texas.

HOEFER & ARNETT
Incorporated

The date of this Prospectus is February 22, 1996.
<PAGE>
SURETY CAPITAL CORPORATION
OFFICE LOCATIONS

(The map located here shows the Surety Capital 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.
<PAGE>
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 17.8%. 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
<PAGE>
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

<TABLE>
<S> <C>
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"
</TABLE>

- ------------------------
(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
<PAGE>
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 consolidated financial
data as of and for the nine months ended September 30, 1995 and September 30,
1994 is unaudited.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- -------------------------------------------------------
1995 (1) 1994 (2) 1994 (2) 1993 (3) 1992 1991 1990
--------- ----------- --------- ----------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>

- ----------------------------------
(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
<PAGE>
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.

<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED
DECEMBER 31, DECEMBER 31,
------------------------ ----------------------
INCOME STATEMENT DATA 1995 1994 1995 1994
----------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
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
----------- ---------- ---------- ----------
----------- ---------- ---------- ----------
</TABLE>

<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
BALANCE SHEET DATA 1995 1994
------------ ------------
(UNAUDITED)
<S> <C> <C>
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%
</TABLE>

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
<PAGE>
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
<PAGE>
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
<PAGE>
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 a
per share price of $3.75, 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".

<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
----------------------------
PRO FORMA AS
ACTUAL ADJUSTED
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

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.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
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
</TABLE>

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
<PAGE>
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
<PAGE>
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
<PAGE>
PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
SURETY FIRST
CAPITAL MIDLOTHIAN PRO FORMA
CORPORATION CORPORATION DEBITS CREDITS COMBINED
------------ --------------- -------------- ---------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
------------ --------------- -------------- ---------- ------------
------------ --------------- -------------- ---------- ------------
</TABLE>

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

(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 a sales price of $3.75 per
share, net of underwriting and other estimated offering expenses.

(D) In order to adjust property and equipment to estimated market value an
increase of $319,468 is recorded.

12
<PAGE>
PRO FORMA INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995

<TABLE>
<CAPTION>
PRO FORMA
SURETY FIRST ADJUSTMENTS
CAPITAL MIDLOTHIAN --------------------------- PRO FORMA
CORPORATION CORPORATION DEBITS CREDITS COMBINED
----------- ----------- ------------ ------------ ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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)
----------- ----------
----------- ----------
</TABLE>

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

(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
<PAGE>
PRO FORMA INCOME STATEMENT

FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>
PRO FORMA
SURETY FIRST ADJUSTMENTS
CAPITAL MIDLOTHIAN ------------------------- PRO FORMA
CORPORATION CORPORATION DEBITS CREDITS COMBINED
----------- ----------- ----------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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)
----------- -------------
----------- -------------
</TABLE>

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

(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
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1995 (1) 1994 (2) 1994 (2) 1993 (3) 1992 1991 1990
--------- -------- --------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>

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

(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.

(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
<PAGE>
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
<PAGE>
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
<PAGE>
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

<TABLE>
<CAPTION>
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
------------ ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
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%
------- -------
------- -------
</TABLE>

- ------------------------
(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
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
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
- ------------------------------ ------------ ----------- ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------ ----------- ------------
<S> <C> <C>
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 %
---
---
</TABLE>

- --------------------------
(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
<PAGE>
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
<TABLE>
<CAPTION>
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
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------

<CAPTION>
YEARS ENDED
DECEMBER 31, 1993
COMPARED WITH
DECEMBER 31, 1992
---------------------------------

INCREASE (DECREASE) DUE TO
---------------------------------
VOLUME(1) RATE CHANGES
---------- ---------- --------
<S> <C> <C> <C>
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
---------- ---------- --------
---------- ---------- --------
</TABLE>

- ------------------------------
(1) Nonaccrual loans are included in the average volumes used in calculating
this table.

20
<PAGE>
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
<PAGE>
NONINTEREST INCOME

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ --------------------------------------
1995 1994 1994 1993 1992
------------ ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
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
------------ ---------- ------------ ------------ ----------
------------ ---------- ------------ ------------ ----------
</TABLE>

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
<PAGE>
NONINTEREST EXPENSE

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------------
1995 1994 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
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
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>

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
<PAGE>
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
<PAGE>
INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
3 MONTHS OR 3 MONTHS TO 6 MONTHS TO 1 YEAR TO 5 OVER 5
LESS 6 MONTHS 1 YEAR YEARS YEARS TOTAL
----------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>

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
<PAGE>
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
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ----------- ----------- ----------- ----------- -----------

AGGREGATE PRINCIPAL AMOUNT
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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%
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
</TABLE>

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

<TABLE>
<CAPTION>
WITHIN ONE ONE YEAR TO AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
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
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>

26
<PAGE>
Rate sensitivities of the total loan portfolio before unearned income, as of
September 30, 1995 were as follows:

LOAN REPRICING

<TABLE>
<CAPTION>
WITHIN ONE ONE YEAR TO AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
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
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>

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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
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%
</TABLE>

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
<PAGE>
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

<TABLE>
<CAPTION>
NUMBER OF NET BOOK
DESCRIPTION PARCELS/AUTOS CARRYING VALUE
- ------------------------------------------------------------ ------------- --------------
<S> <C> <C>
Developed property.......................................... 2 $29,676
Vacant land or unsold lots.................................. 2 3,429
Repossessed automobiles..................................... 15 59,725
--- -------
19 $92,830
--- -------
--- -------
</TABLE>

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
<PAGE>
ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------------------------------------------
1995 1994 1993 1992 1991 1990
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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%
------------- ----------- ----------- ----------- ----------- -----------
------------- ----------- ----------- ----------- ----------- -----------
</TABLE>

29
<PAGE>
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

<TABLE>
<CAPTION>
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
-------- -------------------- -------- --------------------
<S> <C> <C> <C> <C>
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%
-------- --- -------- ---
-------- --- -------- ---
</TABLE>

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
301%. 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
<PAGE>
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

<TABLE>
<CAPTION>
HELD-TO- AVAILABLE-
MATURITY FOR-SALE
------------- ------------
<S> <C> <C>
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
------------- ------------
------------- ------------
</TABLE>

31
<PAGE>
INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
<TABLE>
<CAPTION>
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
------------ ----- ------------ ----- ------------ ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------ ------------ ------------ ----------
------------ ------------ ------------ ----------

<CAPTION>
YIELD
-----
<S> <C>
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.......................
</TABLE>

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

<TABLE>
<CAPTION>
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------------------------------- -------------------------------------------
AVERAGE PERCENT OF AVERAGE RATE AVERAGE PERCENT OF AVERAGE RATE
AMOUNT TOTAL PAID AMOUNT TOTAL PAID
------------- ----------- --------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
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%
------------- ----- --- ------------- ----- ---
------------- ----- --- ------------- ----- ---
</TABLE>

32
<PAGE>
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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
MATURITY RANGE 1995 1994
- ---------------------------------------------------------------- ------------- ------------
<S> <C> <C>
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
------------- ------------
------------- ------------
</TABLE>

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

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER
1995 31, 1994
----------------- ---------------
<S> <C> <C>
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%
</TABLE>

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
<PAGE>
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
<PAGE>
RISK-BASED CAPITAL RATIOS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MINIMUM WELL-
------------- ------------------------------------------- CAPITAL CAPITALIZED
1995 1994 1993 1992 RATIOS RATIOS
------------- ------------- ------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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%
</TABLE>

- ------------------------
(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
<PAGE>
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
<PAGE>
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
<PAGE>
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

<TABLE>
<CAPTION>
GROSS LOANS
YEAR OUTSTANDING
- --------------------------------------------------------------------- -------------
<S> <C>
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
</TABLE>

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
<PAGE>
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:

<TABLE>
<S> <C>
A++, A+......................................... Superior
A, A-........................................... Excellent
B++, B+......................................... Very Good
B, B-........................................... Adequate
C++,C+.......................................... Fair
C, C-........................................... Marginal
</TABLE>

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

<TABLE>
<S> <C>
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%
-----
-----
</TABLE>

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
<PAGE>
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 17.8%. 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

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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 Bank 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"), the Tennessee Commissioner of
Commerce and Insurance, appointed by the Chancery Court for the State of
Tennessee, Twentieth Judicial

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District, Davidson County, 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 Bank's alleged exercise of
control over funds held in accounts at the Bank 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 Bank asserts that it had a right to exercise control over the
funds, in the first instance under contractual agreements between the Bank and
the respective insurance companies or the Bank and the policy holders, and in
the second instance in order to protect the Bank 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 Bank 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.

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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

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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

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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
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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.

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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

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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
<PAGE>
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.

<TABLE>
<CAPTION>
NAME AND AGE; YEARS SERVED
AS DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS; OTHER DIRECTORSHIPS
- --------------------------- -----------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>

49
<PAGE>
<TABLE>
<CAPTION>
NAME AND AGE; YEARS SERVED
AS DIRECTOR PRINCIPAL OCCUPATION FOR PAST FIVE YEARS; OTHER DIRECTORSHIPS
- --------------------------- -----------------------------------------------------------------------------------
<S> <C>
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.
</TABLE>

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

<TABLE>
<CAPTION>
NAME AND OTHER ANNUAL ALL OTHER
PRINCIPAL POSITION YEAR SALARY (1) BONUS COMPENSATION (2) COMPENSATION (3)
- --------------------------------------------------- --------- ---------- --------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
C. Jack Bean 1995 $ 111,350 $ 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 $ 77,475 $ 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 $ 85,125 $ 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
</TABLE>

- ------------------------
(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
<PAGE>
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
<PAGE>
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)

<TABLE>
<CAPTION>
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)
- ----------------------------------------- ----------- ----------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>

- ------------------------
(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

<TABLE>
<CAPTION>
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)
- ------------------------------------------------- --------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C>
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-
</TABLE>

- ------------------------
(1) Market value of underlying securities as of the fiscal year-end ($3.50),
minus the exercise or base price.

52
<PAGE>
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.

53
<PAGE>
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:

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL PERCENT OF
NAME OF INDIVIDUAL OR NUMBER OF PERSONS IN GROUP OWNERSHIP (1) CLASS (2)
- -------------------------------------------------------------------------------- ------------------ ------------
<S> <C> <C>
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%
</TABLE>

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

* 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
<PAGE>
(3) Includes 194,119 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:

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
OF BENEFICIAL OF CLASS
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP (1) (2)
- --------------------------------------------- ------------------ ---------
<S> <C> <C>
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
</TABLE>

- ------------------------
(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
<PAGE>
(3) Includes 194,119 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 $.14
per share, and that the Underwriter and such dealers may reallow to other
dealers including any underwriter, a discount not in excess of $.04 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
<PAGE>
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
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>

F-1
<PAGE>
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
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995, DECEMBER 31, 1994 AND 1993
ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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 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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements.

F-3
<PAGE>
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

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
(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
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements.

F-4
<PAGE>
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)

<TABLE>
<CAPTION>
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
---------- --------- ----------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
---------- --------- ----------- ------------ --------- ---------- ------------
---------- --------- ----------- ------------ --------- ---------- ------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements.

F-5
<PAGE>
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

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, ----------------------------------------
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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 -- --
</TABLE>

The accompanying notes are an integral part
of the consolidted financial statements.

F-6
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:

<TABLE>
<S> <C>
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
----------
----------
</TABLE>

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.

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
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
</TABLE>

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
<PAGE>
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):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>

F-11
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INVESTMENT SECURITIES: (CONTINUED)
December 31, 1993:

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)

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

F-12
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. INVESTMENT SECURITIES: (CONTINUED)
December 31, 1994

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

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:

<TABLE>
<CAPTION>
SEPTEMBER DECEMBER DECEMBER DECEMBER
30, 1995 31, 1994 31, 1993 31, 1992
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>

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:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 1994 1993
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
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
------------- ---------- ----------
------------- ---------- ----------
</TABLE>

F-14
<PAGE>
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.

<TABLE>
<CAPTION>
SHARES
UNDER
OPTION PRICE PER SHARE
--------- ----------------
<S> <C> <C>
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
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1995 1994 1993
------------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
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
</TABLE>

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
<PAGE>
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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER DECEMBER DECEMBER
30, 1995 31, 1994 31, 1993
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
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-
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

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:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1995 1994 1993 1992
------------- ------- ------- -------
<S> <C> <C> <C> <C>
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-
--- ------- ------- -------
--- ------- ------- -------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1994 1993 1992
------------- ------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
------------- ------------- ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------
</TABLE>

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:

<TABLE>
<S> <C>
1995...................................................... $ 94,713
1996...................................................... 109,324
1997...................................................... 114,253
1998...................................................... 114,253
1999...................................................... 119,181
---------
Total..................................................... $ 551,724
---------
---------
</TABLE>

F-19
<PAGE>
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
<PAGE>
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

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------
1995 1994 1993
------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
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
------------- ---------- ----------
------------- ---------- ----------
</TABLE>

F-21
<PAGE>
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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------------------
1995 1994 1994 1993 1992
--------- --------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

F-22
<PAGE>
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

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------ ----------------------------------
1995 1994 1994 1993 1992
----------- ----------- ----------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ---------- ---------
----------- ----------- ----------- ---------- ---------
</TABLE>

F-23
<PAGE>
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
<PAGE>
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.

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
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 AND DECEMBER 31, 1994
ASSETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

The accompanying notes are an integral part of
the consolidated financial statements.

F-26
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
NINE MONTHS ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------------ ----------------- -----------------
<S> <C> <C> <C>
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
------------------ ----------------- -----------------
------------------ ----------------- -----------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements.

F-27
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
UNREALIZED
GAIN/(LOSS)
ON
COMMON STOCK ADDITIONAL AVAILABLE TOTAL
--------------------- PAID-IN RETAINED FOR SALE SHAREHOLDERS'
SHARES PAR VALUE CAPITAL EARNINGS SECURITIES EQUITY
--------- ---------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
--------- ---------- ---------- ------------ ----------- -------------
--------- ---------- ---------- ------------ ----------- -------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements.

F-28
<PAGE>
FIRST MIDLOTHIAN CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEAR FOR THE YEAR
SEPTEMBER 30, ENDED DECEMBER ENDED DECEMBER
1995 31, 1994 31, 1993
------------- -------------- --------------
<S> <C> <C> <C>
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
------------- -------------- --------------
------------- -------------- --------------
</TABLE>

The accompanying notes are an integral part
of the consolidated financial statements

F-29
<PAGE>
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

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

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

F-30
<PAGE>
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

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:

F-31
<PAGE>
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:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
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
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>

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.

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>

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:

<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>

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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
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
------------- ------------ ------------
</TABLE>

F-33
<PAGE>
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:

<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>

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:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>

Interest is payable semiannually with the principle due at maturity.

The following is a summary of maturities of Subordinated Debentures at
September 30, 1995.

<TABLE>
<S> <C>
Due within one year....................................................... $ 55,000
Due after one year through five years..................................... 619,707
---------
$ 674,707
---------
---------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Unfunded loan commitments....................................................... $ 708,561 $ 761,132
Letters of credit............................................................... 79,597 80,602
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
1995 1994
--------- ----------
<S> <C> <C>
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
--------- ----------
--------- ----------
</TABLE>

The Company's effective tax rate on income before income taxes differs from
the U.S. statutory tax rate as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1995 1994 1993
------------- ------ ------
<S> <C> <C> <C>
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%
--- ------ ------
--- ------ ------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
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
------------- ------------ ------------
------------- ------------ ------------
</TABLE>

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:

<TABLE>
<S> <C>
1996...................................................... $ 112,650
1997...................................................... 19,250
---------
Total minimum payment..................................... $ 131,900
---------
---------
</TABLE>

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
<PAGE>
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:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
--------------- --------------
<S> <C> <C>
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%
</TABLE>

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
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------

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

<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
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
</TABLE>

2,100,000 Shares

Surety Capital
Corporation

COMMON STOCK

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

PROSPECTUS

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

HOEFER & ARNETT
Incorporated

February 22, 1996

- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
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.

<TABLE>
<S> <C>
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
---------
---------
</TABLE>

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 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
<PAGE>
$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
<PAGE>
SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
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 6th
of March 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.

<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
- ----------------------------------------- ---------------------------------------------------- ----------------

<C> <S> <C>
/s/ C. JACK BEAN Chairman of the Board and Director (Principal March 6, 1996
-------------------------------- Executive Officer)
C. Jack Bean

/s/ BOB HACKLER Senior Vice President, March 6, 1996
-------------------------------- Secretary and Director
Bob Hackler

/s/ B.J. CURLEY Vice President and Chief Financial Officer March 6, 1996
-------------------------------- (Principal Financial Officer and
B.J. Curley Chief Accounting Officer)

/s/ CULLEN W. TURNER Director March 6, 1996
--------------------------------
Cullen W. Turner

/s/ G. M. HEINZELMANN Director March 6, 1996
--------------------------------
G. M. Heinzelmann

/s/ GARRETT MORRIS Director March 6, 1996
--------------------------------
Garrett Morris
</TABLE>

II-3
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
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. (10)
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. (10)
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. (10)
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. (10)
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------------------
<C> <S>
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)
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)
10.10 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.
(10)
21.01 Subsidiaries of the Registrant. (10)
23.01 Consent of Coopers & Lybrand, L.L.P., 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.*
</TABLE>

- ------------------------
(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. 33-64893 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.
(10)Filed with Registration Statement No. 33-64789 on Form S-1 and incorporated
by reference herein.
* Filed herein.

<PAGE>

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

March 7, 1996

Surety Capital Corporation
1845 Precinct Line Road
Suite 100
Hurst, TX 76054

Gentlemen:

We refer to the registration statement on Form S-1, filed on March 7,
1996 (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 288,759 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 the Registration Statement is declared effective, and when the
common stock offered pursuant thereto is 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.

<PAGE>

EXHIBIT 23.01

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".

/s/ COOPERS & LYBRAND L.L.P.

Coopers & Lybrand L.L.P.

Fort Worth, Texas
March 6, 1996

<PAGE>

EXHIBIT 23.02

CONSENT OF INDEPENDENT ACCOUNTANTS'

We consent to the use in the registration statement of Surety Capital
Corporation on Form S-1 of our report dated November 1, 1995 relating to the
consolidated financial statements of First Midlothian Corporation as of
September 30, 1995 and the nine months then ended and for each of the two
years in the period ended December 31, 1994. We also consent to the
reference to our firm under the caption "Experts" in the aforementioned
registration statement.

/s/ SAMSON, ROBBINS & ASSOCIATES, P.L.L.C.

Samson, Robbins & Associates, P.L.L.C.

Dallas, Texas
March 6, 1996

<PAGE>

EXHIBIT 23.03

CONSENT OF 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 March 6, 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
March 6, 1996