SURETY CAPITAL CORP /DE/, S-1, 1997-12-30

SURETY CAPITAL CORP /DE/
S-1, 1997-12-30
NATIONAL COMMERCIAL BANKS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1997
REGISTRATION NO.
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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)
---------------
DELAWARE 6021 75-2065607
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)

C. JACK BEAN
1845 PRECINCT LINE ROAD 1845 PRECINCT LINE ROAD
SUITE 100 SUITE 100
HURST, TEXAS 76054 HURST, TEXAS 76054
(817) 498-2749 (817) 498-2749
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE,
TELEPHONE AND TELEPHONE NUMBER, INCLUDING AREA
NUMBER, INCLUDING AREA CODE, CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OF AGENT FOR SERVICE)
OFFICES)
---------------
COPY TO:
DAN R. WALLER, P.C. MR. WILLIAM T. LUEDKE IV
SECORE & WALLER, L.L.P. BRACEWELL & PATTERSON, L.L.P.
ONE GALLERIA TOWER, SUITE 2290 SOUTH TOWER PENNZOIL PLACE
13355 NOEL ROAD, LB 75 711 LOUISIANA ST., STE. 2900
DALLAS, TEXAS 75240 HOUSTON, TEXAS 77002-2781
(972) 776-0200 (713) 223-2900
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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>
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<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE(2)
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<S> <C> <C> <C> <C>
Common stock, $0.01 per
share par value........ 1,725,000 $6.75 $11,643,750 $3,434.91
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</TABLE>
(1) Includes 225,000 shares for Underwriters' Over-Allotment.
(2) The Registration fee is estimated based upon the average of the high and
low market prices reported for the Common Stock of the Registrant carried
on the Primary List of the American Stock Exchange on December 26, 1997,
which was $6.75 per share. The offering price per share and aggregate
offering price are estimated solely for the purpose of calculating the
registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

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<PAGE>

SURETY CAPITAL CORPORATION

FORM S-1

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
ITEM PROSPECTUS
NO. ITEM CAPTION OR PAGE
---- ---- ---------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside Facing Page of Registration
Front Cover Page of Prospectus.............................................................Statement, ii, and 1

2. Inside Front and Outside Back Cover Pages of Prospectus..................................68 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...............................................................................................9

5. Determination of Offering Price..................................................................Not applicable

6. Dilution.........................................................................................Not applicable

7. Selling Security Holders.........................................................................Not applicable

8. Plan of Distribution.........................................................................................65

9. Description of Securities to be Registered...................................................................64

10. Interests of Named Experts and Counsel...........................................................Not applicable

11. Information with Respect to the Registrant.................................................................9-67

12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities..............Not applicable
</TABLE>
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION

PRELIMINARY PROSPECTUS DATED December 29, 1997

SURETY CAPITAL CORPORATION

1,500,000 Shares of Common Stock

All 1,500,000 shares of Common Stock (the "Common Stock") offered hereby (the
"Offering") are being sold by Surety Capital Corporation (the "Company"). The
Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol
"SRY". See "Market Price and Dividend Policy". On December 26, 1997 the last
sale price of the Common Stock as reported on AMEX was $6.75.

The Company intends to use the proceeds of the Offering primarily to finance
the Company's acquisition of TexStar National Bank, Universal City, Texas,
although the Offering is not contingent upon completion of the acquisition. Any
remaining proceeds will be used for general corporate purposes. See "Use of
Proceeds" and "The TexStar National 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 "RISK FACTORS" ON PAGE 8 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.

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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(2)
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<S> <C> <C> <C>
Per Share................................... $ $ $
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Total(3).................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting".
(2) Before deducting offering expenses payable by the Company, estimated at
$ .
(3) The Company has granted the Underwriter a 30-day option to purchase up to
225,000 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 Discounts and
Commissions and Proceeds to Company will be approximately $ , $ and
$ , respectively. See "Underwriting".

The shares of Common Stock are offered by the Underwriter named below,
subject to prior sale, when, as and if delivered to and accepted by the
Underwriter. The Underwriter reserves the right to reject orders in whole or in
part, and to withdraw, cancel or modify the Offering without notice. It is
expected that delivery of the certificates representing the shares will be made
to the Underwriter on or about , 1998 in Dallas, Texas.

HOEFER & ARNETT
Incorporated

, 1997.
<PAGE>

[MAP APPEARS HERE]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, INCLUDING OVER-ALLOTTING THIS OFFERING, THEREBY CREATING A
SYNDICATE SHORT POSITION, ENTERING OR MAINTAINING A STABILIZING BID FOR THE
COMMON STOCK, RAISING A STABILIZING BID TO MATCH INDEPENDENT BIDS IN THE
MARKET, PURCHASING COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS, AND
IMPOSING PENALTY BIDS. SUCH TRANSACTIONS MIGHT HAVE THE EFFECT OF STABILIZING
OR MAINTAINING THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THE LEVEL
THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME. SEE "UNDERWRITING".

2
<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 this prospectus, unless the context
otherwise requires, the term "Company" means Surety Capital Corporation and
its subsidiary. As used in the prospectus, unless the context otherwise
requires, a description of activities conducted by the Company includes
activities conducted by its subsidiary. Unless otherwise indicated, all
information in this prospectus assumes that the Underwriter's over-allotment
option is not exercised.

THE COMPANY

GENERAL. Surety Capital Corporation (the "Company") is a bank holding
company headquartered in Hurst, Texas. The Company, which is a Delaware
corporation, owns all of the outstanding shares of Surety Bank, National
Association (the "Bank"). The Company conducts substantially all of its
activities through the Bank. The Company operates full-service banking offices
in the Texas communities of Chester, Hurst, Kennard, Lufkin, Midlothian,
Waxahachie, Wells and Whitesboro. At September 30, 1997, the Company had
$176.9 million in total assets, $155.0 million in deposits and $20.8 million
in shareholders' equity, and its subsidiary Bank was "well capitalized" under
federal regulatory capital adequacy guidelines. The Company has had five
consecutive years of increasing net earnings, which have grown from
approximately $16 thousand in 1992 to $1.7 million in 1996, and $1.5 million
for the nine months ended September 30, 1997. Assuming the successful
completion of the acquisition of TexStar National Bank ("TexStar") and the
Offering as of September 30, 1997, the Company's total assets, deposits and
shareholders' equity on a pro forma basis would have been $253.5 million,
$220.7 million and $29.5 million, respectively.

BUSINESS STRATEGY. The Company's business strategy has two key aspects:
growth through acquisitions of community banks and an emphasis on specialized
lending, which it funds using relatively low cost core retail deposits from
its network of community banking offices. The Company acquired its first
community bank in December, 1989. Since 1992, the Company has established
seven new full-service branches by acquiring six community banks and
purchasing the deposits and certain assets of a branch of another bank. The
Company is conducting the Offering to raise the capital to acquire TexStar, a
community bank located in Universal City, Texas, which reported $73.5 million
in total assets, $65.7 million in deposits and $5.6 million in shareholders'
equity at September 30, 1997. TexStar will be the Company's first presence in
the greater San Antonio, Texas, metropolitan area. See "The TexStar National
Bank Acquisition".

While the Company is actively pursuing its growth strategy, the Company
believes that growth is not prudent unless the acquired assets and liabilities
can be profitably deployed. It is in this regard that the Company
distinguishes itself from other community banking organizations by balancing
its traditional community bank lending with the active development of lending
niches such as insurance premium financing and medical claims factoring. The
ability to fund these lending activities with relatively low cost deposits
from the Company's community bank network gives the Company a pricing
advantage over non-bank competitors for its loan products. For the nine months
ended September 30, 1997, the Company's average cost of funds was 3.7%
compared with a loan portfolio yield of approximately 11.7%. The following is
a description of the Company's niche and traditional lending activities:

. INSURANCE PREMIUM FINANCING. 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 5,000 independent insurance agents and maintains a
loan portfolio consisting of receivables from nearly 600 insurance
companies. At September 30, 1997, the Company reported total gross IPF
loans of $46.1 million (approximately 39.5% of gross loans), a 17.7%
increase over the

3
<PAGE>

December 31, 1996 total balance of $39.2 million in IPF loans (37.1% of
gross loans). The loans are relatively short term, generally with
maturities of eight to nine months. 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 net loan balance. The primary
risk in IPF lending is not that a borrower will default on the loan but
that an insurance company will default on payment of the unearned
premium following a default by a borrower. No lending is without risk,
but specialized products may present different types of risks than
traditional loans. See "Business--Insurance Premium Financing" and "Risk
Factors--Insurance Premium Financing Concentration".

. MEDICAL CLAIMS FACTORING. Another Company niche product is 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, 1997,
the Company reported $10.5 million in medical claims receivables,
representing 9.0% of total loans outstanding. The Company purchases
primarily 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 average period these receivables
remain outstanding, from the date of funding by the Company to
collection, is approximately 60 to 120 days. As of September 30, 1997,
the Company had realized an annualized yield in excess of 26.4% in this
program. See "Business--Medical Claims Receivables Factoring" and "Risk
Factors--Medical Claims Factoring".

. TRADITIONAL LENDING ACTIVITIES. The Company diversifies its lending
risks by balancing its specialty lending with traditional loans. At
September 30, 1997, the Company had approximately $56.9 million, or
roughly half of its total loan portfolio, in IPF loans and medical
claims receivables, with the other half of its loan portfolio in
traditional community bank loans, including real estate, commercial and
installment loans. The Company believes that its specialized lending
products help it achieve a higher loan portfolio yield than it could
achieve on traditional community bank loans alone. See "Business--
Commercial and Consumer Banking".

THE TEXSTAR ACQUISITION. The acquisition of TexStar complements the
Company's business strategy in that it provides the Company with a solid base
of core deposits to use to fund its specialty and traditional lending
activities. TexStar has traditionally maintained a low loan to deposit ratio,
and the Company believes that it can increase the amount of loans originated
from TexStar's banking locations by enhanced marketing and access to the
Company's normal sources for IPF and medical claims factoring loans. The
TexStar acquisition will increase the Company's total assets from $176.9
million to $253.5 million as of September 30, 1997, on a pro forma basis, and
the addition of TexStar's main office in Universal City and four full-service
branches in the greater San Antonio metropolitan area will increase the
Company's number of full-service banking locations from eight to thirteen. The
acquisition of TexStar is expected to be completed in the first quarter of
1998. However, the Offering is not contingent upon completion of the TexStar
Acquisition. See "The TexStar National Bank Acquisition".

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Securities Offered by
the Company............ 1,500,000 shares of Common Stock
Common Stock to be Out-
standing after the Of-
fering................. 7,251,882 shares(1)
Use of Proceeds......... The proceeds of this Offering will be used to finance
the acquisition of TexStar and for general corporate
purposes. See "Use of Proceeds".
Risk Factors............ Prospective investors are advised to review carefully
the matters discussed under "Risk Factors".
AMEX Symbol............. "SRY"
</TABLE>
- --------
(1) Excludes shares issuable upon the exercise of (i) the Underwriter's
overallotment option covering 225,000 shares, and (ii) options under the
Company's incentive stock option plans. See "Underwriting" and
"Management--Executive Compensation and Other Information".

5
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data of the Company is derived
from the unaudited financial statements of the Company as of and for the nine
month periods ended September 30, 1997 and 1996, and from the audited financial
statements of the Company as of and for the five years ended December 31, 1996.
The following summary consolidated financial data of the Company should be read
in connection with the consolidated financial statements of the Company and the
notes thereto and the information in Management's Discussion and Analysis of
Financial Condition and Results of Operations.

<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------------------------
1997 1996(1) 1996(1) 1995(2) 1994(3) 1993(3) 1992(3)
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
($ IN 000'S)
Interest income........ $ 12,007 $ 10,476 $ 14,390 $ 9,535 $ 5,387 $ 3,995 $ 3,344
Interest expense....... 4,290 3,962 5,362 3,678 1,488 1,124 978
-------- -------- -------- -------- -------- ------- -------
Net interest income.... 7,717 6,514 9,028 5,857 3,899 2,871 2,366
Provision for credit
losses................ 295 90 135 60 107 91 300
-------- -------- -------- -------- -------- ------- -------
Net interest income
after provision for
credit losses......... 7,422 6,424 8,893 5,797 3,792 2,781 2,067
Noninterest income..... 1,765 1,355 1,877 1,419 1,160 1,182 784
Noninterest expense.... 6,781 6,052 8,135 5,878 4,462 3,592 2,835
-------- -------- -------- -------- -------- ------- -------
Earnings before income
taxes................. 2,406 1,727 2,636 1,338 490 371 16
Income taxes........... 875 594 938 451 17 0 0
-------- -------- -------- -------- -------- ------- -------
Net income............. $ 1,531 $ 1,133 $ 1,698 $ 887 $ 473 $ 371 $ 16
======== ======== ======== ======== ======== ======= =======
COMMON SHARE DATA:(4)
Net income............. $ 0.27 $ 0.22 $ 0.32 $ 0.27 $ 0.20 $ 0.19 $ 0.00
Book value............. $ 3.62 $ 3.24 $ 3.35 $ 2.94 $ 2.65 $ 2.32 $ 2.05
Tangible Book
Value(5).............. $ 2.57 $ 2.13 $ 2.26 $ 2.18 $ 1.83 $ 2.13 $ 1.84
Weighted average common
shares outstanding (in
000's)................ 5,751 5,263 5,389 3,279 2,394 2,002 1,952
Period end shares
outstanding (in
000's)................ 5,752 5,748 5,748 3,506 3,041 2,273 1,981
BALANCE SHEET DATA:
($ IN 000'S)
Total assets........... $176,894 $160,166 $176,439 $121,339 $102,294 $49,036 $30,964
Insurance premium
finance loans, net.... 44,429 33,933 38,224 21,905 20,497 14,209 7,051
Other loans, net....... 69,961 62,879 64,928 45,197 44,167 17,417 12,442
Allowance for credit
losses................ 1,367 1,292 1,285 703 698 401 325
Total deposits......... 154,999 152,281 155,690 109,599 92,027 43,596 26,840
Shareholders' equity... 20,806 18,603 19,231 10,295 8,066 5,281 4,058
PERFORMANCE DATA:(4)
Return on average total
assets................ 1.2% 0.9% 1.0% 0.8% 0.8% 0.8% 0.1%
Return on average
shareholders' equity.. 10.8 9.5 9.8 9.5 7.4 8.7 0.4
Net interest
margin(6)............. 6.5 6.1 6.2 6.1 7.1 7.0 8.7
Efficiency ratio(7).... 68.3 74.6 71.8 78.4 87.5 87.9 89.2
Net loans to deposits.. 72.9 62.7 65.4 60.6 70.3 72.5 72.6
ASSET QUALITY RATIOS:(4)
Nonperforming assets to
total assets.......... 0.8% 0.4% 0.6% 0.1% 0.2% 0.3% 0.7%
Nonperforming loans to
total loans........... 0.2 0.3 0.2 0.1 0.2 0.3 0.8
Net loan charge-offs to
average loans......... 0.2 0.1 0.2 0.1 0.4 0.3 1.6
Allowance for credit
losses to total
loans................. 1.2 1.2 1.2 1.0 1.1 1.3 1.7
Allowance for credit
losses to
nonperforming loans... 576.8 482.4 502.5 996.1 574.8 425.8 201.1
CAPITAL RATIOS:
Tier I risk-based
capital............... 11.9% 11.1% 11.1% 10.8% 10.1% 11.4% 14.4%
Total risk-based
capital............... 13.1 12.3 12.3 11.7 11.2 12.6 15.7
Leverage............... 8.7 7.4 7.0 6.9 5.6 10.0 11.9
</TABLE>
- --------
(1) In February, 1996, the Company acquired First Midlothian Corporation,
Midlothian, Texas. In March, 1996, the Company acquired certain assets and
assumed certain liabilities of Providers Funding Corporation, Dallas,
Texas. The acquisitions were accounted for as purchase transactions.

6
<PAGE>

(2) In September, 1995, the Company completed the acquisition of certain assets
and the assumption of certain liabilities of a branch of another bank
located in Waxahachie, Texas. This acquisition was accounted for as a
purchase transaction.
(3) In May, 1994, the Company acquired The Farmers Guaranty State Bank of
Kennard, Kennard, Texas, and in December, 1994 the Company acquired First
National Bank, Whitesboro, Texas. During 1994, the Company had no effective
tax rate as it utilized a net operating loss carryforward. The Company
returned to paying federal income taxes at an effective rate of 34% during
1995. As a result, net income for the years ended December 31, 1995 and
1996 may be more indicative of operating trends in the future. Conversely,
earnings before income taxes may be a more useful comparison when looking
at results of operations in 1994 and prior years. In March, 1993, the
Company acquired 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. The information
provided for 1992 has been restated to reflect a one for ten reverse stock
split in June 1993. All these acquisitions were accounted for as purchase
transactions.
(4) All interim periods have been annualized.
(5) Tangible book value is the book value per share after deducting intangible
assets such as goodwill.
(6) The net interest margin represents the difference between the average yield
on interest-earning assets and the average rate on interest-bearing
liabilities.
(7) The efficiency ratio is non-interest expenses (excluding amortization of
intangibles), divided by the sum of net interest income plus non-interest
income, excluding net gains (losses) on dispositions of investment
securities and certain assets.

7
<PAGE>

RISK FACTORS

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. An investment in the securities of the Company may pose risks
unique to the Company, or unique to the financial services industry, which are
not posed by other investments.

INSURANCE PREMIUM FINANCING CONCENTRATION. As of September 30, 1997, IPF
loans totaled $46.1 million, representing approximately 39.5% of the total
gross loans of the Company. Such a high concentration of IPF loans may expose
the Company to different types of risks and a greater risk of loss than would
a more traditional commercial and consumer loan portfolio. In traditional loan
products, the primary risk is that a borrower will fail to repay the loan.
However, when a borrower fails to repay an IPF loan, typically the insurance
policy is canceled and the unearned premium is paid to the lender. Significant
risks posed by IPF loans normally not present in traditional loans include the
risk that an insurance company will become insolvent or otherwise unable to
meet its obligations, or that someone will obtain IPF loans for fictitious
policies where the Company does not have recourse to an insurance company for
insurance premiums. See "Business--Insurance Premium Financing", "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Nonperforming Assets," and "Legal Proceedings." Losses or other difficulties
encountered by any one insurance company, or fraudulent activity by an
insurance company or agent, could have a material adverse effect on the
Company. In addition, financial difficulties or 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. Most
of the IPF loans are generated through independent insurance agents, who are
not obligated to refer business to the Company. 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 TexStar, 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations", and "Business--Insurance Premium
Financing".

MEDICAL CLAIMS FACTORING. As of September 30, 1997, the Company had
approximately $4.3 million of medical claims receivables outstanding 120 days
or more from the date of funding by the Company, or 41% of its total medical
claims receivables. At December 31, 1996 the Company had approximately $1.1
million of medical claims receivables, 19% of total medical claims
receivables, outstanding 120 days or more. It has been the Company's
experience that, historically, approximately 80% of its medical claims
receivables were collected within 60 to 120 days. Therefore, approximately 20%
of such receivables would remain outstanding after 120 days. The Company
believes that the increase in the proportion of medical claims receivables
outstanding after 120 days resulted primarily because the Company did not
increase the staffing for collections commensurate with the growth in medical
claims receivables. While the Company believes that substantially all of these
claims ultimately will be collected from insurance companies or the federal
government, this development represents a significant increase, from December
31, 1996, in the amount of medical claims receivables outstanding over 120
days, and there can be no assurance of ultimate collectibility. As with IPF
loans, losses or difficulties encountered by any one medical claims payor, or
fraudulent activity by any one medical claims payor or medical services
provider, could have a material adverse effect on the Company. In addition,
financial difficulties or regulatory or structural changes affecting medical
services providers or medical claims payors generally may have a material
adverse effect on the Company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Nonperforming Assets".

POTENTIAL NEGATIVE IMPACT FROM THE ACQUISITION OF TEXSTAR. As a result of
the acquisition of TexStar, the Company's asset size will increase from $176.9
million at September 30, 1997 to $253.5 million on a pro forma basis. The
Company's loan to deposit ratio will decrease from 73.1% at September 30, 1997
to 65.9% on a pro forma basis. The Company anticipates that the acquisition of
TexStar will negatively impact the Company's net interest margin, return on
assets and return on shareholder equity in the near term. The acquisition may
also

8
<PAGE>

negatively impact earnings per share in the near term. The future prospects of
the Company will depend, in significant part, on a number of factors,
including, without limitation, the Company's ability to integrate TexStar; its
ability to compete effectively in the greater San Antonio metropolitan market
area; its success in retaining earning assets, including loans, acquired with
TexStar; and its ability to generate new earning assets with attractive
yields. No assurance can be given that the Company will be able to accomplish
any of the foregoing. No assurance can be given that the Company will be able
to achieve results in the future similar to those achieved in the past or that
the Company will be able to manage effectively the growth resulting from the
acquisition of TexStar. The officers and directors of TexStar will not be
subject to non-competition agreements and may compete against the Company. See
"The TexStar National Bank Acquisition".

FUTURE GROWTH. Fueled by acquisitions, the total assets of the Company have
increased from $31.0 million at December 31, 1992, to $176.9 million at
September 30, 1997. There can be no assurance that the Company will grow as
rapidly in the future as it has in the past. The Company may decide that it
will not pursue further acquisitions, or the Company may not be able to locate
and complete favorable acquisition opportunities in the future. In recent
years, the aggregate number of community banks in Texas has decreased,
primarily through mergers and acquisitions, and the competition for
acquisitions has increased. If the Company does not make acquisitions in the
future, it may not be able to sustain its historical growth rate.

RELIANCE ON KEY PERSONNEL. The Company is dependent upon its executive
officers and key employees. Specifically, the Company considers the services
of C. Jack Bean, G. M. Heinzelmann, III, Bobby W. Hackler, and B. J. Curley 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. Although the Company has entered into agreements with these
individuals designed to provide incentives to remain in the Company's employ,
the Company has not requested non-competition agreements from these
individuals. The Company has entered into Change in Control Agreements with
Messers. Heinzelmann, Hackler and Curley, and is negotiating a new agreement
with Mr. Bean, 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".

POSSIBLE MARKET VOLATILITY. 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. See "Market Price and Dividend Policy". The stock market has from
time to time experienced extreme price and volume volatility. These market
fluctuations may be unrelated to the operating performance of particular
companies whose shares are traded and may adversely affect the market price of
the Common Stock. In addition, during periods of extreme market volatility,
investors may be unable to obtain prompt execution of buy or sell orders in
the Common Stock.

INTEREST RATE RISK. The Company's earnings 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. The Company has attempted to structure its asset
and liability management strategies to mitigate the impact on net interest
income of changes in market interest rates. However, there can be no assurance
that the Company will be able to manage interest rate risk so as to avoid
significant adverse affects in net interest income. From time to time,
maturities of assets and liabilities are not balanced, and a rapid increase or
decrease in interest rates could have an adverse effect on the net interest
margin and results of operations of the Company. The nature, timing and effect
of any future changes in federal monetary and fiscal policies on the Company
and its results of operations are not predictable. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Interest Rate Sensitivity Managment".

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.

9
<PAGE>

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".

NO DIVIDENDS. The Company has not previously paid any cash dividends on its
Common Stock. The Company currently intends to retain earnings to support
future growth, rather than using earnings to pay dividends. 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 other types of financial institutions, 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 loans. The Company believes that such competition will increase in the
future. In addition, the manner in 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".

NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this prospectus, all statements other than statements of historical fact
regarding the Company's financial condition, results of operations, business
strategy and future acquisitions or operations are "forward-looking
statements". When used in this Prospectus, words such as "believes",
"anticipates", "intends", "expects", "should", and words of similar import
identify a forward-looking statement. Such forward-looking statements may
involve numerous assumptions about known and unknown trends, uncertainties,
risks, economic conditions and other factors which may ultimately prove to be
inaccurate. Certain of these factors are discussed in more detail elsewhere in
this prospectus, including without limitation under "Risk Factors",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", and "Business". These factors include the Company's ability to
successfully complete the TexStar acquisition, and to redeploy excess
liquidity, as well as the Company's ability to continue to make future
acquisitions. Actual results may differ materially from any future results
expressed or implied by such forward-looking statements. Prospective investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update or to publicly revise any of
the forward-looking statements contained herein to reflect future events or
developments.

USE OF PROCEEDS

The Company has entered into an agreement to acquire TexStar. In connection
with the acquisition, the shareholders of TexStar will receive cash for their
shares in that bank. The Company intends to use the net proceeds from the sale
of Common Stock to finance this acquisition. However, the Offering is not
contingent upon completion of the acquisition. Any remaining proceeds will be
used by the Company for general corporate purposes. See "The TexStar National
Bank Acquisition".

10
<PAGE>

CAPITALIZATION

The following table sets forth the unaudited consolidated capitalization of
the Company as of September 30, 1997, and the pro forma capitalization
adjusted to reflect (i) the sale by the Company of 1,500,000 shares of the
Common Stock offered hereby at an assumed offering price of $6.75 per share,
net of underwriting commissions and other expenses; (ii) the consummation of
the acquisition of TexStar; and (iii) the application of net proceeds as
described under "Use of Proceeds".

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL PRO FORMA
----------- -----------
<S> <C> <C>
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized none issued at September 30,
1997........................................... $ -- $ --
Common stock, $.01 par value, 20,000,000 shares
authorized, Issued--5,786,171 shares,
(7,251,882 as adjusted)........................ 57,862 72,862
Additional paid-in capital...................... 16,850,067 25,566,317
Retained earnings............................... 3,982,998 3,967,998
Stock rights issuable(1)........................ 57,862 72,862
Treasury stock, 34,289 shares at September 30,
1997 carried at cost........................... (172,828) (172,828)
Unrealized gain on available-for-sale securities,
net of tax....................................... 30,397 30,397
----------- -----------
Total shareholders' equity.................... $20,806,358 $29,537,608
=========== ===========
</TABLE>
- --------
(1) To reflect rights issuable under the shareholder rights agreement adopted
by the Company in June 1997. See "Description of Securities--Shareholders'
Rights Agreement."

11
<PAGE>

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". For the nine months
ended September 30, 1997, the Company's Common Stock ranged from $4.13 to
$6.50. For the year ended December 31, 1996, the Company's Common Stock ranged
from $3.25 to $4.94.

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 for fiscal years ended 1995 and 1996 and through November 30,
1997.

<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1995 FISCAL YEAR:
First quarter.................................................... $4.38 $3.06
Second quarter................................................... 6.75 3.19
Third quarter.................................................... 5.13 3.50
Fourth quarter................................................... 4.50 3.75
1996 FISCAL YEAR:
First quarter.................................................... $4.50 $3.25
Second quarter................................................... 4.94 3.63
Third quarter.................................................... 4.94 4.00
Fourth quarter................................................... 4.88 4.00
1997 FISCAL YEAR:
First quarter.................................................... $5.75 $4.13
Second quarter................................................... 5.63 5.00
Third quarter.................................................... 6.50 5.13
Fourth quarter (through November 30)............................. 7.25 6.00
</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. 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, 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. 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 bank'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. 56 no dividends may ever be paid in an
amount greater than the bank's net profits. As of September 30, 1997,
approximately $3.5 million was available for payment of dividends by the Bank
to the Company. 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".

12
<PAGE>

THE TEXSTAR NATIONAL BANK ACQUISITION

In recent years, the Company has successfully pursued a strategy of growth
through acquisitions, and has profitably reinvested acquired assets and
liabilities. The acquisition of TexStar complements the Company's business
strategy in that TexStar is a community bank located in a growth area, with
excess liquidity which can be used to fund the Company's specialized lending
activities.

BUSINESS OF TEXSTAR

At September 30, 1997, TexStar had $73.5 million in total assets, $67.9
million in deposits and $5.6 million in shareholders' equity. TexStar is a
community bank which offers interest-bearing and noninterest-bearing
depository accounts, and makes real estate, commercial and consumer loans. At
September 30, 1997, TexStar's loan portfolio consisted of $13.9 million of
real estate loans (42.8% of the gross loan portfolio), $14.5 million of
commercial loans (44.6% of the gross loan portfolio), and $4.1 million of
installment loans (12.6% of the gross loan portfolio). At September 30, 1997,
TexStar's total nonaccrual loans were $202,000 (0.6% of the gross loan
portfolio). The allowance for possible loan losses was $473,457, or 234.2% of
total nonaccruing loans, and 1.4% of the gross loan portfolio. Other real
estate owned by TexStar was $475,374 at September 30, 1997. TexStar reported
net income after taxes of $547,289 for 1996, and $394,682 for the nine months
ended September 30, 1997. See the financial statements of TexStar included in
this prospectus. At September 30, 1997, TexStar's loan-to-deposit ratio was
48.8%. The Company intends to use the excess liquidity acquired with TexStar
to fund additional IPF loans and medical claims receivables factoring.

TexStar is headquartered in Universal City, which is located in the growth
corridor northeast of San Antonio, Texas. San Antonio is the eighth largest
Standard Metropolitan Statistical Area in the United States. TexStar has four
branch locations in Converse, New Braunfels, San Antonio, and Schertz. As of
1997, Bexar County, where San Antonio and Universal City are located, had an
estimated population of 1,333,744. Bexar County is projected to have a
population of 1,429,374 by 2002 or an 8% increase. In 1997, estimated average
household income for Bexar County was $48,317, the estimated median household
income was $33,439, and the estimated per capita income was $17,359. The
median age was approximately 32 years. Over 44,000 businesses in Bexar county
currently employ approximately 638,000 people. Although the closing of Kelly
Air Force base might have a negative impact on San Antonio, other events, such
as the relocation of the corporate headquarters of Southwestern Bell to San
Antonio, should have a positive impact. Management of TexStar considers the
economy in the immediate area surrounding TexStar stable. The largest employer
in the area, Randolph Air Force Base, continues to add jobs and missions
despite the downsizing of the military. It continues to serve as the
headquarters for Air Education and Training Command.

TexStar is a Statewide Preferred Lender under the government guaranteed
United States Small Business Administration ("SBA") lending program. Under
this program, TexStar originates and funds SBA loans qualifying for guarantees
from the United States Small Business Administration. These guarantees range
from 75% to 90% of principal and up to 120 days of accrued interest. In
addition, in the event of a default and liquidation of one of these loans the
SBA pays its prorata share of the liquidation costs. The SBA guaranteed
portion of these loans is generally sold into the secondary market with
servicing retained. The guaranteed portion is sold for a premium
(approximately 7% to 10% of the SBA guaranteed portion) with a servicing fee
of at least 1% of the guaranteed portion retained. At September 30, 1997,
TexStar had originated $7,046,510 in SBA loans with the $5,276,514 SBA
guaranteed portion sold in the secondary market. The remaining $1,768,996 in
unguaranteed portion of these loans remains in TexStar's loan portfolio.
TexStar has been making SBA loans for approximately 4 years and has not
experienced a default and liquidation regarding any of these loans. The
Company may expand the generation of SBA loans because of TexStar's Statewide
Preferred Lending Status. For example, the Company could establish additional
loan production offices staffed by lenders that are specially trained in SBA
loan production.

THE REORGANIZATION AGREEMENT

The Company and the Bank have entered into a reorganization agreement dated
October 10, 1997 with TexStar and certain shareholders (the "TexStar
Shareholders") of TexStar (the "Reorganization Agreement")

13
<PAGE>

and a related merger agreement between the Company, the Bank and TexStar (the
"Merger Agreement"). Under the Merger Agreement, TexStar will be merged into
the Bank (the "Merger"), and the shareholders of TexStar will receive cash in
the aggregate amount of (i) $9,500,000 plus (ii) a performance payment equal
to 50% of the net earnings (as defined in the Merger Agreement) of TexStar in
excess of $100,000 for the period from September 1, 1997 to the Closing Date.
In addition, the parties have agreed that TexStar may pay a $100,000 bonus to
its president upon consummation of the transaction. The shareholders of
TexStar, other than shareholders who dissent from the Merger, will
collectively reimburse the Company for an agent's fee payable upon
consummation of the Merger. If the acquisition had been completed on September
30, 1997, the purchase price paid to the shareholders of TexStar would have
been approximately $9.5 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 or proceedings 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 TexStar, the
parties could be deprived of any of the material benefits contemplated under
the Reorganization Agreement. In addition, the Company is not obligated to
complete the acquisition unless certain conditions set out in the
Reorganization Agreement have been satisfied or waived by the Company,
including that (i) the shareholders of TexStar shall have approved the
transactions contemplated under the Reorganization Agreement; (ii) TexStar, in
the opinion of the Company, shall not have suffered any material adverse
change in its financial condition, business, operations, prospects, properties
or assets; (iii) holders of no more than 12% of the outstanding shares of
TexStar shall have dissented from the merger of TexStar and the Bank; (iv) the
Company shall be satisfied with the results of its due diligence review; (v)
TexStar and the TexStar Shareholders shall have complied with and performed
their covenants in the Reorganization Agreement; (vi) each representation or
warranty of TexStar shall be accurate; and (vii) the Company shall have
sufficient financial resources available, in its sole opinion, to consummate
the acquisition. TexStar is not obligated to complete the transaction unless
certain conditions set out in the Reorganization Agreement are satisfied or
waived, including the condition that the Company shall have approved the
Merger. The TexStar Shareholders have agreed that they shall be responsible
for filing all tax returns for TexStar for all periods ending prior to the
Merger. In addition, the TexStar Shareholders have agreed that they will not
make any claim against the Bank for indemnification for actions taken as a
director or officer of TexStar. TexStar and the TexStar Shareholders have
agreed to establish an escrow account in the amount of $400,000, to indemnify
the Company, the Bank and their respective officers, directors, employees,
agents, successors and assigns against any claims connected with or arising
out of a breach of warranty or a misrepresentation or a breach of covenant by
TexStar under certain provisions of the Reorganization Agreement.
Indemnification of such parties against such claims is limited to the escrowed
$400,000, which will be paid to the TexStar shareholders establishing the
escrow if not used to defend against or satisfy indemnified claims. TexStar
had 575,000 shares of common stock authorized, and 485,000 shares issued and
outstanding, as of August 31, 1997. The TexStar Shareholders who individually
and as a group approved and executed the Reorganization Agreement are the
record and beneficial owners of approximately 74% of the outstanding common
stock of TexStar.

If the Company elects to terminate the Reorganization Agreement after
December 9, 1997 because, in its opinion, it does not have sufficient
financial resources available to complete the acquisition or it is not
satisfied with the results of the due diligence review of TexStar, the Company
is obligated to pay TexStar a break-up fee of $25,000.

On December 12, 1997, the OCC approved the application to merge TexStar into
the Bank, contingent upon the Company raising at least $6,000,000 in
additional capital. The meeting of the shareholders of TexStar to consider and
vote upon the Reorganization Agreement will be held on January 21, 1998. 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. The Company anticipates that the closing will take
place following the closing of the Offering and prior to March 31, 1998.

14
<PAGE>

PRO FORMA FINANCIAL STATEMENTS

The following pro forma financial information sets forth the condensed
balance sheets at September 30, 1997 and the condensed income statements for
the nine months ended September 30, 1997 and for the year ended December 31,
1996 for each of the Company, consolidated, and TexStar, the adjustments
reflecting the proposed acquisition of TexStar by the Company and the
completion of the Offering, and the pro forma combined information. The
acquisition will be accounted for as a purchase transaction. The information
with respect to the Company and TexStar as of September 30, 1997 and the pro
forma information are unaudited. The pro forma balance sheet assumes that the
acquisition and the Offering were consummated on September 30, 1997. The pro
forma income statements assume that the acquisition and the Offering were
consummated on January 1, 1997, regarding the pro forma income information for
the nine months ended September 30, 1997, and on January 1, 1996, regarding
the pro forma information for the year ended December 31, 1996. The pro forma
financial information 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 of the acquisition and the offering.

[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY.]

15
<PAGE>

PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------- PRO FORMA
COMPANY TEXSTAR DEBITS CREDITS COMBINED
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and due from
banks.................. $ 6,671,815 $ 3,787,753 8,731,250 (1) 9,500,000 (3) $ 9,690,818
Federal funds sold...... 11,485,000 11,485,000
------------ ----------- ----------- ---------- ------------
Total cash and cash
equivalents........... 18,156,815 3,787,753 8,731,250 9,500,000 21,175,818
Interest bearing
deposits with banks.... 190,000 190,000
Securities:
Available-for-sale..... 14,369,508 22,541,598 36,911,106
Held-to-maturity....... 18,376,112 10,151,658 155,862 (2) 28,371,908
------------ ----------- ----------- ---------- ------------
Total securities..... 32,745,620 32,693,256 155,862 65,283,014
Loans
Total loans, net of
unearned discount..... 114,390,600 32,551,204 147,225,482
Allowance for credit
losses................ (1,366,662) (473,457) (1,840,119)
------------ ----------- ----------- ---------- ------------
Net loans............ 113,023,938 32,077,747 145,385,363
Premises and equipment,
net.................... 3,777,650 2,745,843 621,500 (2) 7,144,993
Accrued interest
receivable............. 855,707 613,357 1,469,064
Other real estate and
repossessed assets..... 130,992 475,374 606,366
Other assets............ 1,738,969 476,721 2,215,690
Intangibles............. 5,990,140 585,452 3,469,321 (2) 10,044,913
------------ ----------- ----------- ---------- ------------
Total assets........... $176,893,509 $73,455,503 $12,822,071 $9,655,862 $253,515,221
============ =========== =========== ========== ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities:
Deposits............... $154,999,319 $65,681,173 $220,680,492
Other liabilities...... 1,087,832 2,209,289 3,297,121
------------ ----------- ----------- ---------- ------------
Total liabilities.... 156,087,151 67,890,462 223,977,613
Shareholders' equity:
Common stock........... 57,862 2,425,000 2,425,000 (3) 15,000 (1) 72,862
Additional paid-in
capital............... 16,850,067 2,357,616 2,357,616 (3) 8,716,250 (1) 25,566,317
Retained earnings...... 3,982,998 829,620 829,620 (3) (15,000)(1) 3,967,998
Stock rights
issuable.............. 57,862 15,000 (1) 72,862
Treasury stock......... (172,828) (172,828)
Unrealized gain (loss)
on available-for-sale
securities............ 30,397 (47,195) (47,195)(3) 30,397
------------ ----------- ----------- ---------- ------------
Total shareholders'
equity.............. 20,806,358 5,565,041 5,565,041 8,731,250 29,537,608
------------ ----------- ----------- ---------- ------------
Total liabilities and
stockholders'
equity................ $176,893,509 $73,455,503 $ 5,565,041 $8,731,250 $253,515,221
============ =========== =========== ========== ============
</TABLE>
- --------
(1) This adjustment represents the sale of 1,500,000 shares of Common Stock
with a par value of $0.01 at a $6.75 per share public offering price, less
$685,000 in estimated offering expenses and $656,250 in underwriting
discounts and commissions, with net proceeds to the Company of $8,731,250.
(2) This adjustment represents the purchase price adjustments to adjust the
assets and liabilities of TexStar National Bank to fair value upon the
merger and results in recording of $3,469,321 in intangibles.
(3) This adjustment represents the purchase of TexStar and the elimination of
the capital of TexStar.

16
<PAGE>

PRO FORMA CONDENSED STATEMENT OF NET INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
COMPANY TEXSTAR DEBITS CREDITS COMBINED
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on
loans................ $9,872,455 $2,605,916 12,478,371
Interest on securi-
ties................. 1,811,503 1,196,177 3,007,680
Interest on federal
funds sold........... 323,455 72,298 395,753
---------- ---------- ----------
Total interest in-
come................. 12,007,413 3,874,391 15,881,804
Interest expense:
Interest on deposits.. 4,290,054 1,835,451 6,125,505
Interest on other
borrowings...........
---------- ---------- ----------
Total interest ex-
pense................ 4,290,054 1,835,451 6,125,505
Net interest income..... 7,717,359 2,038,940 9,756,299
Provision for credit
losses................. 295,000 97,000 392,000
Noninterest income...... 1,764,705 424,507 2,189,212
Noninterest expense:
Salaries and employee
benefits............. 3,392,296 890,623 4,282,919
Occupancy and
equipment............ 1,123,513 292,065 31,050(1) 1,446,628
General and adminis-
trative.............. 2,265,249 646,461 173,466(2) 175,820(3) 2,909,356
---------- ---------- ---------- ---------- ----------
Total noninterest ex-
pense................ 6,781,058 1,829,149 204,516 175,820 8,638,903
Income before federal
income taxes........... 2,406,006 537,298 204,516 175,820 2,914,608
Federal income taxes.... 874,917 142,616 52,117(4) 1,069,650
Net income............ $1,531,089 $ 394,682 256,633 175,820 $1,844,958
========== ========== ========== ========== ==========
Net income per share:
Net income per share.. $ 0.27 $ 0.25
Average shares out-
standing............. 5,751,212 7,251,212
</TABLE>
- --------
(1) This adjustment represents additional depreciation on the acquired
buildings and equipment.
(2) This adjustment represents the amortization of $3,469,321 over a blended
15 years.
(3) This adjustment represents the savings anticipated to be realized in
connection with the acquisition. These adjustments are a direct result of
the elimination of director and professional fees which will not continue
after the acquisition.
(4) This adjustment represents the tax effect of the adjustments, except for
the amortization of intangibles which is not deductible for tax purposes.

17
<PAGE>

PRO FORMA CONDENSED STATEMENT OF NET INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------- PRO FORMA
COMPANY TEXSTAR DEBITS CREDITS COMBINED
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on
loans................ $10,779,721 $3,201,824 $13,981,545
Interest on
securities........... 2,532,023 1,368,484 3,900,507
Interest on federal
funds sold........... 1,078,618 49,927 1,128,545
----------- ---------- -----------
Total interest
income............... 14,390,362 4,620,235 19,010,597
Interest expense:
Interest on deposits.. 5,361,689 2,285,831 7,647,520
Interest on other
borrowings
----------- ---------- -----------
Total interest
expense.............. 5,361,689 2,285,831 7,647,520
Net interest income..... 9,028,673 2,334,404 11,363,077
Provision for credit
losses................. 135,000 215,000 350,000
Noninterest income...... 1,877,454 560,645 2,438,099
Noninterest expense:
Salaries and employee
benefits............. 4,244,874 1,001,234 5,246,108
Occupancy and
equipment............ 1,244,551 278,642 41,433(1) 1,564,626
General and
administrative....... 2,645,587 731,878 231,288(2) 196,866(3) 3,411,887
----------- ---------- ---------- ---------- -----------
Total noninterest
expense.............. 8,135,012 2,011,754 272,721 196,866 10,222,621
Income before federal
income taxes........... 2,636,115 668,295 272,721 196,866 3,228,555
Federal income taxes.... 938,128 121,006 55,956(4) 1,115,090
Net income............ $ 1,697,987 $ 547,289 328,677 196,866 $ 2,113,465
=========== ========== ========== ========== ===========
Net income per share:
Net income per share.. $ 0.32 $ 0.31
Average shares
outstanding.......... 5,389,366 6,889,366
</TABLE>
- --------
(1) This adjustment represents additional depreciation on the acquired
buildings and equipment.
(2) This adjustment represents the amortization of goodwill of $3,469,321 over
15 years.
(3) This adjustment represents the savings anticipated to be realized in
connection with the acquisition. These adjustments are a direct result of
the elimination of director and professional fees which will not continue
after the acquisition.
(4) This adjustment represents the tax effect of the adjustments, except for
the amortization of intangibles which is not deductible for tax purposes.

18
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA

The following summary consolidated financial data of the Company is derived
from the unaudited financial statements of the Company as of and for the nine
month periods ended September 30, 1997 and 1996, and from the audited
financial statements of the Company as of and for the five years ended
December 31, 1996. The following summary consolidated financial data of the
Company should be read in connection with the consolidated financial
statements of the Company and the notes thereto and the information in
Management's Discussion and Analysis of Financial Condition and Results of
Operations.

<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------ ----------------------------------------------
1997 1996(1) 1996(1) 1995(2) 1994(3) 1993(3) 1992(3)
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
($ IN 000'S)
Interest income........ $ 12,007 $ 10,476 $ 14,390 $ 9,535 $ 5,387 $ 3,995 $ 3,344
Interest expense....... 4,290 3,962 5,362 3,678 1,488 1,124 978
-------- -------- -------- -------- -------- ------- -------
Net interest income.... 7,717 6,514 9,028 5,857 3,899 2,871 2,366
Provision for credit
losses................ 295 90 135 60 107 91 300
-------- -------- -------- -------- -------- ------- -------
Net interest income af-
ter provision for
credit losses......... 7,422 6,424 8,893 5,797 3,792 2,781 2,067
Noninterest income..... 1,765 1,355 1,877 1,419 1,160 1,182 784
Noninterest expense.... 6,781 6,052 8,135 5,878 4,462 3,592 2,835
-------- -------- -------- -------- -------- ------- -------
Income before income
taxes................. 2,406 1,727 2,636 1,338 490 371 16
Income taxes........... 875 594 938 451 17 0 0
-------- -------- -------- -------- -------- ------- -------
Net income............. $ 1,531 $ 1,133 $ 1,698 $ 887 $ 473 $ 371 $ 16
======== ======== ======== ======== ======== ======= =======
COMMON SHARE DATA:(4)
Net income............. $ 0.27 $ 0.22 $ 0.32 $ 0.27 $ 0.20 $ 0.19 $ 0.00
Book value............. $ 3.62 $ 3.24 $ 3.35 $ 2.94 $ 2.65 $ 2.32 $ 2.05
Tangible book val-
ue(5)................. $ 2.57 $ 2.13 $ 2.26 $ 2.18 $ 1.83 $ 2.13 $ 1.84
Weighted average common
shares outstanding (in
000's)................ 5,751 5,263 5,389 3,279 2,394 2,002 1,952
Period end shares out-
standing (in 000's)... 5,752 5,748 5,748 3,506 3,041 2,273 1,981
BALANCE SHEET DATA:
($ IN 000'S)
Total assets........... $176,894 $160,166 $176,439 $121,339 $102,294 $49,036 $30,964
Insurance premium fi-
nance loans, net...... 44,429 33,933 38,224 21,905 20,497 14,209 7,051
Other loans, net....... 69,961 62,879 64,928 45,197 44,167 17,417 12,442
Allowance for credit
losses................ 1,367 1,292 1,285 703 698 401 325
Total deposits......... 154,999 152,281 155,690 109,599 92,027 43,596 26,840
Shareholders' equity... $ 20,806 $ 18,603 $ 19,231 $ 10,295 $ 8,066 $ 5,281 $ 4,058
PERFORMANCE DATA:(4)
Return on average total
assets................ 1.2% 0.9% 1.0% 0.8% 0.8% 0.8% 0.1%
Return on average
shareholders' equity.. 10.8 9.5 9.8 9.5 7.4 8.7 0.4
Net interest mar-
gin(6)................ 6.5 6.1 6.2 6.1 7.1 7.0 8.7
Efficiency ratio(7).... 68.3 74.6 71.8 78.4 87.5 87.9 89.2
Net loans to deposits.. 72.9 62.7 65.4 60.6 70.3 72.5 72.6
ASSET QUALITY RATIOS:(4)
Nonperforming assets to
total assets.......... 0.8% 0.4% 0.6% 0.1% 0.2% 0.3% 0.7%
Nonperforming loans to
total loans........... 0.2 0.3 0.2 0.1 0.2 0.3 0.8
Net loan charge-offs to
average loans......... 0.2 0.1 0.2 0.1 0.4 0.3 1.6
Allowance for credit
losses to total
loans................. 1.2 1.2 1.2 1.0 1.1 1.3 1.7
Allowance for credit
losses to
nonperforming loans... 576.8 482.4 502.5 996.1 574.8 425.8 201.1
CAPITAL RATIOS:
Tier I risk-based capi-
tal................... 11.9% 11.1% 11.1% 10.8% 10.1% 11.4% 14.4%
Total risk-based capi-
tal................... 13.1 12.3 12.3 11.7 11.2 12.6 15.7
Leverage............... 8.7 7.4 7.0 6.9 5.6 10.0 11.9
</TABLE>
- --------
(1) In February, 1996, the Company acquired First Midlothian Corporation,
Midlothian, Texas. In March, 1996, the Company acquired certain assets and
assumed certain liabilities of Providers Funding Corporation, Dallas,
Texas. The acquisitions were accounted for as purchase transactions.

19
<PAGE>

(2) In September, 1995, the Company acquired certain assets and assumed
certain liabilities of a branch of another bank located in Waxahachie,
Texas. This acquisition was accounted for as a purchase transaction.
(3) In 1994, the Company acquired The Farmers Guaranty State Bank of Kennard,
Kennard, Texas, and the First National Bank, Whitesboro, Texas. During
1994, the Company had no effective tax rate as it utilized a net operating
loss carryforward. The Company returned to paying federal income taxes at
an effective rate of 34% during 1995. As a result, net income for the
years ended December 31, 1995 and 1996 may be more indicative of operating
trends in the future. Conversely, earnings before income taxes may be a
more useful comparison when looking at results of operations in 1994 and
prior years. In 1993, the Company acquired 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. All these acquisitions were accounted for as purchase
transactions. The information provided for 1992 has been restated to
reflect a one for ten reverse stock split in June 1993.
(4) All interim periods have been annualized.
(5) Tangible book value is the book value per share after deducting intangible
assets such as goodwill.
(6) The net interest margin represents the difference between the average
yield on interest-earning assets and the average rate on interest-bearing
liabilities.
(7) The efficiency ratio is non-interest expenses (excluding amortization of
intangibles), divided by the sum of net interest income plus non-interest
income, excluding net gains (losses) on dispositions of investment
securities and certain assets.

20
<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, 1997 and 1996 and the three years ended December 31, 1996. The
discussion should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this prospectus.

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. As of September 30, 1997, the Company had total
assets of $176,893,509, net loans of $113,023,938, total deposits of
$154,999,319, and total shareholders' equity of $20,806,358. As of December
31, 1996 the Company had total assets of $176,439,310, net loans of
$101,866,914, total deposits of $155,690,341, and total shareholders' equity
of $19,230,552. The Company reported net income of $1,531,089 for the nine
months ended September 30, 1997 compared with net income of $1,133,217 for the
nine months ended September 30, 1996, as a result of internal loan growth
within its niche products of insurance premium financing and medical claims
factoring. The Company reported net income of $1,697,987 for the year ended
December 31, 1996 compared with net income of $886,886 for the year ended
December 31, 1995 as a result of internal loan growth within the same niche
products and its acquisition of a community bank and a factoring company.

RESULTS OF OPERATIONS

NET EARNINGS

Net earnings were $1,531,089 or $0.27 per share for the nine months ended
September 30, 1997, compared with net earnings of $1,133,217 or $0.22 per
share for the nine months ended September 30, 1996, an increase of $397,872 or
35%. Factors contributing to the increase in earnings in 1997 compared with
1996 include an increase in net interest income, loan growth in the Company's
niche lending products, including insurance premium financing and medical
claims factoring, and the growth of noninterest income mainly as a result of
the acquisitions of First Midlothian Corporation, Midlothian, Texas (the
"First Midlothian Acquisition") and Providers Funding Corporation (the
"Providers Acquisition").

Net earnings were $1,697,987 or $0.32 per share for the year ended December
31, 1996, compared with net earnings of $886,886 or $0.27 per share for the
year ended December 31, 1995, an increase of $811,101 or 91.5%. Factors
contributing to the increase in earnings in 1996 compared with 1995 include an
increase in net interest income, growth in the Company's niche lending
products, and growth of noninterest income mainly as a result of the First
Midlothian and Providers Acquisitions in 1996 and the acquisition of a branch
in Waxahachie by purchasing certain assets from, and assuming certain
liabilities of, another bank ("the Waxahachie Acquisition") in 1995.

Net earnings were $886,886 for 1995 or $0.27 per share, compared with net
earnings of $472,760 for 1994 or $0.20 per share. The 87.6% increase in
earnings in 1995, compared with 1994, was attributable to an increase in net
interest income resulting from improved asset quality, growth in the Company's
niche lending products and increase in noninterest income resulting from the
acquisitions during 1994 of The Farmers Guaranty State Bank of Kennard,
Kennard, Texas (the "Kennard Acquisition") and First National Bank,
Whitesboro, Texas (the "Whitesboro Acquisition").

NET INTEREST INCOME

Net interest income before provision for credit losses 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-

21
<PAGE>

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 claims receivables factoring and federal funds sold.

Net interest income before provision for credit losses for the nine months
ended September 30, 1997 was $7,717,359 million, an increase of 18.5%, or
$1,203,230 million, from net interest income for the nine months ended
September 30, 1996. The increase was due primarily to growth in the Company's
niche lending products and the First Midlothian and Providers Acquisitions.

Net interest income before provision for credit losses was $9,028,673
million for the year ended December 31, 1996, an increase of $3,171,371
million or 54.1% compared with the year ended December 31, 1995, resulting
principally from an increase in average interest-earning assets from
$96,321,408 million to $145,875,221 million, a significant portion of which
was comprised of loans (typically the highest yielding asset). The increase in
average interest-earning assets was offset by an increase in average interest-
bearing liabilities from $84,423,369 million to $125,542,397 million. In
addition, the Company experienced an increase in the net interest spread of 10
basis points from 6.1% to 6.2% for the years ended December 31, 1995 and 1996,
respectively. The foregoing increase resulted principally from the fact that
the cost of interest-bearing liabilities decreased by 10 basis points while
the yield on interest-earning assets remained unchanged at 9.9% for 1996 and
1995. Net interest income was $5,857,302 million for 1995, an increase of
$1,956,024 million or 50.2% compared with net interest income of $3,899,278
million for 1994. The Company's average total interest-earning assets
increased from approximately $54,777,881 million for 1994 to $96,321,408
million for 1995, representing a 75.7% increase resulting principally from an
increase in loans. The net interest margin of 6.1% for 1995 decreased 100
basis points from 7.1% for 1994 due to the decrease in the average loan to
deposit ratio in 1995. The average loan to deposit ratio for 1995 was 70.6% as
compared with 73.9% for 1994.

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 net yield on total
interest-earning assets increased to 10.2% for the nine months ended September
30, 1997, from 9.8% for the nine months ended September 30, 1996. The net
yield on total interest-earning assets remained unchanged at 9.9% from 1995 to
1996 and resulted principally from an increase in the average yield on all
loan products. The yield on the investment portfolio and federal funds sold
decreased from 1995 to 1996 as a result of changes in interest rates within
the marketplace. The yield on loans increased to 12.1% for the year ended
December 31, 1996 from 11.2% for the year ended December 31, 1995. The cost of
interest-bearing liabilities remained unchanged at 4.3% for the nine months
ended September 30, 1997 compared to the nine months ended September 30, 1996.
The cost of interest-bearing liabilities decreased to 4.3% for the year ended
December 31, 1996 from 4.4% for the year ended December 31, 1995. The
following tables set 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 or earned for the
nine months ended September 30, 1997 and 1996, and for the three years ended
December 31, 1996, 1995 and 1994. The tables also set forth the average rate
earned on all interest-earning assets, the average rate paid on all interest-
bearing liabilities, the net interest income and the net yield on average
interest-earning assets and interest-bearing liabilities for the same periods.

22
<PAGE>

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 NINE MONTHS ENDED SEPTEMBER 30, 1996
-----------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ ANNUALIZED AVERAGE INCOME/ ANNUALIZED
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
--------------- -------------- --------------------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
U.S. Treasury and
agency securities and
due from time(1)..... $ 37,585,012 $ 1,811,503 6.4% $ 37,985,065 $ 1,918,279 6.7%
Federal funds sold.... 8,613,801 323,455 5.0 21,114,785 875,221 5.5
Loans(2)(3)........... 112,568,699 9,872,455 11.7 85,351,415 7,682,259 12.0
Allowance for credit
losses............... (1,319,124) NA NA (1,119,472) NA N/A
--------------- -------------- ------- --------------- -------------- -------
Total interest-earning
assets................. $157,448,388 $ 12,007,413 10.2% $143,331,793 $10,475,759 9.8%
=============== ============== ======= =============== ============== =======
Cash and due from
banks................ 5,668,715 6,181,557
Premises and equip-
ment................. 3,882,628 3,742,163
Accrued interest re-
ceivable............. 972,556 1,012,359
Other assets.......... 7,456,061 5,897,982
--------------- ---------------
Total assets.......... $ 175,428,348 $ 160,165,854
=============== ===============
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Interest-bearing liabil-
ities:
Interest-bearing
demand deposits...... $ 39,227,467 $ 797,744 2.7% $ 34,995,294 $ 632,228 2.4%
Savings deposits...... 7,737,747 139,649 2.4 8,274,505 128,407 2.1
Time deposits......... 85,717,079 3,352,661 5.2 79,248,375 3,194,391 5.4
Notes payable......... 0 0 0 80,144 6.612 11.0
--------------- -------------- ------- --------------- -------------- -------
Total interest-bearing
liabilities............ $ 132,682,293 $ 4,290,054 4.3% $ 122,598,318 $ 3,961,638 4.3%
=============== ============== ======= =============== ============== =======
Noninterest-bearing
deposits............. 22,317,694 20,061,217
Accrued interest
payable and other
liabilities.......... 1,504,300 802,798
--------------- ---------------
Total liabilities....... 156,504,287 143,462,333
Shareholders' equity.... 18,924,061 16,703,521
--------------- ---------------
Total liabilities and
shareholders' equity... $ 175,428,348 $ 160,165,854
=============== ===============
Net interest income..... $ 7,717,359 $ 6,514,121
============== ==============
Net interest spread..... 5.9% 5.5%
======= =======
Net interest margin..... 6.5% 6.1%
======= =======
</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.

23
<PAGE>

AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994
--------------------------------- -------------------------------- -------------------------------
INTEREST INTEREST INTEREST
AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE AVERAGE INCOME/ AVERAGE
BALANCE EXPENSE RATE BALANCE EXPENSES RATE BALANCE EXPENSE RATE
------------ ----------- ------- ------------ ---------- ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning
assets:
Interest-bearing
deposits............. $ 531,688 $ 42,117 7.9% $ 1,388,817 $ 101,408 7.3% $ 981,184 $ 68,173 6.9%
U.S. Treasury and
agency securities and
due from time(1)..... 38,229,219 2,489,906 6.5 16,659,034 1,173,748 7.1 7,648,411 362,078 4.7
Federal funds sold.... 19,291,373 1,078,618 5.6 11,102,928 657,809 5.9 6,456,165 302,621 4.7
Loans(2)(3)........... 88,985,654 10,779,721 12.1 67,884,258 7,601,816 11.2 40,136,926 4,654,137 11.6
Allowance for credit
losses............... (1,162,713) N/A N/A (713,629) N/A N/A (444,805) N/A N/A
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Total interest-earning
assets................ $145,875,221 $14,390,362 9.9% $ 96,321,408 $9,534,781 9.9% $54,777,881 $5,387,009 9.8%
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Cash and due from
banks................ 6,231,693 4,637,833 3,249,783
Premises and
equipment............ 3,806,385 2,495,279 1,520,404
Accrued interest
receivable........... 1,010,323 646,012 205,770
Other real estate
owned................ 585,587 77,197 51,043
Other assets.......... 6,965,368 3,076,316 1,357,765
------------ ------------ -----------
Total assets.......... $164,474,577 $107,254,045 $61,162,646
============ ============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Interest-bearing
liabilities:
Interest-bearing
demand deposits...... $ 36,910,314 $ 880,776 2.4% $ 23,106,404 $ 678,303 2.9% $14,680,300 $ 259,113 1.8%
Savings deposits...... 8,174,212 176,108 2.1 5,329,462 127,211 2.4 3,104,155 94,010 3.0
Time deposits......... 80,397,763 4,298,193 5.3 54,873,148 2,749,386 5.0 28,530,396 1,123,533 4.0
Notes payable......... 60,108 6,612 11.0 1,114,355 122,579 11.0 146,756 11,075 7.5
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Total interest-bearing
liabilities........... $125,542,397 $ 5,361,689 4.3% $ 84,423,369 $3,677,479 4.4% $46,461,607 $1,487,731 3.2%
------------ ----------- ---- ------------ ---------- ---- ----------- ---------- ----
Noninterest-bearing
deposits............. 20,089,712 12,889,281 7,996,860
Other liabilities..... 1,564,827 630,055 281,660
------------ ------------ -----------
Total liabilities...... 147,196,936 97,942,705 54,740,127
Shareholders' equity... 17,277,641 9,311,340 6,422,519
------------ ------------ -----------
Total liabilities and
shareholders' equity.. $164,474,577 $107,254,045 $61,162,646
============ ============ ===========
Net interest income.... $ 9,028,673 $5,857,302 $3,899,278
=========== ========== ==========
Net interest spread.... 5.6% 5.5% 6.6%
==== ==== ====
Net interest margin.... 6.2% 6.1% 7.1%
==== ==== ====
</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.

24
<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>
NINE MONTHS ENDED YEARS ENDED YEARS ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
COMPARED WITH COMPARED WITH COMPARED WITH
SEPTEMBER 30, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- --------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
VOLUME(1) RATE CHANGES VOLUME(1) RATE CHANGES VOLUME(1) RATE CHANGES
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest-bearing
deposits in
financial
institutions... $ (5,013) $ (1,454) $ (6,467) $ (68,743) $ 9,452 $ (59,291) $ 29,607 $ 3,628 $ 33,235
U.S. Treasury
and agency
securities..... (15,550) (84,759) (100,309) 1,397,764 (81,606) 1,316,158 573,825 237,845 811,670
Federal funds
sold........... (476,107) (75,659) (551,766) 455,576 (34,767) 420,809 259,876 95,312 355,188
Loans........... 2,402,749 (212,553) 2,190,196 2,625,216 552,689 3,177,905 3,112,412 (164,733) 2,947,679
---------- --------- ---------- ---------- -------- ---------- ---------- --------- ----------
Total interest
income......... 1,906,079 (374,425) 1,531,654 4,409,813 445,768 4,855,581 3,975,720 172,052 4,147,772
---------- --------- ---------- ---------- -------- ---------- ---------- --------- ----------
Interest
Expense:
Interest-bearing
demand
deposits....... 81,171 84,345 165,516 294,815 (92,342) 202,473 194,483 224,707 419,190
Savings
deposits....... (7,432) 18,674 11,242 59,812 (10,915) 48,897 47,128 (13,927) 33,201
Time deposits... 248,598 (90,328) 158,270 1,353,797 195,010 1,548,807 1,255,544 370,309 1,625,853
Federal funds
purchased and
other borrowed
funds.......... (6,612) 0 (6,612) (115,969) 2 (115,967) 104,267 7,237 111,504
---------- --------- ---------- ---------- -------- ---------- ---------- --------- ----------
Total interest
expense........ 315,725 12,691 328,416 1,592,455 91,755 1,684,210 1,601,422 588,326 2,189,748
---------- --------- ---------- ---------- -------- ---------- ---------- --------- ----------
Net interest
margin......... $1,590,354 $(387,116) $1,203,238 $2,817,358 $354,013 $3,171,371 $2,374,298 $(416,274) $1,958,024
========== ========= ========== ========== ======== ========== ========== ========= ==========
</TABLE>
- --------
(1) Nonaccrual loans are included in the average volumes used in calculating
this table.
(2) Changes attributable to both rate and volume which can be segregated are
allocated to the respective categories.
(3) Loan fees and out-of-period items and adjustments are not included.
(4) Interest income on tax exempt securities does not reflect the tax
equivalent yield.

PROVISION FOR CREDIT LOSSES

The amount of the provision for credit 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. While losses on traditional community bank loans
typically arise out of the borrower's failure to repay the loan, the
borrower's failure to repay an IPF loan generally results in the cancellation
of the underlying insurance policy and the return of the unearned premium to
the lender. Losses on IPF loans typically arise out of the insolvency of an
insurance company, or because loans have been obtained on fictitious policies.
Losses on IPF loans can also arise if for any reason the IPF lender is unable
to obtain prompt cancellation of the underlying insurance policy, so that the
premium continues to be earned and reduces the amount ultimately refunded to
the lender. The Company recorded a $295,000 provision for credit losses during
the nine months ended September 30, 1997 compared with $90,000 during the nine
months ended September 30, 1996 and a $135,000 provision for credit losses
during the year ended December 31, 1996 compared with

25
<PAGE>

$60,000 in 1995, and $106,899 in 1994. The 327.8% increase in the provision
during the nine months ended September 30, 1997, when compared with the same
period in 1996, was necessitated by the loan growth within insurance premium
financing and medical claims factoring and did not increase the Company's
ratio of allowance for credit losses to total loans. The 225% increase in the
1996 provision when compared with 1995 was necessitated by the growth in the
loan portfolio. The 43.9% decrease in the 1995 provision when compared with
1994 was due to an improvement in the Company's ratio of net charge-offs to
average loans, which partially reflected recoveries of previous losses.

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 nine months ended
September 30, 1997 was $1,764,705, an increase of $409,929 or 30.3% compared
with noninterest income of $1,354,776 for the nine months ended September 30,
1996. The increase in noninterest income is attributed to growth in IPF loans,
resulting in growth in related fees, i.e., insufficient funds check charges on
IPF loan payments and late charges on IPF loan payments. Noninterest income
for the year ended December 31, 1996 was $1,877,454, an increase of $458,387
or 32.3% compared with noninterest income of $1,419,067 for the year ended
December 31, 1995. The increase in noninterest income is attributed to the
First Midlothian Acquisition, as well as an increase in loans outstanding. The
First Midlothian Acquisition increased the number and balance of loans
outstanding along with the number and balance of noninterest and interest-
bearing deposit accounts, which resulted in increased noninterest income.

Noninterest income for the year ended December 31, 1995 was $1,419,067, an
increase of $259,060 or 22.3% compared with noninterest income of $1,160,007
for the year ended December 31, 1994. The increase in noninterest income is
attributed to the Kennard and Whitesboro Acquisitions during 1994, and the
Waxahachie Acquisition during 1995, as well as an increase in loans
outstanding. The acquisition of the three locations increased the number and
balance of loans outstanding and increased the number and balance of
noninterest and interest-bearing deposit accounts, which resulted in increased
noninterest income.

The following table sets forth the various categories of noninterest income
for the nine months ended September 30, 1997 and 1996 and the years ended
December 31, 1996, 1995 and 1994.

<TABLE>
<CAPTION>
NONINTEREST INCOME
------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
NONINTEREST INCOME
Insufficient funds
charges................ $ 419,905 $ 332,576 $ 460,156 $ 291,954 $ 263,315
Late fee charges........ 796,697 462,993 681,644 501,960 426,476
Service charges......... 329,695 373,108 372,756 220,086 163,336
Collection fees......... 120,528 98,200 135,533 115,478 96,162
Credit life insurance... 9,298 42,739 57,509 75,435 44,402
Secured credit card an-
nual fee............... 1,428 3,544 4,447 6,561 15,905
Other................... 87,154 41,616 165,409 207,593 150,411
---------- ---------- ---------- ---------- ----------
Total noninterest in-
come................. $1,764,705 $1,354,776 $1,877,454 $1,419,067 $1,160,007
========== ========== ========== ========== ==========
</TABLE>

NONINTEREST EXPENSE

Noninterest expense was $6,781,058 for the nine months ended September 30,
1997, an increase of $729,350 or 12.1% compared with noninterest expense of
$6,051,708 for the nine months ended September 30, 1996. This increase
resulted principally from additional staffing to support the loan growth
within insurance premium financing and medical claims factoring.

26
<PAGE>

Noninterest expense was $8,135,012 for the year ended December 31, 1996, an
increase of $2,256,460 or 38.4% compared with noninterest expense of
$5,878,552 for the year ended December 31, 1995. This increase resulted
principally from the First Midlothian and Providers Acquisitions. These
acquisitions resulted in additional personnel, occupancy and office expenses.
The amortization of intangibles increased in 1996 as a result of the addition
of goodwill and costs in the amount of $106,426 associated with the First
Midlothian Acquisition and the addition of goodwill and costs in the amount of
$58,021 associated with the Providers Acquisition.

Noninterest expense was $5,878,552 for the year ended December 31, 1995, an
increase of $1,416,614 or 31.7% compared with noninterest expense of
$4,461,938 for the year ended December 31, 1994. This increase resulted
principally from the Kennard and Whitesboro Acquisitions during 1994, and the
Waxahachie Acquisition during 1995. The addition of the three locations
resulted in additional personnel, occupancy and office expenses. The
amortization of intangibles increased in 1995 as a result of the addition of
$296,164 in goodwill and costs associated with the Kennard Acquisition, the
addition of $1,886,682 in goodwill and costs associated with the Whitesboro
Acquisition, and the addition of $148,772 in goodwill and costs associated
with the Waxahachie Acquisition. Deposits in the Bank are insured by the Bank
Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC").
In 1996, the Bank paid the minimum FDIC assessment of $2,000.

The Bank anticipates that it will pay a Financing Corporation ("FICO")
assessment of approximately 1.3 basis points on BIF-insured deposits in 1997,
to assist in paying interest on FICO bonds, which financed the resolution of
the thrift industry problems in the last decade.

<TABLE>
<CAPTION>
NONINTEREST EXPENSE
------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Salaries and employee
benefits............... $3,392,296 $3,153,119 $4,244,874 $2,923,118 $2,201,188
Occupancy and equip-
ment................... 1,123,513 933,008 1,244,551 907,286 669,936
General and administra-
tive expense:
Professional fees..... 422,824 323,879 467,662 416,006 315,434
Office supplies....... 206,983 294,007 386,114 253,542 201,028
Travel and
entertainment........ 98,311 67,086 96,577 68,987 60,162
Telephone............. 242,159 207,955 283,564 166,858 128,407
Advertising........... 101,373 98,404 174,335 104,499 54,683
Postage............... 212,157 187,410 299,388 230,807 133,887
Amortization of
intangibles.......... 390,428 242,908 359,717 184,332 51,201
Dues and
subscriptions........ 51,116 34,534 70,559 49,331 54,609
Insurance............. 71,300 116,259 167,245 130,335 97,473
Credit cards.......... 5,249 5,374 7,472 19,868 59,573
Bank service charge... 86,427 85,666 110,881 57,196 25,808
FDIC assessment....... 13,737 3,553 3,553 123,310 133,112
Credit reports........ 33,555 17,961 22,850 40,105 17,714
Other................. 329,630 280,585 195,670 202,972 257,723
---------- ---------- ---------- ---------- ----------
Total general and admin-
istrative.............. 2,265,249 1,965,581 2,645,587 2,048,148 1,590,814
---------- ---------- ---------- ---------- ----------
Total noninterest ex-
pense.................. $6,781,058 $6,051,708 $8,135,012 $5,878,552 $4,461,938
========== ========== ========== ========== ==========
</TABLE>

INCOME TAXES

The Company and the Bank will file a consolidated tax return for 1997. The
Company estimates that its effective tax rate for 1997 will be approximately
36% and has recognized income tax expense of $874,917 on

27
<PAGE>

income before taxes of $2,406,006 for the nine months ended September 30,
1997, as compared with income tax expense of $593,972 on income before taxes
of $1,727,189 for the nine months ended September 30, 1996. The Company's
effective tax rates in 1996, 1995 and 1994, respectively, were 35.6%, 33.7%
and (0.1)%.

INTEREST RATE SENSITIVITY MANAGEMENT

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.

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. If in a given period more assets are subject to
repricing than liabilities, the balance sheet is asset sensitive. As interest
rates rise, an asset sensitive position should 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 should have an adverse effect on net interest income. However,
the theory of asset/liability sensitivity does not take into account other
factors which affect changes in net interest income, including changes in
volume of rate sensitive assets and liabilities.

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 Bank's interest-earning assets
and interest-bearing liabilities at December 31, 1996:

INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
3 MONTHS 6 MONTHS 1 YEAR
3 MONTHS TO TO TO OVER
OR LESS 6 MONTHS 1 YEAR 5 YEARS 5 YEARS TOTAL
------------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-earning
deposits in financial
institutions.......... $ 95,265 $ 95,577 $ 0 $ 95,000 $ 0 $ 285,842
Investment securities.. 3,221,113 2,017,285 5,146,741 18,714,657 9,682,747 38,782,543
Federal funds sold..... 16,772,000 0 0 0 0 16,772,000
Loans.................. 41,641,731 20,446,883 16,949,696 19,063,757 5,049,621 103,151,688
------------ ----------- ------------ ----------- ----------- ------------
Interest-earning
assets................. $ 61,730,109 $22,559,745 $ 22,096,437 $37,873,414 $14,732,368 $158,992,073
------------ ----------- ------------ ----------- ----------- ------------
Interest-bearing
liabilities:
Interest-bearing demand
deposits.............. $ 40,874,278 $ 0 $ 0 $ 0 $ 0 $ 40,874,278
Savings deposits....... 7,493,087 0 0 0 0 7,493,087
Time deposits.......... 27,123,281 16,076,329 31,946,685 8,297,937 0 83,444,232
------------ ----------- ------------ ----------- ----------- ------------
Interest-bearing
liabilities............ $ 75,490,646 $16,076,329 $ 31,946,685 $ 8,297,937 $ 0 $131,811,597
------------ ----------- ------------ ----------- ----------- ------------
Period interest
sensitivity gap........ $(13,760,537) $ 6,483,416 $ (9,850,248) $29,575,477 $14,732,368 $ 27,180,476
============ =========== ============ =========== =========== ============
Cumulative interest
sensitivity gap........ $(13,760,537) $(7,277,121) $(17,127,369) $12,448,108 $27,180,476 $ 27,180,476
============ =========== ============ =========== =========== ============
Cumulative gap as a
percent of total
assets................. (7.8)% (4.1)% (9.7)% 7.0% 15.4% 15.4%
Cumulative interest-
sensitive assets as
percent of cumulative
interest-sensitive
liabilities............ 81.8% 92.1% 86.1% 109.4% 120.6% 120.6%
</TABLE>

28
<PAGE>

The cumulative rate-sensitive gap position at one year was a liability-
sensitive position of $17.1 million, or negative 9.7%.

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. Accordingly, the Company believes it will not
experience a significant impact from changes in interest rates. As of
September 30, 1997 and December 31, 1996, the Company was holding $563,339 and
$536,340 respectively, 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.

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, 1997, and at December 31, 1996, 1995,
1994, 1993 and 1992:

LOAN PORTFOLIO ANALYSIS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------------ ----------- ----------- ----------- -----------
AGGREGATE PRINCIPAL AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Loans
Insurance premium
financing............. $ 46,111,636 $ 39,168,604 $22,409,356 $20,931,642 $14,518,680 $ 7,267,889
Commercial loans....... 22,715,798 22,745,139 16,301,840 13,205,698 5,204,120 4,142,926
Installment loans...... 10,316,265 12,631,520 10,645,406 12,029,243 9,016,179 7,386,598
Real estate loans...... 27,255,527 24,774,167 16,281,558 17,297,636 1,878,030 809,215
Medical claims
receivable............ 10,500,327 6,377,061 3,353,540 2,705,974 2,379,482 1,094,461
------------ ------------ ----------- ----------- ----------- -----------
Total loans............ 116,899,553 105,696,491 68,991,700 66,170,193 32,996,491 20,701,089
Less: Unearned
interest.............. (2,508,953) (2,544,803) (1,889,461) (1,506,843) (1,370,229) (1,207,469)
Allowance for credit
losses................ (1,366,662) (1,284,774) (702,927) (697,948) (401,227) (324,728)
------------ ------------ ----------- ----------- ----------- -----------
Total net loans...... $113,023,938 $101,866,914 $66,399,312 $63,965,402 $31,225,035 $19,168,892
============ ============ =========== =========== =========== ===========
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF LOAN PORTFOLIO
<S> <C> <C> <C> <C> <C> <C>
Loans
Insurance premium financing.......... 39.5% 37.1% 32.5% 31.6% 44.0% 35.1%
Commercial loans..................... 19.4 21.5 23.6 20.0 15.8 20.0
Installment loans.................... 8.8 12.0 15.4 18.2 27.3 35.7
Real estate loans.................... 23.3 23.4 23.6 26.1 5.7 3.9
Medical claims receivable............ 9.0 6.0 4.9 4.1 7.2 5.3
----- ----- ----- ----- ----- -----
Total.............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>

29
<PAGE>

The concentration of IPF loans may expose the Company to greater risk of
loss than would a more diversified loan portfolio. See "Risk Factors--
Insurance Premium Financing Concentration" and "Nonperforming Assets." As of
September 30, 1997, the Company had approximately $4.3 million of medical
claims receivables which had been outstanding 120 days or more from the date
of funding by the Company, or 41% of its total medical claims receivables. See
"Risk Factors--Medical Claims Factoring" and "Risk Factors--Nonperforming
Assets."

As of September 30, 1997, December 31, 1996 and December 31, 1995
commitments of the Company under standby letters of credit and unused lines of
credit totaled approximately $6,647,000, $3,976,000 and $3,698,000,
respectively. The increase of $2,671,000 from December 31, 1996 to September
30, 1997 is due primarily to an increase in interim construction loans.

Stated loan maturities (including floating rate loans reset to market
interest rates) of the total loan portfolio, net of unearned income, as of
December 31, 1996 were:

STATED LOAN MATURITIES

<TABLE>
<CAPTION>
ONE AFTER ONE AFTER
YEAR YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Stated Loan
Maturities/Floating Rates
Reset:
Insurance premium financing.. $38,224,213 $ 0 $ 0 $ 38,224,213
Commercial and real estate
loans....................... 34,480,091 $19,063,757 $5,049,621 58,593,469
Medical claims receivable.... 6,334,006 0 0 6,334,006
----------- ----------- ---------- ------------
Total...................... $79,038,310 $19,063,757 $5,049,621 $103,151,688
=========== =========== ========== ============

Rate sensitivities of the total loan portfolio before unearned income as of
December 31, 1996 were as follows:

LOAN REPRICING

<CAPTION>
ONE AFTER ONE AFTER
YEAR YEAR THROUGH FIVE
OR LESS FIVE YEARS YEARS TOTAL
----------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Fixed Rate................... $54,623,671 $18,259,465 $5,049,621 $ 77,932,757
Variable Rate................ 24,405,104 669,971 0 25,075,075
Nonaccrual................... 9,535 134,321 0 143,856
----------- ----------- ---------- ------------
Total...................... $79,038,310 $19,063,757 $5,049,621 $103,151,688
=========== =========== ========== ============
</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

30
<PAGE>

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 Company 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.

As of September 30, 1997, the Company had approximately $4.3 million of
medical claims receivables outstanding 120 days or more from the date of
funding by the Company, or 41% of its total medical claims receivables. At
December 31, 1996 the Company had approximately $1.1 million of medical claims
receivables, 19% of total medical claims receivables, outstanding 120 days or
more. It has been the Company's experience that, historically, approximately
80% of its medical claims receivables were collected within 60 to 120 days.
Therefore, approximately 20% of such receivables would remain outstanding
after 120 days. The Company believes that the increase in the proportion of
medical claims receivables outstanding after 120 days resulted primarily
because the Company did not increase the staffing for collections commensurate
with the growth in medical claims receivables. While the Company believes that
substantially all of these claims ultimately will be collected from insurance
companies or the federal government, this development represents a significant
increase, from December 31, 1996, in the amount of medical claims receivables
outstanding over 120 days, and there can be no assurance of ultimate
collectibility. As with IPF loans, losses or difficulties encountered by any
one medical claims payor, or fraudulent activity by any one medical claims
payor or medical services provider, could have a material adverse effect on
the Company. In addition, financial difficulties or regulatory or structural
changes affecting medical services providers or medical claims payors
generally may have a material adverse effect on the Company.

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, 1997, and December 31, 1996 and 1995:

<TABLE>
<CAPTION>
NONPERFORMING ASSETS
--------------------------------
SEPTEMBER 30, DECEMBER 31,
------------- ------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
Nonaccrual loans............................ $ 125,898 $143,856 $ 31,000
Loans 90 days past due and still accruing
interest................................... 110,543 111,797 39,568
Total nonperforming loans................... 236,441 255,653 70,568
Other real estate owned and other collateral
acquired................................... 130,992 738,198 85,528
Other assets(1)............................. 1,088,497 0 0
---------- -------- --------
Total nonperforming assets.................. $1,455,930 $993,851 $156,096
========== ======== ========
Nonperforming assets to total assets........ 0.8% 0.6% 0.1%
Nonperforming loans to total loans.......... 0.2% 0.2% 0.1%
</TABLE>
- --------
(1) In June of 1997, the Company learned that certain IPF agreements on which
it had made approximately $1.1 million in loans may be fictitious or
forged. Of this amount, $850,000 originated through one insurance agency.
The remainder originated through a second insurance agency. The Company
believes that these are two isolated and unrelated instances of possible
insurance agency fraud. The $1.1 million has been reclassified from loans
to other assets. This amount will remain in a nonaccrual account until
collected. The Company has commenced legal action against the parties
believed to be responsible. The matters are under continuing investigation
by state and federal authorities. Management believes that it has
meritorious claims against not only the agents and agencies believed
responsible, but also against the insurance underwriters and against the
fidelity bond carriers for various entities. The Company currently
believes that substantially all amounts involved ultimately will be
collected. The Company has not established a reserve regarding these
claims. See "Legal Proceedings."

31
<PAGE>

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 Company on a case-by-case
basis. The Company 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.

The following table sets forth a summary of other real estate owned and
other collateral acquired as of September 30, 1997:

OTHER REAL ESTATE OWNED & OTHER COLLATERAL ACQUIRED

<TABLE>
<CAPTION>
NUMBER OF NET BOOK
DESCRIPTION PARCELS/AUTOS CARRYING VALUE
- ----------- ------------- --------------
<S> <C> <C>
Vacant land or unsold lots......................... 3 $107,555
Repossessed automobiles............................ 8 $ 23,437
--------
Total............................................ $130,992
========
</TABLE>

ALLOWANCE FOR CREDIT 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 collaterialized loan,
the quality of the collateral for such loan. The allowance for credit 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 credit 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 allowance for credit 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 credit losses for
the nine months ended September 30, 1997 and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992:

ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning balance....... $1,284,744 $ 702,927 $ 697,948 $ 401,227 $ 324,728 $ 343,206
Charge-offs:
Commercial loans....... (50,979) (6,151) (13,151) (41,537) (48,681) (202,777)
Installment loans...... (272,041) (188,419) (104,295) (163,669) (179,713) (287,113)
Real estate loans...... (1,901) (21,185) 0 (5,350) 0 0
Insurance premium
finance............... 0 (939) 0 (1,710) (19,380) (182,423)
Medical claims
factoring............. 0 (12,724) 0 0 0 0
---------- --------- --------- --------- --------- ---------
Total charge-offs.... $ (324,921) $(229,418) $(117,446) $(212,266) $(247,774) $(672,313)
========== ========= ========= ========= ========= =========
</TABLE>

32
<PAGE>

<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Recoveries:
Commercial loans....... $ 5,209 $ 5,067 $ 1,012 $ 15,698 $ 1,412 $ 30,081
Installment loans...... 61,673 43,538 37,366 43,070 88,511 89,005
Real estate loans...... 2,325 10,240 13,288 0 0 0
Insurance premium
finance............... 42,602 2,720 0 2,488 71,790 235,194
Medical claims
factoring............. 0 0 0 0 0 0
------------ ------------ ----------- ----------- ----------- -----------
Total recoveries..... 111,809 61,565 51,666 61,256 161,713 354,280
------------ ------------ ----------- ----------- ----------- -----------
Net charge-offs......... (213,112) (167,853) (65,780) (151,010) (86,061) (318,033)
Bank acquisition(1)..... -- 614,700 10,759 340,832 71,976 --
Provision for credit
losses................. 295,000 135,000 60,000 106,899 90,584 299,555
------------ ------------ ----------- ----------- ----------- -----------
Ending balance.......... $ 1,366,662 $ 1,284,744 $ 702,927 $ 697,948 $ 401,227 $ 324,728
============ ============ =========== =========== =========== ===========
Period end total loans,
net of unearned
interest............... $114,390,600 $103,151,688 $67,102,239 $64,663,350 $31,626,262 $19,493,620
============ ============ =========== =========== =========== ===========
Average loans........... $112,568,699 $ 88,985,654 $67,884,258 $40,136,926 $26,008,833 $20,496,380
============ ============ =========== =========== =========== ===========
Ratio of net charge-offs
to average loans....... 0.2% 0.2% 0.1% 0.4% 0.3% 1.6%
============ ============ =========== =========== =========== ===========
Ratio of provision for
credit losses to
average loans.......... 0.3% 0.2% 0.1% 0.3% 0.4% 1.5%
============ ============ =========== =========== =========== ===========
Ratio of allowance for
credit losses to ending
total loans............ 1.2% 1.2% 1.0% 1.1% 1.3% 1.7%
============ ============ =========== =========== =========== ===========
Ratio of allowance for
credit losses to total
nonperforming loans.... 578.0% 502.5% 996.1% 574.8% 425.8% 201.1%
============ ============ =========== =========== =========== ===========
Ratio of allowance for
credit losses to total
nonperforming assets... 93.9% 129.3% 450.3% 287.5% 311.2% 148.5%
============ ============ =========== =========== =========== ===========
</TABLE>
- --------
(1) Reflects balances of allowances for credit losses acquired in connection
with bank acquisitions.

The following table sets forth an allocation of the allowance for credit
losses among categories as of September 30, 1997, and December 31, 1996 and
1995. The Company believes that any allocation of the allowance for credit
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.

ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------- ---------------------- --------------------
PERCENT OF PERCENT OF PERCENT OF
ALLOWANCE ALLOWANCE ALLOWANCE
AMOUNT BY CATEGORY AMOUNT BY CATEGORY AMOUNT BY CATEGORY
---------- ----------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Insurance premium
financing loans........ $ 318,765 23.3% $ 217,734 17.0% $154,644 22.0%
Medical claims factor-
ing.................... 423,082 30.9% 149,082 11.6% 0 0%
Commercial loans........ 155,183 11.4% 396,031 19.2% 179,246 25.5%
Installment loans....... 249,851 18.3% 397,353 30.9% 222,828 31.7%
Real estate loans....... 219,781 16.1% 273,656 21.3% 146,209 20.8%
---------- ----- ---------- ----- -------- -----
Total................. $1,366,662 100.0% $1,284,774 100.0% $702,927 100.0%
========== ===== ========== ===== ======== =====
</TABLE>

33
<PAGE>

INVESTMENT ACTIVITIES

The investment portfolio, which was 20.8% of the Company's earning asset
base as of September 30, 1997, 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 in its investment portfolio.

As of September 30, 1997, $18.4 million in investment securities were
classified as held-to-maturity and $14.4 million were classified as available-
for-sale. During the nine months ended September 30, 1997, the Company
purchased $6.0 million of available-for-sale securities. During the nine
months ended September 30, 1997, proceeds from the maturity of held-to-
maturity securities were $4.2 million and from the maturity of available-for-
sale securities were $4.9 million. The Company sold $2.9 million in available-
for-sale securities during the nine months ended September 30, 1997.

As of December 31, 1996, $22.6 million in investment securities were
classified as held-to-maturity and $16.2 million were classified as available-
for-sale. On February 29, 1996, the Company's investment portfolio increased
by $21.2 million as a result of the First Midlothian Acquisition. The
securities acquired through the acquisition closely matched the investment
objectives of the Company; therefore, no securities were sold in connection
with the First Midlothian Acquisition. As of December 31, 1996, proceeds from
the maturity of held-to-maturity securities were $15.5 million and the
maturity of available-for-sale securities were $0.9 million. During 1996
purchases of held-to-maturity securities were $3.1 million and purchases of
available-for-sale securities were $7.2 million. No securities were sold
during 1996.

The amortized cost of the held-to-maturity securities was $18.4 million as
compared with their estimated market value of $18.7 million on September 30,
1997. The unrealized gain on the held-to-maturity securities was $271,149. The
securities within the available-for-sale classification had an amortized cost
of $14.3 million and an estimated market value of $14.4 million on September
30, 1997. The unrealized gain in the available-for-sale securities was $44,000
as of September 30, 1997. These unrealized gains are the result of interest
rate movements during 1996 and 1997 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 Company include $385,071 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 $178,268
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, 1997, and December 31, 1996 and 1995:

INVESTMENT PORTFOLIO

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
----------------------- ----------------------- -----------------------
HELD-TO- AVAILABLE- HELD-TO- AVAILABLE- HELD-TO- AVAILABLE-
MATURITY FOR-SALE MATURITY FOR-SALE MATURITY FOR-SALE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes..... $ 0 $ 5,193,124 $ 3,001,104 $ 5,208,904 $ 0 $ 497,969
U.S. Government
agencies............... 13,205,663 7,461,375 14,149,123 9,388,104 8,563,315 8,724,930
State/County/Municipal
securities............. 4,838,724 541,800 5,025,972 403,105 4,730,921 404,257
Mortgage-backed
securities............. 331,725 130,317 385,071 178,268 486,302 219,926
Other investments....... 0 1,042,892 0 1,042,892 0 281,075
----------- ----------- ----------- ----------- ----------- -----------
Total.................. $18,376,112 $14,369,508 $22,561,270 $16,221,273 $13,780,538 $10,128,157
=========== =========== =========== =========== =========== ===========
</TABLE>

34
<PAGE>

INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE

AS OF SEPTEMBER 30, 1997

<TABLE>
<CAPTION>
MATURING OR REPRICING
---------------------------------------------------------
AFTER 1 YEAR BUT AFTER 5 YEARS BUT
WITHIN 1 YEAR WITHIN 5 YEARS WITHIN 10 YEARS AFTER 10 YEARS
------------------- -------------------- ------------------- ----------------
AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD(1) AMOUNT YIELD
---------- -------- ----------- -------- ---------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-Maturity
U.S. Government
agencies............... $ 992,804 6.1% $10,419,674 6.3% $1,793,185 6.9% $ 0
State/County Municipal
securities............. 604,346 5.7% 2,782,634 6.1% 1,451,744 6.2% 0
Mortgage-backed
securities............. 0 0 0 331,725 6.8%
---------- ----------- ---------- ----------
Total.................. $1,597,150 $13,202,308 $3,244,929 $ 331,725
========== =========== ========== ==========
Available-for-Sale
U.S. Treasury notes..... $5,193,124 6.7% $ 0 $ 0 $ 0
U.S. Government
agencies............... 298,980 7.8% 2,199,805 7.5% 4,962,590 6.7%
Mortgage-backed
securities............. 0 0 0 130,317 7.7%
Federal Reserve Bank
stock.................. 0 0 0 446,250 N/A
Municipals.............. 0 274,235 4.7% 267,565 4.8% 0
Other investments....... 0 0 0 596,642 N/A
---------- ----------- ---------- ----------
Total.................. $5,492,104 $ 2,474,040 $5,230,155 $1,173,209
========== =========== ========== ==========
</TABLE>
- --------
(1) Yields on tax exempt obligations have (not) been computed on a tax
equivalent basis.

The Company has maintained a substantial portion of its investment portfolio
in the held-to-maturity category since the implementation of Financial
Accounting Standard No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" in 1994. In order to designate a security as held-to-
maturity, an institution must have both the ability and the present intent to
hold that security to maturity. The TexStar acquisition will increase the
Company's investment portfolio 49.8% from $32.7 million to $65.3 million. If
the TexStar acquisition had been completed on September 30, 1997, and no
investment securities were reclassified or sold by either the Company or
TexStar, the held-to-maturity portion of the investment portfolio would have
been $28.4 million, or 43.5% of the investment portfolio. Subsequent to the
execution of the Reorganization Agreement, the Company begun reevaluating its
classification of its investment portfolio to determine whether any securities
should be reclassified or sold in connection with the TexStar acquisition, in
order to maintain an appropriate asset/liability configuration. In addition,
the Company evaluated whether maintaining the same proportion of its
investment portfolio in held-to-maturity, or maintaining any investment
securities in the held-to-maturity category, continues to be appropriate in
light of the Company's acquisition strategy. Given the pending TexStar
acquisition, and the Company's acquisition strategy, the Company has
determined that it is appropriate to reclassify and/or sell certain investment
securities.

DEPOSIT ACTIVITIES

The Company attracts deposits 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 $154,999,987 for
the nine months ended September 30, 1997, representing an increase of
$9,427,986 or 6.5% compared with the average balance of total deposits for the
year ended December 31, 1996, due to internally generated growth. The
Company's average balance of total deposits was $145,572,001 for the year
ended December 31, 1996, representing an increase of $49,403,706 or 51.4%
compared with the average balance of total deposits for the year ended
December 31, 1995 due to both acquisitions and internally generated growth.
The Company's average balance of total deposits was $96,198,295 for the year
ended December 31, 1995, representing an increase of $41,886,584 or 77.1%
compared with the average balance of total deposits for the year ended
December 31, 1994, due to both acquisitions and internally generated growth.

35
<PAGE>

The following table sets forth certain information regarding the Company's
average deposits as of September 30, 1997, and December 31, 1996 and 1995:

AVERAGE DEPOSITS

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------- ------------------------------- ------------------------------
AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE AVERAGE PERCENT AVERAGE
AMOUNT OF TOTAL RATE PAID AMOUNT OF TOTAL RATE PAID AMOUNT OF TOTAL RATE PAID
------------ -------- --------- ------------ -------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits........ $ 22,317,694 14.4% N/A $ 20,089,712 13.8% N/A $12,889,281 13.4% N/A
Interest-bearing demand
deposits............... 39,227,467 25.3 2.7% 36,910,314 25.3 2.4% 23,106,404 24.0 2.9%
Savings deposits........ 7,737,747 5.0 2.4 8,174,212 5.6 2.1 5,329,462 5.5 2.4
Time deposits........... 85,717,079 55.3 5.2 80,397,763 55.3 5.3 54,873,148 57.1 5.0
------------ ----- --- ------------ ----- --- ----------- ----- ---
Total average deposits.. $154,999,987 100.0% 4.3% $145,572,001 100.0% 4.3% $96,198,295 100.0% 4.4%
============ ===== === ============ ===== === =========== ===== ===
</TABLE>

As of September 30, 1997, non-brokered time deposits over $100,000
represented 13.9% of total deposits, compared with 13.0% of total deposits as
of December 31, 1996. As of September 30, 1997, certificates of deposits in
excess of $100,000 accounted for $21,631,301 of the Company's deposits. Of
this amount, $19,752,904 had a maturity of one year or less. The Company 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, 1997, and December 31, 1996 and 1995:

TIME DEPOSITS OF $100,000 OR MORE

<TABLE>
<CAPTION>
MATURITY RANGE SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
-------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Three months or less.... $ 8,705,772 $ 8,626,435 $ 6,679,584
Three through six
months................. 3,683,333 3,843,571 3,368,061
Six through twelve
months................. 7,363,800 7,687,144 3,821,337
Over twelve months...... 1,878,397 119,085 1,603,692
----------- ----------- -----------
Total................. $21,631,301 $20,276,235 $15,472,674
=========== =========== ===========
</TABLE>

RETURN ON EQUITY AND ASSETS

The following are various ratios for the Company for the nine months ended
September 30, 1997 and 1996, and for the years ended December 31, 1996, 1995,
and 1994:

RETURN ON EQUITY AND ASSETS

<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEARS ENDED
SEPTEMBER 30 DECEMBER 31,
-------------------- ----------------------
1997 1996 1996 1995 1994
--------- --------- ------ ------ ------
(ANNUALIZED)
<S> <C> <C> <C> <C> <C>
Return on average assets........ 1.2% 0.9% 1.0% 0.8% 0.8%
Return on average equity........ 10.8% 9.5% 9.8% 9.5% 7.4%
Average equity to average
assets......................... 10.8% 10.4% 10.5% 8.7% 10.5%
</TABLE>

36
<PAGE>

LIQUIDITY

The Company'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, 1997, 14.0% of the Company'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 Company'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
Company's liquidity could be adversely affected. Currently, the maturities of
the Company's large time deposits are spread throughout the year, with 40%
maturing in the fourth quarter of 1997, 17% maturing in the first quarter of
1998, 34% maturing in the second and third quarters of 1998, and the remaining
9% maturing thereafter. The Company monitors those maturities in an effort to
minimize any adverse effect on liquidity.

On February 28, 1996 the Company completed a primary and secondary offering
of its Common Stock. The offering was underwritten by Hoefer & Arnett,
Incorporated, an investment banking firm. A total of 2,388,759 shares of
Common Stock were sold in the offering at a price of $3.75 per share,
including 288,759 shares of Common Stock sold as an over-allotment and 174,939
shares of Common Stock held by a shareholder of the Company. The $7,394,293 in
net proceeds from this offering were used by the Company to finance the First
Midlothian Acquisition, to retire the Company's outstanding bank debt and for
general corporate purposes.

The Company raised $7.4 million during 1996, $1.2 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. In addition, the Company
issued 25,398 shares of its Common Stock in connection with the Providers
Acquisition. See "Business--Business Strategy".

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, 1997 was $20.8 million,
compared to $19.2 million at December 31, 1996. The growth in equity has been
the result of the retention of earnings. The Company had consolidated net
income of $1,531,089 for the nine months ended September 30, 1997.

The Company's shareholders' equity at December 31, 1996 was $19.2 million,
compared with $10.3 million at December 31, 1995. 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 income of $1,697,987 for the year
ended December 31, 1996. 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 ratio 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 11.9% and 13.1%, respectively, at September 30, 1997, 11.1% and
12.3%, respectively, at December 31, 1996, and 10.8% and 11.7%, respectively,
at December 31, 1995. The Bank is currently, and expects to continue to be, in
compliance with these guidelines. See "Regulation and Supervision".

The Board of Governors of the Federal Reserve System ("FRB") has announced a
policy sometimes known as the "source of strength doctrine" which 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

37
<PAGE>

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:

RISK-BASED CAPITAL RATIOS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31, MINIMUM WELL-
SEPTEMBER 30, ------------------------------- CAPITAL CAPITALIZED
1997 1996 1995 1994 1993 RATIOS RATIOS
------------- ------- ------ ------ ------ ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Tier I risk-based capi-
tal.................... $13,975 $12,013 $7,964 $6,790 $3,821
Tier II risk-based capi-
tal.................... 1,367 1,285 703 698 401
Total capital........... 15,342 13,298 8,667 7,488 4,222
Risk-weighted assets.... 169,438 108,208 73,983 67,011 33,594
CAPITAL RATIOS:
Tier I risk-based capi-
tal.................... 11.9% 11.1% 10.8% 10.1% 11.4% 4.0% 8.0%
Tier II risk-based capi-
tal.................... 13.1 12.3 11.7 11.2 12.6 8.0 10.0
Leverage ratio.......... 8.1 7.0 6.9 5.6 10.0 3.0(1) 5.0
</TABLE>
- --------
(1) The OCC has established 3% as the minimum leverage ratio for institutions
rated a composite 1 under the rating system for banks, although the OCC
may require a higher leverage ratio.

The following table sets forth an analysis of the Bank's capital ratios on a
pro forma basis assuming that the acquisition of TexStar had been completed at
September 30, 1997.

<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------------- -------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
--------------- --------- --------------- ---------
COMPANY TEXSTAR COMPANY TEXSTAR
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA CAPITAL RA-
TIOS:
Tier I risk-based capi-
tal.................... 11.9% 6.9% 9.3% 11.1% 6.3% 8.3%
Total risk-based capi-
tal.................... 13.1 14.0 10.4 12.3 12.6 9.4
Leverage................ 8.7 6.9 6.4 7.0 6.6 5.6
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

In December 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 127, "Deferral of the
Effective Date of Certain Provisions of FASB Statement No. 125". This
Statement deferred the effective date of FASB Statement No. 125 for secured
lending, repurchase agreement, dollar-roll, securities lending, and similar
transactions to transactions occurring after December 31, 1997. Management
believes that the adoption of this pronouncement will not have a material
impact on the financial statements of the Company.

In February 1997, FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 simplifies the standards
for computing earnings per share ("EPS") previously found in APB Opinion No.
15, "Earnings per Share" ("Opinion 15"), and makes them comparable to

38
<PAGE>

international EPS standards. SFAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. Basic EPS excludes dilution and is computed
by dividing income available to common shareholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15.
SFAS 128 also requires dual presentation of basic and diluted EPS on the face
of the income statement for entities with complex capital structures and a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS 128 is
effective for financial statements issued for periods ending after December
31, 1997, including interim periods; earlier application is not permitted.
Basic EPS under SFAS 128 was $0.27 and $0.22 for the nine months ended
September 30, 1997 and 1996, respectively, and fully diluted EPS was $0.26 and
$0.22 for the nine months ended September 30, 1997 and 1996, respectively.
SFAS 128 requires restatement of all prior-period EPS data presented.

In February 1997, FASB issued Statement of Financial Accounting Standards
No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129").
SFAS 129 establishes standards for disclosing information about an entity's
capital structure, including the pertinent rights and privileges of various
securities outstanding. SFAS 129 is effective for financial statements issued
for periods after December 15, 1997.

In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general-purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 does not require a specific format for
the financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.

In June of 1997, FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("FAS 131"). FAS 131 establishes standards for the way that public enterprises
report information about operating segments in annual financial statements,
and requires that those enterprises report information about operating
segments in annual financial statements and report selected information about
operating segments in interim financial reports issued to shareholders. FAS
131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers.

FAS 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that it is used internally for evaluating segment performance and
deciding how to allocate resources to segments.

FAS 131 is effective for periods beginning after December 15, 1997. In the
initial year of application, comparative information for earlier years is to
be restated.

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
in this report have been prepared in accordance with generally accepted
accounting principles, which require the measurement of

39
<PAGE>

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 Company,
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 Federal Reserve Bank. The Federal Reserve Bank
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 Federal Reserve Bank 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 Company and its results of
operations are not predictable.

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 100%. 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 making IPF loans, 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 of 1956, as amended ("BHCA"). 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.

BUSINESS STRATEGY

In the past five years, the Company has increased its asset size and
geographically diversified its business through a number of acquisitions. In
March, 1993, the Company acquired First State Bank, Wells, Texas, for $1.1
million ("Wells Acquisition"), and acquired Bank of the East, Chester, Texas,
for $645,676 ("Chester Acquisition"). In June, 1994, the Company acquired a
bank with $14.8 million in assets for $1.2 million in the Kennard Acquisition.
The Company financed each of these three acquisitions with internally
generated funds. In December, 1994, the Company acquired a bank with $43.4
million in assets for $6 million in the Whitesboro Acquisition. The Company
financed the Whitesboro 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.

In September, 1995, the Company financed the Waxahachie Acquisition with
internally generated funds. At the closing, the Company assumed deposits and
other liabilities totaling approximately $16.6 million, and paid a deposit
premium of approximately $331,000. In February, 1996, the Company acquired a
bank with $51.3 million in assets for $6,595,707 in the Midlothian
Acquisition. The Company financed the Midlothian Acquisition through an
$7,394,293 underwritten public offering of its shares of common stock, which
closed in February 1996. In March, 1996, the Company acquired all of the
assets and assumed approximately $50,000 of liabilities of a Dallas-based
medical claims servicing company, for a purchase price of $1,000,000 plus
25,398 shares of Company Common Stock, in the Providers Acquisition.

40
<PAGE>

The Company views these acquisitions as a means of expanding its operations
and believes that the acquisitions have contributed favorably to the financial
condition and results of operations of the Company. The Company continues to
actively serve the banking needs of local communities where it makes
acquisitions. In addition, the acquired deposits allow the Company to increase
its niche lending activities of insurance premium financing and medical claims
factoring. The Company's strategy is to continue to acquire community banks
with low loan-to-deposit ratios and to use excess deposits to fund insurance
premium financing and other niche lending products.

THE BANK

The Bank was chartered as a national banking association in 1963. The Bank's
principal offices are located at 1845 Precinct Line Road, Suite 100, Hurst,
Texas 76054, and its telephone number is (817) 498-2749. The Bank also
operates seven branches in Chester, Kennard, Lufkin, Midlothian, Waxahachie,
Wells and Whitesboro, Texas. The Bank owns a 17% interest in McCoy Myers and
Associates, Inc., a bank computer data processing service corporation.

COMMERCIAL AND CONSUMER BANKING

The Company's lending activities were divided approximately evenly between
its niche lending products of insurance premium financing and medical claims
factoring, on the one hand, and the more traditional community bank loans such
as commercial, real estate and consumer loans, as of September 30, 1997. At
September 30, 1997 approximately 19.4%, 32.1%, 39.5% and 8.9% of the Company's
total loan portfolio represented commercial loans, consumer banking loans, IPF
loans, and medical claims receivables, respectively.

The Company provides general commercial banking services for corporate and
other business clients as a part of the Company's efforts to serve the local
communities in which it operates. The Company's commercial loans are generally
made to provide working capital, to finance the purchase of equipment, and for
the expansion of existing businesses. These loans typically 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 average yield during the nine months ended
September 30, 1997 for the Company's commercial lending activities was 9.9%.
The Company's commercial loans generally have maturities of twelve months or
less.

The Company 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.

INSURANCE PREMIUM FINANCING

Insurance premium financing ("IPF") was the first niche lending product
emphasized by the Company. 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 loans are structured so as to decrease
the risk of loss on a default by the insured, although the structure will not
necessarily decrease the risk of loss in certain circumstances, such as the
insolvency of an insurance company or agency fraud. The following three
factors decrease the risk of loss created by an insured who defaults in the
payment of his premiums:

. 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

41
<PAGE>

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 repayments 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>
SEPTEMBER 30,
PERIOD 1997 1996 1995 1994 1993 1992
------ ------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Loans Outstand-
ing.................... $46,111,636 $39,168,604 $22,409,356 $20,931,642 $14,518,680 $7,267,889
</TABLE>

The typical premium finance loan has a nine month life. Because of the need
to bill policy holders and to cancel promptly policies when loan repayments
are not received in a timely fashion, this niche lending product requires
highly sophisticated data processing systems. The Company uses a combination
of off-the-shelf and customized computer software, 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 and is housed in the Company's offices in Hurst, Texas.
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 600 insurance companies and over 5,000
insurance agents. These parties refer insurance purchasers who request
financing to the Company, although in most cases the relationships are not
exclusive.

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 repay the premiums
over the course of the policy life rather than to repay the entire premium at
the time the policy is purchased.

Since the Company relies on a rebate of the unearned premium as collateral
to repay 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
Company's capital for insurance companies rated "A" or better by A. M. Best
Key Rating Guide (see below), 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.

42
<PAGE>

A. M. Best rates companies from A through C, with four variations within
each letter grade, indicated by ++ for the highest rating within that letter
grade, and by a minus sign for the lowest rating within a letter grade. The
ratings are described as superior (for A++ and A+), excellent (for A and A-),
very good (for B++ and B+), adequate (for B and B-), fair (for C++ and C+),
and marginal (for C and C-). Over 70% of the Company's IPF loans are extended
to finance insurance premiums for policies issued by Insurance companies rated
or "A-" or better by A. M. Best.

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. In June, 1997, the Company became
aware that a number of IPF agreements on which it has made loans may be
fictitious or forged. See "Management's Discussion and Analysis of Financial
Conditions and Results of Operations--Nonperforming Assets".

MEDICAL CLAIMS RECEIVABLES FACTORING

The Company has engaged in medical claims receivables factoring since 1990.
Medical claims receivables factoring involves the purchase of accounts
receivable from doctors, hospitals, and other health care organizations,
although Medicare and Medicaid claims are limited to approximately 20% of
factored medical receivables. 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 amount
of 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 claims 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, 1997, the
yield on the funds committed to this activity was 26.4%. The Company uses
specialized computer systems which automate much of the administration of the
medical claims receivables.

The Company could incur losses in its medical claims receivables factoring
business for a number of reasons, including fraud and the failure of the
insurance company or the government agency to repay 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
claims receivables of that health care provider to secure payment of the

43
<PAGE>

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 claims receivables
factoring, like IPF, is a specialty type of financing which provides high
yields and requires specialized expertise. The Company considers the market
for this type of financing to be relatively broad, and to extend beyond the
local markets served by the Company's branches.

COMPETITION

There is significant competition among banks and bank holding companies in
the market served by the Company, 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 Company 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, many of which
are larger in terms of capital, resources and personnel. 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 loans.

The Company believes that such competition will continue and increase in the
future. In addition, the manner in 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.

EMPLOYEES

As of September 30, 1997 the Company had 131 full-time employees and two
part-time employees. None of the Company's employees are subject to a
collective bargaining agreement, and the Company believes that its employee
relations are good.

PROPERTIES

The Company has eight full-service banking facilities, located in Chester,
Hurst, Lufkin, Wells, Kennard, Waxahachie, Whitesboro and Midlothian, Texas.
Upon consummation of the acquisition of TexStar National Bank, the Company
will acquire five additional banking facilities. The Company believes the
existing facilities are adequate for its present needs. The following chart
provides information about the Company's existing facilities.

<TABLE>
<CAPTION>
DEPOSITS AT
BRANCH/OFFICE SQ. FT. LOCATION/OWNERSHIP SEPTEMBER 30, 1997
------------- ------- ------------------ ------------------
<S> <C> <C> <C>
Lufkin................ 9,772 600 South First Street $21,067,202
Lufkin, Texas 75901
owned
Hurst................. 14,810 1845 Precinct Line Road 8,264,744
Suite 100
Hurst, Texas 76054
leased
Chester............... 8,000 209 Katy Ave. 8,504,149
Chester, Texas 75936
owned
Wells................. 4,825 215 Rusk Ave. U.S. Highway 9,754,795
69
Wells, Texas 75976
owned
</TABLE>

44
<PAGE>

<TABLE>
<CAPTION>
DEPOSITS AT
BRANCH/OFFICE SQ. FT. LOCATION/OWNERSHIP SEPTEMBER 30, 1997
------------- ------- ------------------ ------------------
<S> <C> <C> <C>
Kennard................. 3,860 2000 Highway 7 14,848,201
Kennard, Texas 75847
owned
Waxahachie.............. 19,186 104 Elm St. 13,899,845
Waxahachie, Texas 75165
owned
Whitesboro.............. 6,365 2500 Highway 82 East 35,286,684
Whitesboro, Texas 76263
owned
Midlothian.............. 17,116 910 North 9th St. 43,373,698
Midlothian, Texas 76065
owned
------------
Total....................................................... $154,999,319
============
</TABLE>

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 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, including laws
regulating consumer finance transactions, such as the Truth in Lending Act,
the Home Mortgage Disclosure Act and the Equal Credit Opportunity Act and 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. The supervision and regulation of bank holding companies and
their subsidiaries is intended primarily for the protection of depositors, the
deposit insurance funds of the FDIC and the banking system as a whole, and not
for the protection of the bank holding company stockholders or creditors.

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 registered under 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 BHCA and
other federal laws subject bank holding companies to particular restrictions
on the types of activities in which they may engage, and to a range of
supervisory requirements and activities, including regulatory enforcement
actions for violations of laws and regulations. Certain violations may also
result in criminal penalties.

45
<PAGE>

Regulatory Restrictions on Dividends; Source of Strength

It is the policy of the FRB that bank holding companies should pay cash
dividends on common stock only out of income available over the past year and
only if prospective earnings retention is consistent with the organization's
expected future needs and financial condition. This supports 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. As discussed below, a bank holding company in certain
circumstances could be required to guarantee the capital plan of an
undercapitalized banking subsidiary.

Under the prompt corrective action provisions of the Federal Deposit
Insurance Act, any company which controls an undercapitalized bank can be
required to guarantee compliance by the bank with a capital restoration plan.
The aggregate liability of the holding company of an undercapitalized bank is
limited to the lesser of 5% of the institution's assets at the time it became
undercapitalized or the amount necessary to cause the institution to become
"adequately capitalized". The bank regulators have greater power in situations
where an institution becomes "significantly" or "critically" undercapitalized
or fails to submit a capital restoration plan. For example, a bank holding
company controlling such an institution can be required to obtain prior FRB
approval of proposed dividends, or might be required to consent to a
consolidation or to divest the troubled institution or other affiliates.

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

Acquisitions of Control

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 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 from
the FRB 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. In approving
bank acquisitions by bank holding companies, the FRB is required to consider
the financial and managerial resources and future prospects of the bank
holding company and the banks concerned, the convenience and needs of the
communities to be served and various competitive factors.

46
<PAGE>

Activities Closely Related to Banking

The BHCA prohibits a bank holding company, with certain limited exceptions,
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. Some of the
activities that have been determined by regulation to be closely related to
banking include 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 by bank holding companies of companies engaged in
banking related activities 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. The FRB is also empowered
to differentiate between activities commenced de novo and activities commenced
through acquisition of a going concern.

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 a bank to affiliates,
investments in the stock or other securities of a bank holding company by its
subsidiary bank, and the nature and amount of collateral that a bank may accept
from any affiliate to secure loans extended to the affiliate. A bank holding
company, as an affiliate of a bank, is also subject to these restrictions.

Anti-Tying 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.

Securities Activities

The FRB has approved applications by bank holding companies to engage,
through nonbank subsidiaries, in certain securities-related activities
(underwriting of municipal revenue bonds, commercial paper, consumer
receivable-related activities and one-to-four family mortgage-backed
securities), provided that the affiliates would not be "principally engaged" in
such activities for purposes of Section 20 of the Glass-Steagall Act. In
limited situations, holding companies may be able to use such subsidiaries to
underwrite and deal in corporate debt and equity securities.

Safe and Sound Banking Practices

Bank holding companies are not permitted to engage in unsafe and unsound
banking practices. The FRB's Regulation Y, for example, generally requires a
bank holding company to give the FRB prior notice of any redemption or
repurchase of its own securities, if the consideration to be paid, together
with the consideration paid for any repurchases or redemptions in the preceding
year, is equal to 10% or more of the company's consolidated net worth. The FRB
may oppose the transaction if it believes that the transaction would constitute
an unsafe or unsound practice or would violate any law or regulation. Depending
on the circumstances, the FRB could take the position that paying a dividend
would constitute an unsafe or unsound banking practice.

The FRB has broad authority to prohibit activities of bank holding companies
and their nonbanking subsidiaries which represent unsafe and unsound banking
practices or which constitute violations of laws or regulations, and can assess
civil money penalties for certain activities conducted on a knowing and
reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $1,000,000 for each day the
activity continues.

47
<PAGE>

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 a reserves requirement, 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". Because the FRB regulates the bank holding company parent of the
Bank, the FRB also has supervisory authority which directly affects the Bank.
In addition, upon making certain determinations with respect to the condition
of any insured national bank, such as the Bank, the FDIC may begin proceedings
to terminate a bank's federal deposit insurance.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets

Dividends paid by the Bank have provided a substantial part of the Company's
operating funds and for the foreseeable future it is anticipated that
dividends paid by the Bank to the Company will continue to be the Company's
principal source of operating funds. There are certain statutory limitations
on the payment of dividends by the Bank. Until a national bank's capital
surplus equals or exceeds its capital stock, the bank must transfer ten
percent of its net income to capital surplus prior to paying a dividend.
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. Under federal law, a bank cannot pay a
dividend if after paying the dividend, the Bank will be "undercapitalized."
The OCC may find a dividend payment that meets these statutory requirements to
be an unsafe or unsound practice.

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

Limitations on Interest Charges

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".

Branching

National banks may establish a branch anywhere in Texas provided that the
branch is approved in advance by the OCC, which considers a number of factors,
including financial history, capital adequacy, earnings prospects, character
of management, needs of the community and consistency with corporate powers.
The Interstate Banking Act, which expanded the authority of bank holding
companies and banks to engage in interstate bank acquisitions and interstate
banking, allows each state the option of "opting out" of the interstate
branching (but not banking) provisions. The Texas Legislature opted out of the
interstate branching provisions in 1995. Interstate banking was effective on
September 25, 1995, and interstate branching would have become effective in
Texas in June, 1997, if Texas had not elected to opt out. The Texas "opt-out"
legislation prohibiting interstate branching is effective until September,
1999.

48
<PAGE>

Corrective Measures for Capital Deficiencies

The Federal Deposit Insurance Act, as amended, 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, 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, a leverage ratio of 5.0% or greater,
and it is not subject to any order, written agreement or 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 of 4.0% or greater, and
a leverage capital ratio of 4.0% or greater (3.0% or greater if the
institution was rated a CAMELS 1 in its most recent report of examination and
is not experiencing significant growth), 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 8.0%, a Tier I risk-based capital ratio that is less than 4.0%, or a
leverage ratio that is less than 4.0% (or a leverage ratio that is less than
3.0% if the institution was rated CAMELS 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.

As an institution's capital decreases, the OCC's enforcement powers become
more severe. A significantly undercapitalized institution is subject to
mandated capital raising activities, restrictions on interest rates paid and
transactions with affiliates, removal of management and other restrictions.
The OCC has only very limited discretion in dealing with a critically
undercapitalized institution and is virtually required to appoint a receiver
or conservator.

Based on its capital ratios as of September 30, 1997, the Bank was "well
capitalized" under the applicable regulations. The Company does not believe
that the 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.

Restrictions of Transactions with Affiliates and Insiders

Transactions between the Bank and its nonbanking subsidiaries, including the
Company, are subject to Section 23A of the Federal Reserve Act. In general,
Section 23A imposes limits on the amount of such

49
<PAGE>

transactions and also requires certain levels of collateral for loans to
affiliates parties. It also limits the amount of advances to third parties
which are collateralized by the securities or obligations of the Company or
its subsidiaries.

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

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

Examinations

The OCC periodically examines and evaluates national banks. Based upon such
an evaluation, the OCC may revalue the assets of the institution and require
that it establish specific reserves to compensate for the difference between
the OCC-determined value and the book value of such assets.

Audit Reports

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

Brokered Deposit Restrictions

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

Cross-Guarantee Provisions

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

Deposit Insurance Assessments

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 BIF assessment rate
is determined by the FDIC for categories of banks based upon the risk to the
insurance

50
<PAGE>

fund. An institution's risk classification is assigned based on its capital
levels and the level of supervisory concern the institution poses to the
regulators. In addition, the FDIC can impose special assessments in certain
instances. The current range of BIF assessments is between 0.0% and .27% of
deposits. The FDIC has also established a process for raising or lowering all
rates for insured institutions semi-annually if conditions warrant a change.
Under this system, the FDIC has the flexibility to adjust the assessment rate
schedule twice a year without seeking prior public comment, but only within a
range of five cents per $100 above or below the premium schedule adopted.
Changes in the rate schedule outside the five cent range above or below the
current schedule can be made by the FDIC only after a full rulemaking with
opportunity for public comment.

In November of 1996, the FDIC's Board of Directors approved an assessment
against BIF-assessable deposits to be paid to the Financing Corporation
("FICO") to assist in paying interest on FICO bonds, which financed the
resolution of the thrift industry crisis. The FICO assessment is approximately
1.3 basis points on BIF-insured deposits. The first quarter 1997 FICO
assessment of the Bank was approximately $4,800.

Community Reinvestment Act

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" rating 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 affect, 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.

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 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.

The minimum standard for the ratio of Tier I capital to total risk-weighted
assets is 4.0% and the ratio of total 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". See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

51
<PAGE>

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 3.0% 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 a CAMEL 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources--Risk-based Capital
Ratios" for a discussion of the Company's and the Bank's Tier I and Tier II
capital ratios.

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.

Instability of Regulatory Structure

Various legislation, including proposals to overhaul the bank regulatory
system, expand the powers of banking institutions and bank holding companies
and limit investments that a depository institution may make with insured
funds, is from time to time introduced in Congress. Such legislation may
change banking statutes and the operating environment of the Company and its
banking subsidiaries in substantial and unpredictable ways. The Company cannot
determine the ultimate effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon the financial
condition or results of operations of the Company or its subsidiaries.

Expanding Enforcement Authority

One of the major additional burdens imposed on the banking industry by
FDICIA is the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition, the FRB, OCC and
FDIC are possessed of extensive authority to police unsafe or unsound
practices and violations of applicable laws and regulations by depository
institutions and their holding companies. For example, the FDIC may terminate
the deposit insurance of any institution which it determines has engaged in an
unsafe or unsound practice. The agencies can also assess civil money
penalties, issue cease and desist or removal orders, seek injunctions, and
publicly disclose such actions. FDICIA, FIRREA and other laws have expanded
the agencies' authority in recent years, and the agencies have not yet fully
tested the limits of their powers.

Effect on Economic Environment

The policies of regulatory authorities, including the monetary policy of the
FRB, have a significant effect on the operating results of bank holding
companies and their subsidiaries. Among the means available to the FRB to
affect the money supply are open market operations in U.S. Government
securities, changes in the discount rate on member bank borrowings and changes
in reserve requirements against member bank deposits. These means are used in
varying combinations to influence overall growth and distribution of bank
loans, investments and deposits and their use may affect interest rates
charged on loan or paid for deposits.

FRB monetary policies have materially affected the operating results of
commercial banks in the past and are expected to continue to do so in the
future. The nature of future monetary policies and the effect of such policies
on the business and earnings of the Company and its subsidiaries cannot be
predicted.

52
<PAGE>

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company elected eight directors at the annual meeting of the
shareholders held on May 29, 1997. All directors are elected annually and hold
office until the next annual meeting of shareholders, expected to be held in
May, 1998, or until their respective successors have been duly elected and
have qualified. The following table provides information, as of November 15,
1997, about the directors and executive officers of the Company.

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

C. Jack Bean C. Jack Bean has been Chairman of the Board and a
Age 69 director of the Company since March 1987, and served as
Director Since 1987 President of the Company from March 1987 to July 1992.
Mr. Bean was the owner and founder of Surety Finance
Company, the Company's predecessor, from 1985 until
March 1987. He has served as Chairman of the Board and
a director of the Bank since December 1989. Mr. Bean
has served as a director of Dallas Fire Insurance
Company, a licensed Texas stock insurance company,
since November 1996.

William B. Byrd William B. Byrd has been involved in personal
Age 66 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.

B. J. Curley B. J. Curley has been Secretary of the Company since
Age 33 June 1996 and Chief Financial Officer and Vice
President since October 1995. Since December 1994 he
has served as Chief Financial Officer and Senior Vice
President 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.

Bobby W. Hackler Bobby W. Hackler has been Vice Chairman of the Company
Age 51 since February 1997 and Chief Operating Officer since
Director Since 1994 June 1996. He previously served as Senior Vice
President of the Company from June 1996 to January
1997, as Chief Financial Officer from January 1992 to
October 1995, and as Vice President and Secretary from
January 1992 to June 1996. He has served as Vice
Chairman of the Bank since February 1997, as President
since February 1994, as Chief Executive Officer since
July 1992, and as a director since December 1990. Mr.
Hackler has served as a director of McCoy Myers and
Associates, Inc., in which the Bank owns an interest,
since November 1996.

Joseph S. Hardin Joseph S. Hardin has been involved in personal
Age 82 investment activities for the past five years. Mr.
Director Since 1989 Hardin has served as a director of the Bank since May
1994.

G. M. Heinzelmann, III G. M. Heinzelmann, III has been President of the
Age 35 Company since July 1992. He previously served as Vice
Director Since 1993 President of the Company from May 1987 to July 1992.
Mr. Heinzelmann has served as Executive 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.

Margaret Holland Margaret E. Holland has been a partner in the law firm
Age 45 of Tracy & Holland, L.L.P., since October 1992. Ms.
Director since 1997 Holland has served as a director of the Bank since
September 1997.
</TABLE>

53
<PAGE>

<TABLE>
<CAPTION>
NAME AND AGE OF
NOMINEE; YEARS PRINCIPAL OCCUPATION FOR PAST
SERVED AS DIRECTOR FIVE YEARS; OTHER DIRECTORSHIPS
------------------ -------------------------------
<S> <C>
Michael L. Milam Michael L. Milam has been president of Dallas Fire
Age 44 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 been a member of the law firm of
Age 82 Morris and Schieffer 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 been involved in personal
Age 57 investment activities for the past five years. Mr.
Director Since 1987 Turner has served as a director of the Bank since
December 1993.
</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.

No director presently holds any other directorships in companies with a
class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934 or subject to the requirements of Section 15 of that act.

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 (2) 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, 1996, 1995 and 1994:

SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION

<TABLE>
<CAPTION>
ALL OTHER
NAME AND COMPENSATION
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) ($)(2)
------------------ ---- ------------ -------- ------------
<S> <C> <C> <C> <C>
C. Jack Bean 1996 $139,346 $19,850 $2,407
Chairman of the Board and Chief 1995 $114,100 $17,000 $3,411
Executive 1994 $107,653 $14,500 $3,740
Officer of the Company; Chairman of
the
Board of the Bank
Bobby W. Hackler 1996 $103,946 $15,200 $2,622
Vice Chairman and Chief Operating 1995 $ 88,125 $13,000 $3,128
Officer 1994 $ 78,879 $11,100 $2,857
of the Company; Vice Chairman,
President
and Chief Executive Officer of the
Bank
G. M. Heinzelmann, III 1996 $ 94,500 $13,800 $2,383
President of the Company; Executive 1995 $ 80,475 $12,000 $2,848
Vice 1994 $ 71,872 $10,100 $2,600
President of the Bank
</TABLE>
- --------
(1) Includes salary and directors' fees paid by the Bank, before any salary
reduction for contributions to the Bank's Savings Plan under Section
401(k) of the Internal Revenue Code of 1986, as amended (the "Code").
(2) Unless otherwise noted, the amounts shown in this column consist of
matching contributions under the Bank's Savings Plan under Section 401(k)
of the Code, which was adopted by the Bank in 1993.

54
<PAGE>

INCENTIVE STOCK OPTION PLANS. The Board has adopted the 1988 and 1995
Incentive Stock Option Plans of Surety Capital Corporation (the "Incentive
Plans") for officers and/or key employees of the Company, which have been
approved by the shareholders of the Company. The purpose of the Incentive
Plans is to attract and retain capable employees and provide an incentive to
such employees to remain in the employ of the Company. Options granted under
the Incentive Plans are "incentive stock options" within the meaning of
Section 422 of the Code.

The Incentive Plans are administered by the Stock Option Committee. Options
for the purchase of Common Stock under the Incentive Plans may be granted to
officers or key employees selected from time to time by the Stock Option
Committee. The exercise price for any options granted pursuant to the
Incentive Plans must be at least equal to the fair market value of the Common
Stock on the date the options are granted. Under each Incentive Plan up to
100,000 shares of Common Stock of the Company were set aside for issuance
pursuant to the exercise of options granted thereunder. Under the 1988
Incentive Plan each option is exercisable for five (5) years from the date of
grant, and under the 1995 Incentive Plan each option is exercisable for ten
(10) years from the date of grant, subject to earlier termination upon the
occurrence of certain events. Options granted under the Incentive Plans may,
in the discretion of the Stock Option Committee, either be immediately
exercisable in full or be subject to satisfaction of certain conditions prior
to exercise. To exercise the options, grantees must pay the exercise price in
cash or Common Stock, or any combination of cash and Common Stock.

OPTION GRANTS. The following table provides information on incentive stock
options granted in fiscal year 1996 to the named executive officers:

OPTION GRANTS IN FISCAL YEAR 1996(1)
<TABLE>
<CAPTION>

INDIVIDUAL GRANTS POTENTIAL
--------------------------------------------- REALIZABLE VALUE
NUMBER OF PERCENT AT ASSUMED ANNUAL
SECURITIES OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION
OPTIONS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------
NAME (#)(2) FISCAL YEAR ($/SH)(3) DATE 5%($)(4) 10%($)(4)
---- ---------- ------------ --------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
C. Jack Bean............ 5,308 17.69% $3.3125 01-04-06 $11,058 $28,022
5,284(5) 17.61% $3.3125 01-04-06 $11,008 $27,896
Bobby W. Hackler........ 4,062 13.54% $3.3125 01-04-06 $ 8,462 $21,444
4,043(5) 13.48% $3.3125 01-04-06 $ 8,422 $21,344
G. M. Heinzelmann, III.. 3,692 12.31% $3.3125 01-04-06 $ 7,691 $19,491
3,675(5) 12.25% $3.3125 01-04-06 $ 7,656 $19,401
</TABLE>
- --------
(1) This table reflects incentive stock options granted on January 4, 1996
under the 1995 Incentive Stock Option Plan of Surety Capital Corporation
(the "1995 Plan") to the named executive officers. Of these options,
13,062 vested on the date of grant and 13,002 vested upon the public
announcement by the Company of its 1996 operating results, as earnings per
weighted average share outstanding for 1996 had reached a specified
target. The options have been granted for a term of ten years, subject to
earlier termination upon the occurrence of certain events related to
termination of employment.
(2) Under the terms of the 1995 Plan, the Stock Option Committee retains the
discretion, subject to the 1995 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 $3.3125 market value at date of grant)
from the date of grant

55
<PAGE>

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 ten year term.
(5) These options vested upon the public announcement by the Company of its
1996 operating results, as earnings per weighted average share outstanding
for 1996 had reached a specified target.

OPTION 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 the end of the last fiscal year under the 1988 and 1995
Incentive Stock Option Plans:

AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FY-END(#) FY-END($)
VALUE ------------- --------------------
SHARES ACQUIRED REALIZED EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) ($)(1) UNEXERCISABLE UNEXERCISABLE(2)
---- --------------- --------- ------------- --------------------
<S> <C> <C> <C> <C>
C. Jack Bean............ 5,308 $7,630.25 -0-/5,284 $ 0.00/$3,963.00
Bobby W. Hackler........ 0 $ 0 16,390/4,043 $14,604.00/$3,032.25
G. M. Heinzelmann, III.. 2,616 $3,026.71 14,867/3,675 $13,245.56/$2,756.25
</TABLE>
- --------
(1) Fair market value at exercise minus the exercise price.
(2) Market value of underlying securities as of the fiscal year-end ($4.0625),
minus the exercise or base price.

TERMINATION OF EMPLOYMENT, CHANGE IN CONTROL AND EXECUTIVE DEFERRED
COMPENSATION AGREEMENTS. The Company has entered into termination of
employment, change in control and executive deferred compensation agreements
with certain of its officers, as more fully described below. While these
agreements were not adopted to deter takeovers, they may have an incidental
anti-takeover affect by making it more expensive for a bidder to acquire
control of the Company.

CHANGE IN CONTROL AGREEMENTS. The Company has entered or proposes to enter
into change in control agreements with the following executive officers of the
Company: C. Jack Bean, B. J. Curley, Bobby W. Hackler and G. M. Heinzelmann,
III. The proposed change in control agreement with C. Jack Bean had not been
executed as of December 29, 1997, and is subject to the approval of the Board
of Directors of the Company.

The change in control agreements provide for the payment under certain
circumstances of benefits to these officers in the event of a change in
control of the Company followed by the termination of employment of the
officers.

A "change in control" is deemed to have occurred if (i) any person becomes
the beneficial owner, directly or indirectly, of twenty percent (20%) or more
of the Common Stock of the Company, or (ii) during any period of two (2)
consecutive years during the term of the change in control agreements,
individuals who at the beginning of such period constitute the Board of
Directors cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the beginning
of such period has been approved in advance by directors representing at least
66% of the directors then in office who were directors at the beginning of the
period.

Under the change in control agreements, officers who, during the period
commencing on the effective date of a change of control and ending two (2)
years thereafter, are terminated by the Company for any reason other than for
cause or who terminate their employment with the Company with good reason are
entitled to receive a change in control payment at the time of such
termination. The change in control payment payable under the change in control
agreements may, at the election of the officers, be either in the form of a
lump sum cash payment or in the form of Common Stock of the Company.

56
<PAGE>

The stock payment consists of shares of Common Stock of the Company in an
amount equal to the result obtained by dividing the cash payment the officer
would otherwise be entitled to receive by the market value of the Common Stock
on the effective date of the change in control.

Pursuant to the change in control agreements, the Company is obligated to
require any successor to all or substantially all of the business and/or
assets of the Company to assume the obligations under the change in control
agreements. Failure on the part of the Company to obtain such assumption prior
to the effectiveness of any such succession entitles the officers to
compensation from the Company in the same amount and on the same terms as they
would be entitled to receive under the change in control agreements following
a change in control.

The change in control agreements continue in effect through September 1,
1998. On each successive September 1, the terms of the change in control
agreements will be automatically extended for one additional year, unless not
later than by December 31 of the preceding year the Company shall have given
notice to the officers that it does not wish to extend such change in control
agreements.

LEVEL-TERM LIFE INSURANCE AGREEMENTS. In 1995 the Company entered into
level-term life insurance agreements with the following executive officers of
the Company pursuant to which the Company purchased $250,000 insurance
policies on their respective lives: Bobby W. Hackler and G. M. Heinzelmann,
III. The Company will repay the premiums on such policies, which are owned by
such executive officers, until the earlier of each officer reaching age 65, or
the termination of such officer's employment by the Company. However, under
certain circumstances if the officers are terminated prior to reaching age 65,
the Company remains obligated to repay the premiums on the policies until the
officer reaches age 65 or dies. The annual premiums on these policies are
$1,270 and $300, respectively.

1988 AND 1995 INCENTIVE STOCK OPTION PLANS. Both the 1988 and 1995 Incentive
Stock Option Plans contain certain "change in control" provisions designed to
attract and retain valued employees of the Company and to ensure that such
employees' performance is not undermined by the possibility, threat or
occurrence of a change in control. These plans provide that in the event of a
change in control of the Company (in the form of a dissolution or liquidation
of the Company or a merger or consolidation in which the Company is not the
surviving corporation) any options granted under the plans become fully
exercisable, notwithstanding any vesting schedule relating to such options to
the contrary.

1997 STOCK OPTION GRANT. Effective January 2, 1997, the Company adopted a
non-qualified stock option plan for officers and key employees of the Company.
The Company has granted options covering 125,000 shares to each of C. Jack
Bean, Bobby W. Hackler, and G. M. Heinzelmann, III, has granted options
covering 75,000 shares to B. J. Curley, and has granted options covering
25,000 shares to Barry Carroll and Robert E. Crews, all of which options vest
over a 5 year period and have an exercise price of $4.1875. The options were
granted to align the long-term financial interests of these officers and key
employees with those of the shareholders of the Company, and to provide an
additional incentive for those persons to remain as officers and employees of
the Company.

EXECUTIVE DEFERRED COMPENSATION AGREEMENTS. In 1995 the Company entered into
executive deferred compensation agreements, which are nonfunded, nontrusted
and nonqualified deferred compensation plans (the "EDC Agreements"), with the
following executive officers of the Company: B. J. Curley, Bobby W. Hackler
and G. M. Heinzelmann, III. The purpose of the EDC Agreements is to provide an
economic incentive to the officers to remain in the employ of the Company
until reaching age 65. Depending on the circumstances that trigger payments
under the EDC Agreements, or termination of the EDC Agreements without
payment, the EDC Agreements provide for the following: (i) $25,000 per year
for fifteen years if the officers continue employment

57
<PAGE>

with the Company until reaching age 65; (ii) a lump sum payment if employment
is terminated prior to reaching age 65 (a) for any reason other than cause
during a two-year period after a change in control, (b) by the officers for
good reason during the two-year period after a change in control, (c) because
of disability, (d) because of death, or (e) for any reason other than cause;
or (iii) no payment in the event of termination of employment for cause.

The lump sum payment under item (ii) in the preceding paragraph is equal to
the cash surrender value (at the time of the employment termination) of a
universal key-man life insurance policy owned and funded by the Company on
each officer who has entered into an EDC Agreement with the Company. Each life
insurance policy is owned by the Company, and the Company is the beneficiary
under the policy. In the event of an employment termination for a reason other
than the death of the officer, assuming the Company then owns the policy, the
officer may purchase the policy for its then cash surrender value. If the
Company does not own the life insurance policy at the time a lump payment is
due under item (ii) in the preceding paragraph, the EDC Agreements contain
fixed schedules of payments that vary with the then ages of the officers. The
fixed payment schedules were determined with reference to the estimated cash
surrender values of the life insurance policies owned by the Company on each
officer.

The following table provides information with respect to amounts that will
be paid if certain conditions under the EDC Agreements are met.

LONG-TERM INCENTIVE PLANS
CUMULATIVE AWARDS THROUGH FISCAL YEAR 1996

<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS UNDER
NUMBER OF PERFORMANCE OR NON-STOCK PRICE-BASED PLANS
SHARES, OTHER PERIOD UNTIL -----------------------------------
UNITS OR MATURATION THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS (#) OR PAYOUT(2) ($ OR #)(3) ($ OR #)(4) ($ OR #)(5)
---- ---------------- ------------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Bobby W. Hackler........ (1) Contingent $15,865 $15,865 $375,000
G. M. Heinzelmann, III.. (1) Contingent $ 1,326 $ 1,326 $375,000
</TABLE>
- --------
(1) The EDC Agreements provide for deferred compensation payments to the
officers as follows: (i) $25,000 per year for fifteen years if the
officers continue employment with the Company until reaching age 65; (ii)
a lump sum payment if employment is terminated prior to reaching age 65
(a) for any reason other than cause during a two-year period after a
change in control, (b) by the officers for good reason during the two-year
period after a change in control, (c) because of disability, (d) because
of death, or (e) for any reason other than cause; or (iii) no payment in
the event of termination of employment for cause. The lump sum payments to
the officers under (ii) above are based on the cash surrender values of
life insurance policies owned by the Company on each, or fixed schedules
of payments in the event the Company no longer owns the life insurance
policies at the time payment is due. The fixed payment schedules (which
are estimates of the cash surrender value of each policy) vary depending
on the officers' ages on the date of employment termination, as follows:
(i) Mr. Hackler, age 51 through 64, payment range of $15,865 to $216,754,
(ii) Mr. Heinzelmann, age 34 through 64, payment range of $1,326 to
$195,836.
(2) The payments due under the EDC Agreements will commence within thirty (30)
days after each officer reaches age 65, or within ninety (90) days of an
earlier employment termination under the conditions outlined in footnote
(1) above.
(3) The threshold amounts payable under the EDC Agreements are based on the
ages of the officers as set forth in this Prospectus (Mr. Hackler, age 51;
and Mr. Heinzelmann, age 35) and assume that a termination of either of
such officer's employment occurred at his respective age under
circumstances other than a termination for cause.
(4) The target amounts payable under the EDC Agreements are the same as the
threshold amounts under footnote (3) above, as these change annually with
the ages of the officers.

58
<PAGE>

(5) The maximum amounts payable under the EDC Agreements will result if the
officers continue in the employment of the Company until reaching age 65,
at which time fifteen annual payments of $25,000 each will be payable to
each officer.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Neither the
Company nor the Bank currently has a Compensation Committee or other Board
committee performing equivalent functions. The Company did not pay any cash
compensation to the named executive officers during the fiscal year ended
December 31, 1996; all such compensation was paid by the Bank. The Company
monitors salaries through its review of the Bank's budgeting process. The
named executive officers of the Company are members of the Board of Directors
of the Bank (the "Bank Board"), and in such capacity participated in
deliberations regarding compensation for executive officers of the Company
during the fiscal year ended December 31, 1996.

DIRECTORS' FEES AND COMPENSATION. During 1996, the Company paid each
director who was not an officer of the Company $500 for attendance at each
meeting of the Board and $500 for attendance at each committee meeting
thereof. No fee was paid for attendance at a committee meeting if the meeting
was held in conjunction with a meeting of the Board or with a meeting of
another committee. The total amount paid by the Company as directors' fees in
the fiscal year ended December 31, 1996 was $11,500.

During 1996, the Bank paid each director $250 for attendance at each meeting
of the Board of Directors of the Bank and $250 for attendance at each
committee meeting thereof. The total amount paid by the Bank as directors'
fees in the fiscal year ended December 31, 1996 was $21,750.

The Board has adopted the 1996 Stock Option Plan for Directors (the
"Directors Plan"), which is a formula plan pursuant to which annual options
are automatically granted to directors of the Company who are not employees of
the Company or the Bank, upon the terms and conditions set forth in the
Directors Plan. All options under the Directors Plan are nonstatutory stock
options. On the first business day of each calendar year, each non-employee
director is automatically granted an option to purchase 2,000 shares of Common
Stock of the Company at the closing price of the Common Stock as reported on
the American Stock Exchange on the grant date. In 1996 each non-employee
director of the Company received an option to purchase 2,000 shares of Common
Stock of the Company at an exercise price of $4.1875 per share.

NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

Effective January 2, 1997, the Company adopted the 1997 Non-Qualified Stock
Option Plan for Non-Employee Directors of the Company. The Company has granted
options under this plan covering 125,000 shares to each of William B. Byrd,
Joseph S. Hardin, Michael L. Milam, Garrett Morris and Cullen W. Turner, all
of which options vest over a 5 year period and have an exercise price of
$4.1875. The options were granted to align the long-term financial interests
of the directors with those of the shareholders of the Company, and to provide
an additional incentive for those persons to remain as directors of the
Company.

RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company has loans, deposits and
other transactions with its executive officers and directors and businesses
with which such persons are associated. It is the Company's policy that all
such transactions are entered into on substantially the same terms as those
prevailing at the time for comparable transactions with unrelated third
parties. During the first three quarters of 1997, the Company extended loans
of $195,152 to insureds to finance premiums paid to a director-related
company. From January 1, 1997 through October 31, 1997, the Company paid
$91,800 for legal services to Tracy & Holland, L.L.P., a law firm in which
Margaret Holland is a partner. The Company paid $124,145 to such firm in 1996
for legal services.

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.

59
<PAGE>

The Certificate of Incorporation of the Company limits the liability of
directors to the full extent permitted by Delaware law. The Certificate of
Incorporation also provides that the Company will indemnify directors and
officers to the full extent provided by Delaware law. Section 6.04 of the
Company's Bylaws provides that the Company shall indemnify all persons to the
full extent allowable by law who, by reason of the fact that they are or were
a director of the Company, become a party or are threatened to be made a party
to any indemnifiable action, suit or proceeding. The Company shall pay, in
advance of the final disposition of any indemnifiable action, suit or
proceeding under this bylaw, all reasonable expenses incurred by the director,
upon receipt of an undertaking by or on behalf of the director to repay such
amount if it is ultimately determined that he is not entitled to be
indemnified by the 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.

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 "Executive Compensation and Other Information",
individually, and, together with all current executive officers of the Company
as a group, as of November 15, 1997:

<TABLE>
<CAPTION>
AMOUNT AND
AME OF INDIVIDUALN NATURE OF PERCENT
OR NUMBER OF BENEFICIAL OF
PERSONS IN GROUP OWNERSHIP(1) CLASS(2)
- ------------------ -------------- --------
<S> <C> <C>
C. Jack Bean................................................ 197,193 shares(3) 3.41%
William B. Byrd............................................. 14,800 shares(4) *
Bobby W. Hackler............................................ 58,637 shares(5) 1.01%
Joseph S. Hardin............................................ 200,583 shares(6) 3.48%
G. M. Heinzelmann, III...................................... 64,051 shares(7) 1.10%
Margaret E. Holland......................................... 5,000 shares(8) *
Michael L. Milam............................................ 44,250 shares(9) *
Garrett Morris.............................................. 9,250 shares(10) *
Cullen W. Turner............................................ 90,100 shares(11) 1.56%
All directors and executive
officers as a group(10 persons)............................ 706,250 shares(12) 11.85%
</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 5,751,882 shares of Common Stock issued and outstanding at
November 15, 1997, 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.
(3) Includes 172,193 shares of Common Stock owned of record and 25,000 shares
of Common Stock which Mr. Bean has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options granted to him under the
1997 Non-Qualified Stock Option Plan for Officers and Key Employees of the
Company. (See "Executive Compensation and Other Information--Incentive
Stock Option Plans" and "Option Exercises and Holdings".)
(4) Includes 5,800 shares of Common Stock owned of record; 4,000 shares of
Common Stock which Mr. Byrd has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options granted to him under the
1996 Stock Option Plan for Directors of the Company; and 5,000 shares of
Common Stock which Mr. Byrd has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options

60
<PAGE>

granted to him under the 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors of the Company. (See "Executive Compensation and Other
Information--Directors' Fees and Compensation".)
(5) Includes 128 shares of Common Stock owned of record; 33,509 shares of
Common Stock which Mr. Hackler has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options granted to him under the
1988 and 1995 Incentive Stock Option Plans of the Company; and 25,000
shares of Common Stock which Mr. Hackler has the right to acquire within
sixty (60) days from November 15, 1997 pursuant to options granted to him
under the 1997 Non-Qualified Stock Option Plan for Officers and Key
Employees of the Company. (See "Executive Compensation and Other
Information--Incentive Stock Option Plans" and "Option Exercises and
Holdings".)
(6) Represents 191,583 shares of Common Stock held by a trust for which Mr.
Hardin serves as a co-trustee; 4,000 shares of Common Stock which Mr.
Hardin has the right to acquire within sixty (60) days from November 15,
1997 pursuant to options granted to him under the 1996 Stock Option Plan
for Directors of the Company; and 5,000 shares of Common Stock which Mr.
Hardin has the right to acquire within sixty (60) days from November 15,
1997 pursuant to options granted to him under the 1997 Non-Qualified Stock
Option Plan for Non-Employee Directors of the Company. (See "Executive
Compensation and Other Information--Directors' Fees and Compensation".)
(7) Includes 8,590 shares of Common Stock owned of record; 30,461 shares of
Common Stock which Mr. Heinzelmann has the right to acquire within sixty
(60) days from November 15, 1997 pursuant to options granted to him under
the 1988 and 1995 Incentive Stock Option Plans of the Company; and 25,000
shares of Common Stock which Mr. Heinzelmann has the right to acquire
within sixty (60) days from November 15, 1997 pursuant to options granted
to him under the 1997 Non-Qualified Stock Option Plan for Officers and Key
Employees of the Company. (See "Executive Compensation and Other
Information--Incentive Stock Option Plans" and "Option Exercises and
Holdings".)
(8) Includes 5,000 shares of Common Stock which Ms. Holland has the right to
acquire within sixty (60) days from November 15, 1997 pursuant to options
granted to her under the 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors of the Company. (See "Executive Compensation and Other
Information--Directors' Fees and Compensation".)
(9) Includes 250 shares of Common Stock owned of record; 35,000 shares of
Common Stock held by Dallas Fire Insurance Company, which is a wholly-
owned subsidiary of a corporation in which Mr. Milam has a 50% ownership
interest; 4,000 shares of Common Stock which Mr. Milam has the right to
acquire within sixty (60) days from November 15, 1997 pursuant to options
granted to him under the 1996 Stock Option Plan for Directors of the
Company; and 5,000 shares of Common Stock which Mr. Milam has the right to
acquire within sixty (60) days from November 15, 1997 pursuant to options
granted to him under the 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors of the Company. (See "Executive Compensation and Other
Information--Directors' Fees and Compensation".)
(10) Includes 250 shares of Common Stock owned of record; 4,000 shares of
Common Stock which Mr. Morris has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options granted to him under the
1996 Stock Option Plan for Directors of the Company; and 5,000 shares of
Common Stock which Mr. Morris has the right to acquire within sixty (60)
days from November 15, 1997 pursuant to options granted to him under the
1997 Non-Qualified Stock Option Plan for Non-Employee Directors of the
Company. (See "Executive Compensation and Other Information--Directors'
Fees and Compensation".)
(11) Includes 5,300 shares of Common Stock owned of record; 20,800 shares of
Common Stock held by a trust for which Mr. Turner serves as trustee;
55,000 shares of Common Stock held by an estate for which Mr. Turner
serves as executor; 4,000 shares of Common Stock which Mr. Turner has the
right to acquire within sixty (60) days from November 15, 1997 pursuant
to options granted to him under the 1996 Stock Option Plan for Directors
of the Company; and 5,000 shares of Common Stock which Mr. Milam has the
right to acquire within sixty (60) days from November 15, 1997 pursuant
to options granted to him under the 1997 Non-Qualified Stock Option Plan
for Non-Employee Directors of the Company. (See "Executive Compensation
and Other Information--Directors' Fees and Compensation".)
(12) Includes 40,698 shares of Common Stock of the Company currently
exercisable pursuant to the Company's 1988 Incentive Stock Option Plan;
29,158 shares of Common Stock of the Company currently exercisable
pursuant to the Company's 1995 Incentive Stock Option Plan; 20,000 shares
of Common Stock of the

61
<PAGE>

Company currently exercisable pursuant to the Company's 1996 Stock Option
Plan for Directors; and 30,000 shares of Common Stock of the Company
currently exercisable pursuant to the Company's 1997 Non-Qualified Stock
Option Plan for Non-Employee Directors; and 90,000 shares of Common Stock
of the Company currently exercisable pursuant to the 1997 Non-Qualified
Stock Option Plan for Officers and Key Employees.

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 five percent (5%) of the issued and outstanding shares of the Common
Stock of the Company as of November 15, 1997:

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME AND ADDRESS OF BENEFICIAL OF
OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2)
------------------- ----------------- --------
<S> <C> <C>
Evergreen Asset Management Group ................... 458,200 shares(3) 7.97%
c/o First Union Corporation
One First Union Center
Charlotte, North Carolina 28288
Nicholas Limited Edition, Inc. ..................... 432,800 shares 7.52%
700 North Water Street
Milwaukee, Wisconsin 53202
John Hancock Bank & Thrift.......................... 303,700 shares 5.28%
Opportunity Fund
101 Huntington Avenue
Boston, Massachusetts 02199
</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 5,751,882 shares of Common Stock issued and outstanding at
November 15, 1997, 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.
(3) Includes 3,000 shares as to which First Union Corporation shares voting
and dispositive powers.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
executive officers, directors and persons who own more than ten percent (10%)
of a registered class of the Company's equity securities to file reports of
ownership with the Securities and Exchange Commission.

Based upon a review of SEC Forms 3, 4 and 5 and amendments thereto furnished
to the Company, management of the Company has determined that during fiscal
year 1996 the following directors, officers and/or ten percent (10%)
beneficial owners of Common Stock of the Company failed to timely file with
the Securities and Exchange Commission one or more required reports on Form 3,
4 or 5 regarding transactions in securities of the Company:

<TABLE>
<CAPTION>
REPORTING NUMBER OF NUMBER OF
PERSON REPORTS TRANSACTIONS
--------- --------- ------------
<S> <C> <C>
C. Jack Bean...................................... 1 3
Michael L. Milam.................................. 1 1
</TABLE>

62
<PAGE>

To the best knowledge of management of the Company, during fiscal year 1996
no director, officer or ten percent (10%) beneficial owner of Common Stock of
the Company failed to file with the Securities and Exchange Commission any
required reports on Form 3, 4 or 5 regarding transactions in securities of the
Company.

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., filed on January 5, 1993, now pending
in the 141st Judicial District Court of Tarrant County, Texas (the "MacGregor
Case").

The claimant in the Anchorage Case is the Tennessee Commissioner of Commerce
and Insurance ("Tennessee"), appointed by the Chancery Court for the State of
Tennessee, Twentieth Judicial District, Davidson County, to liquidate
Anchorage Fire and Casualty Insurance Company ("Anchorage"), including
Anchorage deposits at the Bank. Tennessee 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. ("Shortline"),
is the holder of a Florida judgment against MacGregor General Insurance
Company, Ltd. ("MacGregor") who seeks to recover funds allegedly belonging to
MacGregor which were held by the Bank.

Both cases arise out of the Bank's alleged exercise of control over funds,
representing the Bank's collateral, held in accounts at the Bank under
agreements with Anchorage and MacGregor. The Bank asserts that it had a right
to exercise control over its collateral under contractual agreements between
the Bank and the respective insurance companies or the Bank and the policy
holders, and also in order to protect the Bank against the possibility of
inconsistent orders regarding the same funds. Tennessee also seeks to recover
funds allegedly transferred in and out of the Anchorage/MacGregor accounts at
the Bank during an approximate four month period in 1993.

When the MacGregor case was initially filed, Shortline sought a restraining
order against the Bank concerning the MacGregor funds. When the Bank received
notice of competing claims to some or all of these funds by Tennessee, the
Bank intervened and interpled approximately $600,000 into the court's
registry. Shortline now seeks, inter alia, damages against the Bank from an
alleged wrongful offset wherein the Bank allegedly exercised control over the
MacGregor funds at the Bank pursuant to agreements with MacGregor. The Bank
moved for and obtained a summary judgment that its intervention and
interpleader of funds was proper. Shortline also sought and obtained a summary
judgment from the trial court that the funds interpled by the Bank into the
court's registry belonged to Shortline. Tennessee appealed the summary
judgment to the Fort Worth Court of Appeals. The Fort Worth Court of Appeals
affirmed the trial court's ruling that the Bank's intervention and
interpleader was proper but reversed the trial court's ruling that the funds
in the court belonged to Shortline. Currently, Shortline and Tennessee have
made application to the Texas Supreme Court to allow an appeal of the ruling
from the Fort Worth Court of Appeals.

In the Anchorage case, Tennessee claims that the Bank allegedly transferred
funds in and out of the Anchorage accounts after allegedly receiving notice of
court orders prohibiting such transfers. Discovery in this case is in the
initial stages and the damages sought by Tennessee are not yet certain. The
Company believes both of these cases lack merit and intends to defend them
vigorously. The outcome of both of these cases is uncertain at this time.

63
<PAGE>

In June, 1997, the Company learned that a number of IPF agreements on which
it has made loans may be fictitious or forged, and has filed two lawsuits
regarding such agreements. The first lawsuit was filed by the Bank on July 24,
1997, in the 342nd District Court of Tarrant County, Texas, against Defendants
Greenway Insurance Agency, Inc., Peter M. O'Malley, Jr., and Auto-Owners
Insurance Company (the "Greenway" case). The Greenway case was removed to the
Federal District Court for the Northern District of Texas, Fort Worth
Division, where it is currently pending. In the Greenway case, the Bank
alleges that Defendants O'Malley and Greenway submitted forged, fictitious and
fraudulent premium finance agreements to the Bank for the funding of loans on
insurance policies purportedly issued by Auto-Owners Insurance Company. These
loans were funded to Greenway pursuant to instructions on the premium finance
agreements submitted and pursuant to written instructions from Auto-Owners.
The fictitious loans submitted by Greenway and O'Malley that ultimately went
into default exceeded $800,000, for which the Bank is suing Defendants on
theories of negligence, fraud, and breach of contract and warranty. The
Greenway case is in the initial state of discovery and is currently set for
trial in June 1998. A claim for this loss under the Bank's bond issued by St.
Paul Mercury Insurance Company ("St. Paul") has been presented to St. Paul.
St. Paul is investigating this bond claim and has yet to take a position with
respect to the claim.

The second lawsuit was filed by the Bank as plaintiff against Beverly
Insurance Group, Inc. in its own right and d/b/a First Coast Insurance
Services, and Rhoda Nottingham (the "First Coast" case). The First Coast case
was filed on December 1, 1997, and is currently pending in the 348th Judicial
District Court of Tarrant County, Texas. The Defendants in the First Coast
case were submitting premium finance agreements to the Bank which resulted in
loans being funded by the Bank to Defendants pursuant to instructions
contained on the premium finance agreements. Once the premium finance
agreements had been funded, payment coupon books were mailed by the Bank to
the insured at the address listed for the insured in the premium finance
agreement. After the Bank had been financing purported insurance policies
under the premium finance agreements submitted by Defendants for some period
of time, it was discovered that numerous payment coupon books were being
returned to the Bank by the post office because the insured's address listed
on the premium finance agreement sent by Defendants was not correct. As such,
required payments on numerous premium finance agreements were not made which
resulted in numerous premium finance agreements going into default. The Bank
has asserted causes of action against Defendants for breach of contract and
warranty, negligence and, alternatively, fraud, where the Bank seeks to
recover the amount of loans in default, which is in excess of $300,000. The
First Coast case is in its initial stages with the Defendants not having been
served with citation to appear as of yet. The potential exists for a bond
claim in this case similar to the bond claim in the Greenway case.

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, 5,786,171 of which shares were issued
and outstanding as of November 15, 1997 (not including 55,216 shares issuable
upon the exercise of outstanding stock options). At November 15, 1997, the
Company had 431 shareholders of record.

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.

64
<PAGE>

The transfer agent and registrar of the common stock is Securities Transfer
Corporation, 16910 Dallas Parkway, Suite 100, Dallas, Texas 75248.

SHAREHOLDERS' RIGHTS AGREEMENT

The Company has adopted a shareholder rights agreement which is intended to
discourage takeover or efforts or tender offers under which not all
outstanding shares of Common Stock would be purchased for the same price and
on substantially the same terms. Pursuant to the Surety Capital Corporation
Rights Agreement dated as of June 17, 1997 between the Company and Securities
Transfer Corporation, as Rights Agent, the Company declared a dividend of one
right (a "Right") for each outstanding share of the Common Stock to
shareholders of record at the close of business on June 6, 1997.

Each Right initially entitles shareholders to buy one share of Common Stock
at an exercise price of $50.00 (the "Purchase Price"). The rights will be
exercisable only if a person or group acquires 15% or more of the Common Stock
or announces a tender offer the consummation of which would result in
ownership by such person or group of 15% or more of the Common Stock. The
Company will be entitled to redeem the Rights at $0.0001 per Right at any time
prior to the tenth day after a person or group acquires 15% or more of the
Common Stock, other than pursuant to a transaction approved by the Board. The
Rights are redeemable even after a 15% or more acquisition, if the Board so
determines, in connection with a merger of the Company with a "white knight"
and under other circumstances.

In the event of a 15% or more acquisition, each Right will entitle its
holder to purchase that number of shares of Common Stock equal to the result
obtained by dividing the Purchase Price by 50% of the then current market
price of the Common Stock.

If the Company, or any subsidiary of the Company, is acquired in a merger or
other business combination transaction in which the Common Stock is exchanged
or changed, or 50% or more of the Company's assets or earning power are sold,
each Right will entitle its holder to purchase that number of shares of common
stock of the surviving or acquiring entity equal to the result obtained by
dividing the Purchase Price by 50% of the then current market price of the
common stock of the surviving or acquiring entity.

PREFERRED STOCK

The Company is authorized to issue one million (1,000,000) shares of
preferred stock, par value $0.01 per share, no shares 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.

SHARES ELIGIBLE FOR FUTURE SALE

All shares of Common Stock issued in the Offering will be available for
resale in the public market without restriction or further registration under
the Securities Act, except for shares purchased by affiliates of the Company
(in general, any person who has a control relationship with the Company) which
shares will be subject to the resale limitations of Rule 144 under the
Securities Act. After the Offering, shares of Common Stock held by affiliates
will be considered to be "control shares", and are eligible for sale in the
public market in compliance with Rule 144. All officers and directors of the
Company have agreed, subject to certain exceptions, that they will not offer,
sell or otherwise dispose of any shares of Common Stock owned by them for a
period of 180 days after the date of this prospectus without the prior written
consent of the Underwriter.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) including a person who may be deemed to be an
"affiliate" of the Company as that term is defined under the Securities Act,
is entitled to sell, within any three-month period, a number of restricted
shares as to which at least one year has elapsed from the later of the
acquisition of such shares from the Company or an affiliate of the Company in
an amount that does not exceed the greater of (i) one percent of the then
outstanding shares of

65
<PAGE>

Common Stock (72,518 shares based upon 7,251,882 shares to be outstanding
immediately after the Offering), or (ii) if the common shares are quoted on the
NASDAQ National Market or a stock exchange, the average weekly trading volume
of the common shares during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain requirements as to the manner of
sale, notice, and the availability of current public information about the
Company. However, a person who is not deemed to have been an affiliate of the
Company during the 90 days preceding a sale by such person and who has
beneficially owned shares as to which at least two years has elapsed from the
later of the acquisition of such shares from the Company or an affiliate of the
Company is entitled to sell them without regard to the volume, manner of sale,
or notice requirements of Rule 144.

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriter, the Underwriter has agreed to purchase from the
Company and the Company has agreed to sell to the Underwriter, 1,500,000 shares
of Common Stock.

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 1,500,000 shares of Common
Stock if any are purchased. The Company has been advised that the Underwriter
proposes to offer the shares of Common Stock directly to the public at the
public offering price set forth on the cover page of this prospectus, and to
certain securities dealers at such price less a concession not in excess of
$ per share, and that the Underwriter and such dealers may reallow to other
dealers including any underwriter, a discount not in excess of $ per share.
After commencement of this Offering, the offering price and concession and
discounts may be changed by the Underwriter. The Company has agreed to pay the
Underwriter an accountable expense allowance not to exceed $150,000.

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 225,000 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.

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 has 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.

In connection with this Offering, the Underwriter may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Common Stock.
Specifically, the Underwriter may overallot this Offering, creating a short
position in the Common Stock. In addition, the Underwriter may bid for and
purchase the Common Stock in the open market to cover such short positions, or
to stabilize the price of the Common Stock.

If the Underwriter creates a short position in the Common Stock in connection
with the Offering, i.e., if it sells a greater aggregate number of shares of
Common Stock than is set forth on the cover page of this Prospectus, the
Underwriter may reduce the short position by purchasing shares of Common Stock
in the open market. The Underwriter may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.

The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases Common Stock in the open
market to reduce the selling group members' short position

66
<PAGE>

or to stabilize the price of the Common Stock, it may reclaim the amount of
the selling concession from the selling group members who sold those shares of
Common Stock as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security.

Neither the Company nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. The
Underwriter is not required to engage in these activities, and, if it does
engage in these activities, may end such activities at any time.

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 Underwriters by Bracewell & Patterson, L.L.P., Houston,
Texas.

EXPERTS

The consolidated balance sheets of the Company as of December 31, 1996 and
1995 and the related consolidated Statements of Income, Shareholders' Equity,
and Cash Flows for each of the three years in the period ended December 31,
1996, included in this prospectus, 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 financial statements of TexStar National Bank, Universal City, Texas as
of December 31, 1996 and for each of the two years in the period ended
December 31, 1996, also included in this prospectus, have been included herein
in reliance on the report of Burnside & Rishebarger, PLLC, 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. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits. Statements made in this
prospectus as to the contents of any contract or other document are not
necessarily complete, and, in each instance, are qualified by reference to the
copy of such contract or document filed as an exhibit to the Registration
Statement or previously filed with the Commission. In addition, the Company is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and in accordance therewith files
reports, proxy statements 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 and
copied at the public reference facilities of the Commission at Room 1024, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549; and at the
regional offices of the Commission located at 411 W. Seventh Street, Eighth
Floor, Fort Worth, Texas 76102. Copies of such material also may be obtained
upon the payment of prescribed rates by writing to the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549. The Commission

67
<PAGE>

maintains a site on the World Wide Web that contains reports, proxy statements
and other information filed electronically by issuers with the Commission,
which site can be accessed at http://www.sec.gov.

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.

68
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SURETY CAPITAL CORPORATION:
Consolidated Balance Sheet at September 30, 1997 (unaudited)............. F-2
Consolidated Statements of Income for the Nine Months Ended September 30,
1997 and 1996 (unaudited)............................................... F-3
Consolidated Statements of Shareholders' Equity for the Nine Months Ended
September 30, 1997 (unaudited).......................................... F-4
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1997 and 1996 (unaudited)........................................... F-5
Notes to Unaudited Consolidated Financial Statements..................... F-7
Report of Independent Accountants........................................ F-10
Consolidated Balance Sheets as of December 31, 1996, 1995................ F-11
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994........................................................... F-12
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994........................................ F-13
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994..................................................... F-14
Notes to Consolidated Financial Statements............................... F-16
TEXSTAR NATIONAL BANK:
Balance Sheet at September 30, 1997 (unaudited).......................... F-37
Statements of Income for the Nine Months Ended September 30, 1997 and
1996 (unaudited)........................................................ F-38
Statements of Shareholders' Equity for the Nine Months Ended September
30, 1997 (unaudited).................................................... F-39
Statements of Cash Flows for the Nine Months Ended September 30, 1997 and
1996 (unaudited)........................................................ F-40
Notes to Financial Statements............................................ F-41
Report of Independent Accountants........................................ F-45
Balance Sheets as of December 31, 1996, 1995............................. F-46
Statements of Income for the years ended December 31, 1996 and 1995...... F-47
Statements of Stockholders' Equity as of December 31, 1996 and 1995...... F-48
Statements of Cash Flows for the years ended December 31, 1996 and 1995.. F-49
Notes to Financial Statements............................................ F-50
</TABLE>

F-1
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS:
Cash and due from banks......................................... $ 6,671,815
Federal funds sold.............................................. 11,485,000
Interest bearing deposits in financial institutions............. 190,000
Investment securities:
Available-for-sale............................................. 14,369,508
Held-to-maturity............................................... 18,376,112
------------
Total investment securities.................................. 32,745,620
Loans........................................................... 116,899,553
Less: Unearned interest......................................... (2,508,953)
Allowance for credit losses.................................. (1,366,662)
------------
Net loans....................................................... 113,023,938
Premises and equipment, net..................................... 3,777,650
Accrued interest receivable..................................... 855,707
Other real estate and repossessed assets........................ 130,992
Other assets.................................................... 2,022,647
Excess of cost over fair value of net assets acquired, net of
accumulated amortization
of $1,109,716 at September 30, 1997............................ 5,990,140
------------
Total assets................................................. $176,893,509
============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand deposits................................................. $ 22,607,969
Savings, NOW and money markets.................................. 45,076,627
Time deposits, $100,000 and over................................ 21,631,301
Other time deposits............................................. 65,683,422
------------
Total deposits............................................... 154,999,319
Accrued interest payable and other liabilities.................. 1,087,832
------------
Total liabilities............................................ 156,087,151
------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued at
September 30, 1997............................................. --
Common stock, $.01 par value, 20,000,000 shares authorized,
5,786,171 shares
issued at September 30, 1997, and 5,751,882 outstanding at
September 30, 1997............................................. 57,862
Additional paid-in capital...................................... 16,850,067
Retained earnings............................................... 3,982,998
Stock rights issuable........................................... 57,862
Treasury stock, 34,289 shares at September 30, 1997 carried at
cost........................................................... (172,828)
Unrealized gain (loss) on available-for-sale securities, net of
tax............................................................ 30,397
------------
Total shareholders' equity................................... 20,806,358
------------
Total liabilities and shareholders' equity................... $176,893,509
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-2
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Interest income:
Commercial and real estate loans................. $ 3,472,758 $ 3,245,672
Consumer loans................................... 968,832 1,084,355
Insurance premium financing...................... 3,717,187 2,509,161
Medical receivables factoring.................... 1,713,678 843,071
Federal funds sold............................... 323,455 875,221
Investment securities:
Taxable........................................ 1,561,055 1,637,835
Tax-exempt..................................... 237,685 243,673
Interest bearing deposits........................ 12,763 36,771
----------- -----------
Total interest income.......................... 12,007,413 10,475,759
----------- -----------
Interest expense:
Savings, NOW and money market.................... 937,393 760,635
Time deposits, $100,000 and over................. 839,902 754,507
Other time deposits.............................. 2,512,759 2,439,884
Other expense.................................... -- 6,612
----------- -----------
Total interest expense.......................... 4,290,054 3,961,638
----------- -----------
Net interest income before provision for credit
losses........................................ 7,717,359 6,514,121
----------- -----------
Provision for credit losses........................ 295,000 90,000
----------- -----------
Net interest income............................. 7,422,359 6,424,121
----------- -----------
Noninterest income................................. 1,764,705 1,354,776
----------- -----------
Noninterest expense:
Salaries and employee benefits................... 3,392,296 3,153,119
Occupancy and equipment.......................... 1,123,513 933,008
General and administrative....................... 2,265,249 1,965,581
----------- -----------
Total noninterest expense...................... 6,781,058 6,051,708
----------- -----------
Income before income taxes................... 2,406,006 1,727,189
Income tax expenses:
Current.......................................... 874,917 593,972
----------- -----------
Net income..................................... $ 1,531,089 $ 1,133,217
=========== ===========
Net income per share of common stock............... $ 0.27 $ 0.22
=========== ===========
Weighted average shares outstanding................ 5,751,212 5,262,716
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-3
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
UNREALIZED
GAIN/
COMMON STOCK (LOSS) ON
----------------- ADDITIONAL STOCK AVAILABLE- TOTAL
PAR PAID-IN RETAINED RIGHTS TREASURY FOR-SALE SHAREHOLDERS'
SHARES VALUE CAPITAL EARNINGS ISSUEABLE STOCK SECURITIES EQUITY
--------- ------- ----------- ---------- --------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 5,763,737 $57,637 $16,752,003 $2,509,771 $ (74,539) $(14,320) $19,230,552
Stock Rights Issuable... (57,862) $57,862
Purchase of Treasury
Stock (18,671 shares).. (98,289) (98,289)
Net Income.............. 1,531,089 1,531,089
Exercise of stock
options................ 22,434 225 98,064 98,289
Change in unrealized
gain/(losses) on
available-for-sale
securities, net of tax,
$19,800................ 44,717 44,717
--------- ------- ----------- ---------- ------- --------- -------- -----------
Balance at September 30,
1997................... 5,786,171 $57,862 $16,850,067 $3,982,998 $57,862 $(172,828) $ 30,397 $20,806,358
========= ======= =========== ========== ======= ========= ======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-4
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 1,531,089 $ 1,133,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses.................... 295,000 90,000
Provision for depreciation..................... 510,022 457,502
Amortization of intangible assets.............. 390,428 182,849
Gain on sale of available-for-sale securities.. (10,379)
Gain on sale or disposal of assets............. (110,888)
Net (decrease) increase in unearned interest on
loans......................................... (35,850) 451,427
Net increase (decrease) in other assets........ 194,218 (103,009)
Net decrease in accrued interest payable and
other liabilities............................. (450,385) (243,238)
------------ ------------
Net cash provided by operating activities.... 2,313,255 1,968,748
------------ ------------
Cash flows from investing activities:
Net increase in loans............................ (9,056,707) (14,059,111)
Payments received on purchased medical claims
receivables..................................... 14,899,958 13,278,557
Purchases of medical claims receivables.......... (18,753,754) (10,404,482)
Purchases of available-for-sale securities....... (5,973,016) (7,239,958)
Proceeds from sales of available-for-sale
securities...................................... 2,948,507
Proceeds from maturities of available-for-sale
securities...................................... 4,951,170 4,883,718
Purchases of held-to-maturity securities......... (2,977,925)
Proceeds from maturities of held-to-maturity
securities...................................... 4,185,158 8,495,145
Proceeds from maturities of interest bearing
deposits in financial institutions.............. 95,842 1,034,216
Proceeds from sale of bank premises and
equipment....................................... 119,780
Purchases of bank premises and equipment......... (362,352) (429,747)
Proceeds from sale of other real estate and
repossessed assets.............................. 613,539
Direct cost incurred for bank acquisition........ (106,113)
Net cash acquired through acquisition............ 3,876,901
------------ ------------
Net cash used in investing activities........ (6,331,875) (3,648,799)
------------ ------------
Cash flows from financing activities:
Net decrease in deposits......................... (691,022) (6,555,012)
Principal payments on notes payable.............. (375,000)
Purchase of treasury stock....................... (98,289) (23,709)
Exercise of stock options........................ 98,289 23,712
Proceeds from the sale of stock.................. 7,452,098
------------ ------------
Net cash (used in) provided by financing
activities.................................. (691,022) 522,089
------------ ------------
Net decrease in cash and cash equivalents.......... (4,709,642) (1,157,962)
Beginning cash and cash equivalents................ 22,866,457 23,217,018
------------ ------------
Ending cash and cash equivalents................... $ 18,156,815 $ 22,059,056
============ ============
</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, 1997 AND 1996

<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------
1997 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Supplemental schedule of noncash investing and
financing activities:
Transfers of repossessed collateral to other
assets............................................. $ 750,739
Transfer of loans to other assets................... $1,088,497
Additions to loans to facilitate the sale of other
real estate and other assets....................... $ 344,907
Adjustments to other assets subsequent to
acquisition........................................ $ 141,955
Declaration of stock dividend....................... $ 57,862
Net cash acquired through acquisitions:
Interest bearing deposits in financial
institutions....................................... $ 274,242
Investment securities............................... 21,214,629
Net loans........................................... 18,476,948
Premises and equipment, net......................... 1,270,401
Other assets........................................ 896,832
Excess of cost over fair value of net assets
acquired........................................... 3,881,881
Deposits............................................ (49,237,113)
Other liabilities................................... (654,721)
------------
Net cash acquired through acquisitions................ $ (3,876,901)
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-6
<PAGE>

SURETY CAPITAL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The financial statements included herein have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. These condensed
financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's latest annual
report on Form 10-K. In the opinion of the Company, all adjustments consisting
only of normal recurring adjustments necessary to present fairly the financial
position of the Company as of September 30, 1997, and the results of its
operations and its cash flows for the indicated periods have been included.
The results of operations for such interim period are not necessarily
indicative of the results to be expected for the fiscal year ending December
31, 1997.

2. Loans, net:

At September 30, 1997, the loan portfolio was composed of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Insurance premium financing................................... $ 46,111,636
Installment loans............................................. 10,316,265
Commercial loans.............................................. 22,715,798
Real estate loans............................................. 27,255,527
Medical claims receivable..................................... 10,500,327
------------
Total gross loans........................................... 116,899,553
Unearned interest............................................. (2,508,953)
Allowance for credit losses................................... (1,366,662)
------------
Loans, net................................................ $113,023,938
============
</TABLE>

Activity in the allowance for credit losses is as follows:

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Beginning balance................................ $1,284,774 $ 702,927
Provision for credit losses...................... 295,000 90,000
Bank acquisition................................. 614,700
Loans charged off, net of recoveries............. (213,112) (115,438)
---------- ----------
Ending balance................................... $1,366,662 $1,292,189
========== ==========
</TABLE>

Loans on which the accrual of interest has been discontinued amounted to
approximately $126,000 and $144,000 at September 30, 1997 and December 31,
1996, respectively.

At September 30, 1997, the Company's recorded investment in loans for which
impairment has been recognized in accordance with Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors

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

F-7
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

for Impairment of a Loan," ("SFAS 114") consists primarily of commercial loans
and installment loans as follows:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Impaired loans............................................... $10,356,686
Impaired loans with related allowance calculated under SFAS
114......................................................... 9,165,643
Allowance on impaired loans calculated under SFAS 114........ 853,522
Impaired loans with no allowance calculated under SFAS 114... 1,191,043
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Average impaired loans....................................... 7,651,462
Interest income recognized on impaired loans................. 694,370
</TABLE>

As of September 30, 1997, there were no commitments to lend additional funds
for loans considered impaired.

3. Stock Option Plans:

The Company has two long-term incentive stock option plans for key senior
officers of the Company. The stock option plans provide these key employees
with options to purchase shares of the Company's Common Stock at an exercise
price equal to the fair market value of such Common Stock on the date of
grant. On July 16, 1996, the Company adopted a stock option plan for directors
of the Company who are not employees of the Company. This plan is a formula
plan pursuant to which annual options to purchase 2,000 shares of the
Company's Common Stock at an exercise price equal to the fair market value of
such Common Stock on the date of the grant are automatically granted to each
non-employee director of the Company.

STOCKHOLDERS' RIGHTS AGREEMENT:

Pursuant to the Surety Capital Corporation Rights Agreement dated as of June
17, 1997 between the Company and Securities Transfer Corporation, as Rights
Agent, the Company declared a dividend of one right (a "Right") for each
outstanding share of common stock, $0.01 par value, of the Company (the
"Common Stock") to stockholders of record at the close of business on June 6,
1997.

Each Right initially entitles stockholders to buy one share of Common Stock
at an exercise price of $50.00 (the "Purchase Price"). The rights will be
exercisable only if a person or group acquires 15% or more of the Common Stock
or announces a tender offer the consummation of which would result in
ownership by such person or group of 15% or more of the Common Stock. The
Company will be entitled to redeem the Rights at $0.0001 per Right at any time
prior to the tenth day after a person or group acquires 15% or more of the
Common Stock, other than pursuant to a transaction approved by the Board. The
Rights are redeemable even after a 15% or more acquisition, if the Board so
determines, in connection with a merger of the Company with a "white knight"
and under other circumstances.

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

F-8
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

If the Company, or any subsidiary of the Company, is acquired in a merger or
other business combination transaction in which the Common Stock is exchanged
or changed, or 50% or more of The Company's assets or earning power are sold,
each Right will entitle its holder to purchase that number of shares of common
stock of the surviving or acquiring entity equal to the result obtained by
dividing the Purchase Price by 50% of the then current market price of the
common stock of the surviving or acquiring entity.

5. Other Receivables:

The Bank has learned that a number of insurance premium finance agreements
on which it has made loans may be fictitious or forged. The matter is under
continuing investigation by state and federal authorities. All of the loans
originated through two insurance agencies. The total unpaid balance of all of
the loans in question is approximately $1.1 million. This amount has been
reclassified from loans to other receivables. This amount will remain in a
non-accrual account until collected and will be classified as a nonperforming
asset. The Bank has commenced legal action against the parties believed to be
responsible. Management believes it has meritorious avenues of collection and
no material losses are expected.

6. Subsequent Events:

On October 10, 1997 the Company and Surety Bank entered into an agreement to
acquire TexStar National Bank ("TexStar"), located in University City, Texas.
The purchase price for TexStar is projected to be approximately $19.59 per
share of TexStar common stock outstanding (total cash consideration:
approximately $9,500,000), which will be paid to the shareholders of TexStar
in connection with the merger of TexStar with and into Surety Bank.

As of September 30, 1997, TexStar had total assets of $73,635,427, total
deposits of $65,681,173, total loans of $32,551,203, total equity of
$5,647,545 and year to date net income of $394,682. TexStar has five full-
service banking facilities located primarily in suburban areas northeast of
San Antonio, Texas.

The completion of the merger will result in Surety Bank increasing its asset
size to approximately $250,000,000. This will represent an approximate 43%
increase in asset size. The completion of the merger is subject to a number of
contingencies, including regulatory approvals by applicable banking
authorities, due diligence review by Surety Bank of TexStar's business
operations, the raising of sufficient funds by Surety Capital to facilitate
the transaction, approval by TexStar's shareholders, and other matters. If
consummated, the transaction is expected to close on or before March 31, 1998.

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

F-9
<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, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.

As discussed in Note 2 to the consolidated financial statements, Surety
Capital Corporation changed its method of accounting for investment securities
in 1994.

Coopers & Lybrand L.L.P.

Fort Worth, Texas
January 21, 1997

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

F-10
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Cash and due from banks.......................... $ 6,094,457 $ 4,727,018
Federal funds sold............................... 16,772,000 18,490,000
Interest bearing deposits in financial institu-
tions........................................... 285,842 1,046,297
Investment securities:
Available-for-sale............................. 16,221,273 10,128,157
Held-to-maturity............................... 22,561,270 13,780,538
------------ ------------
Total investment securities.................. 38,782,543 23,908,695
Loans............................................ 105,696,491 68,991,700
Less: Unearned interest.......................... (2,544,803) (1,889,461)
Allowance for credit losses...................... (1,284,774) (702,927)
------------ ------------
Loans, net..................................... 101,866,914 66,399,312
Premises and equipment, net.................... 3,970,193 2,775,688
Accrued interest receivable.................... 1,083,336 781,031
Other real estate and repossessed assets....... 738,198 85,528
Other assets................................... 607,214 467,147
Excess of cost over fair value of net assets
acquired, net of Accumulated amortization of
$719,288 and $359,572 at
December 31, 1996 and 1995, respectively....... 6,238,613 2,658,557
------------ ------------
Total assets................................. $176,439,310 $121,339,273
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand deposits.................................. $ 23,878,744 $ 13,182,888
Savings, NOW and money markets................... 48,372,642 30,612,855
Time deposits, $100,000 and over................. 20,276,235 15,472,674
Other time deposits.............................. 63,162,720 50,330,085
------------ ------------
Total deposits............................... 155,690,341 109,598,502
Note payable..................................... 375,000
Accrued interest payable and other liabilities... 1,518,417 1,071,299
------------ ------------
Total liabilities............................ 157,208,758 111,044,801
------------ ------------
Commitments and contingent liabilities (Notes 10 &
16)
Shareholders' equity:
Preferred stock, $.01 par value, 20,000,000
shares authorized, none issued at December 31,
1996 and 1995
Common stock, $.01 par value, 20,000,000 shares
authorized, 5,763,737 and 3,516,595 shares
issued at December 31, 1996 and 1995,
respectively, and 5,748,119 and 3,506,429
outstanding at December 31, 1996 and 1995,
respectively.................................. 57,637 35,166
Additional paid-in capital..................... 16,752,003 9,356,469
Retained earnings.............................. 2,509,771 811,784
Treasury stock, 15,618 and 10,166 shares car-
ried at cost at December 31, 1996 and 1995,
respectively.................................. (74,539) (50,830)
Unrealized gain/(loss) on available-for-sale
securities, net of tax........................ (14,320) 141,883
------------ ------------
Total shareholders' equity..................... 19,230,552 10,294,472
------------ ------------
Total liabilities and shareholders' equity... $176,439,310 $121,339,273
============ ============
</TABLE>

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

F-11
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Commercial and real estate loans.......... $ 5,772,065 $3,664,124 $1,422,911
Consumer loans............................ 1,444,189 1,198,632 1,059,188
Insurance premium financing............... 3,563,467 2,739,060 2,172,038
Federal funds sold........................ 1,078,618 657,809 302,621
Investment securities
Taxable................................. 2,165,301 905,046 338,286
Tax-exempt.............................. 324,605 268,702 23,792
Interest bearing deposits................. 42,117 101,408 68,173
----------- ---------- ----------
Total interest income................. 14,390,362 9,534,781 5,387,009
----------- ---------- ----------
Interest expense:
Savings, NOW and money market............. 1,056,884 805,514 353,123
Time deposits, $100,000 and over.......... 1,106,754 792,098 362,700
Other time deposits....................... 3,191,439 1,957,288 760,833
Other expense............................. 6,612 122,579 11,075
----------- ---------- ----------
Total interest expense................ 5,361,689 3,677,479 1,487,731
----------- ---------- ----------
Net interest income before provision
for credit losses.................... 9,028,673 5,857,302 3,899,278
Provision for credit losses................. 135,000 60,000 106,899
----------- ---------- ----------
Net interest income................... 8,893,673 5,797,302 3,792,379
----------- ---------- ----------
Noninterest income.......................... 1,877,454 1,419,067 1,160,007
----------- ---------- ----------
Noninterest expense:
Salaries and employee benefits............ 4,244,874 2,923,118 2,201,188
Occupancy and equipment................... 1,244,551 907,286 669,936
General and administrative................ 2,645,587 2,048,148 1,590,814
----------- ---------- ----------
Total noninterest expense............. 8,135,012 5,878,552 4,461,938
----------- ---------- ----------
Income before income taxes............ 2,636,115 1,337,817 490,448
Income tax expenses:
Current................................... 938,128 263,007 36,697
Deferred.................................. 0 187,924 (19,009)
----------- ---------- ----------
Net income............................ $ 1,697,987 $ 886,886 $ 472,760
=========== ========== ==========
Net income per share of common stock........ $ .32 $ .27 $ .20
=========== ========== ==========
Weighted average shares outstanding......... 5,389,366 3,279,448 2,393,841
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-12
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
UNREALIZED
GAIN/
COMMON STOCK (LOSS) ON
----------------- ADDITIONAL RETAINED AVAILABLE- TOTAL
PAR PAID-IN EARNINGS TREASURY FOR-SALE SHAREHOLDERS'
SHARES VALUE CAPITAL (DEFICIT) STOCK SECURITIES EQUITY
--------- ------- ----------- ---------- -------- ---------- ------------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 tax
of $1,462.............. -- -- -- -- -- $ (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.... 459,500 4,595 1,192,587 -- -- -- 1,197,182
Purchase of Treasury
Stock.................. -- -- -- -- $(50,830) -- (50,830)
Net Income.............. -- -- -- 886,886 -- -- 886,886
Exercise of stock
options................ 16,266 163 50,668 -- -- -- 50,831
Change in unrealized
gain/(losses) on
available-for-sale
securities, net of tax
of $74,544............. -- -- -- -- -- 144,722 144,722
--------- ------- ----------- ---------- -------- --------- -----------
Balance at December 31,
1995................... 3,516,595 35,166 9,356,469 811,784 (50,830) 141,883 10,294,472
--------- ------- ----------- ---------- -------- --------- -----------
Sale of Common Stock.... 2,239,218 22,392 7,371,901 -- -- -- 7,394,293
Purchase of Treasury
Stock.................. -- -- -- -- (23,709) -- (23,709)
Net Income.............. -- -- -- 1,697,987 -- -- 1,697,987
Exercise of stock
options................ 7,924 79 23,633 -- -- -- 23,712
Change in unrealized
gain/(losses) on
available-for-sale
securities, net of tax
of $81,147............. -- -- -- -- -- (156,203) (156,203)
--------- ------- ----------- ---------- -------- --------- -----------
Balance at December 31,
1996................... 5,763,737 $57,637 $16,752,003 $2,509,771 $(74,539) $ (14,320) $19,230,552
========= ======= =========== ========== ======== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-13
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activi-
ties:
Net income........................ $ 1,697,987 $ 886,886 $ 472,760
Adjustments to reconcile net in-
come to net cash provided by op-
erating activities:
Provision for credit losses..... 135,000 60,000 106,899
Provision for depreciation...... 573,745 500,725 330,644
Amortization of intangible as-
sets........................... 359,717 184,332 51,201
Gain on sale or disposal of as-
sets........................... (22,879) (8,477) (15,508)
Net increase in unearned inter-
est on loans................... 655,342 382,618 136,614
Net (decrease) increase in other
assets......................... 14,925 (353,503) (220,707)
Net (decrease) increase in ac-
crued interest payable and
other liabilities.............. (101,725) 411,209 (122,438)
------------- ------------ ------------
Net cash provided by operating
activities................... 3,312,112 2,063,790 739,465
------------- ------------ ------------
Cash flows from investing activi-
ties:
Net increase in loans............. (15,070,139) (1,486,861) (7,760,672)
Payments received on purchased
medical claims receivables....... 14,229,677 15,716,784 12,290,141
Purchases of medical claims
receivables...................... (17,480,467) (16,688,775) (11,229,044)
Purchases of available-for-sale
securities....................... (7,239,958) (7,356,633)
Proceeds from sales of available-
for-sale securities.............. 4,736,638
Proceeds from maturities of
available-for-sale securities.... 909,492 2,670,121 169,971
Purchases of held-to-maturity
securities....................... (3,081,744) (7,048,483) (316,276)
Proceeds from maturities of held-
to-maturity securities........... 15,515,641 2,808,990 4,556,981
Purchases of interest bearing
deposits in financial
institutions..................... (99,081) 500,000
Proceeds from maturities of
interest bearing deposits in
financial institutions........... 1,034,697 576,972 712,743
Purchases of bank premises and
equipment........................ (518,010) (609,135) (420,487)
Proceeds from sales of bank
premises and equipment........... 4,437 6,000 16,308
Proceeds from sale of other real
estate and repossessed assets.... 428,217 507,208
Net cash acquired in
acquisitions..................... 3,731,462 15,370,125 2,509,161
------------- ------------ ------------
Net cash (used in) provided by
investing activities......... (7,536,695) 9,103,870 1,028,826
------------- ------------ ------------
Cash flows from financing activi-
ties:
Net (decrease) increase in
deposits......................... (3,145,274) 1,032,815 (1,525,190)
Proceeds from issuance of note
payable.......................... 1,750,000
Principal payments on note
payable.......................... (375,000) (1,375,000)
Purchase of treasury stock........ (23,709) (50,830)
Exercise of stock options......... 23,712 50,831
Proceeds from the sale of stock... 7,394,293 1,197,182 2,314,772
------------- ------------ ------------
Net cash provided by financing
activities................... 3,874,022 854,998 2,539,582
------------- ------------ ------------
Net (decrease) increase in cash and
cash equivalents................... (350,561) 12,022,658 4,307,873
Beginning cash and cash equiva-
lents.............................. 23,217,018 11,194,360 6,886,487
------------- ------------ ------------
Ending cash and cash equivalents.... $ 22,866,457 $ 23,217,018 $ 11,194,360
============= ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-14
<PAGE>

SURETY CAPITAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure:
Cash paid during the period for in-
terest............................ $ 5,190,521 $ 3,421,225 $ 1,339,223
Cash paid during the period for
federal income taxes.............. $ 545,000 $ 22,733 $ 12,000
Supplemental schedule of noncash
investing and financing activities:
Transfers of repossessed collateral
to other assets................... $ 752,648 $ 457,483 $ 241,189
Additions to loans to facilitate
the sale of OREO and other
assets............................ $ 212,715 $ 162,385
Supplemental schedule of investing
activities:
Interest bearing deposits in finan-
cial institutions................. $ 274,242 $ 1,588,931
Investment securities.............. 21,214,629 16,196,901
Loans, net......................... 18,476,948 $ 875,159 26,363,109
Premises and equipment, net........ 1,270,401 273,677 999,713
Other assets....................... 959,648 6,569 474,002
Excess of cost over fair value of
net assets acquired............... 3,939,773 151,365 2,239,171
Deposits........................... (49,237,113) (16,538,565) (49,956,393)
Other liabilities.................. (629,990) (138,330) (414,595)
------------ ------------ ------------
Net cash acquired in acquisitions.... $ (3,731,462) $(15,370,125) $ (2,509,161)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.

F-15
<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 wholly-owned subsidiary, Surety Bank, National Association
(the "Bank"), which 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 debt and equity securities that have readily
determined fair values.

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. Unrealized gains
and losses, net of taxes, related to securities available-for-sale are
recorded as a separate component of shareholders' equity. Securities purchased
and held principally for the purpose of selling them in the near term are
classified as trading. The Company had no securities classified as trading as
of December 31, 1996 or 1995. The cost of securities sold is based on the
specific identification method.

Loans and Allowance for Credit Losses

Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance for credit
losses, and deferred fees or costs on originated loans. Loan origination fees
and certain direct origination costs are capitalized and recognized as an
adjustment of the yield of the related loan. Loans are stated at the amount of
unpaid principal, reduced by unearned interest and an allowance for credit
losses. The allowance for credit losses is established through a provision for
credit losses charged against current earnings.

A loan is considered impaired if, based on current information and events,
it is probable that the Company will be unable to collect the scheduled
payments of principal and interest when due, according to the contracted terms
of the loan agreement. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. The measurement of impaired
loans and the related allowance for credit losses is generally based on the
fair value of the collateral. Smaller balance homogenous loans consisting of
residential mortgages and consumer loans are evaluated for reserves
collectibility based on historical loss experience. Loans are charged against
the allowance for credit losses when management believes that the
collectibility of the principal is unlikely.

F-16
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income subsequently recognized only to the extent cash
payments are received.

Interest income on 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 credit losses as
deemed appropriate.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed using the straight-line method at rates sufficient to
amortize the cost over the estimated lives of the assets. Expenditures for
repairs and maintenance are expensed as incurred, and renewals and betterments
that extend the lives of assets are capitalized. Cost and accumulated
depreciation are eliminated from the accounts when assets are sold or retired
and any resulting gain or loss is reflected in operations in the year of
disposition.

Other Real Estate and Repossessed Assets

Real estate properties acquired through, or in lieu, of loan foreclosure are
to be sold and are initially recorded at fair value at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are periodically
performed by management and the real estate is carried at the lower of
carrying amount or fair value less cost to sell. Any write down to fair market
value at the date of acquisition is charged against the allowance for credit
losses. Any subsequent write-downs are reflected in operations.

Income Per Share

Net income per share of common stock is computed based upon the weighted
average number of shares of common stock outstanding during the years ended
December 31, 1996, 1995 and 1994.

Income Taxes

The Company's method of accounting for income taxes utilized an asset and
liability approach for financial statement purposes. The types of differences
between the tax bases of assets and liabilities and their financial reporting
amounts that give rise to significant portions of deferred income tax
liabilities or assets include: allowances for possible credit losses, property
and equipment, investment securities and net operating loss carryforwards.

Purchase Method of Accounting

Net assets acquired in purchase transactions are recorded at their fair
value at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired is amortized on a straight-line basis,
generally over a 15 year period. The Company continually re-evaluates the
propriety of the carrying amount of such intangible assets as well as its
amortization period, to determine whether current events and circumstances
warrant adjustments to the carrying value and/or revised estimates of the
period of benefit. At this time, the Company believes that no significant
impairment of such intangible asset has occurred and that no reduction of
amortization period is warranted.

F-17
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Fair Values of Financial Instruments

The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments as disclosed herein:

Cash and short-term instruments. The carrying amounts of cash and short-term
instruments approximate their fair value.

Available-for-sale and held-to-maturity securities. Fair values for
securities, excluding restricted equity securities, are based on quoted market
prices. The carrying values of restricted equity securities approximate their
fair values.

Loans receivable. For variable-rate loans that reprice frequently and have
no significant change in credit risk, fair values are based on carrying
values. Fair values for certain mortgage loans (for example, one-to-four
family residential) and other consumer loans are based on quoted market prices
of similar loans sold in conjunction with securitization transactions,
adjusted for differences in loan characteristics. Fair values for commercial
real estate and commercial loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Fair values for impaired loans
are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.

Deposit liabilities. The fair values disclosed for demand deposits are, by
definition, equal to the amount payable on demand at the reporting date (that
is, their carrying amounts). The carrying amounts of variable-rate, fixed-term
money market accounts and certificates of deposit (CDs) approximate their fair
values at the reporting date. Fair values for fixed-rate CDs are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.

Accrued interest. The carrying amounts of accrued interest approximate their
fair values.

Off-balance sheet instruments. Fair values for off-balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements.

Use of Estimates

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

Recent Accounting Pronouncements

In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities (SFAS 125). This Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. This Statement requires that after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. This Statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December
31, 1996. In December 1996, the FASB issued Statement of Financial Accounting
Standards No. 127, Deferral of the Effective Date of Certain Provisions of
FASB Statement No. 125. This Statement deferred the effective date of

F-18
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

FASB Statement No. 125 for secured lending, repurchase agreement, dollar-roll,
securities lending, and similar transactions to transactions occurring after
December 31, 1997.

In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, Earnings per Share (FAS 128). FAS 128 simplifies the
standards for computing earnings per share (EPS) previously found in APB
Opinion No. 15, Earnings per Share (Opinion 15), and make them comparable to
international EPS standards. FAS 128 replaces the presentation of primary EPS
with a presentation of basic EPS. Basic EPS excludes dilution and is computed
by dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS pursuant to Opinion 15.
FAS 128 also requires dual presentation of basic and diluted EPS on the face
of the income statement for entities with complex capital structures and a
reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. FAS 128 is
effective for financial statements issued for periods ending after December
31, 1997, including interim periods; earlier application is not permitted. FAS
128 requires restatement of all prior-period EPS data presented.

In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, Disclosure of Information About Capital Structure (FAS
129). FAS 129 establishes standards for disclosing information about an
entity's capital structure, including the pertinent rights and privileges of
various securities outstanding. FAS 129 is effective for financial statements
issued for periods ending after December 15, 1997.

Management believes that the adoption of these pronouncements will not have
a material impact on the financial statements of the Company.

3. Acquisitions:

BANK ONE, TEXAS, NATIONAL ASSOCIATION BRANCH IN WAXAHACHIE, TEXAS

On September 28, 1995 the Bank acquired certain assets (principally cash)
and assumed certain liabilities (principally customer deposits) relating to
the branch of Bank One, Texas, National Association (Bank One) located in
Waxahachie, Texas (the Waxahachie Branch). The Bank financed the acquisition
through the use of internally-generated funds.

At the closing, the Bank assumed deposits and other liabilities totaling
approximately $16,539,000. In addition, the Bank acquired certain small
business and consumer loans totaling approximately $875,000, certain real
property, furniture and equipment totaling approximately $274,000, and cash
and other assets totaling approximately $15,426,000. After paying a deposit
premium of two percent (2%) on the deposits assumed totaling approximately
$331,000, the Bank 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 the
Bank's existing branch network.

FIRST NATIONAL BANK, MIDLOTHIAN, TEXAS

On February 28, 1996 the Company completed a primary and secondary offering
of its Common Stock. The offering was underwritten by Hoefer & Arnett,
Incorporated, a San Francisco investment banking firm. A total of 2,388,759
shares of Common Stock were sold in the offering at a price of $3.75 per
share, including 288,759 shares of Common Stock sold as an over-allotment and
174,939 shares of Common Stock held by a shareholder of the Company. The
proceeds from this offering were used by the Company to finance the

F-19
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

acquisition of First National Bank, Midlothian, Texas, to retire the Company's
outstanding bank debt and for general corporate purposes.

On February 29, 1996 the Company completed the acquisition of First
Midlothian Corporation, a Texas bank holding company located in Midlothian,
Texas (First Midlothian), and its wholly owned subsidiary, First National
Bank, Midlothian, Texas ("First National").

With the completion of this acquisition, the Bank increased its asset size
by approximately 42%. In the transaction, a subsidiary of the Bank was first
merged with and into First Midlothian, pursuant to which merger the
shareholders of First Midlothian received cash in exchange for their shares of
capital stock of First Midlothian in an amount equal to approximately one
hundred fifty percent (150%) of the book value of First National. The Bank
paid $5,976,000 to the shareholders of First National in exchange for all of
the issued and outstanding shares of common stock of First National plus an
additional $619,707 to repay in full all outstanding debentures of First
Midlothian. The purchase of First National resulted in cost in excess of net
assets acquired amounting to $2,553,638, which is being amortized on a
straight line basis over a 15-year period. The assets and liabilities of First
National have been recorded at their fair values as of February 29, 1996.
Purchase accounting mark-to-market adjustments for the purchase of First
National resulted in a net increase in assets of $268,818. Immediately
following the merger, First National and the Bank consolidated under the
charter of the Bank. The acquisition has been accounted for as a purchase in
the accompanying consolidated financial statements.

Included in the accompanying consolidated financial statements are the
following amounts for First National as of December 31, 1996 and for the
twelve months ended December 31, 1996:

<TABLE>
<S> <C>
Balance sheet data:
Cash and due from banks....................................... $ 310,442
Federal funds sold............................................ 12,000,000
Investment securities......................................... 15,246,465
Net loans..................................................... 14,942,495
Premises and equipment, net................................... 1,395,777
Accrued interest receivable................................... 106,788
Other assets.................................................. 589,064
-----------
Total assets.................................................. $44,591,031
===========
Deposits...................................................... $43,980,472
Accrued interest payable...................................... 264,692
Income statement data:
Total interest income......................................... $ 2,382,278
Total interest expense........................................ 1,163,786
Other income.................................................. 312,154
Noninterest expense........................................... 1,276,156
-----------
Net income.................................................... $ 254,490
===========
</TABLE>

The consolidated results of operations include the operations of First
National subsequent to March 1, 1996. The unaudited pro forma information for
the twelve months ended December 31, 1996 and the unaudited pro forma
information for the twelve months ended December 31, 1995, presented below,
reflect the acquisition of First National as if it had been acquired as of
January 1, 1995. Pro forma adjustments consisting of a provision for income
taxes and interest expense have been made to properly reflect the unaudited
pro forma information.

F-20
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED TWELVE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
<S> <C> <C>
Interest income.................... $14,998,219 $13,179,319
Net income......................... 1,274,313 1,128,635
Net income per share of common
stock............................. $ 0.22 $ 0.20
</TABLE>

PROVIDERS FUNDING CORPORATION

On March 15, 1996, the Bank completed the acquisition of Providers Funding
Corporation ("PFC"), a Dallas-based medical claims servicing company. The
acquisition was accomplished through the purchase of certain assets consisting
of accounts receivable along with certain furniture and equipment and the
assumption of certain liabilities of PFC by the Bank. The Bank used cash on
hand in the amount of $1,000,000 to fund this purchase (before deducting the
then outstanding balance of principal plus interest on the indebtedness of PFC
to the Bank). The Bank also entered into non-competition and confidentiality
agreements with certain principals of PFC in consideration for which the
Company issued 25,398 shares of Common Stock of the Company to such
principals. The purchase of PFC resulted in cost in excess of net assets
acquired amounting to $1,338,364 and is being amortized on a straight line
basis over a 15-year period. Due to the short term nature of the receivables
(average life of 90 days) and the short term nature of the liabilities (less
than 30 days), no purchase accounting mark-to-market adjustments were
necessary. The acquisition has been accounted for as a purchase in the
accompanying consolidated financial statements. The Bank operates PFC as a
division titled "Providers Funding, a division of Surety Bank, N.A."

4. Investment Securities:

Investment securities consisted of the following at December 31, 1996 and
1995:

December 31, 1996:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury................... $ 5,193,782 $ 15,122 $ 5,208,904
Obligations of other U.S.
Government agencies and
corporations................... 9,423,964 39,027 $74,887 9,388,104
State and county municipals..... 409,498 15 6,408 403,105
Mortgage-backed securities...... 173,513 4,755 178,268
Other securities................ 1,042,892 1,042,892
----------- -------- ------- -----------
Total available-for-sale...... $16,243,649 $ 58,919 $81,295 $16,221,273
=========== ======== ======= ===========
HELD-TO-MATURITY:
U.S. Treasury................... $ 3,001,104 $ 4,216 $ 3,005,320
Obligations of other U.S.
Government agencies and
corporations................... 14,149,123 42,723 $15,697 14,176,149
State and county municipals..... 5,025,972 170,621 238 5,196,355
Mortgage-backed securities...... 385,071 357 385,428
----------- -------- ------- -----------
Total held-to-maturity........ $22,561,270 $217,917 $15,935 $22,763,252
=========== ======== ======= ===========
</TABLE>

F-21
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

December 31, 1995:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury................... $ 485,991 $ 11,978 $ 497,969
Obligations of other U.S.
Government agencies and
corporations................... 8,525,194 199,736 8,724,930
State and county municipals..... 411,394 338 $ 7,475 404,257
Mortgage-backed securities...... 209,529 10,397 219,926
Other securities................ 281,075 281,075
----------- -------- ------- -----------
Total available-for-sale...... $ 9,913,183 $222,449 $ 7,475 $10,128,157
=========== ======== ======= ===========
HELD-TO-MATURITY:
U.S. Treasury...................
Obligations of other U.S.
Government agencies and
corporations................... $ 8,563,315 $ 59,020 $ 3,882 $ 8,618,453
State and county municipals..... 4,730,921 245,828 4,976,749
Mortgage-backed securities...... 486,302 325 3,811 482,816
----------- -------- ------- -----------
Total held-to-maturity........ $13,780,538 $305,173 $ 7,693 $14,078,018
=========== ======== ======= ===========
</TABLE>

The amortized cost and estimated market value of investment securities at
December 31, 1996 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right
to call or prepay obligations with or without call or prepayment penalties.

December 31, 1996:

<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
AVAILABLE-FOR-SALE:
Due within one year.................................... $ 5,100,083 $ 5,109,980
Due after one year through five years.................. 4,579,871 4,590,208
Due after five years through ten years................. 5,347,290 5,299,924
Mortgage-backed securities............................. 173,513 178,269
Other securities....................................... 1,042,892 1,042,892
----------- -----------
Total available-for-sale............................. $16,243,649 $16,221,273
=========== ===========
HELD-TO-MATURITY:
Due within one year.................................... $ 4,190,699 $ 4,191,974
Due after one year through five years.................. 13,997,113 14,114,613
Due after five years through ten years................. 3,988,387 4,071,237
Mortgage-backed securities............................. 385,071 385,428
----------- -----------
Total held-to-maturity............................... $22,561,270 $22,763,252
=========== ===========
</TABLE>

No sales of available-for-sale investment securities occurred during 1996.
Proceeds from sales of available-for-sale investment securities during the
year ended December 31, 1995 were $4,736,538 with gross recognized gains of
$100 and no losses.

F-22
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

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.

At December 31, 1996 and 1995 the carrying values of Federal Reserve Bank
stock were $446,250, and $261,150, respectively. The Federal Reserve Bank
stock's market value was estimated to be the same as its carrying value at all
dates.

At December 31, 1996 and 1995 securities with a carrying amount of
$20,927,000 and $10,734,000, respectively, were pledged as collateral for
public deposits, as required or permitted by law.

5. Loans, net:

At December 31, 1996 and 1995, the loan portfolio was composed of the
following:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Insurance premium financing...................... $ 39,168,604 $22,409,356
Installment loans................................ 12,631,520 10,645,406
Commercial loans................................. 22,745,139 16,301,840
Real estate loans................................ 24,774,167 16,281,558
Medical claims receivable........................ 6,377,061 3,353,540
------------ -----------
Total gross loans.............................. 105,696,491 68,991,700
Unearned interest................................ (2,544,803) (1,889,461)
Allowance for credit losses...................... (1,284,774) (702,927)
------------ -----------
Loans, net....................................... $101,866,914 $66,399,312
============ ===========
</TABLE>

Loans on which the accrual of interest has been discontinued amounted to
approximately $144,000 and $31,000 at December 31, 1996 and 1995,
respectively.

A summary of changes in allowance for credit losses for the years ended
December 31, 1996 and December 31, 1995 were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Balance at beginning of year...................... $ 702,927 $ 697,948
Additions (deductions):
Provision for credit losses..................... 135,000 60,000
Bank acquisition................................ 614,700 10,759
Loans charged off............................... (229,418) (117,446)
Recoveries of loans previously charged-off...... 61,565 51,666
---------- ---------
Balance at end of year............................ $1,284,774 $ 702,927
========== =========
</TABLE>

F-23
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1996 and December 31, 1995, the Company's recorded
investment in loans for which impairment has been recognized in accordance
with Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan," ("SFAS 114") consists primarily of
commercial loans and installment loans as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
--------------- ---------------
<S> <C> <C>
Impaired loans........................... $ 4,837,271 $ 1,282,701
Impaired loans with related allowance
calculated under SFAS 114............... 3,209,403 950,196
Allowance on impaired loans calculated
under SFAS 114.......................... 387,386 76,692
Impaired loans with no allowance calcu-
lated under SFAS 114.................... 1,627,868 332,505
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Average impaired loans................... $ 3,436,870 $ 1,102,871
Interest income recognized on impaired
loans................................... 415,861 123,522
</TABLE>

As of December 31, 1996 and December 31, 1995, there were no commitments to
lend additional funds for loans considered impaired.

6. Premises and Equipment:

Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:

<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES 1996 1995
---------------- ----------- -----------
<S> <C> <C> <C>
Buildings....................... 5-30 years $ 2,203,262 $ 1,397,245
Furniture, fixtures and comput-
ers............................ 3-10 years 2,795,616 2,148,112
Automobiles..................... 3-5 years 375,361 264,709
Leasehold improvements.......... 3-5 years 100,470 93,840
----------- -----------
5,474,709 3,903,906
Less accumulated depreciation... (1,920,545) (1,346,747)
Land............................ 416,029 218,529
----------- -----------
Net premises and equipment...... $ 3,970,193 $ 2,775,688
=========== ===========
</TABLE>

7. Deposits:

At December 31, 1996 and 1995, the scheduled maturities of time deposits of
less than $100,000 are as follows:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Three months or less................................ $18,379,000 $12,701,000
Over three months through 12 months................. 36,698,000 28,142,000
Over one year....................................... 8,086,000 9,487,000
----------- -----------
$63,163,000 $50,330,000
=========== ===========
</TABLE>

F-24
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

At December 31, 1996 and 1995, the scheduled maturities of time deposits of
$100,000 or more are as follows:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Three months or less................................ $ 8,626,000 $ 6,680,000
Over three months through 12 months................. 11,531,000 7,189,000
Over one year....................................... 119,000 1,604,000
----------- -----------
$20,276,000 $15,473,000
=========== ===========
</TABLE>

8. Shareholders' Equity:

During the year ended December 31, 1996, 2,239,218 shares of the Company's
common stock were sold in a public offering for a total consideration, net of
expenses, of $7,394,293. During the year ended December 31, 1995, 459,500
shares of the Company's common stock were sold in a private offering for a
total consideration, net of expenses, of $1,197,182. During the year 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.

9. Stock-Based Compensation Plans

The Company has three stock-based compensation plans, which are described
below. The Company applies Accounting Principles Board Opinion 25 ("APB 25")
and related Interpretations in accounting for its stock-based compensation
plans. In 1995, the FASB issued FASB Statement No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would
change the methods the Company applies in recognizing the cost of its stock-
based compensation plans. Adoption of the cost recognition provisions of SFAS
123 is optional and the Company has decided not to elect these provisions of
SFAS 123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and are
presented below.

The Company has adopted three stock option plans, the 1988 Incentive Stock
Option Plan and the 1995 Incentive Stock Option Plan, and the Directors Stock
Option Plan (collectively, the "Stock Option Plans"). Under each Stock Option
Plan, the Company is authorized to issue up to 100,000 shares of Common Stock
pursuant to stock options to selected employees and directors. The Company is
authorized under the Stock Option Plans to grant stock options as incentive
stock options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended) to employees and nonstatutory stock options to
directors.

The Stock Option Plans provide that the exercise price of any stock option
may not be less than the fair market value of the Common Stock on the date of
grant. Options granted in 1995 have contractual terms of 5 years and options
granted in 1996 have contractual terms of 10 years. The 1995 options are 100%
vested as of the date of grant. Of the 1996 options, 15,000 are 100% vested as
of the date of grant and 25,000 are 100% vested at the first anniversary of
the date of grant. The Company granted 39,769 options in 1995 and 40,000 in
1996. In accordance with APB 25, the Company has not recognized any
compensation cost for the stock options granted in 1995 and 1996.

F-25
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of the status of the Company's stock options as of December 31,
1996, 1995, and 1994 and the changes during the year ended on that date is
presented below:

<TABLE>
<CAPTION>
1996 1995 1994
------------------- ------------------- -------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year............ 55,216 $4.36 31,713 $5.27 26,713 $ .53
Granted................. 40,000 $3.59 39,769 $3.13 10,000 $4.68
Exercised............... 7,924 $2.99 16,266 $3.13 -- --
Forfeited............... -- -- -- -- -- --
Expired................. -- -- -- -- 5,000 $4.45
Outstanding at end of
year................... 87,292 $4.13 55,216 $4.36 31,713 $5.27
Exercisable at end of
year................... 62,292 $4.28 55,216 $4.36 31,713 $5.27
Weighted-average Fair
Value of options
granted during the
year................... $1.15 $1.79 N/A
</TABLE>

The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995, respectively:
dividend yield of 0.00% for both years; expected volatility of 48.85% for both
years; risk-free interest rates are from 5.37% to 7.76%; and the expected
lives of the options are 5 years for 1996 grants and 2.5 years for 1995
grants.

The following table summarizes information about stock options outstanding
at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.34 to $5.00.......... 74,095 5.62 $3.72 46,095 $3.70
$5.01 to $7.22.......... 13,197 0.74 $6.42 13,197 $6.42
------ ---- ----- ------ -----
$2.34 to $7.22.......... 87,292 4.88 $4.13 62,291 $4.28
</TABLE>

Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 and 1995 would approximate the pro forma
amounts below:

<TABLE>
<CAPTION>
1996 1995
---------------------- ---------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
SFAS 123 Charge................... -- $ 59,189 -- $ 45,713
APB 25 Charge..................... -- -- -- --
Net Income...................... $1,697,987 $1,642,519 $886,886 $856,583
Net Income Per Common Share....... $ 0.32 $ 0.30 $ 0.27 $ 0.26
</TABLE>

The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to 1995.

F-26
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

10. Financial Instruments With Off-Balance-Sheet Risk and Concentration of
Credit Risk:

The 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 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 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
December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Unfunded loan commitments............................. $3,721,000 $3,289,000
Letters of credit..................................... 255,000 409,000
</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 Bank evaluates each customer's creditworthiness on a case by case basis.
The amount of collateral obtained, if deemed necessary by the Bank, upon
extension of credit is based on management's 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 Bank had
certificates of deposit, or other deposit accounts, in the amount of $220,500
and $230,500 at December 31, 1996 and 1995, respectively, as collateral
supporting those letter of credit commitments for which collateral is deemed
necessary.

The Bank sold $16,772,000, $18,490,000, and $7,265,000 in federal funds at
December 31, 1996, 1995 and 1994, respectively. These funds represent
uncollateralized loans made by the Bank, in varying amounts, to commercial
banks with whom the Bank has correspondent relationships. The Bank maintains
deposits with other financial institutions in amounts which exceed FDIC
insurance coverage. The Bank has not experienced any losses in such accounts
and believes it is not exposed to any significant credit risks on cash and
cash equivalents.

The Bank has geographic concentrations of credit in its principal trade
areas of Angelina, Cherokee, Ellis, Grayson, Houston, Tarrant and Tyler
Counties, Texas. Additionally, the Bank has a significant concentration of
credit, based upon like collateral, in its insurance premium finance
portfolio. Insurance premium finance comprises approximately $39,169,000 or
37% and $22,409,000 or 33% of consolidated total loans as of December 31, 1996
and 1995, respectively.

11. Related Party Transactions:

In the ordinary course of business, loans have been granted to directors,
executive officers and employees. Loans to these related parties total
approximately $398,000, and $428,000 as of December 31, 1996 and 1995,
respectively.

F-27
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

12. Net Income Per Common Share:

Net income per common share for the year ended December 31, 1996, 1995, and
1994 was based upon 5,389,366, 3,279,448, and 2,393,841 weighted average
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.

13. Employee Benefit Plan:

Effective October 1, 1993 the Company adopted the Surety Bank 401(k) Plan
(the "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 gross pay. The Company contributes amounts equal to a maximum of 2.5%
of the employee's gross wages, subject to statutory limits. The expense and
employer contribution for the Plan for the years ended December 31, 1996, 1995
and 1994 was $85,886, $88,982, and $58,745, respectively.

14. Federal Income Tax:

The components of the net deferred asset/(liability) recognized at December
31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Deferred tax liability:
Depreciation and amortization.................. $(463,817) $(299,557)
Securities..................................... (1,011) (34,286)
Deferred loan costs............................ (63,050) (46,819)
Other.......................................... (830) (52,750)
Net unrealized gain on available-for-sale
investment securities......................... (73,091)
--------- ---------
(528,708) (506,503)
Deferred tax asset:
Net unrealized loss on available-for-sale
investment securities......................... 8,056
Tax net operating losses....................... 35,326 40,373
Depreciation................................... 24,878 31,620
Allowance for credit losses.................... 194,274 145,080
Securities..................................... 59,409 50,088
Other.......................................... 27,183 27,397
Other real estate losses....................... 61,155
--------- ---------
410,281 294,558
--------- ---------
Net deferred tax asset/(liability)........... $(118,427) $(211,945)
========= =========
</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,
-------------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
U.S. statutory rate.................................... 34.0 % 34.0 % 34.0 %
Other.................................................. .9 1.7
Goodwill............................................... 4.4 4.2
Valuation allowance.................................... (33.0)
Tax-exempt interest.................................... (3.7) (6.2) (1.1)
---- ---- -----
Effective tax rate..................................... 35.6 % 33.7 % (.1)%
==== ==== =====
</TABLE>

F-28
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

As of December 31, 1996, the Company has a net operating loss carryforward
of approximately $104,000 for income tax reporting purposes which expires, if
not used, in 2002 through 2004. The utilization of this net operating loss
carryforward is limited by Section 382 of the Internal Revenue Code to
approximately $15,000 annually until its expiration.

The comprehensive provision for federal income taxes for the years ended
December 31, 1996, 1995 and 1994 consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal...................................... $916,674 $247,359 $18,430
State........................................ 33,826 15,648 18,267
-------- -------- -------
950,500 263,007 36,697
-------- -------- -------
Deferred:
Federal...................................... (12,372) 187,924 (19,009)
-------- -------- -------
State........................................ (12,372) 187,924 (19,009)
-------- -------- -------
Provision for tax expense charged to results of
operations.................................... 938,128 450,931 17,688
Tax expense charged to goodwill................ 86,706
Tax on unrealized gain on available-for-sale
securities.................................... (81,147) 73,092
-------- -------- -------
Comprehensive provision for federal income
taxes......................................... $856,981 $610,729 $17,688
======== ======== =======
</TABLE>

15. Other Noninterest Income and Expense:

Other noninterest income for the years ended December 31, 1996, 1995 and
1994 was composed of the following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Noninterest Income:
Nonsufficient fund charges............... $ 460,156 $ 291,954 $ 263,315
Late fee charges......................... 681,644 501,960 426,476
Service charges.......................... 372,756 220,086 163,336
Collection fees.......................... 135,533 115,478 96,162
Credit life insurance.................... 57,509 75,435 44,402
Secured credit card annual fee........... 4,447 6,561 15,905
Other.................................... 165,409 207,593 150,411
---------- ---------- ----------
Total.................................. $1,877,454 $1,419,067 $1,160,007
========== ========== ==========
</TABLE>

F-29
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Other noninterest expense for the years ended December 31, 1996, 1995 and
1994 was composed of the following:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
General and administrative expense:
Professional fees........................ $ 467,662 $ 416,006 $ 315,434
Office supplies.......................... 386,114 253,542 201,028
Travel and entertainment................. 96,577 68,987 60,162
Telephone................................ 283,564 166,858 128,407
Advertising.............................. 174,335 104,499 54,683
Postage.................................. 299,388 230,807 133,887
Amortization of intangibles.............. 359,717 184,332 51,201
Dues and subscriptions................... 70,559 49,331 54,609
Insurance................................ 167,245 130,335 97,473
Credit cards............................. 7,472 19,868 59,573
Bank service charge...................... 110,881 57,196 25,808
FDIC assessment.......................... 3,553 123,310 133,112
Credit reports........................... 22,850 40,105 17,714
Other.................................... 195,670 202,972 257,723
---------- ---------- ----------
$2,645,587 $2,048,148 $1,590,814
========== ========== ==========
</TABLE>

16. Commitments and Contingencies:

As of December 31, 1996 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>
<CAPTION>
FOR THE YEARS ENDING:
---------------------
<S> <C>
1997............................................................ $138,865
1998............................................................ 131,068
1999............................................................ 136,696
--------
Total......................................................... $406,629
========
</TABLE>

Rent expense was $161,862 for the year ended December 31, 1996, $94,713 for
the year ended December 31, 1995 and $83,062 for the year ended December 31,
1994.

The Company has entered into change in control agreements with certain of
its executive officers. The change in control agreements provide for the
payment under certain circumstances of benefits to these executive officers in
the event of a change in control of the Company followed by the termination of
employment of the officers.

A "change in control" is deemed to have occurred if (i) any person becomes
the beneficial owner, directly or indirectly, of twenty percent (20%) or more
of the Common Stock of the Company, or (ii) during any period of two (2)
consecutive years during the term of the change in control agreements,
individuals who at the beginning of such period constitute the Board of
Directors cease for any reason to constitute at least a majority thereof,
unless the election of each director who was not a director at the beginning
of such period has been approved in advance by directors representing at least
66 2/3% of the directors then in office who were directors at the beginning of
the period.

F-30
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The amount of the lump sum cash payment is equal to each officer's annual
base salary rate (but excluding all other compensation, such as bonuses and
fringe benefits) in effect immediately before the effective date of the change
in control, multiplied by three (3). The stock payment consists of shares of
Common Stock of the Company in an amount equal to the result obtained by
dividing the cash payment the officer would otherwise be entitled to receive
by the market value of the Common Stock on the effective date of the change in
control.

The change in control agreements continue in effect through September 1,
1997. On each successive September 1, the terms of the change in control
agreements will be automatically extended for one (1) additional year, unless
not later than by December 31 of the preceding year the Company shall have
given notice to the officers that it does not wish to extend such change in
control agreements.

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").

F-31
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Shortline also sought and obtained a summary judgment from the trial court
that the funds interpled by the Bank into the court's registry belonged to
Shortline. Tennessee appealed the summary judgment to the Fort Worth Court of
Appeals. The Fort Worth Court of Appeals affirmed the trial court's ruling
that the Bank's intervention and interpleader was proper but reversed the
trial court's ruling that the funds in the court belonged to Shortline.
Currently, Shortline and Tennessee have made application to the Texas Supreme
Court to allow an appeal of the ruling from the Fort Worth Court of Appeals.

The Bank believes both of these cases lack merit and intends to defend them
vigorously. The outcome of both of these cases is uncertain at this time.

17. Regulatory Matters:

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

Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk- weighted assets (as defined in the regulations), and of Tier I capital
(as defined) to average total consolidated assets (as defined in the
regulations) also known as the leverage ratio. Management believes, as of
December 31, 1996, that the Bank has met all capital adequacy requirements to
which it is subject.

As of September 30, 1996, the most recent notification from the Office of
the Comptroller of the Currency categorized the Bank as adequately capitalized
under the regulatory framework for prompt corrective action. To be categorized
as adequately capitalized the Bank must maintain minimum total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Bank's category.

The Bank's actual capital amounts and ratios are also presented in the table
for the years ended December 31, 1996 and 1995.

F-32
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
MINIMUM WELL-
CAPITAL CAPITALIZED
DECEMBER 31, RATIOS RATIOS
------------------------- ------- -----------
1996 1995
------------ -----------
<S> <C> <C> <C> <C>
Tier I risk-based capital........ $ 12,013,000 $ 7,964,000
Tier II risk-based capital....... 1,285,000 703,000
Total capital................ 13,298,000 8,667,000
Risk-weighted assets............. 108,208,000 73,983,000
Capital ratios:
Tier I risk-based capital...... 11.10% 10.76% 4.00% 6.00%
Tier II risk-based capital..... 12.29 11.72 8.00 10.00
Leverage ratio................. 7.02 6.88 4.00 5.00
</TABLE>

18. Fair Value of Financial Instruments:

Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.

For variable-rate loans that reprice frequently with no significant change
in credit risk, fair values are based on carrying values. The fair values of
other loans are estimated using discounted cash flow analysis, which utilize
interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.

The fair values of noninterest and interest-bearing demand deposits are, by
definition, equal to the amount payable on demand, i.e., their carrying
amount. The fair values of interest-bearing time deposits are estimated using
a discounted cash flow calculation that applies interest rates currently being
offered on certificates of similar maturities.

The carrying amounts for cash and due from banks, federal funds sold,
accrued interest receivable, notes payable and accrued interest payable
approximate the fair values of such assets and liabilities.

Fair values for the Company's off-balance sheet instruments, which consist
of lending commitments and standby letters of credit, are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the counterparties' credit standing.
Management believes the value of these off-balance sheet instruments are not
materially different from the commitment amount.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1996 AT DECEMBER 31, 1995
---------------------- -----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ----------- ---------- -----------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and interest bearing
liabilities................... $ 6,094 $ 6,094 $ 5,773 $ 5,773
Federal funds sold............. 16,772 16,772 18,490 18,490
Available-for-sale securities.. 16,221 16,221 10,128 10,128
Held-to-maturity securities.... 22,561 22,763 13,781 14,078
Loans receivable............... 101,867 101,298 66,399 66,499
Accrued interest receivable.... 1,083 1,083 781 781
Financial Liabilities:
Noninterest bearing deposits... 23,879 23,879 13,183 13,183
Interest bearing deposits...... 131,811 131,845 96,416 96,444
Other short-term borrowings.... -- -- 375 375
Accrued interest payable....... 1,518 1,518 520 520
Off-balance sheet instruments.. 2,550 2,550 3,698 3,698
</TABLE>

F-33
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

19. Parent Company Financial Information:

CONDENSED PARENT COMPANY ONLY

STATEMENTS OF CONDITION
AS OF DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS:
Cash.......................................... $ 756,813 $ 59,525
Receivable from subsidiary.................... 103,760 67,998
Investment in subsidiary, at equity........... 18,318,004 10,493,698
Other assets.................................. 51,975 107,057
----------- -----------
Total assets................................ $19,230,552 $10,728,278
=========== ===========
LIABILITIES:
Note payable.................................. -- $ 375,000
Accrued liabilities........................... -- 58,806
----------- -----------
Total liabilities........................... -- 433,806
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock.................................. $ 57,637 $ 35,166
Additional paid-in capital.................... 16,752,003 9,356,469
Retained earnings............................. 2,509,771 811,784
Treasury stock................................ (74,539) (50,830)
Unrealized (loss) gain on available-for-sale
securities................................... (14,320) 141,883
----------- -----------
Total shareholders' equity.................. 19,230,552 10,294,472
----------- -----------
Total liabilities and shareholders' equity.. $19,230,552 $10,728,278
=========== ===========
</TABLE>

F-34
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

CONDENSED PARENT COMPANY ONLY

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ---------- ---------
<S> <C> <C> <C>
Interest income............................. $ 40,045 $ 7,395 $ 24,685
Interest expense............................ 6,612 122,579 11,075
---------- ---------- ---------
Net interest income (expense) before pro-
vision for credit loss................... 33,433 (115,184) 13,610
Recovery on credit loss..................... 3,101
---------- ---------- ---------
Net interest income/(expense)............. 33,433 (115,184) 16,711
Noninterest expense......................... (169,610) (230,252) (207,473)
Equity in net income of subsidiary.......... 1,788,489 1,140,603 390,797
---------- ---------- ---------
Net income before income taxes............ 1,652,312 795,167 200,035
Income tax (benefit) expense:
Current................................... (45,675) (120,612) (242,493)
Deferred.................................. 28,893 (30,232)
---------- ---------- ---------
Net income.............................. $1,697,987 $ 886,886 $ 472,760
========== ========== =========
</TABLE>

F-35
<PAGE>

SURETY CAPITAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

CONDENSED PARENT COMPANY ONLY

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 1,697,987 $ 886,886 $ 472,760
Adjustments to reconcile net income to
Net cash used in operating activi-
ties:
Net increase in receivable from sub-
sidiary............................ (35,762) 174,495 (242,493)
Equity in net income of subsidi-
ary.............................. (1,810,509) (1,137,764) (393,636)
Net decrease (increase) in de-
ferred tax asset................. 30,232 (30,232)
Net (decrease) increase in other
assets........................... 55,082 (86,057) (21,000)
Net (decrease) increase in accrued
liabilities...................... (58,806) 44,892 13,914
----------- ----------- -----------
Net cash used in operating ac-
tivities....................... (209,814) (87,316) (200,687)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from the maturity of inter-
est.................................. 450,000
Investment in subsidiary.............. (6,170,000) (5,000,000)
----------- ----------- -----------
Net cash used in investing ac-
tivities....................... (6,170,000) (4,550,000)
----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock.................. 7,394,293 1,197,182 2,314,772
Short-term debt....................... 1,750,000
Exercise of stock options............. 23,712 50,831
Payments on borrowings................ (375,000) (1,375,000)
Purchase of treasury stock............ (23,709) (50,830)
----------- ----------- -----------
Net cash provided by (used in)
financing activities........... 7,077,102 (177,817) 4,064,772
Net increase (decrease) in cash and cash
equivalents............................ 697,288 (265,133) (685,915)
Beginning cash and cash equivalents..... 59,525 324,658 1,010,573
----------- ----------- -----------
Ending cash and cash equivalents........ $ 756,813 $ 59,525 $ 324,658
=========== =========== ===========
</TABLE>

F-36
<PAGE>

TEXSTAR NATIONAL BANK

BALANCE SHEET
SEPTEMBER 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS:
Cash and due from banks........................................ $ 3,787,753
Investment securities:
Available-for-sale........................................... 22,541,598
Held-to-maturity............................................. 10,151,658
-----------
Total investment securities................................ 32,693,256
Loans.......................................................... 32,551,203
Less: Allowance for credit losses.............................. (473,457)
-----------
Net loans...................................................... 32,077,746
Premises and equipment, net.................................... 2,745,843
Accrued interest receivable.................................... 613,357
Other real estate and repossessed assets....................... 475,374
Other assets................................................... 476,722
Excess of cost over fair value of net assets acquired, net of
Accumulated amortization of $4,920 at September 30, 1997...... 585,452
-----------
Total assets............................................... $73,455,503
===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Demand deposits................................................ $13,057,443
Savings, NOW and money markets................................. 17,269,742
Time deposits, $100,000 and over............................... 17,331,006
Other time deposits............................................ 18,022,982
-----------
Total deposits............................................. 65,681,173
Note payable................................................... 1,577,773
Accrued interest payable and other liabilities................. 631,516
-----------
Total liabilities.......................................... 67,890,462
-----------
SHAREHOLDERS' EQUITY:
Common stock, $5 par value, 575,000 shares authorized, and
485,000 shares issued and outstanding at September 30, 1997... 2,425,000
Additional paid-in capital..................................... 2,357,616
Retained earnings.............................................. 829,620
Unrealized gain (loss) on available-for-sale securities, net of
tax........................................................... (47,195)
-----------
Total shareholders' equity................................. 5,565,041
-----------
Total liabilities and shareholders' equity................. $73,455,503
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-37
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
Interest income:
Commercial loans................................. $1,308,740 $1,307,135
SBA loans........................................ 724,990 630,825
Real estate loans................................ 337,736 261,838
Consumer loans................................... 234,449 193,347
Federal funds sold............................... 72,299 42,801
Investment securities:
Taxable........................................ 1,165,936 1,017,371
Tax-exempt..................................... 30,242 471
---------- ----------
Total interest income........................ 3,874,392 3,453,788
---------- ----------
Interest expense:
Savings, NOW and money market.................... 370,300 333,158
Time deposits, $100,000 and over................. 768,615 620,431
Other time deposits.............................. 681,553 717,045
Other interest expense........................... 14,983 30,817
---------- ----------
Total interest expense......................... 1,835,451 1,701,451
---------- ----------
Net interest income before provision for
credit losses............................... 2,038,941 1,752,337
---------- ----------
Provision for credit losses........................ 97,000 165,000
---------- ----------
Net interest income............................ 1,941,941 1,587,337
---------- ----------
Noninterest income................................. 424,506 400,566
---------- ----------
Noninterest expense:
Salaries and employee benefits................... 890,623 727,877
Occupancy and equipment.......................... 292,065 200,279
General and administrative....................... 646,461 541,409
---------- ----------
Total non interest expense..................... 1,829,149 1,469,565
---------- ----------
Income before income taxes................... 537,298 518,338
Income tax expense:
Current.......................................... 142,616 91,505
---------- ----------
Net income..................................... $ 394,682 $ 426,833
========== ==========
Net income per share of common stock............... $ 0.98 $ 1.14
========== ==========
Weighted average shares outstanding................ 401,476 375,000
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-38
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)

<TABLE>
<CAPTION>
UNREALIZED
GAIN/
COMMON STOCK (LOSS) ON
------------------ ADDITIONAL AVAILABLE-
PAR PAID-IN RETAINED FOR-SALE TOTAL
SHARES VALUE CAPITAL EARNINGS SECURITIES EQUITY
------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 375,000 $1,875,000 $1,682,616 $434,938 $(141,863) $3,850,691
Sale of Common Stock.... 110,000 550,000 675,000 1,225,000
Net Income.............. 394,682 394,682
Change in unrealized
gain/(losses) on
available-for-sale
securities, net of tax,
$22,263................ 94,668 94,668
------- ---------- ---------- -------- --------- ----------
Balance at September 30,
1997................... 485,000 $2,425,000 $2,357,616 $829,620 $ (47,195) $5,565,041
======= ========== ========== ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-39
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 394,682 $ 426,833
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses.................... 97,000 165,000
Provision for depreciation..................... 71,185 39,914
Amortization of intangible assets.............. 4,920 49,620
(Gain) loss on sale of investment securities... 6,089 (18,799)
Net (increase) in accrued interest receivable.. (96,555) (40,905)
Increase (decrease) on unrealized gains on
available-for-sale securities................. 94,668 (353,390)
Net (increase) decrease in prepaid expenses and
other assets.................................. 113,382 (72,913)
Net increase in accrued interest payable and
other liabilities............................. 239,782 1,150,368
------------ ------------
Net cash provided by operating activities.... 925,153 1,345,728
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans............................ (1,039,000) (2,613,959)
Purchases of investment securities............... (13,877,367) (10,107,456)
Proceeds from sales or maturities of investment
securities...................................... 6,368,853 8,662,530
Net decrease in federal funds sold............... 155,000 1,900,000
Purchases of bank premises and equipment......... (1,016,717) (235,172)
Proceeds from sales of bank premises and
equipment--Net of gain.......................... -- 4,961
Net (decrease) of other real estate and
repossessed assets.............................. -- (86,534)
------------ ------------
Net cash provided by (used in) investing
activities.................................. (9,409,231) (2,475,630)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits.............. 7,048,747 1,745,806
Proceeds from issuance of note payable........... 1,379,660 --
Proceeds from sale of stock...................... 1,225,000 --
------------ ------------
Net cash provided by (used in) financing ac-
tivities.................................... 9,653,407 1,745,806
------------ ------------
Net increase in cash and cash equivalents.......... 1,169,329 615,904
Cash and cash equivalents at beginning of year..... 2,618,424 2,331,804
------------ ------------
Cash and cash equivalents at end of year........... $ 3,787,753 $ 2,947,708
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Transfers of repossessed collateral to other
assets.......................................... $ 33,007
Additions to loans to facilitate the sale of
other real estate and other assets.............. $ 78,833
NET CASH ACQUIRED THROUGH ACQUISITIONS:
Net loans........................................ $ 199,397
Premises and equipment, net...................... 8,179
Other assets..................................... 12,378
Excess of cost over fair value of net assets
acquired........................................ 590,372
Deposits......................................... (14,455,320)
------------
Net cash acquired through acquisitions....... $ 13,644,994
============
</TABLE>
The accompanying notes are an integral part of the financial statements.

F-40
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies:

Organization

TexStar National Bank (the "Bank") is engaged in the business of banking,
including the acceptance of deposits and the making of loans to customers in
Bexar and surrounding counties and in Texas. Although the loan portfolio is
diversified, a substantial portion of its debtors' ability to honor their
loans is dependent upon the economic conditions in the area, especially in the
business sector. The Bank competes for deposits and loans principally with
other commercial banks, savings and loan associations and credit unions. In
addition, the Bank is subject to the regulations of certain federal agencies
and undergoes periodic examination by those regulatory authorities.

Basis of Presentation

The accounting and reporting policies of the Bank conform to generally
accepted accounting principles and to general practices within the banking
industry. Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted, although the Bank
believes that the disclosures are adequate to make the information presented
not misleading. In the opinion of the Bank, all adjustments consisting only of
normal recurring adjustments necessary to present fairly the financial
position of the Bank as of September 30, 1997, and the results of its
operations and its cash flows for the indicated periods have been included.
The results of operations for such interim period are not necessarily
indicative of the results to be expected for the fiscal year ending December
31, 1997.

Investment Securities

During 1993 the Bank adopted Statement of Financial Accounting Standards No.
115 ("SFAS 115"). This statement addresses the accounting and reporting for
investments in equity securities that have readily determined fair values of
all investments in debt securities.

Management determines the appropriate classification of securities at the
time of purchase. If the securities are purchased with the positive intent and
the ability to hold the securities until maturity, they are classified as
held-to-maturity and carried at historical cost, adjusted for amortization of
premiums and accretion of fees and discounts using a method that approximates
the interest method. Securities to be held for an indefinite periods of time
are classified as available-for-sale and carried at fair value. Securities
purchased and held principally for the purpose of selling them in the near
term are classified as trading. The Bank has no securities classified as
trading as of September 30, 1997. The cost of securities sold is based on the
specific identification method.

Loans and Allowance for Credit Losses

A loan is considered impaired if, based on current information and events,
it is probable that the Bank will be unable to collect the scheduled payments
of principal and interest when due, according to the contracted terms of the
loan agreement. The evaluations take into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions
that may affect the borrower's ability to pay. The measurement of impaired
loans and the related allowance for credit losses is generally based on the
fair value of the collateral. Smaller balance homogenous loans consisting

F-41
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

of residential mortgages and consumer loans are evaluated for reserves
collectibility based on historical loss experience. Loans are charged against
the allowance for credit losses when management believes that the
collectibility of the principal is unlikely.

The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued interest
is reversed. Interest income is subsequently recognized only to the extent
cash payments are received.

Interest income on commercial and real estate loans is accrued daily on the
amount of outstanding principal. Accrual of interest is discontinued on a loan
when management believes, after considering economic and business conditions
and collection efforts, that a borrower's financial condition is such that
collection of interest and principal is doubtful. Management evaluates the
book value (including accrued interest) and collateral value on loans placed
on nonaccrual status and provides specific allowance for credit losses as
deemed appropriate.

Premises and Equipment

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 nine months
ended September 30, 1997 and 1996.

Income Taxes

The Bank's method of accounting for income taxes utilized an asset and
liability approach for financial statement purposes. The types of differences
between the tax bases of assets and liabilities and their financial reporting
amounts that give rise to significant portions of deferred income tax
liabilities or assets include: allowances for possible credit losses, property
and equipment, investment securities and net operating loss carryforwards.

Purchase Method of Accounting

Net assets acquired in purchase transactions are recorded at their fair
value at the date of acquisition. The excess of the purchase price over the
fair value of net assets acquired is amortized on a straight-line basis,
generally over a 10-year period. The Bank continually re-evaluates the
propriety of the carrying amount of such intangible assets as well as its
amortization period, to determine whether current events and circumstances
warrant adjustments to the carrying value and/or revised estimates of the
period of benefit. At this time, the Bank believes that no significant
impairment of such intangible asset has occurred and that no reduction of
amortization period is warranted.

F-42
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Use of Estimates

Recent Accounting Pronouncements

In June 1997, FASB issued Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, and losses) in a full set of general- purpose
financial statements. SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence
as other financial statements. SFAS 130 does not require a specific format for
the financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement. SFAS 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management believes that the adoption of
these pronouncements will not have a material impact on the financial
statements of the Bank.

2. Acquisition:

PACIFIC SOUTHWEST BANK, SAVINGS AND LOAN ASSOCIATION BRANCH IN SCHERTZ, TEXAS

During August, 1997, the Bank consummated the acquisition of certain assets
and assumption of certain liabilities relating to the branch of Pacific
Southwest Bank Savings and Loan Association ("Pacific Southwest Bank") located
in Schertz, Texas (the "Schertz Branch"). In June 1997, the Bank administered
a primary offering of its common stock. A total of 110,000 shares of common
stock were sold at a price of $11.50 per share. All proceeds were received by
September 23, 1997 and were used to finance the retirement of liabilities
incurred in connection with the purchase of the Schertz Branch.

At the closing of the purchase of the Schertz Branch, the Bank assumed
deposits and other liabilities totaling approximately $14,455,000. In
addition, the Bank acquired certain small business and consumer loans totaling
approximately $199,000, certain real property, furniture and equipment related
to the Schertz Branch totaling approximately $8,000, other assets totaling
approximately $13,000, and cash totaling approximately $13,645,000. After
paying a deposit premium, of approximately four percent (4%) on the deposits
assumed, totaling approximately $590,000, the Bank received approximately
$13,645,000 in cash from Pacific Southwest Bank as consideration for the net
deposit liabilities assumed. The Schertz Branch and deposits acquired in the
acquisition have been incorporated into the Bank's existing branch network.

3. Loans, net:

At September 30, 1997, the loan portfolio was composed of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Commercial and construction loans........................... $14,523,342
Real estate loans........................................... 13,925,859
Consumer loans.............................................. 4,102,003
-----------
Total loans................................................. 32,551,204
Allowance for credit losses................................. (473,457)
-----------
Loans, net.................................................. $32,077,746
===========
</TABLE>

F-43
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Activity in the allowance for credit losses is as follows:

<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Beginning balance................................ $454,054 $297,259
Provision for credit losses...................... 97,000 165,000
Bank acquisition................................. -- --
Loans charged off, net of Recoveries............. (77,597) 27,457
-------- --------
Ending balance................................... $473,457 $489,716
======== ========
</TABLE>

Loans on which the accrual of interest has been discontinued amounted to
approximately $202,000 and $235,000 at September 30, 1997 and December 31,
1996, respectively.

4. Subsequent Events:

On October 10, 1997 the Bank and Surety Bank, N.A. entered into an agreement
under which Surety Bank will acquire TexStar National Bank. The purchase price
for TexStar is projected to be approximately $19.59 per share of TexStar
common stock outstanding (total cash consideration: approximately $9,500,000),
which will be paid to the shareholders of TexStar in connection with the
merger of TexStar with and into Surety Bank.

The completion of the merger is subject to a number of contingencies,
including regulatory approvals by applicable banking authorities, due
diligence review by Surety Bank of TexStar's business operations, the raising
of sufficient funds by its parent Surety Capital Corporation to facilitate the
transaction, approval by TexStar's shareholders, and other matters. If
consummated, the transaction is expected to close on or before March 31, 1998.

F-44
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
TexStar National Bank

We have audited the accompanying balance sheets of TexStar National Bank
(the "Bank") as of December 31, 1996 and 1995, and the related statements of
income, changes in stockholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TexStar National Bank as
of December 31, 1996 and 1995, and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted
accounting principles.

Burnside & Rishebarger, P.L.L.C.
San Antonio, Texas
January 31, 1997

F-45
<PAGE>

TEXSTAR NATIONAL BANK

BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
NOTES 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks................... $ 2,463,424 $ 2,331,804
Federal funds sold........................ 155,000 1,900,000
Investment securities..................... 1,2 24,998,211 21,858,108
Loans--Net of allowance for loan losses... 3,9 31,238,143 28,164,193
Bank premises and equipment............... 4 1,793,815 930,129
Accrued interest receivable............... 516,802 478,296
Prepaid expenses and other assets......... 395,244 432,238
Other real estate owned................... 515,200 515,200
Other repossessed assets.................. 6,000 12,633
Deferred federal income tax asset......... 5 180,799
----------- -----------
TOTAL ASSETS.......................... $62,262,638 $56,622,601
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand.................................. $11,714,622 $ 9,942,700
Savings, NOW, and money market ac-
counts................................. 15,168,876 12,829,512
Time, $100,000 and over................. 14,648,540 13,236,113
Other time.............................. 16,308,289 16,578,580
----------- -----------
Total deposits............................ 57,840,327 52,586,905
Note Payable.............................. 198,113 248,473
Deferred federal income tax liability..... 5 39,086
Accrued interest payable and other liabil-
ities.................................... 373,507 239,327
----------- -----------
TOTAL LIABILITIES..................... 58,411,947 53,113,791
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES 6,7,8,9,10
Stockholders' equity:
Common stock--$5 par; 575,000 shares
authorized, 375,000 issued and
outstanding in 1996, 375,000 in 1995... 11 1,875,000 1,875,000
Surplus................................. 1,682,616 1,682,616
Unrealized investment holding gains
(losses), net.......................... 1,2 (141,863) 63,545
Retained earnings....................... 434,938 (112,351)
----------- -----------
Total stockholders' equity.............. 3,850,691 3,508,810
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $62,262,638 $56,622,601
=========== ===========
</TABLE>

See notes to financial statements.

F-46
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
NOTES 1996 1995
----- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans......................... $3,201,824 $2,532,206
Interest on investment securities:
U.S. Treasury securities......................... 67,937 232,605
Obligations of U.S. Government agencies.......... 1,300,076 866,497
Obligations of states and political
subdivisions.................................... 471 4,266
Interest on deposits in banks and federal funds
sold.............................................. 49,927 161,642
---------- ----------
Total interest income.............................. 4,620,235 3,797,216
INTEREST EXPENSE:
Interest on savings, NOW, and money market
accounts.......................................... 496,250 473,041
Interest on time deposits.......................... 1,789,581 1,507,988
---------- ----------
Total interest expense............................. 2,285,831 1,981,029
---------- ----------
NET INTEREST INCOME................................ 2,334,404 1,816,187
PROVISION FOR LOAN LOSSES.......................... 1,3 215,000 106,850
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES............................................ 2,119,404 1,709,337
---------- ----------
OTHER INCOME:
Service charges on deposit accounts................ 437,212 414,994
Other service charges, collection and exchange
charges, commissions,
and fees.......................................... 99,308 66,254
Gain on sale of other real estate owned and
repossessions, net................................ 5,326 733
Gain on sale of securities, net.................... 2 18,799
---------- ----------
Total other income................................. 560,645 481,981
---------- ----------
OTHER EXPENSES:
Salaries and wages................................. 876,358 671,688
Employee benefits.................................. 124,876 96,343
Occupancy expense.................................. 144,906 101,499
Furniture and equipment expense.................... 133,736 110,002
Other operating expenses........................... 15 731,878 753,878
Loss on sale of securities, net.................... 2 28,442
---------- ----------
Total other expenses............................... 2,011,754 1,761,852
---------- ----------
INCOME BEFORE INCOME TAXES......................... 668,295 429,466
Income tax expense................................. 5 121,006 71,213
---------- ----------
NET INCOME......................................... $ 547,289 $ 358,253
========== ==========
EARNINGS PER SHARE................................. 1 $ 1.46 $ .96
========== ==========
</TABLE>

See notes to financial statements.

F-47
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
UNREALIZED
INVESTMENT
COMMON HOLDING
NOTES STOCK SURPLUS GAINS (LOSSES) DEFICIT TOTAL
----- ---------- ---------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1,
1995................... $1,875,000 $1,682,616 $(162,210) $(470,604) $2,924,802
Change in unrealized
investment holding
gains (losses), net of
tax.................... 1,2,5 225,755 225,755
Net income.............. 358,253 358,253
---------- ---------- --------- --------- ----------
BALANCE DECEMBER 31,
1995................... 1,875,000 1,682,616 63,545 (112,351) 3,508,810
Change in unrealized
investment holding
gains (losses), net of
tax.................... 1,2,5 (205,408) (205,408)
Net income.............. 547,289 547,289
---------- ---------- --------- --------- ----------
BALANCE DECEMBER 31,
1996................... $1,875,000 $1,682,616 $(141,863) $ 434,938 $3,850,691
========== ========== ========= ========= ==========
</TABLE>

See notes to financial statements.

F-48
<PAGE>

TEXSTAR NATIONAL BANK

STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

<TABLE>
<CAPTION>
NOTES 1996 1995
----- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................... $ 547,289 $ 358,253
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.................. 3 215,000 106,850
Depreciation and amortization.............. 60,332 58,079
Premium amortization--Net of discount
accretion on investment securities........ 64,221 54,046
Gain on sale of other real estate owned and
repossessions, net........................ (5,326) (733)
(Gain) loss on sale of investment
securities................................ 2 (18,799) 28,442
Increase in accrued interest receivable.... (38,506) (173,793)
Increase in prepaid expenses and other
assets.................................... (392,358) (267,398)
(Increase) decrease in deferred federal
income tax................................ (180,799) 73,031
Increase in accrued interest payable and
other liabilities......................... 44,734 439,704
(Decrease) in unearned discounts on
installment loans and loan fees........... (94,017)
------------ ------------
Net cash provided by operating activities.... 295,788 582,464
------------ ------------
INVESTING ACTIVITIES:
Purchases of investment securities........... 2 (11,607,456) (12,750,806)
Proceeds from sales or maturities of
investment securities....................... 2 8,645,874 7,513,282
Proceeds from the sale of other real estate
owned and repossessed assets--Net of
gain/loss................................... 17,959 65,000
Net increase in other real estate owned...... (6,000) (12,633)
Net increase in loans........................ 3 (3,288,950) (6,345,764)
Net (increase) decrease in federal funds
sold........................................ 1,745,000 (1,125,000)
Purchases of premises and equipment.......... 4 (928,978) (42,733)
Principal collected on other real estate
owned....................................... 6,149
Proceeds from sale of fixed asset--Net of
gain........................................ 4,961
------------ ------------
Net cash used by investing activities........ (5,417,590) (12,692,505)
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in noninterest
bearing deposits, savings, NOW and money
market accounts............................. 4,111,286 (3,842,484)
Net increase in time deposits................ 1,142,136 16,082,329
------------ ------------
Net cash provided by financing activities.... 5,253,422 12,239,845
------------ ------------
NET INCREASE IN CASH AND DUE FROM BANKS...... 131,620 129,804
CASH AND DUE FROM BANKS AT BEGINNING OF
YEAR........................................ 1 2,331,804 2,202,000
------------ ------------
CASH AND DUE FROM BANKS AT END OF YEAR....... 1 $ 2,463,424 $ 2,331,804
============ ============
</TABLE>

See notes to financial statements.

F-49
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization--TexStar National Bank (the "Bank") is engaged in the business
of banking, including the acceptance of deposits and the making of loans to
customers in Bexar and surrounding counties and in Texas. Although the loan
portfolio is diversified, a substantial portion of its debtors' ability to
honor their loans is dependent upon the economic conditions in the area,
especially in the business sector. The Bank competes for deposits and loans
principally with other commercial banks, savings and loan associations and
credit unions. In addition, the Bank is subject to the regulations of certain
Federal agencies and undergoes periodic examinations by those regulatory
authorities.

Basis of Presentation--The accounting and reporting policies of the Bank
conform to generally accepted accounting principles and to general practices
within the banking industry.

Investment Securities--During 1993 the Bank adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"). SFAS 115 addresses the accounting
for and reporting of investments in debt and equity securities. In accordance
with SFAS 115, each of the Bank's investment securities are classified in one
of the three following categories:

Held to Maturity--Debt securities that the Bank has the positive intent
and ability to hold to maturity. These securities are reported at amortized
cost.

Trading Securities--Debt and equity securities that are bought and held
principally for the purpose of selling in the near term. These securities
are reported at fair value, with any unrealized gains or losses included in
earnings. The Bank held no trading securities at December 31, 1996 or 1995.

Available for Sale--Debt and equity securities not included in either of
the two categories above. These securities are reported at fair value, with
any unrealized gains or losses excluded from earnings and included as a
separate component of stockholders' equity.

Mortgage-backed Securities--Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans originated
and serviced by issuers of the securities. Mortgage-backed securities are
carried as government agency securities at unpaid principal balances, adjusted
for unamortized premiums and unearned discounts. Premiums and discounts are
amortized using methods approximating the interest method over the remaining
period to contractual maturity, adjusted for anticipated prepayments.
Management intends and has the ability to hold such securities to maturity.
Should any be sold, cost of securities sold is determined using the specific
identification method.

Loans and Allowance for Loan Losses--Loans are stated at the amount of
unpaid principal, reduced by unearned discount and an allowance for loan
losses. Unearned discount on installment loans is recognized as income over
the terms of the loans by the simple interest method. Interest on other loans
is calculated by using the simple interest method on daily balances of the
principal amount outstanding. The allowance for loan losses is established
through provision for loan losses charged to expenses. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible, based on evaluations 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 effect the borrowers' ability to pay.
Accrual of interest is discontinued on a loan when management believes, after
considering economic and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of interest is
doubtful. Loan origination fees and direct origination costs are expensed as
incurred, as management has determined that capitalization of these costs
would be immaterial to the financial statements.

F-50
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

Bank Premises and Equipment--Bank premises and equipment are stated at cost,
net of accumulated depreciation. Depreciation is recognized on the straight-
line method over the estimated useful lives of the assets. The estimated
useful lives range from 3 to 40 years.

Change in Accounting Estimate--Effective January 1, 1996, the Bank increased
the estimated useful lives of certain assets. These revisions were made to
more properly reflect true economic lives of the assets. This change did not
have a material effect on the financial statements.

Other Real Estate Owned--Real estate acquired by foreclosure is carried at
the lower of the recorded investment in the property or its fair value. Prior
to foreclosure, the value of the underlying loan is written down to the fair
value of the real estate to be acquired by a charge to the allowance for loan
losses, if necessary. Any subsequent write-downs are charged against operating
expenses. Operating expenses of such properties, net of related income, and
gains and losses on their disposition are included in other expenses.

Income Tax--The Bank follows Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes," ("SFAS 109"). This statement requires the
use of an asset and liability method of accounting for deferred income taxes.
This standard specifies criteria for the recognition and measurement of
deferred tax assets or liabilities. Under SFAS 109 these items are be
calculated based on the estimated future tax effects of differences between
the financial statement and tax bases of the Bank's assets and liabilities.

Statements of Cash Flows--For purposes of reporting cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks."

Earnings Per Share--Earnings per share are calculated on the basis of the
weighted average number of shares outstanding.

Off-Balance-Sheet Financial Instruments--In the ordinary course of business,
the Bank has entered into off-balance-sheet financial instruments including
commitments to extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they become payable.

Postretirement Benefits--In December 1990, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS")
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions." Under SFAS 106, beginning in 1993, postretirement benefits other
than pensions must be accounted for in a manner similar to current standards
for accounting for pensions. SFAS No. 106 will require that the accumulated
postretirement benefit obligation be either charged in the income statement as
a cumulative effect of a change in accounting in the period of adoption or
delayed and amortized over future periods as part of future postretirement
benefit costs. Since the Company did not provide postretirement benefits
during 1996 or 1995, SFAS No. 106 is not applicable.

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

Hedging Contracts--In October 1994, the Financial Accounting Standards Board
issued SFAS No. 119, "Disclosure About Derivative Financial Instruments and
Fair Value of Financial Instruments." Under SFAS No. 119, beginning in 1994,
disclosures are required in connection with certain off-balance sheet
derivative financial instruments, including interest rate floors and swaps.
These contracts are divided between the following categories:

F-51
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

Held for trading purposes--Including dealing and other trading activities
measured at fair value with gains and losses recognized in earnings, and

Held for purposes other than trading--Including hedges of anticipated
transactions, any gains and losses of which may be deferred.

At December 31, 1996, management of the Bank believes the Bank had no
contracts that qualify as off-balance sheet derivative financial instruments
for purposes of SFAS 119.

Other New Accounting Standards--In March 1995, the FASB issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (SFAS 121), which becomes effective for years beginning
after January 1, 1996. SFAS 121 requires that long-lived assets be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Under SFAS 121, a loss is
to be recognized to the extent that the fair value of an impaired asset is
less than the asset's carrying amount. The Bank's adoption of SFAS 121 as of
January 1, 1996 did not have any material current effect on the financial
condition or results of operations.

2. INVESTMENT SECURITIES

Carrying amounts and approximate market values of investment securities are
summarized as follows:

<TABLE>
<CAPTION>
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Investment Securities Expected
to be Held at Maturity:
U.S. Government agency securi-
ties......................... $ 8,088,464 $212,729 $ 7,875,735
State and municipal securi-
ties.........................
Federal Reserve Bank stock.... 106,750 106,750
Federal Home Loan Bank stock.. 459,500 459,500
----------- -------- -------- -----------
Total held to maturity........ 8,654,714 212,729 8,441,985
----------- -------- -------- -----------
Investment Securities Available
for Sale:
U.S. Government agency securi-
ties......................... 15,539,912 $ 11,091 209,928 15,341,075
U.S. Treasury securities...... 1,007,402 4,980 1,002,422
----------- -------- -------- -----------
Total available for sale...... 16,547,314 11,091 214,908 16,343,497
----------- -------- -------- -----------
Total......................... $25,202,028 $ 11,091 $427,637 $24,785,482
=========== ======== ======== ===========
</TABLE>

<TABLE>
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Investment Securities Expected to be
Held at Maturity:
U.S. Government agency securi-
ties............................. $ 9,161,293 $ 36,530 $231,752 $ 8,966,071
State and municipal securities.... 55,000 206 55,206
Federal Reserve Bank stock........ 106,750 106,750
Federal Home Loan Bank stock...... 136,900 136,900
----------- -------- -------- -----------
Total held to maturity............ 9,459,943 36,736 231,752 9,264,927
----------- -------- -------- -----------
Investment Securities Available for
Sale:
U.S. Government agency securi-
ties............................. 8,009,161 116,933 8,126,094
U.S. Treasury securities.......... 4,274,045 18,838 20,812 4,272,071
----------- -------- -------- -----------
Total available for sale.......... 12,283,206 135,771 20,812 12,398,165
----------- -------- -------- -----------
Total............................. $21,743,149 $172,507 $252,564 $21,663,092
=========== ======== ======== ===========
</TABLE>

F-52
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

During 1994, the Bank transferred from investment securities available for
sale to investment securities held to maturity, securities with an amortized
cost of $4,800,327 and a market value at the date of transfer of $4,773,765.
The unrealized holding loss of $26,562 was reported in the unrealized
investment holding gains (losses) section of stockholders' equity and is being
amortized over the remaining life of the securities as an adjustment of yield
in a manner consistent with the amortization of any premium or discount. The
unamortized unrealized holding loss at December 31, 1996 and 1995 was $7,343
and $12,328, respectively. The Bank did not transfer any securities from
investment securities available for sale during 1995 or 1996.

At December 31, 1996 the balance of the cumulative unrealized investment
holding gains or losses on securities available for sale have been reduced by
deferred taxes as follows:

<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Gross unrealized gains on securities available for
sale................................................. $ 11,091 $135,771
Gross unrealized losses on securities available for
sale................................................. (214,909) (20,812)
--------- --------
Subtotal, net gains (losses).......................... (203,818) 114,959
Gross unrealized holding loss on securities trans-
ferred............................................... (7,343) (12,328)
Deferred federal income tax (34% of subtotal)......... 69,298 (39,086)
--------- --------
Net effect on stockholders' equity.................... $(141,863) $ 63,545
========= ========
</TABLE>

The carrying value of investment securities pledged as collateral for public
funds amounted to approximately $9,747,086 and $8,989,512 at December 31, 1996
and 1995, respectively.

The market value of investment securities pledged to secure public funds
amounted to approximately $9,512,031 and $8,813,906 at December 31, 1996 and
1995, respectively.

The Bank has pledged additional securities in the amount of $4,617,147 and
$1,998,771 to large depositors at December 31, 1996 and 1995, respectively.
The market value of these securities is $4,581,861 and $2,073,125 at December
31, 1996 and 1995, respectively.

The carrying amount and approximate market value of investment securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.

<TABLE>
<CAPTION>
APPROXIMATE
CARRYING MARKET
AMOUNT VALUE
----------- -----------
<S> <C> <C>
SECURITIES EXPECTED TO BE HELD TO MATURITY:
Due in one year or less............................. $ $
Due after one year through five years............... 4,490,961 4,412,344
Due after five years through ten years.............. 1,499,547 1,400,781
Federal Reserve Bank stock.......................... 106,750 106,750
Federal Home Loan Bank stock........................ 459,500 459,500
----------- -----------
Subtotal............................................ 6,556,758 6,379,375
Mortgage-backed securities and collateralized
mortgage obligations............................... 2,097,956 2,062,610
----------- -----------
Total............................................... $ 8,654,714 $ 8,441,985
=========== ===========
SECURITIES AVAILABLE FOR SALE:
Due in one year or less............................. $ 1,007,402 $ 1,002,422
Due after one year through five years............... 5,998,807 5,924,063
Due after five years through ten years.............. 9,541,105 9,417,012
----------- -----------
Total............................................... $16,547,314 $16,343,497
=========== ===========
</TABLE>

F-53
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

Gross realized losses on sales of investment securities in 1996 were
$10,764, which is comprised of losses on U.S. Treasury securities.

Gross realized gains on sales of investment securities in 1996 were $29,563,
which is comprised of gains of $19,954 on U.S. Treasury securities and $9,609
on U.S. Government agency securities.

Gross realized gains on sales of investment securities in 1995 were $4,614,
which is comprised of gains on U.S. Government agency securities.

Gross realized losses on sales of investment securities in 1995 were
$33,056, which was comprised of a loss of $25,556 on U.S. Treasury securities
and a loss of $7,500 on U.S. Government agency securities.

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans are as follows:

<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial......................................... $12,602,552 $12,732,832
Mortgage........................................... 13,797,958 11,903,596
Construction....................................... 1,899,194 560,390
Installment........................................ 3,392,493 3,264,634
----------- -----------
31,692,197 28,461,452
Allowance for loan losses.......................... (454,054) (297,259)
----------- -----------
Total.............................................. $31,238,143 $28,164,193
=========== ===========
</TABLE>

Nonperforming loans at December 31, 1996 and 1995 were composed of
nonaccrual loans totaling $234,748 and $203,391, respectively.

The reduction in interest income associated with nonaccrual loans amounted
to $27,373 and $15,905 for the years ended December 31, 1996 and 1995,
respectively.

At December 31, 1996 and 1995, there were no commitments to lend additional
funds to borrowers whose loans were classified as nonperforming.

The loan portfolio consists of $16,735,816 and $15,283,801 of variable rate
loans and $14,956,381 and $13,177,651 of fixed rate loans at December 31, 1996
and December 31, 1995, respectively.

Changes in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Balance at beginning of year............................ $ 297,259 $200,908
Provision charged to operations......................... 215,000 106,850
Loans charged-off....................................... (100,511) (14,899)
Recoveries.............................................. 42,306 4,400
--------- --------
Balance at end of year.................................. $ 454,054 $297,259
========= ========
</TABLE>

F-54
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

4. BANK PREMISES AND EQUIPMENT

Bank premises and equipment consist of the following:

<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land.................................................. $ 712,460 $ 447,212
Buildings and improvements............................ 797,832 271,022
Leasehold improvements................................ 176,851 99,740
Furniture............................................. 120,501 115,959
Equipment............................................. 372,361 328,544
Automobiles........................................... 19,718 47,959
---------- ----------
Total................................................. 2,199,723 1,310,436
Less accumulated depreciation......................... 405,908 380,307
---------- ----------
Total--Net............................................ $1,793,815 $ 930,129
========== ==========
</TABLE>

5. INCOME TAXES

Net operating loss carryforwards (which differ for financial statement and
federal tax reporting purposes) amounted to $741,837 for tax purposes at
December 31, 1996. The net operating loss carryforwards are subject to annual
limitations because of a change in Bank ownership (see Note 11). The tax net
operating loss carryforwards expire in varying amounts between 2001 and 2006.

<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Current income tax expense............................... $ 232,541 $71,213
Deferred income tax expense.............................. (111,535)
--------- -------
Total income tax expense................................. $ 121,006 $71,213
========= =======
</TABLE>

The reason income taxes for financial reporting purposes differ from the
amount computed by applying the statutory federal income tax rate at December
31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
1996 1995
--------- --------
<S> <C> <C>
Tax provision computed at the statutory rate.......... $ 227,220 $146,018
Tax benefit including utilization of net operating
loss carryforwards................................... (151,949) (71,807)
Tax exempt interest income--Net of disallowed interest
expense of $471 and $286............................. (63) (656)
Meals and entertainment disallowance.................. 2,446 2,285
Nondeductible dues.................................... 1,604 1,794
Other................................................. 41,748 (6,421)
--------- --------
Provision for federal income tax...................... $ 121,006 $ 71,213
========= ========
</TABLE>

Statement of Financial Accounting Standards No. 109 ("SFAS 109") was
effective in 1994 and requires the recognition of deferred tax assets and
liabilities for both the expected future tax impact of differences between the
financial statement and tax bases of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. SFAS 109 additionally requires the establishment of a valuation

F-55
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

allowance to reflect the likelihood of realization of deferred tax assets. As
of December 31, 1996, the Bank had total deferred tax liabilities and total
deferred tax assets as follows:

<TABLE>
<S> <C>
Accrued income................................................... $(324,070)
Fixed asset depreciation......................................... (36,316)
Net operating loss carryforwards................................. 252,225
Unrealized investment holding losses............................. 69,298
Accrued expenses................................................. 72,624
Other real estate owned.......................................... 44,272
Allowance for loan losses........................................ 112,499
Accrued interest on short-term loans............................. (10,151)
Contribution carryforward........................................ 418
---------
Net deferred asset............................................... 180,799
Valuation allowance.............................................. -0-
---------
Deferred tax asset............................................... $ 180,799
=========
</TABLE>

6. COMMITMENTS AND CONTINGENT LIABILITIES

The Bank leases its branch banking premises under a noncancellable
agreement. A portion of the lease payments for 1996 were prepaid at December
31, 1995. Future minimum lease payments at December 31, 1996 are as follows:

<TABLE>
<S> <C>
Year Ending December 31, 1997....................................... $43,871
=======
</TABLE>

Rental expense for the branch banking premises was $42,775 and $20,004 in
1996 and 1995, respectively.

The Bank has commitments and contingencies in the normal course of business
and lawsuits pending that are not expected to result in material adverse
effects.

7. RELATED-PARTY TRANSACTIONS

The Bank has entered into transactions with its directors, significant
shareholders, and their affiliates. Such transactions were made in the
ordinary course of business on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the same time
for comparable transactions with other customers, and did not, in the opinion
of management, involve more than normal credit risk or present other
unfavorable features. The aggregate amount of loans to such related parties at
December 31, 1996 and 1995 was $2,946,218 and $2,711,435, respectively. During
1996 and 1995, new loans to such related parties amounted to $466,534 and
$846,314, respectively, and repayments amounted to $231,751 and $297,215,
respectively. Of the loans to related parties at December 31, 1996 and 1995,
$1,760,000 and $1,680,000, respectively, were secured by time deposits at the
Bank.

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.

The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit and financial guarantees written is

F-56
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.

The amount of commitments at December 31, 1996 are as follows:

<TABLE>
<S> <C>
Unused lines of credit--Real estate and commercial loans......... $4,913,154
Standby letters of credit........................................ 221,284
----------
Total............................................................ $5,134,438
==========
</TABLE>

Unused lines of credit are agreements to lend to a customer as long as there
is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property, plant and equipment, and
income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.

9. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK

The Bank grants loans to customers in Bexar and surrounding counties and
elsewhere in Texas. Many of such customers are depositors of the Bank.
Investment in state and municipal securities also includes governmental
entities, some within the Bank's market area. As shown in Note 3, the Bank has
a diversified loan portfolio, although approximately 44% of its loans are
secured by real estate.

10. REGULATORY MATTERS

The Bank, as a National Bank, is subject to the dividend restrictions set
forth by the Comptroller of the Currency. Under such restrictions, the Bank
may not, without the prior approval of the Comptroller of the Currency,
declare dividends in excess of the sum of the current year's earnings (as
defined) plus the retained earnings (as defined) from the prior two years. No
dividends were declared in 1996.

Risk-based capital guidelines require a bank to maintain Tier 1 capital at a
minimum of 4.0% of total risk- adjusted assets. Tier 1 capital consists
primarily of common equity, excluding the effects of net unrealized gains or
losses on securities available-for-sale net of taxes. Risk-adjusted assets are
the sum of total assets and specific off-balance sheet items after the
appropriate risk weights and/or credit conversion factors ranging from 0% to
100% have been applied.

Total capital, consisting of Tier 1 capital plus Tier 2 capital, must be
maintained at a minimum of 8.0% of risk-adjusted assets. Tier 2 capital
generally consists of the allowance for loan losses limited to a maximum of
1.25% of gross risk-weighted assets. Tier 2 capital may not exceed Tier 1
capital.

The leverage ratio is required to be equal to or greater than 3.0% depending
on each bank's particular regulatory rating. The leverage ratio is computed as
Tier 1 capital divided by average assets outstanding for the quarter,
excluding the effects of net unrealized gains or losses on securities
available-for-sale net of taxes.

F-57
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

The following summarizes certain capital ratios for the Bank at December 31,
1996 and 1995 as compared to the regulatory minimums:

<TABLE>
<CAPTION>
REGULATORY
MINIMUM 1996 1995
---------- ----- -----
<S> <C> <C> <C>
Tier 1 capital ratio................................ 4.0% 11.37% 10.24%
Total capital ratio................................. 8.0% 12.62% 11.11%
Tier 1 leverage ratio............................... 3.0% 6.61% 6.29%
</TABLE>

The Bank did not extend credit to any single borrower or group of related
borrowers in excess of its legal lending limit of $666,991 and $566,240 at
December 31, 1996 and 1995, respectively.

11. COMMON STOCK

In October 1994, the Bank issued 75,000 shares of its common stock at $7.70
per share in a common stock offering. Proceeds from the offering, net of legal
expenses of $19,884, were $557,616. In February 1994, approximately 50% of the
outstanding shares of the Bank's stock were purchased by one individual, which
gave this individual controlling interest. In a letter dated December 10,
1992, the Office of the Comptroller of the Currency stated that they did not
disapprove of this transaction.

12. EMPLOYEE BENEFIT PLAN

During 1994, the Bank adopted a 401(k) employee benefit plan that covers all
employees who meet certain age and service requirements. Employees may make
contributions to the plan through salary deferrals. Additionally, the Bank
will match employee contributions in an amount equal to 25% of employee
contributions with a limitation not to exceed 10% of compensation. The Bank
contributed $6,107 and $5,501 of matching contributions to the plan in 1996
and 1995, respectively.

13. CASH FLOW INFORMATION

In 1996 and 1995, the Bank made cash payments for interest expense on
deposits of approximately $2,247,325 and $1,858,093, respectively. The Bank
made $72,400 and $38,800 in cash payments for federal income taxes in 1996 and
1995, respectively.

14. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.

Cash, Interest-Bearing Deposits, and Federal Funds Sold--The carrying amount
of these short-term instruments is a reasonable estimate of their fair value.

Investment Securities--Securities in the held-to-maturity portfolio are
carried at cost and fair values disclosed are based on quoted market prices
and in the cases where a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.

Loans, Allowance for Loan Losses, Other Assets, and Deposits--Management has
not obtained estimates of fair values of these items although the difference
from carrying value is not believed to be material.

Commitments, Letters of Credit, and Financial Guarantees Written--The fair
value of commitments is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties. For fixed-
rate loan commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. The fair

F-58
<PAGE>

TEXSTAR NATIONAL BANK

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

value of guarantees and letters of credit is based on the fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting
date.

Management's estimated fair values of the Bank's financial instruments are
as follows:

<TABLE>
<CAPTION>
IN THOUSANDS
-----------------
1996 1996
CARRYING FAIR
AMOUNT VALUE
-------- -------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and due from banks................................. $ 2,463 $ 2,463
Federal funds sold...................................... $ 155 $ 155
Investment securities................................... $24,539 $24,326
Loans................................................... $31,692 (1)
Less: Allowance for loan losses......................... $ (454) (1)
Other................................................... $ 517 (1)
FINANCIAL LIABILITY--
Deposits................................................ $57,840 (1)
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit............................ (2) (2)
Standby letters of credit............................... (3) (3)
</TABLE>
- --------
(1) Management has not obtained estimates of fair values of these items
although the difference from carrying value is not believed to be
material.
(2) No gain or loss is expected on commitments to extend credit of $4,913,154
at December 31, 1996 (see Note 8).
(3) No gain or loss is expected on standby letters of credit for $221,284
outstanding at December 31, 1996 (see Note 8).

15. ADVERTISING EXPENSES

The Bank accounts for its advertising as prepaid assets and it charges a
monthly amount to expense over the life of the asset not exceeding one year.
The Bank's advertising charged to expense was $12,505 and $15,142 during 1996
and 1995, respectively.

F-59
<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. 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...................................... 6
Risk Factors............................................................. 8
Note Regarding Forward-Looking Statements................................ 10
Use of Proceeds.......................................................... 10
Capitalization........................................................... 11
Market Price and Dividend Policy......................................... 12
The Texstar National Bank Acquisition.................................... 13
Summary Consolidated Financial Data...................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 40
Regulation and Supervision............................................... 45
Management............................................................... 53
Beneficial Stock Ownership............................................... 60
Legal Proceedings........................................................ 63
Description of Securities................................................ 64
Underwriting............................................................. 66
Legal Matters............................................................ 67
Experts.................................................................. 67
Available Information.................................................... 67
Index to Financial Statements............................................ F-1
</TABLE>

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

1,500,000 Shares

Surety Capital Corporation

Common Stock

-------

P R O S P E C T U S

, 1997

-------

HOEFER & ARNETT
Incorporated

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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............................................... $ 3,434.91
-----------
Printing and Electronic Filing Expenses........................ $ 50,000.00
Legal Fees and Expenses........................................ $100,000.00
Accounting Fees and Expenses................................... $100,000.00
Underwriting Expense Allowance................................. $150,000.00
Director & Officer Liability Insurance Premium [paid by
Registrant on any policy obtained in connection with the
offering and sale of the securities being registered which
insures or indemnifies directors or officers against any
liabilities in connection with this offering].................
Miscellaneous.................................................. $ 10,000.00
-----------
Total........................................................ $413,434.91
===========
</TABLE>

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

The Company issued 25,398 unregistered shares of its common stock, by
issuing 8,466 shares to each of Barry T. Carroll, Lawrence C. Blanton, and
Bill M. Ward, in connection with and as consideration for the execution of
Employment, Non-Competition and Confidentiality Agreements dated March 15,
1996 by these individuals, who were the principals of Providers Funding
Corporation. The Company acquired certain assets from, and assumed selected
liabilities of, Providers Funding Corporation in March, 1996. The shares were
issued pursuant to the exemption provided under Section 4(2) of the Securities
Act of 1933, as amended, and the regulations promulgated thereunder. The
exemption was claimed based upon the fact that the shares were offered and
issued to only three persons in connection with the Company's acquisition of
substantially all of the assets, and selected liabilities, of the business
controlled by the individuals.

II-1
<PAGE>

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.

II-2
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HURST, TEXAS ON THE
29TH OF DECEMBER, 1997.

Surety Capital Corporation

By: /s/ C. Jack Bean
---------------------------------
C. JACK BEAN, Chairman of the
Board

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

SIGNATURE CAPACITY DATE

/s/ C. Jack Bean Chairman of the Board December 29, 1997
- ----------------------------- and Director (Principal
C. JACK BEAN Executive Officer)

/s/ Bobby W. Hackler Vice Chairman, Chief December 29, 1997
- ----------------------------- Operating Officer and
BOBBY W. HACKLER Director

/s/ B.J. Curley Vice President, December 29, 1997
- ----------------------------- Secretary and Chief
B.J. CURLEY Financial Officer

/s/ William B. Byrd Director December 29, 1997
- -----------------------------
WILLIAM B. BYRD

/s/ Joseph S. Hardin Director December 29, 1997
- -----------------------------
JOSEPH S. HARDIN

/s/ G. M. Heinzelmann Director December 29, 1997
- -----------------------------
G. M. HEINZELMANN

/s/ Margaret Holland Director December 29, 1997
- -----------------------------
MARGARET HOLLAND

/s/ Michael L. Milam Director December 29, 1997
- -----------------------------
MICHAEL L. MILAM

/s/ Garrett Morris Director December 29, 1997
- -----------------------------
GARRETT MORRIS

/s/ Cullen W. Turner Director December 29, 1997
- -----------------------------
CULLEN W. TURNER

II-3
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.01 Underwriting Agreement between Surety Capital Corporation, Hoefer &
Arnett, Incorporated and Southwest Securities with respect to the firm
commitment underwriting of shares of the Company's common stock, dated
as of .*
2.01 Agreement and Plan of Reorganization by and between Surety Bank,
National Association; TexStar National Bank; Surety Capital
Corporation; and the shareholders of TexStar listed on Schedule A
attached to the Agreement and Plan of Reorganization, dated October
10, 1997.*
2.02 Agreement to Merge TexStar National Bank with and into Surety Bank,
National Association under the Charter of Surety Bank, National
Association and Under the Title of Surety Bank, National Association;
dated .**
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.(4)
3.06 Certificate of Amendment to Company's Certificate of Incorporation as
filed with Delaware Secretary of State on June 14, 1993.(5)
3.07 Form of Common Stock certificate (specimen).(5)
3.08 Restated Bylaws of the Company.(6)
4.01 Surety Capital Corporation Rights Agreement dated as of June 17,
1997.**
5.01 Opinion of Secore & Waller, L.L.P. with respect to the validity of the
shares to be registered and issued.**
10.01 Surety Capital Corporation 1988 Incentive Stock Option Plan.(4)
10.02 Lease agreement between Precinct Campus, Inc., as landlord, and Surety
Capital Corporation, as tenant, regarding offices located in Hurst,
Texas, dated February 14, 1994.(5)
10.03 Surety Capital Corporation 1995 Incentive Stock Option Plan.(6)
10.04 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.(7)
10.05 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.(7)
10.06 Executive Deferred Compensation Agreement and related Adoption
Agreement with Designation of Beneficiaries entered into between
Surety Capital Corporation and B. J. Curley, dated January 21,
1997.(8)
10.07 Letter Agreement between Surety Capital Corporation and B. J. Curley
regarding provision by Surety Capital Corporation of term life
insurance coverage, dated January 21, 1997.(8)
10.08 Surety Capital Corporation Amended and Restated Stock Option Plan for
Directors, and Form of Stock Option Agreement.(8)
21.01 Subsidiaries of the Registrant.*
23.01 Consent of Coopers & Lybrand L.L.P. with respect to the use of its
January 21, 1997 Report.*
23.02 Consent of Burnside & Rishebarger P.L.L.C. with respect to the use of
its January 31, 1997 Report.*
23.03 Consent of Secore & Waller, L.L.P.**
24.01 Power of Attorney.*
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
<C> <S>
NOTES TO EXHIBIT INDEX
(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 the Company's Form 10-K dated December 31, 1991 and
incorporated by reference herein.
(5) Filed with the Company's Form 10-K dated December 31, 1993 and
incorporated by reference herein.
(6) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994 and incorporated by reference herein.
(7) Filed with Registration Statement No. 33-64789 on Form S-1 and
incorporated by reference herein.
(8) Filed with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 and incorporated by reference herein.
</TABLE>
- --------
* Filed herein.
** To be filed.

II-5

<PAGE>

EXHIBIT 1.01

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

SURETY CAPITAL CORPORATION

1,500,000 Shares*

Common Stock

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

Underwriting Agreement

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

February , 1998
--

-2-
<PAGE>

SURETY CAPITAL CORPORATION

1,500,000 SHARES COMMON STOCK*

UNDERWRITING AGREEMENT

February __, 1998

Hoefer & Arnett Incorporated
As Representative of the Several
Underwriters Named in Schedule I
353 Sacramento Street, 10th Floor
San Francisco, California 94111

Ladies and Gentlemen:

SECTION 1. Introductory. Surety Capital Corporation, a Delaware
corporation (the "Company"), proposes to issue and sell 1,500,000 shares ("Firm
Shares") of its authorized but unissued Common Stock, par value $.01 per share
("Common Stock"), to the several underwriters named in Schedule I as it may be
amended by the Pricing Agreement hereinafter defined ("Underwriters"), who are
acting severally and not jointly. In addition, the Company proposes to grant to
the Underwriters an option to purchase up to 225,000 additional shares of Common
Stock ("Additional Shares") as provided in Section 4 hereof. The Firm Shares,
and to the extent such option is exercised, the Additional Shares, are
hereinafter collectively referred to as the "Shares."

You have advised the Company that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon as you deem
advisable after the registration statement hereinafter referred to becomes
effective, if it has not yet become effective, and the Pricing Agreement
hereinafter defined has been executed and delivered.

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

* Plus an option to acquire up to 225000 additional shares to cover over
allotments.
<PAGE>

Prior to the purchase and public offering of the Shares by the several
Underwriters, the Company and the Representative, acting on behalf of the
several Underwriters, shall enter into a pricing agreement substantially in the
form of Exhibit A hereto ("Pricing Agreement"). The Pricing Agreement may take
the form of an exchange of any standard form of written telecommunication
between the Company and the Representative and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Shares
will be governed by this Agreement, as supplemented by the Pricing Agreement.
From and after the date of the execution and delivery of the Pricing Agreement,
this Agreement shall be deemed to incorporate the Pricing Agreement.

The Company hereby confirms its agreements with respect to the purchase of
the Shares by the Underwriters as follows:

SECTION 2. Representations and Warranties of the Company. The Company
represents and warrants to the several Underwriters that:

(a) A registration statement on Form S-1 (File No. 33-_________) and a
related preliminary prospectus with respect to the Shares have been prepared and
filed with the Securities and Exchange Commission ("Commission") by the Company
and in conformity with the requirements of the Securities Act of 1933, as
amended, and the rules and regulations of the Commission thereunder
(collectively, the "1933 Act"; all references herein to specific rules are rules
promulgated under the 1933 Act); and the Company has so prepared and has filed
such amendments thereto, if any, and such amended preliminary prospectuses as
may have been required to the date hereof. In the event that the Company
determines to rely upon Rule 430A, the Company will prepare and file a
prospectus pursuant to Rule 424(b) that discloses the information previously
omitted from the prospectus in reliance upon Rule 430A. There have been or will
promptly be delivered to you two signed copies of such registration statement
and amendments, including the exhibits filed therewith, and such number of
conformed copies of such registration statement and amendments (but without
exhibits) and of the related preliminary prospectus or prospectuses and final
forms of prospectus as the Underwriters may reasonably request.

The registration statement and prospectus, as amended, on file with
the Commission at the time the registration statement became or becomes
effective, including the information deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A(b), are hereinafter
called the "Registration Statement" and the "Prospectus", respectively, except
that if the prospectus filed by the Company pursuant to Rule 424(b) differs from
the prospectus on file at the time the Registration Statement became or becomes
effective, the term "Prospectus" shall refer to the Rule 424(b) prospectus from
and after the time it is filed with the Commission or transmitted to the
Commission for filing. The Securities Exchange Act of 1934, as amended, and the
rules and regulations of the Commission thereunder are hereinafter collectively
referred to as the "Exchange Act."

-2-
<PAGE>

(b) The Commission has not issued any order preventing or suspending the
use of any preliminary prospectus, and each preliminary prospectus has conformed
in all material respects with the requirements of the 1933 Act and, as of its
date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein not misleading in
light of the circumstances under which they were made. When the Registration
Statement became or becomes effective, and at the First Closing Date and the
Second Closing Date hereinafter defined, as the case may be, the Registration
Statement, including the information deemed to be part of the Registration
Statement at the time of effectiveness pursuant to Rule 430A(b), and the
Prospectus and any amendments or supplements thereto, in all material respects
conformed or will in all material respects conform to the requirements of the
1933 Act, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, included or will include any untrue statement
of a material fact or omitted or will omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company makes no representation or warranty as to
information contained in or omitted from any preliminary prospectus, the
Registration Statement, the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of the Underwriters specifically for use in the
preparation thereof.

(c) The Company and each of its subsidiaries, and TexStar National Bank,
Universal City, Texas, a national banking association ("TexStar"), have been
duly incorporated and are validly existing as corporations or banks in good
standing under the laws of their respective jurisdictions of incorporation, with
full power and authority to own or lease their properties and conduct their
businesses as described in the Prospectus; the Company's only subsidiaries are
those listed on Exhibit 21 of the Registration Statement; TexStar has no
subsidiaries; the Company and each of its subsidiaries, and TexStar, are duly
qualified to do business as foreign corporations under the corporation law of,
and are in good standing as such in, each jurisdiction in which they own or
lease substantial properties, have an office, or in which substantial business
is conducted and such qualification is required except in any such case where
the failure to so qualify or be in good standing would not have a material
adverse effect upon the condition (financial or otherwise), earnings, affairs,
business or prospects of the Company and its subsidiaries, or TexStar, as the
case may be, taken as a whole ("Material Adverse Effect"); and no proceeding of
which the Company has knowledge has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification. Surety Bank, National Association, a
subsidiary of the Company ("Surety Bank") and TexStar are sometimes collectively
referred to herein as the "Banks."

(d) The Company has an authorized and outstanding capitalization as
set forth in the Prospectus under "Capitalization" and the Shares conform in all
material respects to the description thereof contained in the Prospectus. All
of the issued and outstanding

-3-
<PAGE>
body having jurisdiction over the Company or any subsidiary or any of their
respective properties, or any order of any court or governmental agency or other
regulatory authority entered in any proceeding to which the Company or any
subsidiary was or is now a party or by which it is bound. No consent, approval,
authorization or other order of or filing with, any court, regulatory body,
administrative agency or other governmental shares of Common Stock have been
duly authorized, validly issued and are fully paid and non-assessable and free
of preemptive or other similar rights and there are no options, agreements,
contracts or other rights in existence to acquire from the Company any shares of
Common Stock, except as set forth in the Prospectus. Except as set forth in the
Prospectus, there are no holders of the securities of the Company having rights
to the registration thereof. The Company has no banking subsidiaries other than
Surety Bank and TexStar has no banking or other subsidiaries. All of the capital
stock of each subsidiary of the Company, other than Surety Bank, has been duly
authorized, validly issued and is fully paid and non-assessable. All of the
outstanding capital stock of each of the Banks has been duly authorized, validly
issued and is fully paid and, subject to 12 U.S.C. (S) 55 (1982), nonassessable.
Each of the Company and TexStar, directly or indirectly, owns of record and
beneficially, free and clear of any liens, claims, encumbrances or rights of
others, all of the issued and outstanding shares of each of its respective
subsidiaries, except as referred to in the Prospectus. There are no options,
agreements, contracts or other rights in existence to purchase or acquire from
the Company or its subsidiaries, or TexStar, any issued and outstanding shares
of the capital stock of such subsidiaries.

(e) The Shares to be sold by the Company pursuant to this Agreement
and the Pricing Agreement have been duly authorized and, when issued and paid
for in accordance with this Agreement and the Pricing Agreement, will be validly
issued, fully paid and non-assessable; the Shares are not subject to the
preemptive rights of any shareholder of the Company; the holders of the Shares
will not be subject to personal liability by reason of being such holders; and
all corporate actions required to be taken for the authorization, issue and sale
of the Shares have been validly and sufficiently taken.

(f) The execution, delivery and performance by the Company of this
Agreement and the Pricing Agreement have been duly authorized by all necessary
corporate action on the part of the Company and do not and will not violate any
provision of the Company's articles of incorporation (as amended) or bylaws (as
amended) and do not and will not constitute or result in the breach of, or be in
violation of, any of the terms or provisions of or constitute a default under,
or result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company or its subsidiaries under any material
agreement, franchise, license, indenture, lease, mortgage, deed of trust, or
other instrument to which the Company or any subsidiary is a party or by which
the Company, any subsidiary or the property of any of them may be bound or
affected, or any law, order, judgment, decree, rule or regulation applicable to
the Company or any subsidiary of any government, governmental instrumentality,
court or regulatory body, administrative agency, or other governmental

-4-
<PAGE>

body is legally required for the execution and delivery of this Agreement or the
Pricing Agreement by the Company or the consummation by the Company of the
transactions contemplated herein or therein, except as may be required under or
by the 1933 Act, the American Stock Exchange, Inc. or the blue sky laws of the
various jurisdictions. This Agreement and the Pricing Agreement have been duly
authorized, executed and delivered by the Company and constitute valid and
binding obligations of the Company enforceable against the Company in accordance
with their terms except insofar as (i) such enforcement may be subject to
bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to creditors' rights generally; (ii) the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding thereafter may be brought; and (iii) such enforcement may be
subject to any limitations under applicable law which relate to the
indemnification and contribution provisions of this Agreement.

(g) Each of Coopers & Lybrand LLP and Burnside & Rishebarger, who have
expressed their opinion with respect to certain of the financial statements
included in the Registration Statement, are independent accountants within the
meaning of the 1933 Act.

(h) The consolidated financial statements, together with the notes
thereto, of the Company and TexStar included in the Registration Statement
comply in all material respects with the 1933 Act and present fairly the
consolidated financial position of the Company and TexStar, respectively, as of
the respective dates of such financial statements (including, without
limitation, the allowance for possible loan losses), and the consolidated
results of operations and cash flows of the Company and TexStar for the
respective periods covered thereby, are in conformity with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed in the Prospectus; and the supporting schedules included in
the Registration Statement present fairly the information required to be stated
therein. No other financial statements are required to be included in the
Registration Statement. The consolidated financial, statistical and numerical
information with respect to the Company and its subsidiaries, and the financial
and statistical information with respect to Surety Bank, set forth in the
Prospectus are fairly presented, were derived from the consolidated financial
statements or the books and records of the Company and its subsidiaries and are
prepared on a basis consistent with the audited financial statements of the
Company.

(i) The pro forma financial information of the Company and its
subsidiaries included in the Registration Statement presents fairly the
information shown therein; has been compiled on a basis consistent with that of
the audited consolidated financial statements of the Company and its
subsidiaries and of TexStar included in the Registration Statement; has been
prepared in accordance with the Commission's rules and guidelines with respect
to pro forma financial statements; and the assumptions used in the preparation
thereof are reasonable.

-5-
<PAGE>

(j) Neither the Company nor any subsidiary thereof or TexStar, is in
violation of its articles of incorporation, articles of association, or bylaws,
in each case as amended, or in default under any consent decree, formal
agreement, memorandum of understanding or similar agreement, or in default with
respect to any provision of any lease, loan agreement, franchise, license,
permit or other contractual obligation to which it is a party or by which it or
any of its properties may be bound; there does not exist any state of facts
which constitutes an event of default by the Company as defined in such
documents or which, with notice or lapse of time or both, would constitute such
an event of default, except for any such violation or default of the articles of
incorporation, articles of association, bylaws, consent decrees, formal
agreements, memoranda of understanding or similar agreements, or any lease, loan
agreement, franchise, license, permit or other contractual obligations referred
to in this subparagraph (j) which, either individually or in the aggregate,
would not have a Material Adverse Effect.

(k) Except as disclosed in the Prospectus, (A) there is no action,
suit or proceeding before or by any court or governmental or regulatory agency
or body, domestic or foreign, or any arbitrator or arbitration panel, now
pending or, to the knowledge of the Company, threatened against or affecting the
Company or any of its subsidiaries, or TexStar or any of its subsidiaries,
including without limitation proceedings relating to discrimination or
environmental matters, which could result in a Material Adverse Effect, and (B)
there is no decree, judgment, order, formal agreement or memorandum of
understanding of any kind in existence applicable to the Company or any of its
subsidiaries, or TexStar or any of its subsidiaries, or any of their respective
officers, employees or directors, requiring or restraining the taking of any
actions of any kind in connection with the business of the Company and its
subsidiaries or TexStar or its subsidiaries, respectively.

(l) The Company is a bank holding company duly registered with the
Board of Governors of the Federal Reserve System ("Federal Reserve Board") under
the Bank Holding Company Act of 1956, as amended ("BHCA"). Each Bank is a
national bank duly chartered and organized by authority of the Office of the
Comptroller of the Currency ("OCC"). The deposit accounts of each Bank are
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund to the fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid by such Bank. Since January 1,
1993, the Company and each Bank has filed all material reports and amendments
thereto that they were required to file with the Federal Reserve Board, the OCC
and any other federal or state regulatory authorities. Except as set forth in
the Prospectus, there is no unresolved material violation, criticism or
exception by any governmental or regulatory agency with respect to any report or
statement relating to any examinations of the Company or any of its
subsidiaries. The conduct of the business of the Company and each of its
subsidiaries is in compliance in all respects with applicable federal, state,
local and foreign laws and regulations, and all formal agreements, memoranda of
understanding and similar agreements with regulatory authorities, except where
the failure to be in compliance

-6-
<PAGE>

would not have a Material Adverse Effect. Each of the Company and its
subsidiaries, and TexStar, own or possess or have obtained all governmental
licenses, permits, consents, orders, approvals and other authorizations
necessary to lease or own, as the case may be, and to operate their properties
and to carry on their businesses as presently conducted except where the failure
to have any such governmental licenses, permits, consents, orders, approvals and
other authorizations would not have a Material Adverse Effect. Neither the
Company nor any of its subsidiaries, nor TexStar, has received any written
notice of proceedings related to revocation or modification of any such
licenses, permits, consents, orders, approvals or authorizations which singly or
in the aggregate, if the subject of an unfavorable ruling or finding, would
result in a Material Adverse Effect. Except as disclosed in the Prospectus, none
of the Company, TexStar or the Banks is currently a party or subject to any
agreement or memorandum with, or directive or order issued by, the Federal
Reserve Board, the OCC or any other federal or state regulatory authorities,
which imposes any material restrictions or requirements not generally applicable
to bank holding companies or commercial banks.

(m) Each of the Company and its subsidiaries, and TexStar, have valid
and indefeasible title to all of the properties and assets reflected as owned by
them in the financial statements hereinabove described (or described elsewhere
in the Prospectus), subject to no lien, mortgage, pledge, charge, encumbrance or
title defect of any kind except those, if any, reflected in such financial
statements (or described elsewhere in the Prospectus) or which are not material
to the Company and its subsidiaries, or TexStar, as the case may be, taken as a
whole. Each of the Company and its subsidiaries, and each of TexStar and its
subsidiaries, hold their respective leased properties that are material to the
Company and its subsidiaries, or TexStar, respectively, taken as a whole under
valid and binding leases.

(n) None of the Company or its subsidiaries has taken, and none will
take, directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange Act or
otherwise, in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares.

(o) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated or
contemplated therein, there has not been (i) any material adverse change in the
condition (financial or otherwise), earnings, affairs, business or prospects of
the Company or its subsidiaries, or of the earnings, affairs, business or
prospects of TexStar, whether or not arising in the ordinary course of
business, (ii) any material transaction entered into, or any material liability
or obligation incurred, by the Company or its subsidiaries or by TexStar other
than in the ordinary course of business, (iii) any change in the capital stock,
or increase in the short-term debt or long-term debt of the Company or its
subsidiaries or of TexStar, or (iv) any dividend

-7-
<PAGE>

or distribution of any kind declared, paid or made by the Company or TexStar in
respect of its capital stock.

(p) There are no contracts or other documents required to be described
in the Registration Statement or to be filed as exhibits to the Registration
Statement by the 1933 Act which have not been described or filed as required.
The contracts so described in the Prospectus are in full force and effect on the
date hereof; and neither the Company nor any of the subsidiaries, nor to the
knowledge of the Company, any other party, is in breach of or default under any
of such contracts.

(q) The Company together with its subsidiaries, and TexStar, own and
possess sufficient right, title and interest in and to, or has duly licensed
from third parties the right to use, all trademarks, trade names, copyrights and
other proprietary rights ("Trade Rights") material to the business of the
Company and each of its subsidiaries, or TexStar and its subsidiaries, in each
case taken as a whole. None of the Company or any of its subsidiaries or
TexStar has received any written notice of infringement, misappropriation or
conflict from any third party as to such material Trade Rights which has not
been resolved or disposed of, and none of the Company or any of its
subsidiaries, or TexStar, has infringed, misappropriated or otherwise conflicted
with material Trade Rights of any third parties, which infringement,
misappropriation or conflict would have a Material Adverse Effect.

(r) All offers and sales of equity securities prior to the date hereof
by the Company or any of its subsidiaries were at all relevant times either
exempt from the registration requirements of the 1933 Act and the registration
requirements of all applicable state securities or blue sky laws, or were duly
registered in accordance with the provisions thereof.

(s) Each of the Company and its subsidiaries, and TexStar, has timely
filed all necessary federal and state income and franchise tax returns required
to be filed through the date hereof and have paid all taxes shown as due
thereon, and there is no tax deficiency that has been, or to the knowledge of
the Company might reasonably be expected to be, asserted against the Company or
any of its subsidiaries or any of their properties or assets, or against TexStar
or any of its subsidiaries or any of their properties or assets, that could
reasonably be expected to have a Material Adverse Effect.

(t) The Company's Common Stock is registered pursuant to Section 12(b)
of the Exchange Act, and listed for trading on the American Stock Exchange, Inc.
("Amex"). The Company has filed an additional listing application with the Amex
with respect to the Primary Shares, and has received notification from the Amex
that the listing of the Primary Shares has been approved, subject to notice of
issuance or sale thereof.

-8-
<PAGE>

(u) Neither the Company nor any of its subsidiaries (and neither
TexStar nor any of its subsidiaries) is, and neither the Company nor any of its
subsidiaries intends to conduct its business in a manner in which it would
become, an "investment company" within the meaning of the Investment Company Act
of 1940, as amended.

(v) No labor dispute with the employees of the Company or any of its
subsidiaries, or with the employees of TexStar and its subsidiaries, is pending
or, to the knowledge of the Company, threatened that could reasonably be
expected to have a Material Adverse Effect. Each employee benefit plan within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), for which the Company or any subsidiary acts as sponsor within the
meaning of ERISA is and has been in all material respects operated and
administered in accordance with the provisions of ERISA and applicable law. The
present value of all benefits vested under each employee benefit plan which is
subject to Title IV of ERISA did not exceed, as of the end of the most recent
plan year, the value of the assets of the plan allocable to such vested or
accrued benefits, and no such plan or any trust created thereunder has incurred
any "accumulated funding deficiency" within the meaning of the Internal Revenue
Code ("Code") since the effective date of ERISA. No employee benefit plan or any
trust created thereunder or any trustee fiduciary or administrator thereof has
engaged in a "prohibited transaction" within the meaning of the Code or ERISA or
violated any of the fiduciary standards of ERISA, and there has been no
"reportable event" within the meaning of ERISA with respect to any such plan.
Neither TexStar nor its subsidiary maintains an employee benefit plan within the
meaning of ERISA.

(w) Each of the Company and its subsidiaries, and, to the knowledge of
the Company, each of TexStar, (A) makes and keeps books, records and accounts
which, in reasonable detail and in all material respects, accurately and fairly
reflect its transactions and dispositions of its assets and (B) maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (1) transactions are executed in accordance with management's
general or specific authorizations, (2) transactions are recorded as necessary
(i) to permit the preparation of financial statements in conformity with
generally accepted accounting principles consistently applied or any other
criteria applicable to such statements and (ii) to maintain accountability for
assets, (3) access to assets is permitted only in accordance with management's
general or specific authorizations and (4) the recorded accountability for
assets is compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.

(x) Except as disclosed in the Prospectus, (A) none of the Company,
TexStar or any of their respective subsidiaries is presently engaged in
negotiations for the acquisition of all or a portion of the stock or other
equity interest or all or a portion of the assets of any person (including
without limitation any company, corporation, partnership, limited liability
company, partnership, joint venture or sole proprietorship), and (B) has no

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<PAGE>

agreements or understandings with respect to the acquisition of all or a portion
of the stock or other equity interest or all or portion of the assets of any
specific person.

(y) Except as disclosed in the Prospectus, as of the date of the
Prospectus and as of each Closing Date, (A) no extension of credit made by
either Bank to an executive officer, director, or affiliate of the Company or
either of the Banks is (1) delinquent, past due, on non-accrual status or non-
performing, (2) identified as a potential problem loan on any internal "watch
list" or (3) constitutes a restructured loan; and (B) all extensions of credit
to any director or executive officer or any member of their immediate family (1)
were made in the ordinary course of business, (2) were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons, and (3) did not involve
more than the normal risk of collectibility or present other unfavorable
features.

(z) That certain Reorganization Agreement dated October 10, 1997
among TexStar, the certain shareholders of TexStar (for certain limited
purposes) and the Company covering the transactions between the Company and
TexStar described in the Prospectus under the caption "The TexStar Acquisition
- -- The Reorganization Agreement" and the transactions contemplated thereby have
been authorized by all necessary corporate action on the part of the Company,
been executed and delivered by the Company and the other parties thereto and
constitute a valid and binding obligation of the Company (assuming the due
authorization, execution and delivery thereof by the other parties thereto)
enforceable against the Company in accordance with its terms, except insofar as
(i) such agreement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other laws relating to creditors' rights generally, and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding thereafter may be brought.

(aa) The Company intends to apply the net proceeds from the sale of
the Shares for the purposes set forth in the Prospectus under the caption "Use
of Proceeds."

(bb) Since January 1, 1993 the Company has, and at each Closing Date
the Company will have, made all filings required to be made by it under the
Exchange Act; and all such filings conformed and will conform in all material
respects to the requirements of the Exchange Act, and none of such filings
contained an untrue statement of material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in lieu of the circumstances under which they were made, not misleading.

SECTION 3. Representation and Warranty of the Underwriters. The
Representative, on behalf of the several Underwriters, represents and warrants
to the Company that the information set forth with respect to the Shares (a) on
the cover page of the Prospectus with respect to price, underwriting discounts
and commissions and terms of the offering and (b)

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<PAGE>

under "Underwriting" in the Prospectus constitutes the only information
furnished to the Company by and on behalf of the Underwriter for use in
connection with the preparation of the Registration Statement and such
information is correct in all material respects.

SECTION 4. Purchase, Sale and Delivery of Shares. (a) On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
to the several Underwriters named in Schedule I hereto, and the Underwriters
agree, severally and not jointly, to purchase from the Company, the Firm
Shares. The purchase price per share to be paid by the Underwriters to the
Company shall be the price per share set forth in the Pricing Agreement.

Delivery of certificates for the Firm Shares to be purchased by the
Underwriters and payment therefor shall be made at the offices of counsel to the
Representative (or such other place as may be agreed upon by the Company and the
Representative) at such time and date, not later than the third full business
day following the first date that any of the Common Shares are released by you
for sale to the public, as you shall designate by at least 48 hours prior notice
to the Company (the "First Closing Date"); provided, however, that if the
Prospectus is at any time prior to the First Closing Date recirculated to the
public, the First Closing Date shall occur upon the later of the third full
business day following the first date that any of the Common Shares are released
by you for sale to the public or the date that is 48 hours after the date that
the Prospectus has been so recirculated.

Delivery of certificates for the Firm Shares shall be made by or on behalf
of the Company to you, against payment by you of the purchase price therefor by
certified or official bank checks payable in next day funds to the order of the
Company. The certificates for the Shares shall be registered in such names and
denominations as you shall have requested at least two full business days prior
to the First Closing Date, and shall be made available for checking and
packaging on the business day preceding the First Closing Date at a location in
New York, New York, as may be designated by you. Time shall be of the essence,
and delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.

(b) In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase up to an aggregate of 225,000 Additional Shares, at the same purchase
price per share to be paid for the Firm Shares, for use solely in covering any
over allotments made by the Underwriters in the sale and distribution of the
Firm Shares. The option granted hereunder may be exercised at any time (but not
more than once), in whole or in part, within 30 days after the date of the final
Prospectus upon written notice by you to the Company setting forth the aggregate
number of Additional Shares as to which the Underwriters are exercising the
option, the names and denominations in which the certificates for such shares
are to be registered and the time and

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<PAGE>

place at which such certificates will be delivered. Such time of delivery (which
may not be earlier than the First Closing Date), being herein referred to as the
"Second Closing Date," shall be determined by you, but if at any time other than
the First Closing Date, shall not be earlier than three nor later than ten full
business days after delivery of such notice of exercise. Certificates for the
Additional Shares will be made available at the Company's expense for checking
and packaging at 9:00 A.M., local time, on the first full business day preceding
the Second Closing Date at a location as may be designated by you. The manner of
payment for and delivery of the Additional Shares shall be the same as for the
Firm Shares as specified in Section 4(a).

(c) If the Company has elected not to rely upon Rule 430A, the initial
public offering price of the Shares and the purchase price per share to be paid
by the several Underwriters for the Shares shall have each been determined and
set forth in the Pricing Agreement, dated the date hereof, and an amendment to
the Registration Statement and the Prospectus will be filed before the
Registration Statement becomes effective.

(d) If the Company has elected to rely upon Rule 430A, the purchase price
per share to be paid by the several Underwriters for the Shares shall be an
amount equal to the initial public offering price, less an amount per share to
be determined by agreement between the Representative and the Company. The
initial public offering price per share of the Shares shall be a fixed price to
be determined by agreement between the Representative and the Company. The
initial public offering price per share and the purchase price, when so
determined, shall be set forth in the Pricing Agreement. In the event that such
prices have not been agreed upon and the Pricing Agreement has not been executed
and delivered by the parties thereto by the close of business on the second
business day following the date of this Agreement, this Agreement shall
terminate forthwith, without liability of any party to any other party, unless
otherwise agreed to by the Company and the Representative.

SECTION 5. Covenants of the Company. The Company covenants and agrees
with the Underwriters that:

(a) The Company will use its best efforts to cause the Registration
Statement to become effective. The Company will advise you promptly of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement (and make every reasonable effort to obtain the
withdrawal of such order as early as possible) or of the institution of any
proceedings for that purpose, or of any notification of the suspension of
qualification of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceedings for that purpose, and will also advise you
promptly of any request of the Commission for amendment or supplement of the
Registration Statement, of any preliminary prospectus or of the Prospectus, or
for additional information, and will not file any amendment or supplement to the
Registration Statement, to any preliminary

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<PAGE>

prospectus or to the Prospectus of which you have not been furnished with a copy
prior to such filing or to which you reasonably object.

(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the 1933 Act, any event occurs as a result of
which the Prospectus, including any amendments or supplements, would include an
untrue statement of a material fact, or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus, including any amendments or
supplements thereto and including any revised prospectus which the Company
proposes for use by the Underwriters in connection with the offering of the
Shares which differs from the prospectus on file with the Commission at the time
of effectiveness of the Registration Statement, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) to comply with the
1933 Act, the Company promptly will advise you thereof and will promptly prepare
and, if required pursuant to Rule 424(b), file with the Commission an amendment
or supplement which will correct such statement or omission or an amendment
which will effect such compliance.

(c) Neither the Company nor any of its subsidiaries will, prior to the
earlier of the Second Closing Date or termination or expiration of the related
option, incur any material liability or obligation, direct or contingent, or
enter into any material transaction, other than in the ordinary course of
business, except as contemplated by the Prospectus.

(d) The Company will not declare or pay any dividend or make any other
distribution upon the Common Stock payable to shareholders of record on a date
prior to the earlier of the Second Closing Date or termination or expiration of
the related option, except as contemplated by the Prospectus.

(e) Not later than 90 days after the close of the period covered
thereby, the Company will make generally available to its security holders an
earnings statement (which need not be audited) covering a period of at least 12
months beginning after the effective date of the Registration Statement, which
will satisfy the provisions of the last paragraph of Section 11(a) of the 1933
Act and Rule 158 thereunder.

(f) During such period as a prospectus is required by law to be
delivered in connection with offers and sales of the Shares by an underwriter or
dealer, the Company will furnish to you at its expense (and consents to the use
thereof), subject to the provisions of subsection (b) hereof, copies of the
Registration Statement, the Prospectus, each preliminary prospectus and all
amendments and supplements to any such documents in each case as soon as
available and in such quantities as you may reasonably request, for the purposes
contemplated by the 1933 Act.

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<PAGE>

(g) The Company will cooperate with the Underwriters in qualifying or
registering the Shares for sale under the blue sky laws of such jurisdictions as
you designate, and will continue such qualifications in effect so long as
reasonably required for the distribution of the Shares. The Company shall not
be required to qualify as a foreign corporation or to file a general consent to
service of process in any such jurisdiction where it is not currently qualified
or where it would be subject to taxation as a foreign corporation.

(h) During the period of three years after the date of the Pricing
Agreement, the Company will furnish to the Representative a copy (i) as soon as
practicable after the filing thereof, of each report filed by the Company with
the Commission, the Amex, any other securities exchange or the NASD and (ii) as
soon as available, of each report of the Company mailed to any class of its
securityholders.

(i) The Company will use the net proceeds received by it from the sale
of the Shares in the manner specified in the Prospectus under the caption "Use
of Proceeds."

(j) If, at the time of effectiveness of the Registration Statement,
any information shall have been omitted therefrom in reliance upon Rule 430A,
then immediately following the execution and delivery of the Pricing Agreement,
the Company will prepare, and file or transmit for filing with the Commission in
accordance with such Rule 430A and Rule 424(b), copies of an amended prospectus,
or, if required by such Rule 430A, a post-effective amendment to the
Registration Statement (including an amended prospectus), containing all
information so omitted.

(k) The Company will comply with all of the provisions of each
undertaking contained in the Registration Statement.

(l) The Company will not, without the prior written consent of the
Representative, sell, contract to sell or otherwise dispose of any equity
security of the Company (including shares of Common Stock) for a period of 180
days after the effective date of the Registration Statement, other than (i)
Common Stock issued and sold to the Underwriters pursuant to this Agreement, and
(ii) Common Stock issued upon exercises of outstanding stock options granted
under the Company's 1988 Stock Option Plan or 1995 Stock Option Plan (as such
terms are defined in the Prospectus) in the aggregate not to exceed __________
shares of Common Stock. The Company will cause each of its executive officers
and directors to deliver to the Representative on or before the date of this
Agreement an agreement satisfactory in form and substance to the Representative
and its counsel, whereby each agrees, for a period of 180 days after the
effective date of the Registration Statement, not to offer, sell or otherwise
dispose of any shares of Common Stock without the prior written consent of the
Representative ("Lock-Up Letter").

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<PAGE>

SECTION 6. Payment of Expenses. (a) The Company will pay, or reimburse if
paid by the Representative, whether or not the transactions contemplated hereby
are consummated or this Agreement is terminated, all costs and expenses incident
to the performance by the Company of its obligations under this Agreement and
the Pricing Agreement, including, without limiting the generality of the
foregoing, (i) preparation, printing, filing and distribution (including
postage, air freight charges and charges for counting and packaging) of the
Registration Statement, each preliminary prospectus, the Prospectus, each
amendment and/or supplement to any of the foregoing, and this Agreement, the
Pricing Agreement, the Agreement Among Underwriters and the Selected Dealers
Agreement; (ii) the furnishing to the several Underwriters and dealers of copies
of the foregoing materials (provided, however, that any such copies furnished by
the Company more than nine months after the first date upon which the Shares are
offered to the public shall be at the expense of the several Underwriters or
dealers so requesting as provided in paragraph 5(b) above); (iii) the
registrations or qualifications referred to in paragraph 5(g) above (including
reasonable fees and disbursements of counsel in connection therewith) and
expenses of printing and delivering to the several Underwriters copies of the
preliminary and final Blue Sky memoranda, provided that in no event shall the
Company be required to pay in excess of $15,000 with respect to the fees,
disbursements and expenses referred to in this clause (iii), exclusive of filing
fees; (iv) the review of the terms of the public offering of the Shares by the
NASD (including the filing fees paid to the NASD in connection therewith); (v)
the performance by the Company of its other obligations under this Agreement,
including the fees of the Company's counsel and accountants; (vi) the issuance
of the Shares and the preparation and printing of the stock certificates
representing the Shares including any stamp taxes payable in connection with the
original issuance of the Shares; and (vii) the furnishing to the Underwriter of
copies of all reports and information required by Section 5(h) above, including
costs of shipping and mailing.

(b) If the sale to the several Underwriters of the Firm Shares on the
First Closing Date is not consummated because (i) this Agreement is terminated
by the Company for any reason, (ii) this Agreement is terminated by the
Representative in accordance with the provisions of Section 10(i) hereof, (iii)
any condition of the Underwriters' obligations hereunder is not satisfied, or
(iv) of any refusal, inability or failure on the part of the Company to perform
any agreement herein or to comply with any provision hereof (unless such failure
to satisfy such condition or to comply with any provision hereof is due to the
default or omission of the Representative), the Company agrees to reimburse you
upon demand up to $150,000 for all accountable out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the sale
of the Shares. In the event that the Underwriters determine to terminate the
offering for reasons other than those set forth in Section 7 of this Agreement,
the Underwriters shall be responsible for their own out-of-pocket expenses,
excluding fees and disbursements of counsel for the Underwriters, which fees and
disbursements the Company shall reimburse.

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<PAGE>

SECTION 7. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Firm Shares
on the First Closing Date and the Additional Shares on the Second Closing Date
shall be subject to the accuracy in all material respects of the representations
and warranties on the part of the Company herein set forth as of the date hereof
and as of the First Closing Date and the Second Closing Date, as the case may
be, to the accuracy of the statements of the Company made pursuant to the
provisions hereof, to the performance in all material respects by the Company of
its respective obligations hereunder, and to the following additional
conditions:

(a) The Registration Statement shall have become effective either
prior to the execution of this Agreement or not later than 5:00 P.M., Eastern
Time, on the first full business day after the date of this Agreement, or such
later time as shall have been consented to by you but in no event later than
5:00 P.M., Eastern Time, on the third full business day following the date
hereof; and prior to the First Closing Date or the Second Closing Date, as the
case may be, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or shall be pending or, to the knowledge of the Company or you,
shall be contemplated by the Commission. If the Company has elected to rely
upon Rule 430A, the information concerning the initial public offering price of
the Securities and price-related information shall have been transmitted to the
Commission for filing pursuant to Rule 424(b) within the prescribed period and
the Company will provide evidence satisfactory to the Representative of such
timely filing (or a post-effective amendment providing such information shall
have been filed and declared effective in accordance with the requirements of
Rules 430A and 424(b)).

(b) The Shares shall have been qualified for sale under the blue sky
laws of such states as shall have been specified by you.

(c) The legality and sufficiency of the authorization, issuance and
sale of the Shares hereunder, the validity and form of the certificates
representing the Shares, the execution and delivery of this Agreement, the
Pricing Agreement, and all corporate proceedings and other legal matters
incident thereto, and the form of the Registration Statement and the Prospectus
(except financial statements) shall have been approved by counsel for the
Underwriters.

(d) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred any material adverse change, or any development
involving a prospective material adverse change, in or affecting the business or
properties of the Company and its subsidiaries, or TexStar and its subsidiary,
in each case taken as a whole, whether or not arising in the ordinary course of
business, which, in your reasonable judgment, makes it impractical to proceed
with the public offering or delivery of the Shares as contemplated hereby or to
attempt to enforce contracts for the purchase of the Shares.

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<PAGE>

(e) There shall have been furnished to you on the First Closing Date
or the Second Closing Date, as the case may be:

(i) An opinion of Secore & Waller, L.L.P., Dallas, Texas, counsel
for the Company, addressed to you and dated the First Closing Date or the
Second Closing Date, as the case may be, to the effect that:

(1) Each of the Company and TexStar is validly existing as
a corporation in good standing under the laws of the State of Delaware
and the United States of America, as the case may be, with full
corporate power and authority to own or lease its properties and
conduct its business as described in the Prospectus; the Company is a
bank holding company duly registered with the Federal Reserve Board
under the BHCA; TexStar is a national bank in good standing with the
OCC; and each of the Company and TexStar has been duly qualified to do
business as a foreign corporation under the corporation law of, and is
in good standing as such in, every jurisdiction where the ownership or
leasing of property, or the conduct of its business, requires such
qualification except where the failure so to qualify would not have a
Material Adverse Effect.

(2) Each Bank is a national bank duly chartered and
organized by authority of the OCC, validly existing and in good
standing under the laws of the United States of America. TexStar has
no subsidiaries. Each subsidiary of the Company is validly existing as
a corporation in good standing under the laws of its state of
incorporation with full corporate power and authority to own or lease
its properties and conduct its business as described in the
Prospectus; and each subsidiary of its Company has been duly qualified
to do business as a foreign corporation under the corporation law of,
and is in good standing as such in, every jurisdiction where the
ownership or leasing of property, or the conduct of its business,
requires such qualification except where the failure so to qualify
would not have a Material Adverse Effect.

(3) The Company has an authorized capitalization as set
forth in the Prospectus and the Shares conform, in all material
respects, to the description thereof contained in the Prospectus.

(4) No consent, approval, authorization or other order of
or filing with, any court, regulatory body, administrative agency or
other governmental body is legally required for the execution,
delivery and performance of this Agreement by the Company, except as
may be required

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<PAGE>

under or by the 1933 Act, the Amex or the blue sky laws of the various
jurisdictions.

(5) Each of this Agreement and the Pricing Agreement have
been duly and validly authorized and executed by the Company and
constitutes a valid and binding obligation of the Company except only
insofar as (i) such agreement may be subject to bankruptcy,
insolvency, reorganization, moratorium or other laws relating to
creditors' rights generally, (ii) the remedy of specific performance
and injunctive and other equitable relief may be subject to equitable
defenses, and (iii) such enforcement may be subject to any limitations
under applicable federal securities laws relating to indemnification
and contribution.

(6) The Registration Statement has become effective under
the 1933 Act, and, to the best knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted
or are pending or contemplated by the Commission under the 1933 Act,
and the Registration Statement (including the information deemed to be
part of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b), if applicable), the Prospectus and each
amendment or supplement thereto (except for the financial statements
and other statistical or financial data included therein as to which
such counsel need express no opinion) comply as to form in all
material respects with the requirements of the 1933 Act; and the
Primary Shares to be issued to the Underwriter have been approved for
listing on the Amex upon official notice of issuance.

(7) There are no contracts or documents required to be
described in the Registration Statement or Prospectus or to be filed
as exhibits to the Registration Statement which are not described or
filed, as required, and such contracts and documents as are summarized
in the Registration Statement or Prospectus are fairly summarized in
all material respects; and there are no statutes or regulations or any
legal or governmental proceedings pending or, to the knowledge of such
counsel, threatened, required to be described in the Prospectus which
are not described as required.

(8) All of the issued and outstanding shares of the
Company's capital stock have been duly authorized, validly issued and
are fully paid and non-assessable and free of preemptive or other
similar rights under the General Corporation Law of the State of
Delaware, and to such counsel's knowledge there are no options,
agreements, contracts or other

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<PAGE>

rights in existence to acquire from the Company any shares of Common
Stock, except as set forth in the Prospectus. Except as set forth in
the Prospectus, to such counsel's knowledge there are no holders of
the securities of the Company having rights to the registration
thereof. The Company has no subsidiary which conducts business as a
bank under the laws of the State of Texas or Federal law, other than
Surety Bank. All of the capital stock of each subsidiary of the
Company, other than Surety Bank, has been duly authorized, validly
issued and is fully paid and non-assessable. All of the outstanding
capital stock of each of the Banks has been duly authorized and
validly issued and is fully paid and, subject to 12 U.S.C. (S) 55
(1982), nonassessable. The Company, directly or indirectly, owns of
record, free and clear of any liens, claims, encumbrances or rights of
others, all of the issued and outstanding shares of each of its
subsidiaries, except as described in the Prospectus. To such counsel's
knowledge, there are no options, agreements, contracts or other rights
in existence to purchase or acquire from the Company or its
subsidiaries any issued and outstanding shares of such subsidiaries.

(9) The Primary Shares to be sold by the Company pursuant
to this Agreement and the Pricing Agreement have been duly authorized
and, when issued and paid for in accordance with this Agreement and
the Pricing Agreement, will be validly issued, fully paid and non-
assessable; the holders of the Shares will not be subject to personal
liability under the General Corporation Law of the State of Delaware
by reason of being such holders; the Shares are not subject under the
General Corporation Law of the State of Delaware to the preemptive
rights of any shareholder of the Company.

(10) This Agreement and the Pricing Agreement have been
duly and validly authorized, executed and delivered by the Company.

(11) The statements in the Prospectus under the captions
"Regulation and Supervision" and "Description of Securities," insofar
as they constitute conclusions of law, are correct in all material
respects.

(12) The execution, delivery and performance by the Company
of this Agreement and the Pricing Agreement have been duly authorized
by all necessary corporate action and do not and will not violate any
provision of the Company's articles of incorporation (as amended) or
bylaws (as amended) and do not and will not result in the breach of,
or violate, any of the terms or provisions of or constitute a default
under, or result in the creation or imposition of any lien, charge or
encumbrance upon

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<PAGE>

any property or assets of the Company or its subsidiaries under any
material agreement, franchise, license, indenture, lease, mortgage,
deed of trust, or other instrument known to such counsel to which the
Company or any subsidiary is a party or by which the Company, any
subsidiary or the property of any of them may be bound or affected,
or, to such counsel's knowledge, any law, order, judgment, decree,
rule or regulation applicable to the Company or any subsidiary of any
government, governmental instrumentality, court or regulatory body,
administrative agency or other governmental body having jurisdiction
over the Company or any subsidiary or any of their respective
properties, or any order of any court or governmental agency or other
regulatory authority entered in any proceeding to which the Company or
any subsidiary was or is now a party or by which it is bound.

(13) There is no material legal proceeding pending or, to
such counsel's knowledge, threatened against the Company except as
disclosed in the Prospectus.

(14) Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended.

(15) That certain Reorganization Agreement dated October
10, 1997 among TexStar, certain shareholders of TexStar (for certain
limited purposes) and the Company and the transactions contemplated
thereby has been authorized by all necessary corporate action on the
part of the Company, has been executed and delivered by the Company
and the other parties thereto and constitutes a valid and binding
obligation of the Company (assuming the due authorization, execution
and delivery thereof by the other parties thereto) enforceable against
the Company in accordance with its terms, except insofar as (i) such
agreement may be subject to bankruptcy, insolvency, reorganization,
moratorium or other laws relating to creditors' rights generally, and
(ii) the remedy of specific performance and injunctive and other forms
of equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding thereafter may be
brought.

In rendering such opinion, such counsel may rely, provided
that the opinion shall state that you and they are entitled to so
rely, as to factual matters on certificates of the officers and
employees of, and accountants for, the Company, and as to certain
legal matters, the opinion of

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<PAGE>

Tracy & Holland. Such opinion may contain such other qualifications
and assumptions as are reasonably acceptable to counsel for the
Underwriter.

In addition, counsel shall state that they have participated
in conferences with officers and other representatives of the Company,
representatives of the independent public accountants for the Company,
and representatives of the Underwriters and their counsel, at which
the contents of the Registration Statement, the Prospectus and related
matters were discussed and, although such counsel is not passing upon,
and does not assume any responsibility for, the accuracy, completeness
or fairness of the statements contained in the Registration Statement
or the Prospectus and has not made any independent check or
verification thereof, on the basis of the foregoing (relying as to
factual matters upon the statements of officers and other
representatives of the Company), no facts have come to such counsel's
attention that have led them to believe that the Registration
Statement (other than financial statements, the notes thereto and
related schedules and other financial, statistical and accounting data
included therein or omitted therefrom, as to which such counsel need
express no belief), as amended or supplemented, if applicable, at the
time such Registration Statement or any post-effective amendment
became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading (other than
information omitted therefrom in reliance on Rule 430A under the 1933
Act), or that the Prospectus (other than financial statements, the
notes thereto and related schedules and other financial, statistical
and accounting data included therein or omitted therefrom, as to which
such counsel need express no view) as amended or supplemented, if
applicable, as of its date and the First Closing Date or the Second
Closing Date, as applicable, contained an untrue statement of a
material fact or omitted to state a material fact necessary to make
the statements therein not misleading in light of the circumstances
under which they were made.

(ii) Such opinion or opinions of Bracewell & Patterson, L.L.P.,
counsel for the Underwriters, dated the First Closing Date or the Second
Closing Date, as the case may be, to such matters as you may reasonably
require.

(iii) A certificate of the Company executed by the chief
executive officer and the principal financial officer of the Company, dated
the First Closing Date or the Second Closing Date, as the case may be, to
the effect that:

(1) the representations and warranties of the Company set
forth in Section 2 of this Agreement are true and correct, in all
material

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<PAGE>

respects, as of the date of this Agreement and as of the First Closing
Date or the Second Closing Date, as the case may be, and the Company
has complied, in all material respects, with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to such Closing Date; and

(2) the Commission has not issued an order preventing or
suspending the use of the Prospectus or any preliminary prospectus
filed as part of the Registration Statement or any amendment thereto;
no stop order suspending the effectiveness of the Registration
Statement has been issued; and to the best knowledge of the respective
signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the 1933 Act.

The delivery of the certificate provided for in this
subsection shall be and constitute a representation and warranty of
the Company as to the facts required in the immediately foregoing
paragraphs (1) and (2) of this subsection to be set forth in said
certificate.

(iv) At the time the Pricing Agreement is executed and also on
the First Closing Date and the Second Closing Date, as the case may be,
there shall be delivered to you letters addressed to you and the Board of
Directors of the Company from Coopers & Lybrand LLP, and Burnside &
Rishebarger, independent accountants, the first one to be dated the date of
the Pricing Agreement, the second one to be dated the First Closing Date
and the third one (in the event of a second closing) to be dated the Second
Closing Date, to the effect set forth in Exhibit B.

(v) All conditions to the consummation of the transactions
among the Company, TexStar and certain shareholders described in the
Prospectus under the caption "The TexStar Acquisition" shall have been
satisfied in a manner satisfactory to the Representative in its reasonable
discretion.

(vi) The Representative shall have received a Lock-Up Letter
from each executive officer and director of the Company.

(vii) Such further certificates and documents as you may
reasonably request.

All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Bracewell & Patterson, L.L.P., counsel for the Underwriters. The Company
shall furnish you with such manually signed or

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<PAGE>

conformed copies of such opinions, certificates, letters and documents as you
reasonably request.

If any condition to the Underwriters' obligations hereunder to be satisfied
prior to or at the First Closing Date is not so satisfied, this Agreement at
your election will terminate upon notification to the Company without liability
on the part of the Underwriter, the Company, except for the expenses to be paid
or reimbursed by the Company pursuant to Section 6 hereof and except to the
extent provided in Section 8 hereof.

Section 8. Indemnification. (a) The Company agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the 1933 Act or the Exchange Act, from and against any
and all losses, claims, damages, liabilities and expenses whatsoever (including
but not limited to reasonable attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the 1933 Act, the Exchange
Act or otherwise, insofar as such losses, claims, damages, liabilities and
expenses arise out of or are based upon any untrue statement of a material fact
contained in any preliminary prospectus or the Registration Statement or the
Prospectus or in any amendment or supplement thereto, or arise out of or are
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or arise out of or are based in whole or in part on any inaccuracy
in the representations and warranties of the Company contained herein or any
failure of the Company to perform its respective obligations hereunder or under
law, except insofar as such losses, claims, damages, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or
allegation thereof which has been made therein or omitted therefrom in reliance
upon and in conformity with information furnished in writing to the Company by
or on behalf of any Underwriter through the Representative expressly for use
therein; provided, however, that the indemnification contained in this paragraph
with respect to any preliminary prospectus shall not inure to the benefit of the
Underwriter (or of any person controlling such Underwriter) with respect to any
action or claim arising from the sale of the Shares by such Underwriter brought
by any person who purchased Shares from the Underwriter to the extent it is
determined by a court of competent jurisdiction in a final non-appealable
decision that (i) a copy of the Prospectus (as amended or supplemented if any
amendment or supplements thereto shall have been furnished to the Underwriter
prior to the written confirmation of the sale involved) shall not have been
given or sent to such person by or on behalf of the Underwriter with or prior to
the written confirmation of the sale involved and (ii) the untrue statement or
omission of a material fact contained in such preliminary prospectus was
corrected in the Prospectus (as amended or supplemented if amended or
supplemented as aforesaid). In addition to its other obligations under this
Section 8(a), the Company agrees that, as an interim measure during the pendency
of any such claim, action, investigation,

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<PAGE>

inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, described in this Section 8(a),
it will promptly reimburse the Underwriter for all reasonable legal expenses as
they are incurred in connection with investigating or defending such claim,
action, investigation, inquiry or other proceeding. To the extent that any such
interim reimbursement payment is held by a court of competent jurisdiction to
have been improper, each recipient thereof will promptly return it to the
Company.

(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and any person controlling the Company within the meaning
of the 1933 Act and the Exchange Act, to the same extent as the foregoing
indemnity from the Company to each Underwriter and but only with respect to
information relating to such Underwriter furnished in writing to the Company by
or on behalf of such Underwriter expressly for use in the Registration
Statement, the Prospectus or any preliminary prospectus, or any amendment
thereof or supplement thereto.

(c) If any action or claim shall be brought against any indemnified
party under this Section 8, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 8,
promptly notify the indemnifying party in writing of the commencement thereof.
No indemnification shall be available to any party who shall fail to give notice
as provided in this Section 8(e) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but otherwise the omission so to
notify the indemnifying party will not relieve it from any liability that it may
have to an indemnified party under this Section 8. In case any such action is
brought against an indemnified party, and it notifies the indemnifying party of
the commencement thereof, the indemnifying party will be entitled to participate
therein, and to the extent that it may elect by written notice delivered to the
indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party. Upon receipt of notice from the
indemnifying party to such indemnified party of its election to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under Section 8
for any legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof unless (i) the indemnifying party has
agreed in writing to pay such fees and expenses, (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action or (iii) the named parties to any such action
(including any impleaded party) include such indemnified party and the
indemnifying party and such indemnified party shall have been advised in writing
by counsel having experience in securities litigation that there may be one or
more legal defenses available to it which are different from or additional to
those available to the

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<PAGE>

indemnifying party (in which case if such indemnified party notifies the
indemnifying party, the indemnifying party shall, in connection with any one
such action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of not more than one separate firm
of attorneys for all such indemnified parties) and which, in the opinion of such
counsel, would make it impractical to have common representation. The
indemnifying party shall not be liable for any settlement of any such action
effected without its written consent, but if settled with its written consent,
or if there shall be a final judgment for the plaintiff in any such action and
the time for filing all appeals has expired, the indemnifying party agrees to
indemnify and hold harmless any indemnified party and any such controlling
person from and against any loss or liability by reason of such settlement or
judgment.

(d) (i) If the indemnification provided for in this Section 8 is
unavailable as a matter of law to an indemnified party in respect of any losses,
claims, damages, liabilities or expenses referred to therein, then the
indemnifying party, in lieu of indemnifying such indemnified party thereunder,
shall contribute to the amount paid or payable by the indemnified party as a
result of such losses, claims, damages, liabilities or expenses (A) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Underwriters from the offering of the Shares or (B) if the
allocation provided by clause (A) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (A) above but also the relative fault of the Company and
of the Underwriter in connection with the statements or omissions which resulted
in such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company and the Underwriter shall be deemed to be in the same proportion, in
the case of the Company, as the total price paid to the Company, for the Shares
by the Underwriters (net of underwriting discounts and commissions but before
deducting expenses), and, in the case of the Underwriter, as the underwriting
commissions received by them, bears to the total of such amounts paid to the
Company and received by the Underwriter as underwriting commissions in each case
as contemplated by the Prospectus. The relative fault of the Company and of the
Underwriter shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriter and the party's relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omissions.

(ii) The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 8(f) were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in subsection (f)(i). The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in subsection (f)(i) shall
be deemed to include, subject to the limitations set forth in this Section

-25-
<PAGE>

8(f), any legal or other expenses reasonably incurred by such indemnified party
in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9(f), no Underwriter shall be
required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Shares underwritten by it and distributed to the public. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11 (f) of the 1933
Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to their respective
underwriting commitments and not joint.

(e) The indemnity and contribution agreements contained in this
Section 8 and the representations and warranties of the Company set forth in
this Agreement shall remain operative and in full force and effect, regardless
of (i) any investigation made by or on behalf of any Underwriter or any person
controlling such Underwriter, the Company or its directors or officers (or any
person controlling any such person), (ii) acceptance of any Shares and payment
therefor or hereunder and (iii) any termination of this Agreement. A successor
or assign of any Underwriter, the Company or its directors or officers and their
legal and personal representatives (or of any person controlling an Underwriter
or the Company) shall be entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 8.

SECTION 9. Effective Date. This Agreement shall become effective
immediately as to Sections 6, 8 and 10 and as to all other provisions upon
execution and delivery of the Pricing Agreement.

SECTION 10. Termination. Without limiting the right to terminate this
Agreement pursuant to any other provision hereof, this Agreement may also be
terminated by you in your absolute discretion, without liability on your part to
the Company, by notice given to the Company, if prior to the First Closing Date
or, with respect to the Additional Shares, on or prior to any later date on
which the Additional Shares are to be purchased, as the case may be, (i) there
has been, since the date of this Agreement or since the respective dates as of
which information is given in the Prospectus any material adverse change in the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries, or TexStar and its subsidiaries,
considered as a whole, whether or not arising in the ordinary course of
business; or (ii) trading in securities generally on the New York Stock
Exchange, the Amex or the National Association of Securities Dealers Automated
Quotation System shall have been suspended, or if there is a significant decline
in the value of securities generally on such exchanges or such market, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities generally shall have been required on either of such
exchanges or on such market, by the exchanges, market or by order of the
Commission or any other governmental authority having jurisdiction; or (iii) a
general moratorium on savings bank, savings and loan

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<PAGE>

association or commercial banking activities in the United States or in New York
or Texas shall have been declared by either Federal or state authorities; or
(iv) there shall have occurred any outbreak or escalation of hostilities or
other international or domestic calamity, crisis or change in political,
financial or economic conditions the effect of which on the financial markets of
the United States is such as to make it, in your judgment, impracticable or
inadvisable to market the Shares or to enforce contracts for the purchase of
Shares. Notice of such cancellation shall be given to the Company by telegraph,
telephone or facsimile but shall be subsequently confirmed by letter.

SECTION 11. Representations and Indemnities to Survive Delivery. The
respective indemnities, agreements, representations, warranties and other
statements of the Company and the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any termination of this Agreement or investigation made by or on behalf of any
Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, and will survive delivery of and payment
for the Shares sold hereunder.

SECTION 12. Notices. All communications hereunder will be in writing and,
if sent to the Underwriter will be mailed, delivered or telegraphed and
confirmed to Hoefer & Arnett Incorporated, 353 Sacramento Street, 10th Floor,
San Francisco, California 94111, with a copy to Bracewell & Patterson, L.L.P.,
711 Louisiana St., Suite 2900, Houston, Texas 77002, Attention: William T.
Luedke IV; if sent to the Company will be mailed, delivered or telegraphed and
confirmed to the Company at its corporate headquarters with a copy to Secore &
Waller, L.L.P., 13355 Noel Road, LB 75, Dallas, Texas 75240-6657, Attention: Dan
Waller

SECTION 13. Successors. This Agreement and the Pricing Agreement will
inure to the benefit of and be binding upon the parties hereto and their
respective successors, personal representative and assigns, and to the benefit
of the officers and directors and controlling persons referred to in Section 8,
and no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Shares as such from any
Underwriter merely by reason of such purchase.

SECTION 14. Partial Unenforceability. If any section, paragraph or
provision of this Agreement is for any reason determined to be invalid or
unenforceable, such determination shall not affect the validity or
enforceability of any other section, paragraph or provision hereof.

SECTION 15. Applicable Law. This Agreement and the Pricing Agreement
shall be governed by and construed in accordance with the laws of the State of
Texas.

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<PAGE>

If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return to us the enclosed duplicates hereof, whereupon it will
become a binding agreement among the Company and the Underwriter, all in
accordance with its terms.

Very truly yours,

SURETY CAPITAL CORPORATION

By:
---------------------------------------------
B.J. Curley
Vice President and Chief Financial Officer

The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.

HOEFER & ARNETT INCORPORATED

By:
------------------------
Peter Peracca
Partner

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<PAGE>

EXHIBIT A

SURETY CAPITAL CORPORATION

1,500,000 Shares Common Stock*

PRICING AGREEMENT

February __, 1998

Hoefer & Arnett Incorporated
353 Sacramento Street, 10th Floor
San Francisco, California 94111

Ladies and Gentlemen:

Reference is made to the Underwriting Agreement dated February __, 1998
(the "Underwriting Agreement") relating to the sale by the Company and the
purchase by Hoefer & Arnett Incorporated, as Representative of the several
Underwriters (the "Representative"), of the above Shares. All terms herein
shall have the definitions contained in the Underwriting Agreement except as
otherwise defined herein.

Pursuant to Section 3 of the Underwriting Agreement, the Company agrees
with the Underwriter as follows:

1. The initial public offering price per share for the Shares shall be
$___.

2. The purchase price per share for the Shares to be paid by the
Underwriters shall be $___ being an amount equal to the initial public offering
price set forth above less $___ per share.

- -------------------
*Plus an option to acquire up to 225,000 additional shares to cover
overallotments.

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<PAGE>

Very truly yours,

SURETY CAPITAL CORPORATION

By:
----------------------------------------------
B.J. Curley
Vice President and Chief Financial Officer

The foregoing Agreement is hereby
confirmed and accepted as of
the date first above written.

HOEFER & ARNETT INCORPORATED

By:
------------------------
Peter Peracca
Partner

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<PAGE>

EXHIBIT B

Comfort Letter of Coopers & Lybrand LLP and Burnside & Rishebarger

(1) They are independent public accountants with respect to the Company and
its subsidiaries within the meaning of the 1933 Act.

(2) In their opinion the consolidated financial statements and any
supplementary financial information and schedules (and all pro forma financial
information) of the Company and its subsidiaries included in the Registration
Statement comply as to form in all material respects with the applicable
accounting requirements of the 1933 Act.

(3) On the basis of specified procedures (but not an examination in
accordance with generally accepted auditing standards), including inquiries of
certain officers of the Company and its subsidiaries responsible for financial
and accounting matters as to transactions and events subsequent to December 31,
1994, a reading of minutes of meetings of the shareholders and directors of the
Company and its subsidiaries since December 31, 1994, a reading of the latest
available interim unaudited consolidated financial statements of the Company and
its subsidiaries (with an indication of the date thereof) and other procedures
as specified in such letter, nothing came to their attention which caused them
to believe that (i) the unaudited consolidated financial statements of the
Company and its subsidiaries included in the Registration Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act or that such unaudited financial statements are not
fairly presented in accordance with generally accepted accounting principles,
and (ii) at a specified date not more than five days prior to the date thereof
in the case of the first letter and not more than two business days prior to the
date thereof in the case of the second and third letters, there was any change
in the capital stock or long-term debt or short-term debt (other than normal
payments) of the Company and its subsidiaries on a consolidated basis or any
decrease in consolidated shareholders' equity as compared with amounts shown on
the latest unaudited balance sheet of the Company included in the Registration
Statement or for the period from the date of such balance sheet to a date not
more than five days prior to the date thereof in the case of the first letter
and not more than two business days prior to the date thereof in the case of the
second and third letters, there were any decreases, as compared with the
corresponding period of the prior year, in consolidated net interest income,
consolidated noninterest income or in the total or per share amounts of net
earnings, except, in all instances, for changes or decreases which the
Prospectus discloses have occurred or may occur or which are set forth in such
letter.

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<PAGE>

(4) They have carried out specified procedures, which have been agreed to
by the Underwriters, with respect to certain information in the Prospectus
specified by the Underwriters, and on the basis of such procedures, they have
found such information to be in agreement with the general accounting records of
the Company and its subsidiaries.

-32-

<PAGE>

EXHIBIT 2.01

AGREEMENT AND PLAN OF REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") entered into as of
October ___, 1997, by and among SURETY BANK, NATIONAL ASSOCIATION, a national
banking association located in Hurst, Texas ("Surety Bank"), TEXSTAR NATIONAL
BANK, a national banking association located in Universal City, Texas
("TexStar"), SURETY CAPITAL CORPORATION, a Delaware corporation located in
Hurst, Texas ("Surety"), and the shareholders of TexStar listed on Schedule A
attached hereto who are entering into this Agreement for certain limited
purposes (individually a "Shareholder" and collectively, the "Shareholders").

WITNESSETH:

WHEREAS, Surety is the record and beneficial owner of one hundred percent
(100%) of the issued and outstanding shares of common stock of Surety Bank; and

WHEREAS, the parties hereto desire to effect a reorganization whereby
TexStar will merge with and into Surety Bank (the "Merger") pursuant to an
agreement to merge (the "Merger Agreement") in substantially the form attached
hereto as Exhibit A, which provides, among other things, for the conversion and
exchange of the outstanding common stock, $5.00 par value, of TexStar (the
"TexStar Common Stock") immediately prior to the time the Merger becomes
effective in accordance with the provisions of the Merger Agreement into the
right to receive (1) cash and (2) certain performance payments, all as more
fully set forth in the Merger Agreement.

NOW, THEREFORE, to effect such reorganization and in consideration of the
premises and the mutual warranties, representations, covenants and agreements
contained herein, the parties hereto do hereby represent, warrant, covenant and
agree as follows:

1. Representations and Warranties of TexStar. TexStar represents and
warrants to Surety Bank and Surety as follows:

(a) Organization. TexStar is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States of America. TexStar (i) is duly authorized to conduct a general banking
business, in accordance with its charter, subject to the supervision of the
United States Office of the Comptroller of the Currency (the "Comptroller");
(ii) is an insured bank as defined in the Federal Deposit Insurance Act; and
(iii) has full power and authority (including all licenses, franchises, permits
and other governmental authorizations which are legally required) to engage in
the business and activities now conducted by it.

(b) Capital Stock. The authorized capital stock of TexStar consists of
575,000 shares of common stock, par value $5.00 per share, of which as of the
close of business on August 31, 1997,
<PAGE>

485,000 shares were outstanding and no shares were held in the treasury. All of
the outstanding shares of TexStar Common Stock have been duly and validly
authorized and issued, are fully paid and nonassessable and have not been issued
or disposed of in violation of the preemptive rights of any shareholder. Except
as set forth in Schedule 1(b), there are no outstanding subscriptions,
contracts, conversion privileges, options, warrants, calls, preemptive rights or
other rights obligating TexStar to issue, sell or otherwise dispose of, or to
purchase, redeem or otherwise acquire, any shares of TexStar Common Stock.
Since August 31, 1997, no shares of TexStar Common Stock have been purchased,
redeemed or otherwise acquired, directly or indirectly, by TexStar, except as
set forth on Schedule 1(b), and no dividends or other distributions have been
declared, set aside, made or paid to the shareholders of TexStar.

(c) Subsidiaries. TexStar has no subsidiaries and there is no
association, corporation or other entity in which TexStar owns an equity or
voting interest or with respect of which TexStar has an obligation to acquire an
equity or voting interest.

(d) Community Reinvestment Act. TexStar has not received any notice of
non-compliance with the Community Reinvestment Act ("CRA") from any regulatory
agency, and TexStar has supplied Surety Bank with copies of the CRA Statement
for TexStar, all supporting papers relating thereto, all letters and comments
received by TexStar pertaining thereto, and any responses by TexStar to such
comments.

(e) TexStar Financial Statements. TexStar has furnished Surety Bank
with the following financial statements (collectively, the "TexStar Financial
Statements"): (i) the Reports of Income and Condition filed by TexStar with the
Comptroller as of December 31, 1996, 1995 and 1994; and (ii) the unaudited
balance sheet and income statement of TexStar as of June 30, 1997 and for the
six (6) month period then ended. The TexStar Financial Statements fairly present
the financial position, results of operations and changes in financial position
of TexStar as of the dates and for the periods indicated in conformity with
generally accepted accounting principles, consistently applied during such
periods, except as otherwise stated in the TexStar Financial Statements and
subject, in the case of the interim TexStar Financial Statements, to normal and
recurring adjustments.

(f) Liabilities and Obligations. At June 30, 1997 TexStar had no
obligation or liability which was material or which, when combined with all
similar obligations or liabilities, would have been material, except as
disclosed in the TexStar Financial Statements or as set forth in any of the
schedules referred to herein, and there does not exist a set of circumstances
resulting from transactions effected or events occurring on or prior to June 30,
1997, or from any action omitted to be taken during such period, which could
reasonably be expected to result in any such

-2-
<PAGE>

material obligation or liability, except as disclosed or provided for in the
TexStar Financial Statements or except as disclosed in one or more of the
schedules referred to herein. Since June 30, 1997 TexStar has not incurred or
paid any obligation or liability, except for obligations incurred or paid by
TexStar in the ordinary course of its banking business consistent with its past
practice. Except for endorsements made in connection with the deposit of items
for collection made by TexStar in the ordinary course of its banking business
consistent with its past practice and except as set forth in the TexStar
Financial Statements, in Schedule 1(f) attached hereto, or in any of the
schedules referred to herein, TexStar is not obligated (by discount, loan
participation agreement, repurchase agreement or letter of credit) to provide
funds in respect of or to guarantee or assume any debt or obligation which is
either material or which, when combined with all similar debts or obligations,
would be material.

(g) Reports. Since December 31, 1992, TexStar has filed all reports,
registrations and statements, together with any required amendments thereto,
that it was required to file, if any, with (i) the Federal Reserve Board, (ii)
the Federal Deposit Insurance Corporation (the "FDIC"), (iii) the Comptroller
and (iv) any applicable state securities or banking authorities. All such
reports and statements filed with any such regulatory body or authority are
collectively referred to herein as the "TexStar Reports." As of their
respective dates, the TexStar Reports complied in all material respects with all
the rules and regulations promulgated by the Federal Reserve Board, the FDIC,
the Comptroller and applicable state securities or banking authorities, as the
case may be. Copies of all the TexStar Reports have been made available to
Surety Bank by TexStar.

(h) Loans. All loans of TexStar reflected in the TexStar Financial
Statements and all loans originated since June 30, 1997 were made in the
ordinary course of business. A true, complete and accurate list of all (i)
loans classified by examiners as "Other Loans Especially Mentioned,"
"Substandard," "Doubtful," or "Loss," (ii) past due loans, (iii) loans to the
officers of TexStar and the Shareholders, or any of them, and (iv) loans to
other parties which have been guaranteed by the officers of TexStar and the
Shareholders, or any of them, or for which the officers of TexStar and the
Shareholders, or any of them, are otherwise responsible at June 30, 1997 is
attached hereto as Schedule 1(h) and by reference made a part hereof.

(i) Reserve for Possible Loan Losses. The reserve for possible loan
losses as shown on the TexStar Financial Statements is adequate in all material
respects to provide for all losses, net of recoveries relating to loans
previously charged-off, on loans outstanding.

(j) Investment Securities. Except for pledges to secure public and
trust deposits, or except as set forth on Schedule 1(j)

-3-
<PAGE>

attached hereto, none of the investments reflected in the TexStar Financial
Statements as of June 30, 1997 under the heading "Investment Securities" and
none of the investments made since said date by TexStar is subject to any
"investment" or other restriction, whether contractual or statutory, which
materially impairs the ability of the holder thereof freely to dispose of such
investment at any time, to the extent permitted by applicable regulations, for a
fair market price as determined at the time of such disposition.

(k) Evidences of Indebtedness. Each evidence of indebtedness reflected
as an asset in the TexStar Financial Statements as of June 30, 1997, or acquired
since that date, is the legal, valid and binding obligation of the obligor named
therein, enforceable in accordance with its terms (subject, as to enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and
similar laws from time to time in effect). No evidence of indebtedness having an
unpaid balance (principal and accrued interest) in excess of $25,000 is subject
to any defense, offset or counterclaim.

(l) Physical Properties. TexStar has furnished to Surety Bank a
schedule, designated Schedule 1(l), describing all physical properties, real and
personal (showing the gross book values, accumulated depreciation and net book
values), owned or leased by TexStar as of June 30, 1997, having an original cost
in excess of $25,000 (exclusive of supplies consumable in the ordinary course of
business, which need not be scheduled). TexStar has good and indefeasible fee
simple title to all material real estate owned by it, has a valid leasehold
interest in each of the leased properties and owns outright all other assets and
properties, whether real, personal or mixed, tangible or intangible, described
in Schedule 1(l) or reflected in the TexStar Financial Statements as of June 30,
1997, or acquired after said date (other than properties sold, and supplies
consumed, by TexStar in the ordinary course of its banking business consistent
with its past practice), free and clear of all liens, pledges, mortgages,
security interests, charges, burdens, encumbrances, options and adverse claims
("Burdens"), except in each case as set forth in Schedule 1(l) and except for
liens for current taxes not yet due and payable and such imperfections of title,
covenants and easements as do not materially detract from or interfere with the
present use of the asset or property subject thereto or affected thereby. Since
June 30, 1997 TexStar has not satisfied or discharged, or become obligated to
satisfy or discharge, any Burden affecting TexStar or any asset of TexStar,
except in the ordinary course of TexStar's banking business consistent with its
past practice. The operation of the properties of TexStar and the business of
TexStar in the manner in which they are now operated does not violate any zoning
ordinances or municipal regulations in such a way as could, if such ordinances
or regulations were enforced, result in any material impairment of the uses of
the respective properties for the purposes for which

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<PAGE>

they are now operated, and no covenants, easements, rights-of-way or regulations
of record materially impair such uses.

(m) Compliance with Environmental Laws. Except as set forth on Schedule
1(m) or described in the environmental assessments prepared pursuant to Section
3(q) hereof, there is no legal, administrative, or other proceeding, claim, or
action of any nature seeking to impose on TexStar, or that could result in the
imposition on TexStar of, any liability relating to the release of hazardous
substances as defined under any local, state or federal environmental statute,
regulation or ordinance including, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended
("CERCLA"), pending or threatened against TexStar the result of which has had or
could reasonably be expected to have a material adverse effect upon the
financial condition of TexStar; there is no reasonable basis for any such
proceeding, claim or action; and TexStar is not subject to any agreement, order,
judgment, or decree by or with any court, governmental authority or third party
imposing any such environmental liability. TexStar has provided Surety Bank with
copies of all environmental assessments, reports, studies and other related
information in its possession with respect to each bank facility and each non-
residential OREO property.

(n) Condition of Personal Properties. All personal properties owned or
leased by TexStar are used by TexStar in the ordinary course of its business and
are in good condition and repair, normal wear and tear excepted.

(o) Patents, Trademarks, Etc. Except as set forth on Schedule 1(o),
there are no

(i) patents, trademarks, trade names or copyrights or
applications therefor owned by or registered in the name of TexStar or
in which TexStar has rights,

(ii) license agreements to which TexStar is a party, either as
licensor or licensee, with respect to any patents, trademarks, trade
names or copyrights, or

(iii) claims, to the knowledge of TexStar or the Shareholders,
that in the conduct of TexStar's business as now conducted TexStar is
infringing any patents, trademarks, trade names or copyrights of
others.

(p) Compliance with Laws. Except as would not have a material adverse
effect on the financial condition of TexStar, TexStar

(i) has complied with all laws and governmental regulations
pertaining to consumer credit in all material respects,

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<PAGE>

(ii) has complied with all other laws, regulations, licensing
requirements and orders applicable to its business, the breach or
violation of which could have a material adverse effect on said
business (including without limitation licensing requirements with
respect to personnel),

(iii) has filed with the proper authorities all statements and
reports required by the laws, regulations, licensing requirements and
orders to which it or any of its employees (because of his activities
on behalf of his employer) are subject, and

(iv) possesses all necessary licenses, franchises, permits and
governmental authorizations to conduct its business in all material
respects in the manner in which and in the jurisdictions and places
where such business is now conducted.

(q) Insurance. TexStar has furnished to Surety Bank a schedule,
designated Schedule 1(q), containing a brief description of all policies of
fire, liability and other forms of insurance and all fidelity bonds held by
TexStar.

(r) Material Contracts. Except as set forth in Schedule 1(r), neither
TexStar nor its assets, business or operations are a party to or are bound or
affected by or receive benefits under any written or oral agreement, arrangement
or commitment relating to

(i) the employment of any person other than personnel employed
at the pleasure of TexStar in the ordinary course of its business at
rates of compensation and on terms consistent with its past practice,

(ii) the election or retention in office of any director or
officer,

(iii) collective bargaining with, or any representation of any
employees by, any labor union or association,

(iv) the acquisition of services, supplies, equipment or other
personal property involving, in any particular case, more than $25,000
or for a quantity in excess of its requirements for normal operating
purposes,

(v) the purchase or sale of real property,

(vi) distribution, agency, public relations, advertising,
printing, construction, accounting or legal services, except for
agreements, arrangements and commitments subject to cancellation
without liability on notice of thirty (30) days or less and involving
a liability for

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<PAGE>

each such agreement, arrangement or commitment of less than $25,000,

(vii) lease of real or personal property as lessor or lessee, or
sublessor or sublessee, providing for annual payments in the aggregate
in excess of $2,500,

(viii) bonuses, pensions, profit-sharing, retirement, stock
options, stock purchases, employee discounts or other employee
benefits,

(ix) lending or advancing of funds, other than in the ordinary
course of TexStar's banking business consistent with its past
practice,

(x) borrowing of funds or receipt of credit other than in the
ordinary course of TexStar's banking business consistent with its past
practice,

(xi) incurring of any material obligation or liability except
for transactions engaged in by TexStar in the ordinary course of its
banking business consistent with its past practice,

(xii) the sale of personal property or services under which
payments due after the date of this Agreement exceed $25,000,

(xiii) any transaction or series of transactions, including loans,
in which any "affiliate" of TexStar, as that term is used in the Rules
and Regulations of the Securities and Exchange Commission under the
Securities Act of 1933 (the "1933 Act"), any officer or director of
TexStar, any officer or director of any "affiliate" of TexStar, or any
"associate" of any such officer or director, as that term is defined in
Regulation 14A of the General Rules and Regulations under the
Securities Exchange Act of 1934 (the "1934 Act"), has an interest if
such transaction or series of transactions would be required to be
disclosed in a proxy statement filed by a non-banking corporation under
the 1934 Act, or

(xiv) any material transaction not in the ordinary course of
TexStar's banking business consistent with its past practice.

Except as set forth in Schedule 1(r), since June 30, 1997 TexStar has not made
or permitted, or agreed to make or permit, any material modification or
termination of any material agreement, commitment or arrangement, except in the
ordinary course of its banking business consistent with its past practice.

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<PAGE>

(s) Absence of Adverse Agreements. TexStar is not a party to any
agreement or instrument or any judgment, order or decree or any rule or
regulation of any court or other governmental agency or authority which
materially and adversely affects or in the future may materially and adversely
affect the assets, properties, business, financial condition, operations or
prospects of TexStar.

(t) Employee Benefits.

(i) Schedule 1(t) lists each Employee Benefit Plan that TexStar
maintains or to which it contributes. For these purposes, "Employee
Benefit Plan" means any (i) nonqualified deferred compensation or
retirement plan or arrangement which is an employee pension benefit
plan (as defined in (S)3(2) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA")), (ii) qualified defined contribution
retirement plan or arrangement which is an employee pension benefit
plan, (iii) qualified defined benefit retirement plan or arrangement
which is an employee pension benefit plan (including any multiemployer
plan), or (iv) employee welfare benefit plan (as defined in ERISA
(S)3(1)) or material fringe benefit plan or program. With regard to
each such plan:

(1) the plan (and each related trust, insurance contract, or
fund) complies in form and in operation in all respects with the
applicable requirements of ERISA, the Internal Revenue Code of
1986, as amended (the "Code"), and other applicable laws;

(2) all required reports and descriptions have been filed or
distributed appropriately, and the requirements of Part 6 of
Subtitle B of Title I of ERISA and of Code (S)4980B have been met;

(3) all contributions (including all employer contributions
and employee salary reduction contributions) which are due have
been paid and all contributions for any period which are not yet
due have been accrued on the TexStar Financial Statements in
accordance with the past custom and practice of TexStar; and

(4) TexStar is currently complying, and has in the past
complied, with all requirements related to the formation and
operation of the Employee Benefit Plan, and the TexStar Financial
Statements properly reflect all unpaid expenses and obligations in
any way related to the Employee Benefit Plan.

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<PAGE>

(ii) TexStar has delivered or made available to Surety
Bank correct and complete copies of the plan documents and summary
plan descriptions, the most recent determination letter received from
the Internal Revenue Service, the most recent Form 5500 Annual Report,
and all related trust agreements, insurance contracts, and other
funding agreements which implement each such Employee Benefit Plan.

(iii) TexStar does not maintain or contribute to, and has
not in the past maintained or contributed to, any Employee Benefit
Plan providing medical, health, or life insurance or other welfare-
type benefits for current or future retired or terminated employees,
their spouses, or their dependents (other than in accordance with Code
(S)4980B).

(u) Material Contract Defaults. Except as set forth in Schedule 1(u),
TexStar is not in default in any material respect under any of the agreements,
commitments, arrangements, leases, insurance policies or other instruments set
forth or described herein or in the schedules referred to herein or otherwise
disclosed in writing to Surety Bank by TexStar; such agreements, commitments,
arrangements, leases, insurance policies and other instruments are legal, valid
and binding obligations of the respective parties thereto in accordance with
their terms; and there are no defenses, offsets or counterclaims thereto which
may be made by any party thereto other than TexStar, nor has TexStar waived any
substantial rights thereunder, except as set forth in the schedules referred to
herein or otherwise disclosed in writing to Surety Bank by TexStar on or before
the date of this Agreement.

(v) Litigation and Other Proceedings. Except to the extent indicated
in Schedule 1(v), there is not pending or threat ened against TexStar, or
affecting or which would affect the assets of TexStar, any action, suit,
proceeding or investigation which

(i) involves a claim for an amount exceeding the amount
recoverable by TexStar from insurance companies under policies
described in Schedule 1(q), subject to the deductible amounts under
said policies as set forth in said schedule,

(ii) has resulted or might result in any adverse change in the
business, operations or assets or the condition, financial or
otherwise (including without limitation changes in the value of
investments), or results of operations of TexStar,

(iii) has affected or might affect the right or ability of
TexStar to carry on its business as now conducted, or

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<PAGE>

(iv) has affected or might affect the consummation of the
transactions contemplated by this Agreement or the Merger Agreement,

or any circumstances which would give rise to any such action, suit, proceeding
or investigation. The materiality threshold under Section 16 does not apply for
purposes of the foregoing. Except as set forth in Schedule 1(v), TexStar is not
(x) subject to any continuing court or other order, writ, injunction or decree
applicable specifically to it or to its business, property or employees, or (y)
in default with respect to any order, writ, injunction or decree of any nature.

(w) Taxes. TexStar has filed with the appropriate governmental
agencies all federal, state and local income, franchise, excise, real and
personal property and other tax returns and reports which are required to be
filed, and has paid all taxes shown thereon to be due and payable. There are no
unpaid taxes of TexStar which are or may become a lien on the properties or
assets of TexStar, except liens for taxes not yet due and payable. The reserves
and liabilities for taxes reflected in the TexStar Financial Statements have
been accrued in accordance with generally accepted accounting principles
consistent with the past practice of TexStar and are sufficient for the payment
of all interest, taxes, and penalties relating to periods ending with or prior
to the Closing. There is no pending or proposed assessment by any taxing
authority against TexStar for additional taxes for which TexStar does not have
adequate reserves and which is not reflected on the TexStar Financial
Statements. No income tax liability of TexStar has been asserted by the
Internal Revenue Service for taxes in excess of those already paid. TexStar is
not a party to any agreement currently in effect which extends the period for
assessment and collection of any tax, nor is TexStar a party to any action or
proceeding by any governmental authority for assessment or collection of taxes,
nor has any claim for assessment or collection of taxes been asserted against
TexStar. The materiality threshold under Section 16 does not apply for purposes
of the foregoing.

(x) Absence of Certain Changes or Events. Except as set forth in
Schedule 1(x), since June 30, 1997 TexStar has not:

(i) issued or sold any of its capital stock or any corporate
debt obligations (except certificates of deposit, letters of credit,
cashier's checks and other documents and instruments issued in the
ordinary course of the banking business of TexStar);

(ii) granted any option for the purchase of any shares of its
capital stock;

(iii) declared or set aside any dividend or other distribution
in respect of its capital stock, or directly

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<PAGE>

or indirectly, purchased, redeemed or otherwise acquired any such
capital stock;

(iv) made or authorized any change in its outstanding capital
stock or in its Articles of Association or bylaws;

(v) made any material change in its mode of management or
operation or method of accounting;

(vi) incurred any obligations or liabilities (absolute or
contingent) (other than any obligations or liabilities incurred in the
ordinary course of business and any obligations or liabilities less
than $2,500 but not exceeding $10,000 in the aggregate) or mortgaged,
pledged or subjected to lien or encumbrance (other than statutory
liens not yet delinquent) any of its assets or properties;

(vii) discharged or satisfied any lien or encumbrance or paid
any obligation or liability (absolute or contingent), other than
current liabilities included in the TexStar Financial Statements and
current liabilities incurred since the date thereof in the ordinary
course of business;

(viii) sold, exchanged or otherwise disposed of any of its assets
other than in the ordinary course of business;

(ix) made or become obligated to make any capital expenditures
other than such expenditures or commitments which do not aggregate
more than $10,000;

(x) engaged in any transaction affecting its business or
properties not in the ordinary course of business or suffered any
extraordinary loss;

(xi) paid or become obligated to pay any general wage or salary
increase, bonus, severance or termination pay to any officer or
employee, entered into any employment contract with any officer or
employee, instituted any employee welfare, bonus, stock option,
profit-sharing, retirement or similar plan or arrangement, or granted
or agreed to grant any increase in compensation to any director;

(xii) made any investment except investments in the ordinary
course of business, in accordance with past practice;

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<PAGE>

(xiii) suffered any damage, destruction or loss, whether or not
covered by insurance, materially and adversely affecting its
properties;

(xiv) waived any rights of value which in the aggregate are
material;

(xv) experienced any material adverse change in its assets,
properties, business, financial condition, operations, or prospects;

(xvi) suffered the occurrence of any event or condition of any
character which may materially and adversely affect its assets,
properties, business, financial condition, operations, or prospects;
or

(xvii) entered into any material transactions outside the
ordinary course of business except as expressly contemplated by this
Agreement.

(y) Corporate Power and Authority. The Board of Directors of TexStar
has duly approved this Agreement, the Merger Agreement and the transactions
contemplated hereby and thereby, and has authorized the execution and delivery
of this Agreement and, subject to the approval of the shareholders of TexStar,
the Merger Agreement by TexStar. TexStar has full power, authority and legal
right to enter into such agreements and, upon approval of such agreements by
regulatory authorities having jurisdiction in the premises and by the TexStar
shareholders, to consummate the transactions contemplated hereby and thereby.
The execution, delivery and performance of this Agreement and the Merger
Agreement and the consummation of the transactions contemplated hereby and
thereby in accordance with said agreements will not:

(i) conflict with the Articles of Association or the bylaws of
TexStar,

(ii) result in any breach or termination of, or constitute a
default under, or constitute an event which with notice or lapse of
time, or both, would become a default, or result in the creation of
any Burden upon any asset of TexStar, under any agreement, arrangement
or commitment, or violate any order, writ, injunction or decree to
which TexStar is a party or by or under which TexStar or its assets,
business or operations may be bound or affected or receive benefits,
or

(iii) result in the loss or adverse modification of any license,
franchise, permit or other authorization granted to or otherwise held
by TexStar.

(z) Compensation. TexStar has furnished to Surety Bank a schedule,
designated Schedule 1(z), containing the name and

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<PAGE>

position of each person employed by TexStar whose aggregate annual compensation
from TexStar (including bonuses and similar remuneration) exceeds $25,000 and
setting forth his total annual compensation. Except as designated on Schedule
1(z), TexStar has no knowledge of any facts which would indicate that employees
of TexStar will not continue in TexStar's employment on an acceptable basis,
subject to normal turnover. Since June 30, 1997, except as set forth in Schedule
1(z), TexStar has not granted or become obligated to grant any increases in the
wages or salary of, or paid or become obligated to pay any bonus or made or
become obligated to make any similar payment to, any officer or employee
(including, without limitation, any increase in the rate of compensation payable
to any of the personnel listed in Schedule 1(z) over the rate shown in Schedule
1(z)) in an aggregate amount that, computed on an annual basis, would exceed ten
percent (10%) of such officer's or employee's annual rate of compensation prior
to all such increases, bonuses or similar payments. In addition, since June 30,
1997, except as set forth in Schedule 1(z), TexStar has not, directly or
indirectly, paid or become obligated to pay any severance or termination pay to
any officer or employee.

(aa) Availability of Documents. TexStar has heretofore made available
for inspection by Surety Bank at the offices of TexStar true, correct and
complete copies of its Articles of Association and bylaws and all agreements,
arrangements, commitments and documents referred to herein or in the schedules
referred to herein, in each case together with all amendments and supplements
thereto.

(bb) Claims and Deposits. Neither TexStar nor any of the Shareholders
have any claims against TexStar except as otherwise disclosed in Schedule 1(ab).
All sums on deposit with TexStar by the Shareholders and the officers of TexStar
in excess of $100,000 are disclosed on Schedule 1(ab).

(cc) Schedules. All schedules referred to herein furnished or to be
furnished by TexStar to Surety Bank are (or will be when furnished) true,
correct and complete in all material respects, as supplemented on the Closing
Date.

(dd) Stock Ownership. The Shareholders are as of the date of this
Agreement the record owners, and on the Closing Date will be the beneficial and
record owners, of over seventy-four percent (74%) of the issued and outstanding
shares of TexStar Common Stock.

2. Representations and Warranties of Surety Bank. Surety Bank hereby
represents and warrants to TexStar and the Shareholders as follows:

(a) Organization. Surety Bank is a national banking association duly
organized, validly existing and in good standing under the laws of the United
States of America and has all

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<PAGE>

requisite corporate power and authority and is entitled to own or lease its
properties and to carry on its business as and in the places where such
properties are owned or leased and such business is conducted.

(b) Corporate Power and Authority. The Board of Directors of Surety
Bank has duly approved this Agreement, the Merger Agreement and the transactions
contemplated hereby and thereby and has authorized the execution and delivery of
this Agreement and the Merger Agreement by Surety Bank. Surety Bank has full
power, authority and legal right to enter into such agreements and, upon
approval of such agreements by regulatory authorities having jurisdiction in the
premises, to consummate the transactions contemplated hereby and thereby. The
making and performance of this Agreement and the Merger Agreement and the
consummation of the transactions contemplated hereby and thereby in accordance
with such agreements will not conflict with the Articles of Association or
bylaws of Surety Bank.

3. Covenants of TexStar and the Shareholders. TexStar and the
Shareholders each hereby covenant and agree with Surety Bank that, unless the
prior written consent of Surety Bank is obtained:

(a) Conduct of Business. Prior to the Effective Time, TexStar will
operate its business only in the usual, regular and ordinary course, and TexStar
will use its best efforts to

(i) maintain its corporate existence in good standing,

(ii) maintain the general character of its business and conduct
its business in its ordinary and usual manner,

(iii) preserve intact its business organization and assets,

(iv) except as provided in Schedule 1(z), keep available the
services of its present officers and employees,

(v) maintain and keep its properties in as good repair and
condition as at present, except for depreciation due to ordinary wear
and tear and damage due to casualty,

(vi) maintain in full force and effect insurance comparable in
amount and scope of coverage to that now maintained by it,

(vii) preserve its goodwill and the goodwill of its suppliers,
depositors, customers and others having business dealings with it,

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<PAGE>

(viii) extend credit in accordance with its existing lending
policies,

(ix) maintain proper business and accounting records in
accordance with generally accepted principles,

(x) comply in all material respects with and perform all
duties imposed on it by all federal and other applicable laws, rules,
regulations, ordinances, codes, orders, licenses and permits imposed
by federal and other governmental authorities or otherwise applicable
to TexStar's properties and business operations,

(xi) perform all of its obligations under contracts, leases
and documents relating to or affecting its assets, properties and
business and use its best efforts to obtain any approvals or consents
required to maintain existing leases and other contracts in effect
following the Merger,

(xii) cause TexStar not to take any action described in Section
1(x), other than the payment of a bonus to Byron K. Bexley ("Bexley")
in the amount of the Net Earnings of TexStar (as defined in Section
5(b) of the Merger Agreement), subject to a maximum of $100,000,
payable by TexStar to Bexley on the Closing Date, if, and only if, the
transactions contemplated by this Agreement are consummated, and

(xiii) prevent the occurrence of any change or event which would
render any of the representations and warranties of TexStar contained
herein and in the Merger Agreement untrue in any material respect at
and as of the Effective Time with the same effect as though such
representations and warranties (in the exact language contained in
this Agreement or in the Merger Agreement with appropriate
modifications of tense in the case of representations and warranties
relating to statements of fact as of specific dates) had been made at
and as of the Effective Time, except as otherwise contemplated by this
Agreement.

(b) Access to Properties and Records. TexStar will keep Surety Bank
closely advised of all material developments relevant to the operations of
TexStar and the consummation of the Merger and will cooperate fully in
permitting Surety Bank to make a full investigation of the business, properties,
financial condition and investments of TexStar and in bringing about the
consummation of the Merger. Prior to the Closing Date, TexStar will update by
amendment or supplement any of the schedules referred to herein and any other
disclosure in writing from TexStar to Surety Bank, including, but not limited
to, the disclosures of TexStar pursuant to Section 1(h). In addition, TexStar
hereby represents and

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<PAGE>

warrants that such schedules and such written disclosures, as so amended or
supplemented, shall be true, correct and complete in all material respects as of
the Closing Date; provided, however, that the inclusion of any information in
any such amendment or supplement, not included in the original schedule or
written disclosure at or prior to the date of this Agreement, will not (except
to the extent such information was not required to be included in the original
schedule or written disclosure) limit or impair any right which Surety Bank
might otherwise have respecting the representations or warranties of TexStar
contained in this Agreement.

(c) Further Assurances. Upon request of Surety Bank, TexStar,
subject to approval by TexStar's counsel, and the Shareholders, and each of
them, will at any time, whether before or after the Closing Date, and from time
to time, duly execute and deliver to Surety Bank all such further instruments
and documents as may be necessary or advisable, in the opinion of Surety Bank's
counsel, to obtain the full benefit of this Agreement and the Merger Agreement
and the transactions contemplated hereby and thereby.

(d) Changed Circumstances. TexStar shall promptly notify Surety Bank
if TexStar discovers that any of the representations or warranties contained in
this Agreement or the Merger Agreement were not true and correct as of the date
hereof, or by reason of changed circumstances, or otherwise, are no longer true
and correct.

(e) Reports. From the date hereof to the Closing Date, TexStar and
the Shareholders, and each of them, will deliver to Surety Bank promptly after
they become available, all TexStar Reports filed by TexStar with any regulatory
body or authority, any report of TexStar to its shareholders, all proxy
statements and other written materials furnished to the shareholders of TexStar,
and all press releases issued by TexStar.

(f) Restatement of TexStar Financial Statements. On or before the
Closing Date, TexStar will cause the following TexStar Financial Statements to
be restated in accordance with Regulation S-X promulgated by the Securities and
Exchange Commission (the "SEC") and will cause same, together with any and all
consents from its independent accountants to the inclusion of such TexStar
financial statements in all necessary registration statements and reports to be
filed by Surety in connection with the consummation of the transactions
contemplated by this Agreement, to be delivered to Surety Bank: statements of
condition at December 31, 1997, 1996 and 1995, and statements of income,
statements of cash flows and of shareholders' equity for the three (3) years
ended as of December 31, 1997, 1996 and 1995, together with the notes thereto,
as certified by the independent accountants of TexStar.

(g) Personnel Changes. From the date of this Agreement and until the
Closing, TexStar shall not cause any changes to be

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<PAGE>

made in the officers or directors of TexStar, except with the prior written
approval of Surety Bank, which approval shall not be unreasonably withheld.

(h) Officers' Certificate. At the Closing Date, TexStar will furnish
to Surety Bank a certificate executed in its corporate name by the chief
executive officer of TexStar dated the Closing Date, which shall state whether
(i) TexStar has complied in all material respects with its agreements contained
herein and in the Merger Agreement to be performed at or prior to the Closing
Date, and (ii) the representations and warranties of TexStar contained herein
and in the Merger Agreement are true in all material respects at and as of the
Closing Date with the same effect as though such representations and warranties
(in the exact language contained in this Agreement or in the Merger Agreement
with appropriate modification of tense in the case of representations and
warranties relating to statements of fact as of specified dates) had been made
at and as of the Closing Date.

(i) Escrow Agreement. At the Closing Date, the Shareholders shall
each execute and deliver the escrow agreement (the "Escrow Agreement") in the
form attached hereto as Exhibit B.

(j) Approvals of Third Parties. As soon as practicable after the
date of this Agreement, TexStar will use its best efforts to provide Surety Bank
with such information concerning TexStar as Surety Bank may request in order to
secure the approval of the Merger by regulatory authorities having jurisdiction
over banks and bank holding companies, and will otherwise use its best efforts
to cause the consummation of the Merger in accordance with the terms and
conditions of this Agreement and the Merger Agreement.

(k) Financial Information. TexStar will deliver, or will cause to be
delivered, to Surety Bank, as soon as available, but in any event within thirty
(30) days after the end of each month commencing with the month of August 1997,
the monthly information furnished to the Board of Directors of TexStar,
including, but not limited to, the following financial statements of TexStar:
(i) a statement of condition of TexStar as of the end of such month and the
related statement of income for such month and for the portion of the fiscal
year of TexStar ended at the end of such month, and (ii) such additional
information regarding the financial position, business or prospects of TexStar
as Surety Bank may reasonably require in connection with any filings by Surety
Bank or Surety with the SEC and the Comptroller. Such additional financial
statements will also be included in the term "TexStar Financial Statements" for
purposes of this Agreement. Additionally, TexStar will deliver, or will cause
to be delivered, at its expense, to Surety Bank, as soon as available, but in
any event by January 31, 1998, a statement of condition of TexStar as of the end
of such fiscal year and the related statement of income and statements of cash
flow and changes in stockholders equity of TexStar for such fiscal year, all in
reasonable detail, in

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<PAGE>

compliance with Regulation S-X promulgated by the SEC, stating in comparative
form the respective figures for the corresponding date and period in the prior
fiscal year and prepared in accordance with generally accepted accounting
principles and accompanied by an opinion thereon by TexStar's independent
accountants.

(l) Proxy Material and Meeting of Shareholders. As soon as
practicable after the receipt of regulatory approval of the transactions
contemplated hereby, TexStar will: (i) prepare a proxy statement, notice of
meeting and form of proxy to be used in connection with a meeting of its
shareholders to consider and vote upon the transactions contemplated in this
Agreement and the Merger Agreement, and (ii) furnish proxy materials to its
shareholders, and duly call and hold a meeting of its shareholders to submit and
recommend to its shareholders the approval of the transactions contemplated in
this Agreement and the Merger Agreement, including the appointment of W. Marvin
Rush or another shareholder of TexStar as the attorney-in-fact of the
shareholders of TexStar who will act on behalf of such shareholders as the
"Representative" pursuant to the Escrow Agreement, and cause to be furnished to
each such shareholder a copy of such proxy material.

(m) Voting. The Shareholders agree to vote all of their shares of
TexStar Common Stock in favor of the Merger at the meeting of the shareholders
of TexStar called to consider and vote upon the transactions contemplated by
this Agreement and the Merger Agreement.

(n) Material Contracts. From the date of this Agreement until the
Closing the Shareholders shall not, without prior consultation with Surety,
permit TexStar to enter into any agreement, contract or commitment to sell or
otherwise dispose of any real property or any material amount of any tangible or
intangible personal property to, make any investment in, or loan or otherwise
extend credit to a third party other than in the ordinary course of TexStar's
business.

(o) Attendance at Meetings of the Board of Directors. From the date
of this Agreement until the Closing, TexStar shall give Surety and Surety Bank
at least three (3) days' prior written notice of any regular or special meeting
of the Board of Directors of TexStar (or of any committee thereof) and permit a
representative of Surety and Surety Bank to attend each of such meetings.

(p) Additional Accruals and Reserves. Immediately prior to the
Closing, TexStar shall establish such additional accruals and reserves as may be
necessary: (i) to conform TexStar's accounting and credit loss reserve
practices and methods to those of Surety Bank and Surety Bank's plans with
respect to the conduct of TexStar's business following the Merger and, (ii) to
the extent permitted by generally accepted accounting principles, to provide for
the costs and expenses relating to the consummation by TexStar

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<PAGE>

of the Merger and the other transactions contemplated by this Agreement.

(q) Environmental Reports. TexStar shall obtain, at its sole
expense, Phase I environmental assessments, or updates to those previously
obtained, for each bank facility and each non-residential OREO property. Oral
reports of such environmental assessments shall be delivered to Surety Bank no
later than four (4) weeks, and written reports shall be delivered to Surety Bank
no later than eight (8) weeks, from the date of this Agreement. TexStar shall
obtain a survey and assessment of all potential asbestos containing material in
owned or leased properties (other than OREO property) and a written report of
the results shall be delivered to Surety Bank within four (4) weeks from the
date of this Agreement.

(r) Title Insurance and Surveys. TexStar shall provide copies of
all existing policies of title insurance and boundary surveys for each bank
facility, which shall be delivered to Surety Bank no later than four (4) weeks
from the date of this Agreement.

(s) Press Releases. TexStar shall consult with Surety Bank as to
the form and substance of any proposed press releases or other proposed public
disclosure of matters related to this Agreement or any of the transactions
contemplated thereby.

(t) Final Tax Returns. The Shareholders agree to cause to be
prepared, signed and filed with the Internal Revenue Service and with any other
appropriate taxing authorities all tax returns for TexStar for all periods
ending prior to or with the Effective Date. This covenant shall survive the
consummation of the transactions contemplated in this Agreement.

(u) TexStar shall have terminated its discretionary incentive
compensation program for its employees (more fully described on Schedule 1(r),
Item (viii)), effective as of the commencement of business January 1, 1998.

4. Covenants of Surety Bank. Surety Bank hereby covenants and agrees
with TexStar and the Shareholders as follows:

(a) Approvals of Third Parties. As soon as practicable after the
date of this Agreement, Surety Bank will use its best efforts to secure all
necessary approvals of third parties, including without limitation regulatory
authorities, having jurisdiction over banks and bank holding companies that are
required in order to effect the Merger and will otherwise use its reasonable
efforts to cause the consummation of the Merger in accordance with the terms and
conditions of this Agreement and the Merger Agreement.

(b) Payment. As and when required by the provisions of the Merger
Agreement, Surety Bank shall pay to the shareholders of

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<PAGE>

TexStar such sums to which such shareholders are entitled under Section 5(a) of
the Merger Agreement.

5. Mutual Representations and Covenants. Surety Bank and TexStar
mutually represent and covenant as follows:

(a) Furnishing Information and Indemnification. Surety Bank and
TexStar have furnished, or will furnish as soon as practicable after the date of
this Agreement, to each other such information as the other has requested or may
request concerning itself required for inclusion in

(i) applications to be filed on behalf of TexStar and Surety
Bank with the Comptroller for authority to consummate the Merger, and

(ii) any other request, application, statement, report or
material to be made or filed by Surety Bank or TexStar to or with any
governmental agency, department or instrumentality in connection with
the transactions contemplated in this Agreement, in the Merger
Agreement or otherwise.

(b) No Agent's Fee. Surety Bank and Surety, on the one hand, and
TexStar, on the other hand, represent to and covenant with each other that there
is no agent's, broker's or finder's fee or commission payable or that will be
payable in connection with the transactions contemplated in this Agreement or
the Merger Agreement by virtue of or resulting from any action or agreement on
the part of such indemnifying party other than a fee payable to Charles T. Meeks
of Austin, Texas ("Agent") upon the consummation of the Merger, pursuant to a
letter agreement dated August 26, 1997 by and between TexStar and Agent. If, but
only if, the Merger is consummated pursuant to this Agreement and the Merger
Agreement, Surety Bank shall pay Agent such fee and such payment shall reduce
the amount payable by Surety Bank pursuant to Section 5(a) of the Merger
Agreement. Except as provided in the foregoing, Surety Bank and Surety, on the
one hand, and TexStar, on the other hand, hereby agree to indemnify and hold
harmless each other from and against any claim, demand, liability, loss, cost or
expense (including court costs and attorneys' fees) on account of or in
connection with any agent's, broker's or finder's fees or commissions payable or
alleged to be payable in connection with this Agreement or the Merger Agreement
or the transactions contemplated hereby or thereby by virtue of or resulting
from any action or agreement on the part of such indemnifying party. This
indemnification provision shall survive the Closing of the transactions
contemplated by this Agreement.

6. Conditions to Obligations of Parties. The obligations of Surety Bank
and TexStar to cause the Merger to be consummated are subject to the
satisfaction on or prior to the Closing Date of each of the following
conditions, unless such condition shall, on or

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<PAGE>

prior to the Closing Date, have been waived in writing by TexStar and Surety
Bank:

(a) Approvals of Third Parties. All orders, consents and approvals
necessary in order for the transactions contemplated hereby to be lawfully
accomplished shall have been entered by each regulatory authority having
jurisdiction in the premises, including the Comptroller, upon terms and
conditions satisfactory to TexStar and Surety Bank; all applicable statutory
waiting periods shall have expired; and all necessary orders, consents and
approvals referred to in Section 3(j) and Section 4(a) hereof shall have been
given by third parties, upon terms and conditions satisfactory to TexStar and
Surety Bank.

(b) Litigation. At the Closing Date, there shall not be pending or
threatened any litigation in any court or any proceeding before or by any
governmental department, agency or instrumentality,

(i) in which it is sought to restrain or prohibit or obtain
damages in respect of the consummation of the Merger, or

(ii) as a result of which, in the reasonable judgment of
Surety Bank or TexStar, either Surety Bank or TexStar or their
respective shareholders could be deprived of any of the material
benefits of the Merger.

7. Conditions to Surety Bank's Obligations. The obligations of Surety
Bank to cause the Merger to be consummated are subject to the satisfaction on or
prior to the Closing Date of each of the following conditions, unless Surety
Bank shall have waived such condition in writing:

(a) Representations, Warranties and Covenants of TexStar and the
Shareholders. TexStar and the Shareholders shall have complied in all material
respects with each agreement or covenant made by it or them in this Agreement or
in the Merger Agreement and to be performed by it or them at or prior to the
Closing Date, and each representation or warranty of TexStar contained in this
Agreement or the Merger Agreement shall be accurate in all material respects at
and as of the Closing Date with the same effect as though such representation or
warranty (in the exact language contained in this Agreement or in the Merger
Agreement with appropriate modification of tense in the case of representations
and warranties relating to statements of fact as of specified dates) had been
made at and as of the Closing Date.

(b) Further Action. Each and every action required of TexStar and
the Shareholders by this Agreement to effect the Merger will have been taken,
including the execution and delivery by TexStar and the attorney-in-fact of the
shareholders of TexStar

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<PAGE>

(appointed at the meeting of the shareholders of TexStar pursuant to Section
3(l) hereof) of the Escrow Agreement.

(i) a certificate from the Comptroller dated not more than
thirty (30) days prior to the Closing Date attesting to TexStar's
existence as a national banking association and certifying as to all
charter documents on file with respect to TexStar,

(ii) a certificate from the Comptroller dated not more than
thirty (30) days prior to the Closing Date attesting to TexStar's
good standing as a national banking association,

(iii) copies, certified by the Comptroller as of a date not
more than thirty (30) days prior to the Closing Date, of the Articles
of Association and all amendments thereto of TexStar,

(iv) copies, certified by the Cashier of TexStar as of the
Closing Date, of the bylaws of TexStar as amended at the Closing
Date, and

(v) a certificate of the Cashier of TexStar dated as of the
Closing Date attesting to the adoption of all resolutions by its
directors and shareholders and the taking of all such other corporate
action by TexStar as required for consummation of the Merger.

(d) Shareholder Approval. At a meeting of the shareholders of
TexStar duly called and held for such purpose, the transactions contemplated in
this Agreement and the Merger Agreement shall have been duly approved by the
requisite vote of such shareholders.

(e) Financial Resources. Surety Bank will have sufficient
financial resources available, in the sole opinion of Surety Bank, to consummate
the transactions contemplated by this Agreement and the Merger Agreement.

(f) Material Adverse Change. TexStar will not, in the reasonable
opinion of Surety and Surety Bank, have suffered any material adverse change in
its financial condition, business, operations, prospects, properties or assets.

(g) Due Diligence. Surety and Surety Bank shall, in the sole
opinion of Surety and Surety Bank, be completely satisfied with the results of
the due diligence review of TexStar conducted by Surety and Surety Bank.

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<PAGE>

(h) Exercise of Dissenters' Rights. At the Closing Date, there
shall not exist any reason for Surety Bank to believe that statutory rights, if
any, of appraisal and payment for stock will be exercised upon consummation of
the Merger by holders of more than twelve percent (12%) of the outstanding
shares of TexStar Common Stock pursuant to 12 U.S.C. 215(a).

(i) Employee Benefit Plans. Immediately prior to the Closing,
TexStar shall have terminated the Employee Benefit Plans in compliance with all
applicable statutes, rules, and regulations.

(j) Loan Loss Reserve. TexStar shall have maintained and the
TexStar Financial Statements shall reflect as of the Closing Date a reserve for
loan losses, excluding cash-secured and the guaranteed portion of SBA loans, at
least equal to the greater of: (i) $463,000, as reflected in the TexStar
Financial Statements at June 30, 1997, or (ii) an amount equal to 1.5% of
TexStar's total outstanding loans as of the Closing Date.

8. Conditions to TexStar's Obligations. The obligations of TexStar to
cause the Merger to be consummated are subject to the satisfaction on or prior
to the Closing Date of each of the following conditions, unless TexStar shall
have waived such condition in writing:

(a) Representations, Warranties and Covenants of Surety Bank.
Surety Bank shall have complied in all material respects with each agreement or
covenant made by it in this Agreement or in the Merger Agreement and to be
performed by it at or prior to the Closing Date, and each representation or
warranty of Surety Bank contained in this Agreement or the Merger Agreement
shall be accurate in all material respects at and as of the Closing Date with
the same effect as though such representation or warranty (in the exact language
contained in this Agreement or in the Merger Agreement with appropriate
modification of tense in the case of representations and warranties relating to
statements of fact as of specified dates) had been made at and as of the Closing
Date.

(b) Further Action. Each and every action required of Surety Bank
to effect the Merger will have been taken.

(c) Other Certificates. Surety Bank shall have furnished to
TexStar a certificate of the Cashier of Surety Bank, dated as of the Closing
Date, attesting to the adoption of all resolutions by the directors and sole
shareholder and the taking of all other corporate action by Surety Bank as
required for consummation of the Merger.

9. Expenses. TexStar, the Shareholders, Surety Bank and Surety shall
each bear and pay all costs and expenses incurred by it or on its behalf in
connection with the proceedings relating to this Agreement and the Merger,
including, without limiting the generality of the foregoing, fees and expenses
of its own financial consultants, accountants and counsel. Surety Bank shall pay
all reasonable expenses and costs incurred by Surety Bank in connection

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<PAGE>

with its efforts to obtain any necessary approvals of any governmental
regulatory authority having control or jurisdiction over any transactions
contemplated by this Agreement. TexStar shall pay all expenses and costs related
to the restatement of the TexStar Financial Statements provided for in Section
3(f) hereof. The Agent's fee provided for in Section 5(b) hereof shall be paid
on a pro rata basis by all of the shareholders of TexStar who do not exercise
their dissenters' rights (collectively, the "Non-Dissenting Shareholders").
Each Non-Dissenting Shareholder shall bear that portion of the Agent's fee that
such Non-Dissenting Shareholder's number of shares of TexStar Common Stock
bears to the total number of shares of TexStar Common Stock held by the Non-
Dissenting Shareholders.

10. Survival of Representations and Warranties. None of the warranties,
representations, covenants and agreements made by TexStar in this Agreement or
in any schedule, exhibit, list or other instrument delivered pursuant to or in
connection with this Agreement shall survive the Closing hereof, except for the
representations of TexStar contained in Section 1(v) and (w) and Section 5(b)
hereof, which shall survive for two (2) years following the Closing and remain
operative and in full force and effect during such period of time regardless of
any investigation at any time made by or on behalf of the party to whom or with
whom the warranty, representation, covenant or agreement is made and shall not
be deemed merged into any document or instrument executed or delivered at
Closing.

11. Indemnification.

(a) Escrow Agreement. TexStar and the Shareholders hereby agree,
and by the approval of this Agreement and the Merger Agreement by the
shareholders of TexStar, the shareholders of TexStar hereby agree, that Surety
and Surety Bank, and their respective officers, directors, employees, agents,
successors and assigns, shall be indemnified and held harmless from any and all
Claims (as defined in the Escrow Agreement); provided, however, that Surety and
Surety Bank agree that the escrow established pursuant to the Escrow Agreement
shall be the exclusive source of funds from which they are entitled to be paid
for a Claim.

(b) Other Indemnification Provisions. Each of the Shareholders
hereby agrees that he or it will not make any claim for indemnification against
TexStar (or any successor) by reason of the fact that he or it was a director,
officer, employee, or agent of such entity or was serving at the request of such
entity as a partner, trustee, director, officer, employee, or agent of another
entity (whether such claim is for judgments, damages, penalties, fines, costs,
amounts paid in settlement, losses, expenses, or otherwise and whether such
claim is pursuant to any statute, charter document, bylaw, agreement, or
otherwise) with respect to any action, suit, proceeding, complaint, claim, or
demand against such Shareholder (whether such action, suit, proceeding,
complaint, claim, or demand is pursuant to this Agreement, applicable law, or
otherwise). Notwithstanding anything herein to the contrary, this

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<PAGE>

Agreement shall not limit, restrict, bar or void any claim, benefit, coverage or
other right the Shareholders may have under any liability policy of insurance
which currently exists or will be obtained for the benefit of TexStar or its
officers, directors, employees or agents.

12. Notices. Any notice, request, instruction or other document to be
given hereunder or under the Merger Agreement by or to any party hereto shall be
in writing and delivered personally or sent by certified mail, postage prepaid,

if to Surety Bank or Surety to:

1845 Precinct Line Road
Suite 100
Hurst, Texas 76054
Attention: Mr. C. Jack Bean

with a copy to:

Ms. Margaret E. Holland
Tracy & Holland, L.L.P.
306 W. 7th Street, Suite 500
Fort Worth, Texas 76102-4982

and if to TexStar:

600 Pat Booker Road
Universal City, Texas 78148
Attention: Mr. Byron K. Bexley

with a copy to:

Mr. Patrick B. Tobin
Jackson Walker, L.L.P.
112 East Pecan Street, Suite 2100
San Antonio, Texas 78205-3799

and if to Shareholders:

Mr. W. Marvin Rush
Rush Peterbilt Truck Center
8810 Interstate 10 East
San Antonio, Texas 78219

with a copy to:

Mr. Patrick B. Tobin
Jackson Walker, L.L.P.
112 East Pecan Street, Suite 2100
San Antonio, Texas 78205-3799

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<PAGE>

or at such other address for a party as shall be specified by like notice.

13. Specific Performance. The parties hereby declare that it is
impossible to measure in money the damages which will accrue to a party hereto,
his heirs, executors, administrators, legal representatives, successors or
assigns, by reason of the failure of another party to perform any of the
obligations hereunder. Therefore, if a party hereto, his heirs, executors,
administrators, legal representatives, successors or assigns, shall institute
any action or proceeding to enforce the provisions hereof, any party against
whom such action or proceeding is brought hereby agrees that specific
performance may be sought and obtained for any breach of this Agreement or the
Merger Agreement without the necessity of proving actual damages; provided,
however, that any party hereto may, at its option, waive its right to specific
performance and collect damages resulting from any breach or failure to perform
hereunder.

14. Confidentiality. Except as necessary or appropriate in connection
with any statement, application or other document filed with applicable
governmental authorities in connection with the transactions contemplated by
this Agreement and the Merger Agreement or as otherwise required by law, each
party hereto will, and will cause its respective officers and authorized
representatives to, hold in confidence all, and not to disclose to others for
any reason whatsoever any, information of the other parties, including, but not
limited to, non-public information as identified in the Right to Financial
Privacy Act 12 U.S.C. (S)(S)3401-3422, which information is received by such
party from the other parties hereto, or any of them, in connection with the
transactions contemplated by this Agreement and the Merger Agreement. If the
transactions contemplated by this Agreement shall not be consummated, such
confidence shall be maintained and such information shall not be used (except to
the extent such information can be shown to be previously known to such party,
in the public domain, or later acquired by such party from other legitimate
sources) and, upon request, all such documents, any copies thereof and extracts
therefrom shall immediately be returned.

15. Attorneys' Fees. If any action at law or in equity, including any
action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement or the Merger Agreement, the prevailing party shall be
entitled to recover reasonable attorneys' fees and related expenses from the
other party or parties, which fees and expenses may be set by the court in the
trial of such action or may be enforced in a separate action brought for that
purpose.

16. Materiality. For purposes of the provisions of this Agreement that
refer to matters or facts with the modification that same are "material," the
parties agree that the threshold for materiality is $25,000.

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<PAGE>

17. Miscellaneous. This Agreement and the Merger Agreement constitute
the entire contract and supersede all prior agreements and understandings, both
written and oral, between the parties hereto and thereto with respect to the
subject matter hereof and thereof, and no party shall be liable or bound to the
other in any manner by any warranties or representations except as specifically
set forth herein or in the Merger Agreement or expressly required to be made or
delivered pursuant hereto or thereto. Each of the attachments, schedules, lists
and exhibits called for by this Agreement and the Merger Agreement is made a
part of this Agreement and the Merger Agreement the same as if set out verbatim
at each point where reference is made to it. The terms and conditions of this
Agreement and of the Merger Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties hereto and
thereto, but nothing contained herein shall be construed as a consent to any
assignment of this Agreement or the Merger Agreement by the parties hereto or
thereto, or any of them. Nothing in this Agreement or in the Merger Agreement,
express or implied, is intended to confer upon any party, other than the parties
hereto and thereto, and their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of such agreements,
except as expressly provided herein or therein. The provisions of Sections 9,
10, 11 and 12 of the Merger Agreement are hereby incorporated into this
Agreement for all purposes notwithstanding whether the Merger Agreement or
Merger Plan have been approved by the shareholders of TexStar. This Agreement
may be executed in one or more counterparts, each of which shall for all
purposes be deemed to be an original and all of which shall constitute the same
instrument, but only one of which need be produced. The headings of the sections
and subsections of this Agreement are inserted for convenience only and shall
not be deemed to constitute part of this Agreement or to affect the construction
hereof. As used in this Agreement, the words "herein", "hereof", and "hereunder"
and other words of similar import refer to this Agreement as a whole and not to
any particular section, subsection or other subdivision. Unless context
otherwise requires,

(i) words in the singular number include the plural and the
plural include the singular, and

(ii) words of the masculine gender include the feminine and
neuter genders and words of the neuter gender referred to any gender.

In case any one or more of the provisions contained in this Agreement or the
Merger Agreement is for any reason held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality, or unenforceability shall not
affect any other provisions hereof or thereof, and this Agreement and the Merger
Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had never been contained herein and therein. This Agreement shall be
construed in accordance with the laws of the

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<PAGE>

State of Texas. No term or condition of this Agreement or the Merger Agreement
shall be deemed to have been waived, nor shall there be any estoppel to enforce
any provision of this Agreement or the Merger Agreement, except by written
instrument signed by the party charged with such waiver or estoppel.

IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be signed in counterparts all as of the date first above written.

SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION

By:
------------------------------------
Bobby W. Hackler, Vice Chairman
of the Board, President and Chief
Executive Officer

ATTEST:

- ----------------------------------
Robert E. Crews, Cashier

TEXSTAR: TEXSTAR NATIONAL BANK

By:
------------------------------------
Byron K. Bexley, President

ATTEST:

- ----------------------------------
, Cashier
- ----------------

SURETY: SURETY CAPITAL CORPORATION

By:
------------------------------------
C. Jack Bean, Chairman of the
Board and Chief Executive Officer

ATTEST:

- ----------------------------------
B.J. Curley, Secretary

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<PAGE>

SHAREHOLDERS:

--------------------------------------
W. Marvin Rush

--------------------------------------
W. Maurice Rush

--------------------------------------
James Pearl

--------------------------------------
Robert B. Thornton

--------------------------------------
Jesse Rodriguez

--------------------------------------
Byron K. Bexley

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<PAGE>

EXHIBIT "A"

AGREEMENT TO MERGE TEXSTAR NATIONAL BANK
WITH AND INTO SURETY BANK, NATIONAL ASSOCIATION UNDER THE
CHARTER OF SURETY BANK, NATIONAL ASSOCIATION AND UNDER
THE TITLE OF SURETY BANK, NATIONAL ASSOCIATION

AGREEMENT TO MERGE ("Merger Agreement") dated as of October __, 1997,
between SURETY BANK, NATIONAL ASSOCIATION, a national banking association
located in Hurst, Texas ("Surety Bank"), and TEXSTAR NATIONAL BANK, a national
banking association located in Universal City, Texas ("TexStar"), and joined in
by SURETY CAPITAL CORPORATION, a Delaware corporation located in Hurst, Texas
("Surety") and _________________________________________ (individually, a
"Shareholder" and collectively, the "Shareholders").

WITNESSETH:

A. Surety Bank is a national banking association duly organized and
existing under the laws of the United States of America having its principal
offices in the City of Hurst, County of Tarrant, State of Texas.

B. TexStar is a national banking association duly organized and existing
under the laws of the United States having its principal offices in the City of
Universal City, County of Bexar, State of Texas.

C. Surety Bank has, and will have as of the Effective Time, authorized
capital consisting of 6,000,000 shares of common stock, $0.91 par value, of
which 3,708,195 shares have been duly issued and are, and will be as of the
Effective Time, validly outstanding.

D. TexStar has, and will have as of the Effective Time, authorized
capital consisting of 575,000 shares of common stock, $5.00 par value ("TexStar
Common Stock"), of which 485,000 shares are, and will be as of the Effective
Time, issued and outstanding.

E. The Boards of Directors of TexStar and of Surety Bank have approved
this Merger Agreement under which TexStar will be merged into Surety Bank and
have authorized the execution hereof; the Board of Directors of Surety has
approved this Merger Agreement, authorized Surety to join in and be bound by
this Merger Agreement, and authorized the undertakings herein made by Surety.

F. Surety Bank, TexStar, Surety and the Shareholders have entered into an
Agreement and Plan of Reorganization dated October __, 1997 ("Reorganization
Agreement") which contemplates the merger provided for in this Merger Agreement.
All terms not defined in this Merger Agreement will have the meaning set forth
in the Reorganization Agreement.

G. As and when required by the provisions of this Merger Agreement or the
Reorganization Agreement (hereinafter referred to collectively as the "Merger
Plan"), all such action as may be
<PAGE>

necessary or appropriate will be taken by Surety Bank, TexStar, Surety and the
Shareholders in order to consummate said merger. In this connection, Surety Bank
shall pay cash and, if applicable, certain performance payments to the
shareholders of TexStar, pursuant to the provisions hereinafter set forth.

NOW, THEREFORE, in consideration of the premises, Surety Bank and TexStar,
joined by Surety and the Shareholders, hereby agree that TexStar shall be merged
into Surety Bank on the following terms and conditions:

1. At the Effective Time, TexStar will be merged into Surety Bank under
the Articles of Association and Charter of Surety Bank. Said merger will be
pursuant to the provisions of and with the effect provided in 12 U.S.C. Section
215(a).

2. At the Effective Time, the name of Surety Bank (herein after referred
to as "Continuing Bank" whenever reference is made to it as of the time of
merger or thereafter) will continue to be "Surety Bank, National Association."
The Articles of Association of Continuing Bank will be as set forth in Annex A
attached hereto and made a part hereof. The bylaws of Surety Bank in effect
immediately prior to the merger will become the bylaws of Continu ing Bank. The
established office and facilities of Surety Bank immediately prior to the merger
will become the established office and facilities of Continuing Bank. The
established office and facilities of TexStar immediately prior to the merger
will continue and be operated as a branch of Continuing Bank.

3. At the Effective Time, the corporate existence of Surety Bank and
TexStar will, as provided in 12 U.S.C. Section 215(a), be merged into and
continued in Continuing Bank; and Continuing Bank will be deemed to be the same
association as Surety Bank and TexStar. All rights, franchises and interests of
Surety Bank and TexStar, respectively, in and to every type of property (real,
personal and mixed) and choses in action shall be transferred to and vested in
Continuing Bank by virtue of such merger without any deed or other transfer.
Continuing Bank at the Effective Time and without any order or other action on
the part of any court or otherwise, will hold and enjoy all rights of property,
franchises and interests, including appointments, designations and nomina tions,
and all other rights and interests as trustee, executor, administrator, transfer
agent and registrar of stocks and bonds, guardian of estates, assignee,
receiver, and in every other fiduciary capacity, and in every agency capacity,
in the same manner and to the same extent as such rights, franchises and
interests were held or enjoyed by Surety Bank and TexStar, respectively, at the
Effective Time.

4. At the Effective Time, Continuing Bank shall be liable for all
liabilities of Surety Bank and of TexStar, respectively; and all deposits,
debts, liabilities, obligations and contracts of Surety Bank and of TexStar,
respectively, matured or unmatured,

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<PAGE>

whether accrued, absolute, contingent or otherwise, and whether or not reflected
or reserved against on balance sheets, books of account or records of Surety
Bank or TexStar, as the case may be, including all liabilities of Surety Bank
and TexStar for taxes, whether existing at the Effective Time or arising as a
result of or pursuant to the merger, will be those of Continuing Bank and will
not be released or impaired by the merger; and all rights of creditors and other
obligees and all liens on property of either Surety Bank or TexStar shall be
preserved unimpaired.

5. At the Effective Time:

(a) Each share of TexStar Common Stock outstanding at the Effective
Time held by the shareholders of TexStar, other than Dissenting Shares (as
hereinafter defined), will, without any action on the part of the shareholders
of TexStar, be converted into and exchanged for the right to receive cash equal
to the sum of (i) the quotient of $9,500,000 divided by the number of shares of
TexStar Common Stock issued and outstanding at the Effective Time and (ii) the
quotient of the Performance Payment (as herein defined) divided by the number of
shares of TexStar Common Stock issued and outstanding at the Effective Time.
The foregoing sum shall be subject to the adjustment set forth in Section 9 of
the Reorganization Agreement and the resulting amount shall be the "Exchange
Price".

(b) The Performance Payment will be equal to fifty percent (50%) of
the Net Earnings of TexStar in excess of $100,000. "Net Earnings of TexStar"
will be the net income of TexStar for the period September 1, 1997 to the
Closing Date before taxes but after all other charges of TexStar (including
normal year-end adjust ments) as reflected by TexStar's financial statements and
mutually agreed upon by Surety Bank and TexStar. In the event of a dispute,
Surety Bank's independent public accountants, Coopers & Lybrand L.L.P., will
ascertain "Net Earnings of TexStar" for the applicable period and such
determination will be conclusive and binding on all the parties to this
Agreement. All determinations by the parties in this regard will be made in
accordance with generally accepted accounting principles.

(c) All shares of capital stock of Surety Bank issued and outstanding
at the Effective Time will continue to be issued and outstanding shares of
capital stock of Continuing Bank.

(d) For purposes of this Merger Agreement, "Dissenting Shares" of a
shareholder of TexStar will refer to those shares of TexStar Common Stock owned
by a shareholder of TexStar who, pursuant to 12 U.S.C. Section 215(a), (i)
gives notice in writing at or prior to the meeting of TexStar's shareholders
referred to in Section 3(l) of the Reorganization Agreement to the presiding
officer that he dissents from the Merger Plan or votes against such Merger Plan
at such meeting and (ii) is thereby entitled to receive the value of his shares
of TexStar Common Stock upon approval of

-3-
<PAGE>

the Merger Plan by the Comptroller of the Currency and written request made by
such shareholder to the Continuing Bank at any time before thirty (30) days
after the Effective Time, accompanied by the surrender of his stock
certificates.

The value of the shares of TexStar Common Stock of any dissenting
shareholder will be ascertained, as of the Effective Time, by an appraisal made
by a committee of three persons, composed of (i) one selected by the vote of the
holders of a majority of the TexStar Common Stock, the owners of which are
entitled to payment in cash; (ii) one selected by the directors of the
Continuing Bank; and (iii) one selected by the two so selected. The valuation
agreed upon by any two of the three appraisers shall govern. If the value so
fixed will not be satisfactory to any dissenting shareholder who has requested
payment, that shareholder may, within five (5) days after being notified of the
appraised value of his shares, appeal to the Comptroller of the Currency, which
shall cause a reappraisal to be made which will be final and binding as to the
value of the shares of the appellant.

If, within ninety (90) days from the Effective Time, for any reason one or
more of the appraisers is not selected as herein provided, or the appraisers
fail to determine the value of such shares, the Comptroller of the Currency
shall upon written request of any interested party cause an appraisal to be made
which will be final and binding on all parties. The expenses of the Comptroller
of the Currency in making the reappraisal or the appraisal, as the case may be,
shall be paid by the Continuing Bank. The value of the shares ascertained shall
be promptly paid to the dissenting shareholders by the Continuing Bank.

6. After the Effective Time:

(a) The shareholders of TexStar, as the sole holders of the
outstanding certificates which prior thereto represented shares of TexStar
Common Stock, may surrender same to Continuing Bank, and the shareholders of
TexStar shall be entitled upon such surrender to receive from Continuing Bank in
exchange therefor, without cost to such holder, the Exchange Price for each
share of TexStar Common Stock represented by such outstanding certificates
surrendered, as adjusted for the required $400,000 contribution into the escrow
established by the Escrow Agreement provided for in the Reorganization
Agreement.

(b) Until so surrendered, each such outstanding certificate which,
prior to the Effective Time, represented shares of TexStar Common Stock shall be
deemed for all purposes to evidence solely the right to receive the amount of
cash into and for which such shares of TexStar Common Stock shall have been
converted pursuant to Section 5(a) hereof. No interest will be payable with
respect to any such cash payments. If a shareholder of TexStar is unable to
locate any of his certificates which prior to the Effective Time represented
shares of TexStar Common Stock, Continu-

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<PAGE>

ing Bank will issue a check to such shareholder in the amount which such
shareholder would otherwise be entitled to receive hereunder without
surrendering such certificate, upon receipt by Continuing Bank of an indemnity
bond in favor of Continuing Bank and satisfactory in all respects to Continuing
Bank.

(c) The stock transfer books of TexStar will be closed as of the close
of business on the Closing Date (hereinafter defined), and no transfer of record
of any of the shares of TexStar Common Stock will take place thereafter. From
and after the close of business on the Closing Date, shares of TexStar Common
Stock will cease to be shares of TexStar, irrespective of whether such shares
are ultimately surrendered.

7. The directors, advisory directors and officers, respectively, of
Continuing Bank at the Effective Time will be those persons who are directors,
advisory directors and officers, respectively, of Surety Bank immediately before
the Effective Time. The committees of the Board of Directors of Continuing Bank
at the Effective Time will be the same as, and will be composed of the same
persons who are serving on, committees of the Board of Directors of Surety Bank
as they exist immediately before the Effective Time.

8. This Merger Agreement will be submitted to the sole shareholder of
Surety Bank and to the shareholders of TexStar at meetings called to be held as
promptly as practicable in accordance with the Reorganization Agreement. Upon
approval of the sole shareholder of Surety Bank and the shareholders of TexStar,
and the satisfaction of all the other conditions set forth in Sections 6, 7 and
8 of the Reorganization Agreement, this Merger Agreement will be made effective
as soon as practicable thereafter in the manner provided in Section 12 hereof.

9. The Merger Plan may be terminated and abandoned at any time prior to
or on the Closing Date, whether before or after action thereon by the sole
shareholder of Surety Bank or the shareholders of TexStar:

(a) By the mutual consent in writing of Surety Bank and the
Shareholders;

(b) By the Shareholders in writing if any of the conditions to the
obligations of the Shareholders or TexStar contained herein or in the
Reorganization Agreement shall not have been satisfied or, if unsatisfied,
waived as of the Closing Date;

(c) By Surety Bank in writing if any of the conditions to the
obligations of Surety or Surety Bank contained herein or in the Reorganization
Agreement shall not have been satisfied or, if unsatisfied, waived as of the
Closing Date;

-5-
<PAGE>

(d) By either the Shareholders or Surety Bank in writing if any of the
conditions to the obligations of such parties contained in Section 6 of the
Reorganization Agreement shall not have been satisfied or, if unsatisfied,
waived as of the Closing Date; or

(e) By either the Shareholders or Surety Bank in writing if the
Closing Date shall not have occurred by March 31, 1998, unless the date is
extended by mutual agreement of the Shareholders and Surety Bank.

10. Except as provided in the next succeeding sentence, in the event of
the termination and abandonment of the Merger Plan pursuant to the provisions of
Section 9 hereof, the same shall be of no further force or effect except that
the indemnification provisions set forth in Section 11 of the Reorganization
Agreement and the provisions relating to expenses set forth in Section 9 of the
Reorganization Agreement shall survive any such termination and abandonment.
Additionally, in the event Surety elects to abandon the Merger Plan by written
notice to such effect to TexStar (the "Election") as a result of the failure of
the conditions to Closing set forth in Section 7(e) or 7(g) of the
Reorganization Agreement, the failure of which shall be determined in the sole
and unfettered discretion of Surety, and such Election is made by Surety after
December 31, 1997, Surety shall pay to TexStar a break-up fee in the amount of
$25,000, and upon payment thereof, none of the parties to the Reorganization
Agreement nor the Merger Agreements shall have any further obligations to each
other, except as expressly set forth in this Section 10.

11. Any of the terms or conditions of the Merger Plan may be waived at any
time, whether before or after action thereon by the shareholders of Surety Bank
or TexStar, by the party which is entitled to the benefits thereof; and this
Merger Agreement or the Reorganization Agreement may be modified or amended at
any time, whether before or after action thereon by the shareholders of Surety
Bank or TexStar; provided, however, that such action shall be taken only if, in
the judgment of Surety Bank and TexStar, such waiver, modification or amendment
will not have a materially adverse effect on Surety Bank, TexStar or their
respective shareholders. Any waiver, modification or amendment must be in
writing.

12. The closing date (the "Closing Date") shall be a date to be selected
by mutual agreement of the parties immediately following the date thirty (30)
days after the date of the order of the Comptroller of the Currency approving
the merger pursuant to 12 U.S.C. Section 1828(c) (or if such date is not a
business day, then the next business day following) and the satisfaction of all
other conditions to the obligations of the parties to the Reorganization
Agreement. The closing (the "Closing") shall be held at the offices of TexStar,
Universal City, Texas on the Closing Date. At the Closing, Surety Bank shall
deliver to the shareholders of TexStar, other than the dissenting shareholders,
cash in the amount

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<PAGE>

of the Exchange Price and the shareholders of TexStar shall deliver to Surety
Bank all of the stock certificates evidencing issued and outstanding shares of
TexStar Common Stock. Subject to the terms, and upon satisfaction on or before
the Closing Date of all requirements of law and the conditions specified in the
Merger Plan, including receipt of the approval of the Comptroller of the
Currency specified in 12 U.S.C. Section 215(a), the merger will become effective
at the time specified in the certificate to be issued by the Comptroller of the
Currency under the seal of his office approving the merger, such time being
herein called the "Effective Time."

13. For the convenience of the parties hereto and to facilitate the
filing and recording of this Merger Agreement, any number of counterparts
thereof may be executed, each of which shall for all purposes be deemed to be an
original and all of which shall constitute the same instrument, but only one of
which need be produced.

IN WITNESS WHEREOF, Surety Bank has caused this Merger Agreement to be
executed in counterparts by its duly authorized officers and its corporate seal
to be hereunto affixed as of the date first above written, and the directors
constituting all of the Board of Directors of such national banking association
have hereunto subscribed their names.

SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION

By:
------------------------------------
Bobby W. Hackler, Vice Chairman of
the Board, President and Chief
Executive Officer

ATTEST:

- ---------------------------
Robert E. Crews, Cashier

ALL OF THE DIRECTORS OF
SURETY BANK, NATIONAL ASSOCIATION

---------------------------------------
C. Jack Bean

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<PAGE>

---------------------------------------
William B. Byrd

---------------------------------------
Bobby W. Hackler

---------------------------------------
Joseph S. Hardin

---------------------------------------
G. M. Heinzelmann, III

---------------------------------------
Michael L. Milam

---------------------------------------
Garrett Morris

---------------------------------------
Cullen W. Turner

THE STATE OF TEXAS )
)
COUNTY OF TARRANT )

On this _______ day of ______________, 1997, before me, a Notary Public for
the State and County aforesaid, personally came Bobby W. Hackler as President
and Robert E. Crews as Cashier, of SURETY BANK, NATIONAL ASSOCIATION, and each
in his said capacity acknowledged the foregoing instrument to be the act and
deed of said association and the seal affixed thereto to be its seal; and came
also C. Jack Bean, William B. Byrd, Bobby W. Hackler, Joseph S. Hardin, G. M.
Heinzelmann, III, Michael L. Milam, Garrett Morris and Cullen W. Turner, being
all of the Board of Directors of said association and each of them acknowledged
said instrument to be the act and deed of said association and of himself as
director thereof.

WITNESS my official seal and signature this day and year aforesaid.

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<PAGE>

---------------------------------------
NOTARY PUBLIC IN AND FOR THE STATE
OF TEXAS

---------------------------------------
My Commission Expires

IN WITNESS WHEREOF, TexStar has caused this Merger Agreement to be executed
in counterparts by its duly authorized officers and its corporate seal to be
hereunto affixed as of the date first above written, and the directors
constituting all of the Board of Directors of such national banking association
have hereunto subscribed their names.

TEXSTAR: TEXSTAR NATIONAL BANK

By:
------------------------------------
Byron K. Bexley, President
ATTEST:

- -------------------------------
_________________, Cashier

ALL OF THE DIRECTORS OF
TEXSTAR NATIONAL BANK

---------------------------------------
W. Marvin Rush

---------------------------------------
W. Maurice Rush

---------------------------------------
James Pearl

---------------------------------------
Robert B. Thornton

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

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<PAGE>

Jesse Rodriguez

---------------------------------------
Byron K. Bexley

THE STATE OF TEXAS )
)
COUNTY OF _________ )

On this _______ day of ______________, 1997, before me, a Notary Public for
the State and County aforesaid, personally came Byron K. Bexley, as President
and ______________ as Cashier, of TEXSTAR NATIONAL BANK, and each in his or her
said capacity acknowledged the foregoing instrument to be the act and deed of
said association and the seal affixed thereto to be its seal; and came also W.
Marvin Rush, W. Maurice Rush, James Pearl, Robert B. Thornton, Jesse Rodriguez
and Byron K. Bexley, being all of the Board of Directors of said association and
each of them acknowledged said instrument to be the act and deed of said
association and of himself or herself as director thereof.

WITNESS my official seal and signature this day and year aforesaid.

---------------------------------------
NOTARY PUBLIC IN AND FOR THE STATE
OF TEXAS

---------------------------------------
My Commission Expires

Surety hereby joins in the foregoing Merger Agreement, and undertakes that
it will be bound thereby and will do and perform all acts and things therein
referred to or provided to be done by it.

IN WITNESS WHEREOF, Surety has caused this undertaking to be made in
counterparts by its duly authorized officers and its corporate seal to be
hereunto affixed as of the date first above written.

SURETY: SURETY CAPITAL CORPORATION

By:
-------------------------------------
C. Jack Bean, Chairman of the

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<PAGE>

Board and Chief Executive Officer

ATTEST:

- ------------------------------
B. J. Curley, Secretary

The Shareholders hereby join in the foregoing Merger Agreement, and
undertake that they will be bound thereby and will do and perform all acts and
things therein referred to or provided to be done by them.

IN WITNESS WHEREOF, the Shareholders have caused this undertaking to be
made as of the date first above written.

THE SHAREHOLDERS:

---------------------------------------
W. Marvin Rush

---------------------------------------
W. Maurice Rush

---------------------------------------
James Pearl

---------------------------------------
Robert B. Thornton

---------------------------------------
Jesse Rodriguez

---------------------------------------
Byron K. Bexley

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<PAGE>

EXHIBIT "B"

ESCROW AGREEMENT

THIS ESCROW AGREEMENT is made as of ____________, 199__ by and among SURETY
BANK, NATIONAL ASSOCIATION, a national banking association located in Hurst,
Texas ("Surety Bank"), TEXSTAR NATIONAL BANK, a national banking association
located in Universal City, Texas ("TexStar"), SURETY CAPITAL CORPORATION, a
Delaware corporation located in Hurst, Texas ("Surety"), W. Marvin Rush, as the
representative of the shareholders of TexStar (the "Representative"), and
______________________ ("Escrow Agent"). All terms not otherwise defined in this
Escrow Agreement shall have the meanings set forth in the Agreement and Plan of
Reorganization dated __________, 1997 by and among Surety Bank, TexStar, Surety
and the Indemnifying Parties (the "Reorganization Agreement") and in the
Agreement to Merge TexStar National Bank with and into Surety Bank, National
Association Under the Charter of Surety Bank, National Association and Under the
Title of Surety Bank, National Association dated ___________, 1997 between
Surety Bank and TexStar and joined in by Surety and the Indemnifying Parties
(the "Merger Agreement"). The Reorganization Agreement and the Merger Agreement
are hereinafter referred to collectively as the "Agreements."

RECITALS

A. Pursuant to the Agreements, TexStar is to be merged into Surety Bank
(the "Merger") under the Articles of Association and Charter of Surety Bank; and

B. In connection with the Merger, a certain portion of the Exchange
Price to be received by the Indemnifying Parties in exchange for their Shares of
TexStar Common Stock (as herein defined) is to be deposited directly by Surety
in the escrow created hereby and disbursed in accordance herewith; and

C. Representative is executing this Escrow Agreement individually and as
attorney-in-fact (as authorized in the Reorganization Agreement) for certain of
the shareholders of TexStar who are identified on Schedule A attached hereto. W.
Marvin Rush and the other shareholders of TexStar identified on Schedule A are
individually referred to as an "Indemnifying Party" and collectively referred
to as the "Indemnifying Parties." Schedule A further sets forth each
Indemnifying Party's Escrow Proportion (as herein defined) and total
contribution to the Escrowed Principal Funds (as herein defined).

Now, therefore, in consideration of the premises and the mutual warranties,
representations covenants and agreements contained herein, the parties hereto
represent, warrant, covenant and agree as follows:

1. DEFINITIONS.

The following terms shall have the meanings specified:
<PAGE>

"Claim Certificate" shall have the meaning specified in Section 4.b.i
hereof.

"Claims" shall have the meaning specified in Section 4.a hereof.

"Effective Time" shall mean the time specified in the certificate to be
issued by the Comptroller of the Currency under the seal of his office approving
the Merger under the Agreements.

"Escrow Agreement" shall mean this escrow agreement (including all
attachments hereto), as same may from time to time be amended.

"Escrowed Funds" shall have the meaning specified in Section 2.b hereof.

"Escrowed Interest Funds" shall have the meaning specified in Section 2.b
hereof.

"Escrowed Principal Funds" shall have the meaning specified in Section 2.a
hereof.

"Escrow Proportion" as to any Indemnifying Party shall mean the percentage
obtained by dividing (i) the number of Shares of TexStar Common Stock held of
record by such Indemnifying Party as of the Effective Time by (ii) the total
number of Shares of TexStar Common Stock held of record by all of the
Indemnifying Parties at the Effective Time. The Escrow Proportion for each
Indemnifying Party is set forth on Schedule A hereto.

"Final Determination" shall mean the final decision of any court of
competent jurisdiction from which no appeal has been allowed because of lapse of
time or otherwise.

"First Release Date" shall mean the first anniversary date of the Effective
Time.

"Indemnified Party" shall mean Surety Bank and Surety, and their respective
officers, directors, employees, agents, successors and assigns.

"Representative" shall mean W. Marvin Rush who is authorized to act on
behalf of the Indemnifying Parties for all purposes of this Escrow Agreement and
who shall serve in such capacity until his resignation or death, in which event
a majority of the shareholders who were members of the Board of Directors of
TexStar immediately before the Effective Time shall appoint a successor
Representative.

"Second Release Date" shall mean the second anniversary date of the
Effective Time.

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<PAGE>

"Shares of TexStar Common Stock" shall mean the outstanding shares of
common stock, $5.00 par value, of TexStar.

Capitalized terms not defined in this Agreement shall have the meaning set
forth in the Agreements.

2. CREATION OF ESCROW; INVESTMENT OF ESCROWED FUNDS.

a. Creation of Escrow Account. At the Effective Time Surety shall
deposit the amount of $400,000 in cash in escrow with the Escrow Agent (the
"Escrowed Principal Funds"). The Representative, on behalf of the Indemnifying
Parties, hereby authorizes and directs Surety to withhold out of each
Indemnifying Party's Exchange Price that amount set forth next to such
Indemnifying Party's name on Schedule A under the heading "Contribution to
Escrowed Principal Funds" and to deposit such amount in escrow with the Escrow
Agent. Escrow Agent hereby agrees to hold and disburse the Escrowed Funds (as
herein defined) in accordance with the terms of this Agreement.

b. Investment of Escrowed Principal Funds and Escrowed Interest Funds.
Escrow Agent shall, to the extent practicable, invest and reinvest the Escrowed
Principal Funds and Escrowed Interest Funds in readily marketable direct
obligations of or obligations guaranteed by the United States of America
maturing within six months from their respective dates of issuance or such other
investments as may be specified in writing by the Representative and Surety
acting jointly. The term "Escrowed Interest Funds" shall mean any interest
received on investments of Escrowed Principal Funds and any interest received on
investments of such interest or dividends. The term "Escrowed Funds" shall mean
the Escrowed Principal Funds and the Escrowed Interest Funds.

3. RELEASE FROM ESCROW.

Escrow Agent will distribute and deliver the Escrowed Funds upon the
occurrence of any of the following events and in the manner hereinafter
provided:

a. Upon the receipt from Surety of a written notice that a specified
amount of Escrowed Funds held by Escrow Agent are to be delivered to the
Indemnifying Parties, such amount of Escrowed Funds shall be delivered to the
Indemnifying Parties.

b. Upon the receipt from time to time of a Claim Certificate signed by
the President or a Vice President of Surety that Surety is entitled to offset in
a stated amount on account of a Claim made by an Indemnified Party, which is not
contested by the Representative in accordance with Section 4.b or, if
contested, which is subsequently resolved in accordance with Section 4.b, by
either the delivery of a written consent of the Representative to Escrow Agent
or entry of a Final Determination with respect to the dispute, Escrow Agent
shall deliver to Surety, in satisfaction of such

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<PAGE>

Claim, that amount of the Escrowed Funds which shall equal the amount stated in
the Claim Certificate or otherwise determined under Section 4.b.

c. On the First Release Date, if Escrow Agent shall hold Escrowed Funds
in excess of the sum of (i) one hundred fifty percent (150%) of the aggregate
amount of all pending Claims, if any, of the Indemnified Parties filed with
Escrow Agent in accordance with Section 4.b below, and (ii) $200,000, Escrow
Agent shall deliver to the Indemnifying Parties the excess of such Escrowed
Funds.

d. On the Second Release Date, if Escrow Agent shall hold Escrowed Funds
in excess of one hundred fifty percent (150%) of the aggregate amount of all
pending Claims, if any, of the Indemnified Parties filed with Escrow Agent in
accordance with Section 4.b below, Escrow Agent shall deliver to the
Indemnifying Parties the excess of such Escrowed Funds.

e. If on the Second Release Date there shall be no outstanding Claims,
Escrow Agent shall on the Second Release Date deliver all then remaining
Escrowed Funds to the Indemnifying Parties.

f. Escrow Agent shall retain any Escrowed Funds not distributed
hereunder to the Indemnifying Parties on the Second Release Date until the
Claims relating to such Escrowed Funds have been fully satisfied or resolved or
a Final Determination has been rendered with respect thereto.

g. Each delivery of Escrowed Funds to the Indemnifying Parties pursuant
to Sections 3.a through 3.f above shall be allocated to each Indemnifying Party
in accordance with such Indemnifying Party's Escrow Proportion; provided,
however, that each Indemnifying Party shall be entitled to receive distributions
hereunder only to the extent that Escrowed Funds shall have been deposited
hereunder on behalf of such Indemnifying Party.

4. INDEMNIFICATION RIGHTS.

a. Reimbursement and Indemnification. The Indemnified Parties shall be
entitled to recover from the Escrowed Funds the amount of any and all
liabilities, damages, losses, claims, demands, costs or expenses (including
interest, penalties, reasonable attorneys' and accountants' fees and expenses,
court costs and fees of expert witnesses) (all of the foregoing hereinafter
collectively referred to as the "Claims") which an Indemnified Party shall
suffer or incur, whether liquidated or unliquidated, accrued or contingent,
connected with or arising out of (i) a breach of warranty or misrepresentation
by TexStar under Section 1(v) or Section 1(w) of the Reorganization Agreement,
or (ii) a misrepresentation or breach of covenant by TexStar under Section 5(b)
of the Reorganization Agreement; provided, however, no Claim may be made against
the Indemnifying Parties until such time as all

-4-
<PAGE>

Claims aggregate $25,000 ("Minimum Claim") after which time the Indemnified
Parties are entitled to indemnification for all Claims in excess of the Minimum
Claim made to the extent of the Escrowed Funds.

b. Procedure for Claims.

i. If, prior to the Second Release Date, Surety shall discover,
incur or receive notice of the existence of any Claim, whether liquidated or
unliquidated, accrued or contingent, asserted or unasserted, for which an
Indemnified Party claims reimbursement or indemnity hereunder, Surety shall
promptly give written notice thereof to the Representative and Escrow Agent by
delivering a certificate (a "Claim Certificate") which shall be signed by the
President or a Vice President of Surety to the effect that an Indemnified Party
has a Claim in the amount specified in such Claim Certificate and setting forth
the basis for such Claim. Upon receipt of any such Claim Certificate, Escrow
Agent shall, as soon as practicable (but not earlier than fourteen (14) business
days after the delivery to Escrow Agent of such Claim Certificate) deliver to
the Indemnified Party Escrowed Funds equal to the amount of the Claim as set
forth in the Claim Certificate. Unless, within ten (10) business days after
delivery to the Representative of any Claim Certificate, the Representative
gives written notice to Surety and Escrow Agent that the Representative
questions the accuracy of, or matters included in, such Claim Certificate, such
Claim Certificate shall constitute full authority to Escrow Agent to take the
action provided for in this Section 4.b and shall be conclusive on all parties
hereto.

ii. If the Representative gives notice questioning the accuracy of,
or matters included in, a Claim Certificate, Escrow Agent shall not distribute
to an Indemnified Party any Escrowed Funds or make any indemnification payment
to an Indemnified Party pursuant to this Section 4.b until Escrow Agent receives
(i) the written consent of the Representative to such indemnifying payment or
(ii) a Final Determination with respect to the dispute. After notice by the
Representative of disagreement with the accuracy of, or matters included in, a
Claim Certificate, either Surety or any other Indemnified Party (on the one
hand) or the Representative (on the other hand), may submit and settle such
disagreement by arbitration in accordance with the Commercial Arbitration Rules,
existing at the date thereof, of the American Arbitration Association (the
"Rules"). The dispute shall be submitted to one arbitrator agreed to by Surety
and the Representative or, if Surety and the Representative cannot agree on one
arbitrator, by three arbitrators selected in accordance with said Rules, and
shall be heard in Fort Worth, Texas. Each arbitrator must be experienced in the
subject matter in dispute. The costs and expenses of the arbitration shall be
paid by the non-prevailing party in such arbitration. If an Indemnified Party is
the prevailing party, a Claim may be made against the Escrowed Funds for such
costs and expenses.

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<PAGE>

iii. In the event of any Claim asserted against an Indemnified Party
by a third party, the Indemnified Party shall immediately notify the
Representative thereof, and permit the Representative, on behalf of the
Indemnifying Parties, to assume the defense of any such Claim or any litigation
resulting therefrom; provided, however, that counsel for the Representative, on
behalf of the Indemnifying Parties, who shall conduct the defense of such Claim
or any litigation resulting therefrom, shall be approved by the Indemnified
Party or Parties against whom the Claim for which indemnification is sought is
made (whose approval shall not be unreasonably withheld), and the Indemnified
Party or Parties may participate in such defense at such party's expense. The
failure of any Indemnified Party to give notice to the Representative as
provided herein shall not relieve the Indemnifying Parties of their obligations
under this Escrow Agreement unless such failure to give notice results in the
forfeiture of substantive rights or defenses of the Indemnifying Parties. The
Representative, in the defense of any such Claim or litigation, shall not,
except with the consent of the relevant Indemnified Party or Parties, which
consent shall not be unreasonably withheld, consent to entry of any judgment or
enter into any settlement with regard to such Claim or litigation. The
Indemnified Parties shall furnish such information regarding themselves or the
Claim in question as the Representative may reasonably request in writing and as
shall be reasonably required in connection with the defense of such Claim and
litigation resulting therefrom. The Representative shall advise the Indemnified
Parties from time to time of the status of such defense. The attorney fees,
costs, and other expenses related to Representative's defending or litigating a
Claim shall be paid from the Escrowed Funds from time to time as approved in
writing by the Representative and Surety. Notwithstanding the above rights of
Representative to defend and litigate a Claim, Surety may, by written notice to
the Representative and Escrow Agent, with the prior written consent of
Representative, which consent shall not be unreasonably withheld, terminate such
defense and litigation and direct that the Claim be paid in full if Surety
reasonably determines, after consultation with its counsel, that the sum of (A)
the estimated costs of defending and litigating such Claim, (B) the estimated
costs of paying such Claim if the defense and litigation is unsuccessful, and
(C) the total of all other Claims for which the requisite notice has been given,
exceeds seventy-five percent (75%) of the total of the Escrowed Funds then held
by Escrow Agent.

iv. If the Representative does not assume the defense of any such
Claim or commence settlement negotiations within thirty (30) days of receiving
the notice provided in Section 4.b.iii above, or such shorter period of time if
applicable because of procedural requirements, and pursue such defense or
settlement proceedings with reasonable diligence, the Indemnified Party may
assume such defense or commence such settlement negotiations and may further
consent to entry of a judgement or enter into a settlement of such Claim or
litigation on behalf of the Indemnifying Parties. In such event, the Indemnified
Party may submit a

-6-
<PAGE>

Claim Certificate to Escrow Agent from time to time for the costs and expenses
(including attorney fees and expenses) incurred by the Indemnified Party in
defending and settling the Claim.

5. GENERAL.

a. Notices. Any notice required or permitted by any party must be in
writing and must be delivered either personally to the other parties or by
certified mail, return receipt requested, at the parties' addresses indicated
below. Any notice will be effective upon delivery in the case of personal
delivery and, in the case of delivery by certified mail, three (3) business days
after the date of deposit in the United States mail, postage prepaid. The
addresses of the parties are as follows:

if to Escrow Agent:

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

if to Surety Bank or Surety:

1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Attention: Mr. C. Jack Bean

with a copy to:

Ms. Margaret E. Holland
Tracy & Holland, L.L.P.
306 W. 7th Street, Suite 500
Fort Worth, Texas 76102-4982

if to TexStar:

600 Pat Booker Road
Universal City, Texas 78148
Attention: Mr. Byron K. Bexley

with a copy to:

Mr. Patrick B. Tobin
Jackson Walker, L.L.P.
112 East Pecan Street, Suite 2100
San Antonio, Texas 78205-3799

-7-
<PAGE>

if to the Indemnifying Parties:

Mr. W. Marvin Rush
Rush Peterbilt Truck Center
8810 Interstate 10 East
San Antonio, Texas 78219

with a copy to:

Mr. Patrick B. Tobin
Jackson Walker, L.L.P.
112 East Pecan Street, Suite 2100
San Antonio, Texas 78205-3799

The names and address of the parties to receive notice as stated in this section
may be changed at any time by notice given in accordance with this section. As
used in this Escrow Agreement, the term "business day" means any day of the
week, Monday through Friday, that is not recognized by the United States Postal
Service as a national holiday and on which the national banks are open for
business.

b. Successors and Assigns; No Assignment by Indemnifying Parties.
This Escrow Agreement is binding upon and shall inure to the benefit of the
respective parties hereto and their respective heirs, executors, administrators,
successors and assigns. Notwithstanding anything herein to the contrary, no
interest herein may be assigned by any Indemnifying Party other than (a)
executors, administrators, legatees or heirs of the Indemnifying Party or (b) in
a transaction involving no change in beneficial ownership. Notice of any
transfers permitted hereunder shall be given to Surety and Escrow Agent and no
such permitted transfer shall be valid until such notice is given.

c. Governing Law. This Escrow Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without giving
effect to the conflict of law rules thereof.

d. Cumulative Rights. The rights of the parties hereunder are
cumulative and are not exclusive of any other rights they may have under the
Agreements or otherwise.

e. Waivers. Waiver by any party of any breach of or failure to comply
with any provision of this Escrow Agreement by any other party shall not be
construed as, or constitute, a continuing waiver of any such provision, or a
waiver of any other breach of, or failure to comply with, any other provision of
this Escrow Agreement.

f. Integration; Amendment and Termination. This Escrow Agreement
(including the attachments hereto) together with the Agreements (including the
attachments thereto) constitutes, except as to Escrow Agent which shall only be
bound by the terms of this

-8-
<PAGE>

Escrow Agreement, the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings
between the parties with respect to the subject matter hereof. This Escrow
Agreement may not be amended or terminated, nor may any condition or term hereof
be waived, orally, but only by an instrument in writing duly executed by the
parties hereto, or, in the case of a waiver, by the party otherwise entitled to
performance.

g. Section and Other Headings. The section and other headings contained
in this Escrow Agreement are for reference purposes only and shall not affect in
any way the meaning or interpretation of this Escrow Agreement.

h. Counterparts. This Escrow Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.

i. No Impairment. If any provision of this Escrow Agreement is held by
a court of competent jurisdiction to be invalid, void or unenforceable, the
remaining provisions shall nevertheless continue in full force and effect
without being impaired or invalidated in any way.

6. Escrow Agent Rights and Duties; Limitation of Liability and Indemnity.

a. Appointment. Surety Bank, Surety, TexStar and the Representative on
behalf of the Indemnifying Parties hereby select Escrow Agent as the escrow
agent for the purposes set forth in this Agreement. Escrow Agent hereby accepts
this appointment and designation.

b. Resignation and Replacement.

i. Escrow Agent may resign by giving at least thirty (30) days
written notice to Surety and the Representative. Upon the dissolution or
resignation of Escrow Agent, Surety and the Representative shall select a
successor escrow agent by mutual agreement. If Escrow Agent has not been
notified of the successor on or before the 30th day, Escrow Agent may pay the
Escrowed Funds and deliver any documents in its possession into the registry or
custody of a court as provided for in Section 6.e below. Escrow Agent shall be
entitled to any compensation accrued prior to the date of its payment and
delivery of the Escrowed Funds and any such documents.

ii. Surety and the Representative may replace the Escrow Agent by
the mutual agreement of Surety and the Representative and written notice to
Escrow Agent, but in such event Escrow Agent shall be entitled to any
compensation accrued prior to the date of its replacement.

-9-
<PAGE>

iii. On the resignation, dissolution, or removal of Escrow Agent,
Escrow Agent shall deliver any Escrowed Funds and documents held pursuant to
this Agreement to its successor, or if there is no successor, to such person as
jointly directed in writing by Surety and the Representative. Failing to receive
such writing, Escrow Agent is authorized to deposit all of same into the
registry of a court of competent jurisdiction. On the completion of such
delivery to its successor or into the registry of the court, Escrow Agent shall
be deemed to be removed as of such date.

c. Fees and Expenses of Escrow Agent. All fees and expenses of Escrow
Agent (including the reasonable fees of any counsel retained by it) in
connection herewith shall be paid from the Escrowed Funds. If the Escrowed Funds
are insufficient for payment in full, one-half of the remaining amount owed to
Escrow Agent will be paid by Surety and one-half will be paid by the
Indemnifying Parties.

d. Liability of the Escrow Agent; Indemnification.

i. Escrow Agent, as part of the consideration for the acceptance
of this escrow, shall not be liable for any acts or omissions, for any claims,
demands or losses, or for any damages made or suffered by any party to this
Agreement, excepting such as may arise through or be caused by its bad faith,
willful misconduct, gross negligence, or breach of fiduciary duty. Furthermore,
it shall not be liable by reason of any act taken in good faith upon advice of
its counsel.

ii. Escrow Agent undertakes to perform only such duties as are
specifically set forth herein and may conclusively rely and shall be protected
in acting or restraining from acting on any written notice, instrument or
signature reasonable believed by it to be genuine and to have been signed or
presented by the proper party or parties duly authorized to do so. Escrow Agent
shall have no responsibility for the contents of any writing contemplated herein
and may rely, without any liability, upon the contents thereof. Attached hereto
as Schedule B are the names, titles and specimen signatures of each of the
persons who are authorized to execute and deliver written notices and directions
to Escrow Agent. Each party may change its authorized persons during the term of
this Escrow Agreement.

iii. Surety, Surety Bank, and the Indemnifying Parties severally
agree to indemnify and hold harmless Escrow Agent against any and all losses,
claims, damages, liabilities and expenses, including, without limitation,
reasonable costs of investigation and counsel fees and disbursements which may
be imposed upon the Escrow Agent or incurred in connection with the acceptance
of the appointment as Escrow Agent or by its performance as Escrow Agent. This
specifically includes any litigation arising from this Escrow Agreement or
involving the subject matter thereof. Notwithstanding this indemnification
provision, or any other term to the contrary,

-10-
<PAGE>

Escrow Agent is responsible for all losses, damages, liabilities, and expenses
caused by its bad faith, willful misconduct, gross negligence, or breach of
fiduciary duty.

e. Tender to the Registry of the Court. In the event of a dispute
concerning the Escrowed Funds, Escrow Agent shall be entitled to tender the
remaining Escrowed Funds and any related documents in its possession to the
registry or custody of a court of competent jurisdiction and may file such
pleadings or motions as it deems appropriate and thereupon be discharged from
all further responsibilities as Escrow Agent. This action shall not deprive
Escrow Agent of any right to reimbursement granted or fees accrued under other
provisions of this Escrow Agreement.

IN WITNESS WHEREOF, Surety, Surety Bank, TexStar, Representative on behalf
of the Indemnifying Parties and Escrow Agent have caused this Escrow Agreement
to be duly executed as of the day and year first above written.

SURETY: SURETY CAPITAL CORPORATION

By:
------------------------------------
C. Jack Bean, Chairman of the
Board and Chief Executive Officer

SURETY BANK: SURETY BANK, NATIONAL ASSOCIATION

By:
------------------------------------
Bobby W. Hackler, Vice Chairman of
the Board, President and Chief
Executive Officer

TEXSTAR: TEXSTAR NATIONAL BANK

By:
------------------------------------
Byron K. Bexley, President

REPRESENTATIVE:

---------------------------------------
W. Marvin Rush

INDEMNIFYING PARTIES:

-11-

<PAGE>

Exhibit 21.01

Subsidiaries of Surety Capital Corporation

Subsidiary Jurisdiction of Organization

Surety Bank, National Association National Banking Association

<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, including all amendments thereto, of our report, dated
January 21, 1997, on our audits of the consolidated financial statements of
Surety Capital Corporation as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994. We also consent to the reference to our
firm under the caption "Experts."

COOPERS & LYBRAND L.L.P.

Fort Worth, Texas
December 10, 1997

<PAGE>

Exhibit 23.02

CONSENT OF BURNSIDE & RISHEBARGER PLLC

We consent to the inclusion in the Registration Statement of Surety Capital
Corporation on Form S-1, and all amendments thereto, of our report, dated
January 31, 1997, on our audits of the financial statements of TexStar National
Bank as of December 31, 1996 and 1995, and for each of the three years in the
period ended December 31, 1996. We also consent to the reference to our firm
under the caption "Experts" in the prospectus included in said Registration
Statement.

/s/ Burnside & Rishebarger, PLLC
BURNSIDE & RISHEBARGER, PLLC

San Antonio, Texas
December 10, 1997

<PAGE>

Exhibit 24.01

SPECIAL POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints C. Jack Bean and Bobby W. Hackler and each of them, his
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution for him and in his name, place and stead, in any and all
capacities, to sign, execute and file this registration statement under the
Securities Act and any and all amendments (including, without limitation, post-
effective amendments and any amendment or amendments or additional registration
statements filed pursuant to Rule 462 under the Securities Act increasing the
amount of securities for which registration is being sought) to this
registration statement, and to file the same, with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, to sign any and all application, registration statements, notices or
other documents necessary or advisable to comply with the applicable state
securities laws, and to file the same, together with other documents, in
connection therewith, with the appropriate state securities authorities,
granting unto said attorney-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.

<TABLE>
<CAPTION>
Signature Capacity in Which Signed Date

<S> <C> <C>
/s/ C. Jack Bean Chairman of the Board December 16, 1997
- ---------------------------
C. Jack Bean

/s/ William B. Byrd Director December 16, 1997
- ---------------------------
William B. Byrd

/s/ B. J. Curley Chief Financial Officer, Vice December 16, 1997
- --------------------------- President, and Secretary
B. J. Curley

/s/ Bobby W. Hackler Vice Chairman, Chief Operating December 16, 1997
- --------------------------- Officer and Director
Bobby W. Hackler

/s/ Joseph S. Hardin Director December 16, 1997
- ---------------------------
Joseph S. Hardin
</TABLE>
<PAGE>

<TABLE>
<S> <C> <C>
/s/ G. M. Heinzelmann, II President and Director December 16, 1997
- ---------------------------
G. M. Heinzelmann, III

/s/ Margaret Holland Director December 16, 1997
- ---------------------------
Margaret Holland

/s/ Michael L. Milam Director December 16, 1997
- ---------------------------
Michael L. Milam

/s/ Garrett Morris Director December 16, 1997
- ---------------------------
Garrett Morris

/s/ Cullen W. Turner Director December 16, 1997
- ---------------------------
Cullen W. Turner
</TABLE>