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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
Mark One
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1997 --- Commission
File Number 33-1983; OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Transition Period From ___________ to
___________.
____________________
SURETY CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 75-2065607
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(State of Incorporation) (IRS Employer Identification
No.)
1845 Precinct Line Road, Suite 100, Hurst, Texas 76054
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(Address of Principal Executive Offices)
(817) 498-2749
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.01 par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. _____
The aggregate market value of Common Stock held by nonaffiliates of the
Registrant, based on the quoted price of the Common Stock as reported on the
American Stock Exchange on March 20, 1998, was $27,349,940. For purposes of
this computation, all officers, directors and 5% beneficial owners of the
Registrant are deemed to be affiliates. Such determination should not be deemed
an admission that such officers, directors or 5% beneficial owners are, in fact,
affiliates of the Registrant. As of March 20, 1998, 5,757,882 shares of Common
Stock were outstanding.
Documents Incorporated by Reference: Portions of the Company's Proxy
-----------------------------------
Statement dated not later than 120 days after the end of the Company's most
recent fiscal year, filed pursuant to Regulation 14A of the Securities Exchange
Act of 1934 for the 1998 Annual Meeting of Stockholders of Surety Capital
Corporation, are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Surety Capital Corporation (the "Company"), a corporation incorporated
under the laws of the state of Delaware in 1985, is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). The Company owns all of the issued and outstanding shares of capital
stock of Surety Bank, National Association, formerly Texas Bank, National
Association and formerly Texas National Bank, Lufkin, Texas (the "Bank"), with
full service offices in Chester, Hurst, Kennard, Lufkin, Midlothian, Waxahachie,
Wells and Whitesboro, Texas.
The Company's principal executive offices are located at 1845 Precinct Line
Road, Suite 100, Hurst, Texas 76054, and its telephone number is 817-498-2749.
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 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 insurance premium finance ("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 conducts all its operations
through the Bank.
ACQUISITIONS
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 East Texas, Chester, Texas, for
$645,676 ("Chester Acquisition"). In June 1994 the Company acquired The Farmers
Guarnaty State Bank of Kennard, Kennard, Texas, with $14.4 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 First National Bank, Whitesboro, Texas, with $41.3 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 acquisition of the Waxahachie, Texas
branch of Bank One, Texas, National Association with internally generated funds.
At the closing of the Waxahachie acqusition, 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 the
First National Bank, Midlothian, Texas, with $53.8 million in assets for
$6,595,707. The Company financed the Midlothian Acquisition through an
$7,394,293 underwritten public offering of its shares of common stock. In March
1996 the Company acquired all of the assets and assumed approximately $50,000 of
liabilities of Providers Funding Corporation, a Dallas-based medical claims
servicing company, for a purchase price of $1,000,000 plus the issuance of
25,398 shares of Common Stock.
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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 primary lending activity of insurance premium financing. 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
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 December 31, 1997. At
December 31, 1997 approximately 23.0%, 10.5%, 26.5% and 40.0% of the Company's
total loan portfolio represented commercial loans, consumer banking loans, real
estate loans, and IPF loans, 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 twelve months ended
December 31, 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:
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. Approximately 25% of the annual premium must be paid by the insured at
the time the insurance is purchased, so the amount of the loan
represents only approximately 75% of the annual insurance premium.
. At any date before the end of the policy term, a portion of the
premium is not yet earned because it applies to the period from that
date to the end of the policy term. This unearned premium is refunded
if the policy is canceled before the end of the policy term. The
amount of the premium financed is generally payable over the first
nine months of the policy's term, so the unearned premium exceeds the
outstanding balance of the loan and will repay the loan in full if the
policy is canceled before the end of the policy term.
. Even though the insured is responsible for repayment of the premium
finance loan, if the insured does not make the loan 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
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1997 1996 1995 1994 1993
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Gross Loans
Outstanding $40,373,695 $39,168,604 $22,409,356 $20,931,642 $14,518,680
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The typical premium finance loan has a nine month life. Because of the
need to bill policy holders and to promptley cancel policies when loan
repayments are not received in a timely fashion, this 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, billing of borrowers, preparation of
notices, calculation and billing of late charges, notification of policy
cancellations, and 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.
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Since the Company relies on a rebate of the unearned premium as collateral
to pay off defaulted insurance premium loans, the Company evaluates the
financial strength of the insurance company as well as the insured. In order to
avoid excessive concentrations, the Company limits the dollar amount of premium
financing for policies written by any single insurance company. The Company's
current policy limits the aggregate loans related to any single insurance
company or any insurance syndicate to a maximum of 35% of the 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.
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 Item 7 "Management's Discussion and Analysis of Financial Conditions and
Results of Operations-Nonperforming Assets."
MEDICAL RECEIVABLES FACTORING
The Bank has engaged in medical receivables factoring since 1990. Medical
receivables factoring involves the purchase of accounts receivable from doctors,
hospitals, and other health care organizations. These accounts receivable are
due principally from major insurance companies and governmental agencies, and
are purchased by the Bank at a price equal to approximately 50% to 60% of their
face amount. When the receivable is paid the Bank retains the purchase price it
paid for the receivables plus a discount factor and a servicing fee. The
remaining balance of the payment is paid to the party from which the receivable
was initially purchased.
During the year ended December 31, 1997, the yield on the funds committed
to this activity was 16.3%. During the first quarter of 1996, the administration
of the medical receivables was handled by Providers Funding Corporation ("PFC"),
a company which specialized in the acquisition and processing of medical
receivables. PFC developed specialized computer systems to automate much of the
administration of the medical receivables. Effective March 15, 1996, the Bank
acquired PFC, which is now operated as a division of the Bank and now conducts
in-house the acquisition and processing of medical receivables.
As of December 31, 1997, the Company had approximately $6.2 million of
medical claims receivables outstanding 120 days or more from the date of funding
by the Company, or 61% of its total medical claims receivables. At December 31,
1996 the Company had approximately $1.4 million of medical claims receivables,
22% of total medical receivables, outstanding 120 days or more. It has been the
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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. Management's fourth
quarter and year-end evaluation of Surety Capital's medical claims factoring
portfolio, indicated that at December 31, 1997, $6,216,651 in medical
receivables were outstanding over 120 days. Consequently, management determined
that charge-offs of $2,033,587 of the $6,216,651 were warranted in the fourth
quarter as well as a provision for an additional $3,686,409 of such receivables.
Upon recognition of the charge-offs and additional reserves for the factored
receivables, the Company believes that it was adequately reserved for all
receivables greater than 120 days outstanding since funding date.
New management of the medical claims factoring division was in place by the
end of January 1998. The new management has made a commitment to vigorously
pursue collecting the portfolio of outstanding receivables over 120 days old.
However, the Company can not predict the likely amount of any such recoveries.
The Company has decreased the level of acquisitions of new medical claims
receivables.
The Company could incur losses in its medical receivables factoring
business for a number of reasons, including fraud and the failure of the
insurance company or the government agency to pay the receivable for any reason.
The Company generally has no recourse against the health care provider for
payment of a medical receivable which is not otherwise paid, although the
Company generally obtains and perfects a security interest in all medical
receivables of that health care provider to secure payment of the receivables.
Therefore, payments on any other receivable in excess of the balance due the
Bank regarding that receivable may, under certain circumstances, be applied to
an unpaid receivable. Medical receivables factoring, like insurance premium
financing, is a specialty type of financing which provides high yields and
requires specialized expertise and systems. The Company considers the market
for this type of financing to be relatively broad, and to extend beyond the
local markets served by the 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.
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EMPLOYEES
As of December 31, 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.
SUPERVISION AND REGULATION
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 the 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 Federal Deposit Insurance Corporation ("FDIC") and the
banking system as a whole, and not for the protection of 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 BHC Act, and
therefore is subject to regulation and supervision by the Board of Governors of
the Federal Reserve System ("FRB"). The Company is required to file reports
with, and to furnish such other information as, the FRB may require pursuant to
the BHC Act, and to subject itself to examination by the FRB. The BHC Act and
other federal laws subject bank holding companies to particular restrictions on
the types of activities in which they may engage, and to a range of supervisory
requirements and activities, including regulatory enforcement actions for
violations of laws and regulations. Certain violations may also result in
criminal penalties.
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"
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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, as amended ("FDIA"), 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
United States 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 BHC Act 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.
ACTIVITIES CLOSELY RELATED TO BANKING. The BHC Act 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
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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 BHC Act 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 BHC Act and FRB 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 or 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.
REGULATION OF THE BANK
The Bank is a national banking association and therefore is subject to
regulation, supervision, and examination by the Office of the Comptroller of the
Currency ("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 "Item 7. Management's Discussion and Analysis of Financial
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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 10% 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
insurance premium financing loan is regulated by the Texas State Board of
Insurance. See "Item 1. 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
legislation prohibiting interstate branching is effective until September 1999.
CORRECTIVE MEASURES FOR CAPITAL DEFICIENCIES. FDIA 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
-10-
<PAGE>
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, a leverage ratio of 5% 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% or greater, a Tier I risk-based capital ratio of 4% or greater, and
a leverage capital ratio of 4% or greater (3% or greater if the institution was
rated a CAMEL 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%, a Tier I risk-
based capital ratio that is less than 4%, or a leverage ratio that is less than
4% (or a leverage ratio that is less than 3% if the institution was rated CAMEL
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%, a Tier I
risk-based capital ratio that is less than 3%, or a leverage ratio that is less
than 3%. A "critically undercapitalized" institution is one which has a ratio of
tangible equity to total assets that is equal to or less than 2%.
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 December 31, 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 affiliates, including the Company, are
subject to Section 23A of the Federal Reserve Act. In general, Section 23A
imposes limits on the amount of such transactions and also requires certain
levels of collateral for loans to 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.
-11-
<PAGE>
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. The Federal Deposit Insurance Corporation Improvement Act of 1991
("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 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 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 zero and 0.27% 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
-12-
<PAGE>
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 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 1998 FICO assessment of the Bank was
approximately $4,700.
COMMUNITY REINVESTMENT ACT OF 1977 ("CRA"). Under the 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, and 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 effect, if any, that any such changes would have on
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 the Bank 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 the Bank.
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 United States 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.
-13-
<PAGE>
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.
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% and the ratio of total capital to risk-weighted assets (including
certain off-balance sheet obligations, such as standby letters of credit) is 8%.
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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The FRB (for the Company) and the OCC (for the Bank) have also adopted
guidelines which supplement the risk-based capital guidelines with a minimum
leverage ratio of Tier I capital to average total consolidated assets ("leverage
ratio") of 3% for institutions with well diversified risk (including no undue
interest rate exposure; excellent asset quality; high liquidity; good earnings);
that are generally considered to be strong banking organizations (rated 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% to 5%. 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources" 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.
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<PAGE>
As of December 31, 1997, the Bank's Tier I risk-based capital ratio was
9.92%, its total risk-based capital ratio was 11.28% and its leverage ratio was
6.24%, which equaled or exceeded the federal minimum regulatory requirements.
Bank regulators may raise capital requirements applicable to banking
organizations beyond current levels. However, the Company is unable to predict
whether higher capital requirements will be imposed and, if so, at what levels
and on what schedules, and therefore cannot predict what effect such higher
requirements may have on the Company and the Bank.
For an analysis of the Company's and the Bank's capital, see "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources."
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<PAGE>
ITEM 2. 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>
BRANCH/OFFICE SQ. FT. LOCATION/OWNERSHIP DEPOSITS AT
DECEMBER 31, 1997
<S> <C> <C> <C>
Lufkin 9,772 600 South First Street
Lufkin, Texas 75901
owned $ 21,538,771
Hurst 14,810 1845 Precinct Line Road
Suite 100
Hurst, Texas 76054
leased $ 8,373,394
Chester 8,000 209 Katy Ave.
Chester, Texas 75936
owned $ 8,536,440
Wells 4,825 215 Rusk Ave.
U.S. Highway 69
Wells, Texas 75976
owned $ 9,829,136
Kennard 3,860 2000 Highway 7
Kennard, Texas 75847
owned $ 15,213,061
Waxahachie 19,186 104 Elm St.
Waxahachie, Texas 75165
owned $ 13,697,161
Whitesboro 6,365 2500 Highway 82 East
Whitesboro, Texas 76263
owned $ 35,072,002
Midlothian 17,116 910 North 9th St.
Midlothian, Texas 76065
owned $ 42,281,527
------------
Total $154,541,492
============
</TABLE>
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<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Bank is a defendant in two related cases: Tennessee Ex Rel. Douglas
Sizemore, Commissioner of Commerce and Insurance for the State of Tennessee, et
al. vs. Surety Bank, N.A., filed in June 1995 in the Federal District Court for
the Northern District of Texas, Dallas Division (the "Anchorage Case"), and
United Shortline Inc. Assurance Services, N.A. et al. vs. MacGregor General
Insurance Company, Ltd., et al., now pending in the 141st Judicial District
Court of Tarrant County, Texas (the "MacGregor Case").
The claimant in the Anchorage Case is 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 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. Shortline and
Tennessee appealed the ruling of the Fort Worth Court of Appeals. Oral argument
has been made to the Texas Supreme Court. The matter is pending before that
court, and no ruling has been made at this time.
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 has not been
completed, and the damages sought by Tennessee are not yet certain.
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.
However, in management's opinion the outcome of these cases will not be material
to the Company.
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
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<PAGE>
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 the defendants on theories of
negligence, fraud, and breach of contract and warranty. An Assignment and
Release Agreement has been executed between the Bank and Auto-Owners. Pursuant
to this agreement, the Bank has assigned and transferred its claims and causes
of action against Greenway and O'Malley to Auto-Owners. In consideration for
this agreement, Auto-Owners has paid the Bank $650,000 and will pursue the
claims and causes of action against Greenway and O'Malley pursuant to the terms
of the agreement. Should a recovery be made, Auto-Owners agrees to pay the Bank
50% of the amounts collected until the Bank has received payments totaling
approximately $197,000, in addition to the $650,000 previously paid. This
constitutes a settlement of this case insofar as the Bank is concerned. The
Bank continues to have a bond claim presented to St. Paul Insurance, and St.
Paul Insurance has yet to take a position with respect to the claim.
The second lawsuit was filed by the Bank 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 submitted 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 approximates $300,000.
The defendants filed an Answer, challenging the jurisdiction of the court in
which the case was filed. Subsequently, the attorneys for the defendants
withdrew, and the defendants are currently without counsel. The Bank has
received notice that Rhoda Nottingham has filed bankruptcy proceedings under
Chapter 13 of the Bankruptcy Code, which imposes an automatic stay on the
proceedings in this case. The potential exists for a bond claim in this case,
similar to the bond claim that was filed in the Greenway case. In management's
opinion, the outcome of this case will not be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the stockholders of the Company during
the fourth quarter of 1997.
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<PAGE>
ITEM 4A. EXECUTIVE OFFICERS OF THE CORPORATION.
The executive officers of the Corporation, each elected to serve at the
pleasure of the Board of Directors until the next annual meeting of the Board of
Directors to be held on May 21, 1998, their respective ages, and their present
position with the Corporation are as follows:
<TABLE>
<CAPTION>
Position With Position
Name Age Corporation Held Since
- ------------------------ --- -------------------------------------- -------------
<S> <C> <C> <C>
C. Jack Bean 70 Chairman of the Board and Director March 1987
Bobby W. Hackler 52 Vice Chairman of the Board, Chief February 1997
Operating Officer and Director
G. M. Heinzelmann, III 35 President and Director July 1992
B. J. Curley 34 Secretary, Chief Financial Officer June 1996
and Vice President
</TABLE>
The business experience of each of these executive officers during the past
five (5) years is set forth below:
C. Jack Bean has been Chairman of the Board and a director of the Company
since March 1987, and served as President of the Company from March 1987 to July
1992. Mr. Bean was the owner and founder of Surety Finance Company, the
predecessor company to the Company's business, from 1985 until March 1987. He
has served as Chairman of the Board and a director of the Bank since December
1989. Mr. Bean has served as a director of Dallas Fire Insurance Company, a
licensed Texas stock insurance company, since November 1996. The president of
Dallas Fire Insurance Company is also a director of the Company.
Bobby W. Hackler has been Vice Chairman of the Company since February 1997,
Chief Operating Officer since June 1996 and a director since May 1994. 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 previously served as Chief Operating Officer of the
Bank from January 1992 to July 1992. Mr. Hackler has served as a director of
McCoy Myers and Associates, Inc., a computer data processing company for banks,
since November 1996. The Bank owns a 17% interest in McCoy Myers and
Associates, Inc.
G. M. Heinzelmann, III has been President of the Company since July 1992
and a director since July 1993. He previously served as Vice 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.
B. J. Curley has been Secretary of the Company since 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, Inc.
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<PAGE>
No family relationships exist among the executive officers and directors of
the Corporation except as follows: 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.
-20-
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
Since January 10, 1995 the Company's Common Stock has been traded on the
American Stock Exchange, Inc.'s ("AMEX") primary list under the symbol "SRY."
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 the fiscal years ended 1997 and 1996.
<TABLE>
<CAPTION>
---------------------------------
High Low
---------------------------------
1997 Fiscal Year
----------------
<S> <C> <C>
First Quarter $5.75 $4.13
Second Quarter 5.63 5.00
Third Quarter 6.50 5.13
Fourth Quarter 7.25 5.69
1996 Fiscal Year
----------------
First Quarter 4.50 3.25
Second Quarter 4.93 3.63
Third Quarter 4.93 4.00
Fourth Quarter 4.88 4.00
</TABLE>
STOCKHOLDERS
As of March 11, 1998 there were 422 record holders of the Company's Common
Stock.
-21-
<PAGE>
QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands, First Quarter Second Quarter Third Quarter Fourth Quarter Total Year
except per share data) to Date
- --------------------------------------------------------------------------------------------------------------
1997 Fiscal Year
- ----------------
<S> <C> <C> <C> <C> <C>
Interest income $ 4,020 $ 4,161 $ 3,828 $ 3,424 $ 15,433
Net interest income 2,544 2,635 2,242 (4,124) 3,298
Income (loss) before income taxes 795 813 798 (7,682) (5,276)
Net (loss) income 500 511 520 (5,007) (3,476)
Basic earnings per share .09 .09 .09 (.87) (.60)
Weighted average shares 5,749,858 5,751,882 5,751,882 5,753,793 5,751,847
Diluted (loss) earnings per share .09 .09 .09 (.87) (.60)
Weighted average shares
outstanding and common
stock equivalents 5,873,717 5,875,741 5,875,741 5,991,473 5,990,815
1996 Fiscal Year
- ----------------
Interest income $ 2,951 $ 3,756 $ 3,769 $ 3,914 $ 14,390
Net interest income 1,700 2,354 2,370 2,470 8,894
Income before income taxes 363 686 678 909 2,636
Net income 244 446 443 565 1,698
Basic earnings per share .06 .08 .08 .10 .32
Weighted average shares 4,319,721 5,746,512 5,746,512 5,747,243 5,389,366
Diluted earnings per share .05 .08 .08 .10 .31
Weighted average shares
outstanding and common
stock equivalents 4,783,843 5,794,636 5,778,548 5,822,924 5,437,661
- --------------------------------------------------------------------------------------------------------------
</TABLE>
DIVIDEND POLICY
THE COMPANY. The Company currently intends not to pay dividends for the
foreseeable future, but to retain any future earnings for use in the business of
the Company and the Bank. The payment of any dividends in the future will be
made at the discretion of the Board of Directors of the Company and will depend
upon the operating results and financial condition of the Company and the Bank,
their capital requirements, contractual agreements, 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 "Item 1. Business - Supervision and Regulation" 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 OCC if the total of all
dividends, including the proposed dividend, in any calendar year exceeds the
total of the national banking association's net profits for that year combined
with its retained net profits of the preceding two years. Under
-22-
<PAGE>
the provisions of 12 U.S.C. 56 no dividends may ever be paid in an amount
greater than the bank's net profits.
The OCC also has authority to prohibit a national bank from engaging in
what in the OCC's opinion constitutes an unsafe or unsound practice in
conducting business, including the payment of a dividend. See "Item 1. Business
- - Supervision and Regulation" for a discussion of regulatory constraints on the
payment of dividends by national banks and bank holding companies generally.
ITEM 6. SELECTED FINANCIAL DATA.
The following summary consolidated financial data of the Company is derived
from the financial statements of the Company as of and for the five years ended
December 31, 1997. 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.
-23-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
1997 1996/(1)/ 1995/(2)/ 1994/(3)/ 1993/(4)/
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA: ($ in 000's)
Interest income $ 15,433 $ 14,390 $ 9,535 $ 5,387 $ 3,995
Interest expense 5,750 5,362 3,678 1,488 1,124
Net interest income before provision 9,683 9,029 5,857 3,899 2,871
Provision for credit losses and for
medical claims factoring 6,385 135 60 107 90
Net interest income after provision for credit losses on
loans and medical claims factoring losses 3,298 8,894 5,797 3,792 2,781
Noninterest income 2,539 1,877 1,419 1,160 1,182
Noninterest expense 11,113 8,135 5,879 4,462 3,592
(Loss) earnings before income taxes (5,276) 2,636 1,338 490 371
Income taxes (1,800) 938 451 18
Net (loss) earnings $ (3,476) $ 1,698 $ 887 $ 473 $ 371
COMMON SHARE DATA:
Basic (loss) earnings $ (0.60) $ 0.32 $ 0.27 $ 0.20 $ 0.19
Diluted (loss) earnings $ (.60) $ 0.31 $ 0.25 $ 0.20 $ 0.18
Book value 2.74 3.34 2.94 2.65 2.32
Weighted average common shares outstanding (in 000's) 5,752 5,389 3,279 2,394 2,002
Weighted average shares outstanding and common stock
equivalents (in 000's) 5,991 5,438 3,614 2,425 2,026
Period end shares outstanding (in 000's) 5,756 5,748 3,506 3,041 2,273
BALANCE SHEET DATA: ($ in 000's)
Total assets $171,652 $ 176,439 $ 121,339 $ 102,294 $ 49,036
Insurance premium finance loans, net 38,350 38,224 21,905 20,497 14,209
Other loans, net 59,333 58,819 42,211 41,597 15,157
Allowance for credit losses 951 1,067 535 563 282
Medical claims factoring, net 3,073 6,116 3,217 2,693 2,368
Total deposits 154,541 155,690 109,599 92,027 43,596
Shareholders' equity 15,877 19,231 10,294 8,066 5,281
PERFORMANCE DATA
Return (loss) on average total assets (2.0)% 1.0% .8% .8% .8%
Return (loss) on average shareholders' equity (18.7) 9.8 9.5 7.4 8.7
Net interest margin 6.2 6.2 6.1 7.1 7.0
Loans to deposits 63.2 61.5 57.7 66.6 66.3
ASSET QUALITY RATIOS
Nonperforming assets to total assets 2.6 % 1.2% 1.0% .6% .7%
Nonperforming loans to total loans .2 .3 .1 .2 .3
Net loan charge-offs to average loans .3 .2 .1 .4 .4
Allowance for credit losses to total loans 1.0 1.1 .8 .9 1.0
Allowance for credit losses to nonperforming loans 502.0 417.4 758.5 463.4 299.5
CAPITAL RATIOS FOR THE BANK
Tier I risk-based capital 9.92% 11.10% 10.76% 10.13% 11.37%
Total risk-based capital 11.28 12.29 11.72 11.17 12.57
Leverage 6.2 7.0 6.9 5.6 10.0
</TABLE>
-24-
<PAGE>
(1) On February 29, 1996 the Company acquired 100% of the outstanding common
stock of First Midlothian Corporation, Midlothian, Texas and on March 15,
1996 the Bank completed the acquisition of certain assets and the
assumption of certain liabilities relating to Providers Funding Corporation
located in Dallas, Texas.
(2) On September 28, 1995 the Company completed the acquisition of certain
assets and the assumption of certain liabilities relating to the branch of
Bank One, Texas, National Association located in Waxahachie, Texas.
(3) On May 31, 1994 the Company acquired 100% of the outstanding common stock
of The Farmers Guaranty State Bank of Kennard, Kennard, Texas, and on
December 8, 1994 the Company acquired 100% of the outstanding common stock
of First National Bank, Whitesboro, Texas.
(4) On March 23, 1993 the Company acquired 100% of the outstanding common stock
of the Bank of East Texas, Chester, Texas and First State Bank, Wells,
Texas. Operations of these two banks have been included in consolidated
operations subsequent to February 28, 1993.
-25-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The information presented below reflects the lending and related funding
business of the Company.
<TABLE>
<S> <C> <C> <C>
Year Year Year
Ended Ended Ended
12/31/97 12/31/96 12/31/95
------------ ------------ -----------
INSURANCE PREMIUM FINANCING:
Average Balance Outstanding $ 44,188,830 $ 29,210,848 $23,532,953
Average Yield 11.2% 12.2% 11.6%
Interest Income $ 4,935,716 $ 3,563,467 $ 2,739,060
CONSUMER, COMMERCIAL AND
REAL ESTATE FINANCING:
Average Balance Outstanding $ 59,132,390 $ 52,047,775 $41,111,320
Average Yield 10.5% 11.5% 10.5%
Interest Income $ 6,183,824 $ 5,983,791 $ 4,311,889
MEDICAL CLAIMS FACTORING:
Average Balance Outstanding $ 9,044,262 $ 3,660,432 $ 3,239,985
Average Yield 16.3% 33.7% 17.0%
Interest Income $ 1,477,510 $ 1,232,463 $ 550,867
COST OF FUNDS:
Average Balance of Deposits $154,531,929 $145,572,001 $96,198,295
Average Interest Rate 3.7% 3.7% 3.7%
Interest Expense $ 5,749,798 $ 5,361,689 $ 3,554,900
COST OF SHORT TERM DEBT:
Average Balance of Debt $ 60,108 $ 1,114,355
Average Interest Rate 11.0% 11.0%
Interest Expense $ 6,612 $ 122,579
</TABLE>
Note: Average balances are computed using daily balances throughout each
period.
The following discussion highlights the major changes affecting the
operations and financial condition of the Company for the three years ended
December 31, 1997. The discussion should be read in conjunction with the
consolidated financial statements and accompanying notes included in this
report.
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 December 31, 1997 the Company had total assets of
$171,651,618, net loans of $97,683,110, net factored medical claims receivables
of $3,073,155, total deposits of $154,541,492, and total shareholders' equity of
$15,877,333. The Company reported a net loss of $(3,476,304) for the year
ended December 31, 1997 compared with net income of $1,697,987 for the year
ended December 31, 1996. The reported loss for 1997 was a result of a decision
by the Company's management to charge-off certain medical claims receivables and
to make provisions for other receivables outstanding over 120 days, due to
concerns regarding the collectibility of such receivables. Management's fourth
quarter and year-end evaluation of the Company's medical claims factoring
portfolio indicated that at December 31, 1997 $6,216,651 in medical claims
receivables were outstanding over 120 days. Consequently, management determined
that charge-offs of approximately $2,033,587 of the $6,216,651 were warranted in
the fourth quarter, as well as a provision for an additional $3,686,409 of such
receivables. Due
-26-
<PAGE>
to the above, management recognized an impairment to the unamortized goodwill of
$1,151,111 relating to medical claims factoring division during the fourth
quarter of 1997.
On September 28, 1995 the Bank acquired the assets and assumed the
liabilities of the Waxahachie, Texas branch of Bank One, Texas, National
Association. On February 29, 1996 the Company acquired First Midlothian
Corporation and its wholly-owned subsidiary, First National Bank. These banking
facilities are all operated as branches of the Bank. In addition, on March 15,
1996 the Bank acquired certain assets and assumed certain liabilities of
Providers Funding Corporation. The Company views these acquisitions as a means
of expanding its operations and anticipates they will contribute favorably to
future results of the Company. The Company continues to actively serve the
banking needs of these local communities, as it has served the local communities
of its other branches. The deposits at these branches have allowed the Company
to increase its lending activities of insurance premium financing and insurance
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 lending products. See "Item 1.
Business - Acquisitions."
RESULTS OF OPERATIONS
NET (LOSS) EARNINGS
The net loss was $(3,476,304) or a net loss per basic common share of
$(0.60) for the year ended December 31, 1997, compared with net earnings of
$1,697,987 ($0.32 per basic common share) for the year ended December 31, 1996.
The reported loss for 1997 was a result of a decision by the Company's
management to charge-off certain medical claims receivables and to make
provisions for other receivables outstanding over 120 days, due to concerns
regarding the collectibility of such receivables. Management's fourth quarter
and year-end evaluation of the Company's medical claims factoring portfolio,
indicated that at December 31, 1997, $6,216,651 in medical claims receivables
were outstanding over 120 days. Consequently, management determined that charge-
offs of approximately $2,033,587 of the $6,216,651 were warranted in the fourth
quarter, as well as a provision for an additional $3,686,409 of such
receivables. Due to the above, management recognized an impairment to the
unamortized goodwill of $1,151,111 relating to medical claims factoring division
during the fourth quarter of 1997.
Net earnings were $1,697,987 ($0.32 per basic common share) for the year
ended December 31, 1996, compared with net earnings of $886,886 ($0.27 per
basic common share) for the year ended December 31, 1995, an increase of
$811,101 or 91.4%. 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 acquisition of First Midlothian Corporation, Midlothian, Texas and
the acquisition of Providers Funding Corporation. See "Item 1. Business -
Acquisitions."
(LOSS) EARNINGS BEFORE INCOME TAXES
The loss before income taxes was $(5,276,374) for the year ended December
31, 1997, compared with earnings before income taxes of $2,636,115 for the year
ended December 31, 1996, a decrease of $7,912,489 or 300.2%. Earnings before
income taxes were $2,636,115 for the year ended December 31, 1996, compared with
$1,337,817 for the year ended December 31, 1995, an increase of $1,298,298 or
97.0%.
-27-
<PAGE>
NET INTEREST INCOME
Net interest income is the difference between income earned on interest-
earning assets and the interest expense incurred on interest-bearing liabilities
before provisions for credit losses and provisions for medical claims
receivables. The net yield on total interest-earning assets, also referred to
as interest rate margin or net interest margin, represents net interest income
divided by average interest-earning assets. The Company's principal interest-
earning assets are loans, investment securities, medical claims receivables and
federal funds sold.
Net interest income before provision was $9.7 million for the year ended
December 31, 1997, an increase of $654,214 or 7.3% compared with the year ended
December 31, 1996 resulting principally from an increase in average interest-
earning assets from $145.9 million to $156.6 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 $125.5 million to $132.1 million. In
addition, the Company experienced no change net interest margin of 6.2% for
the years ended December 31, 1996 and 1997, respectively. The foregoing
increase resulted principally from an increase in average loans and factored
medical claims receivables from $89.0 million to $112.4 million. Net interest
income before provision was $9.0 million for the year ended December 31, 1996,
an increase of $3.2 million or 54.1% compared with the year ended December 31,
1995, resulting principally from an increase in average interest-earning assets
from $96.3 million to $145.9 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 $84.4 million to $125.5 million. The Company
experienced an increase in the net interest margin 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.
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 from 1996 to 1997 remained unchanged at 9.9%. The yield on the
investment portfolio decreased by 10 basis points and is attributed to declining
interest rates on reinvestments made during 1997. Federal funds sold decreased
by 40 basis points and is attributed to a reduction in the federal funds rate
made by the Federal Reserve Bank in early 1997. The yield on loans decreased to
11.2% for the year ended December 31, 1997 from 12.1% for the year ended
December 31, 1996. The cost of interest bearing liabilities increased to 4.4%
for the year ended December 31, 1997 from 4.3% for the year ended December 31,
1996. The net yield on total interest earning assets from 1995 to 1996 remained
unchanged at 9.9% 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 decreased to 4.3% for the year ended December 31,
1996 from 4.4% for the year ended December 31, 1995. The following table sets
forth for each category of interest-earning assets and interest-bearing
liabilities the average amounts outstanding, the interest earned or paid on such
amounts and the average rate paid for the three years ended December 31, 1997,
1996 and 1995. The table also sets forth the average rate earned on all
interest-earning assets, the average rate paid on all interest-bearing
liabilities, and the net yield on average interest-earning assets for the same
periods.
-28-
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1997 Year ended December 31, 1996
--------------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------- ----------- -------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 186,945 $ 18,768 10.0% $ 531,688 $ 42,117 7.9%
U.S. Treasury and agency
securities/(1)/ 35,693,396 2,300,527 6.4 38,229,219 2,489,906 6.5
Federal funds sold 9,999,199 516,340 5.2 19,291,373 1,078,618 5.6
Loans/(2)/ /(3)/ 103,321,220 11,119,540 10.8 85,325,222 9,547,258 11.2
Medical claims receivables 9,044,262 1,477,510 16.3 3,660,432 1,232,463 33.7
Allowance for credit losses
and factoring ( 1,655,993) - - ( 1,162,713) - -
------------ ----------- ---- ------------ ----------- ----
Total interest-earning assets $156,589,029 $15,432,685 9.9% $145,875,221 $14,390,362 9.9%
------------ ----------- ---- ------------ ----------- ----
Cash and due from banks 5,943,102 6,231,693
Premises and equipment 3,865,966 3,806,385
Accrued interest receivable 951,155 1,010,323
Other real estate owned 259,828 585,587
Other assets 7,296,715 6,965,368
------------ ------------
Total assets $174,905,795 $164,474,577
============ ============
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand $ 38,109,284 $ 1,046,696 2.8% $ 36,910,314 $ 880,776 2.4%
deposits
Savings deposits 7,846,458 189,443 2.4 8,174,212 176,108 2.1
Time deposits 86,156,027 4,513,659 5.2 80,397,763 4,298,193 5.3
Notes payable 60,108 6,612 11.0
------------ ----------- ---- ------------ ----------- ----
Total interest-bearing liabilities $132,111,769 $ 5,749,798 4.4% $125,542,397 $ 5,361,689 4.3%
------------ ----------- ---- ------------ ----------- ----
Noninterest-bearing deposits 22,420,160 20,089,712
Other liabilities 1,759,679 1,564,827
------------ ------------
Total liabilities 156,291,608 147,196,936
Shareholders' equity 18,614,187 17,277,641
------------ ------------
Total liabilities and equity $174,905,795 $164,474,577
============ ============
Net interest income $ 9,682,887 $ 9,028,673
=========== ===========
Net interest spread 5.5% 5.6%
==== ====
Net interest margin 6.2% 6.2%
==== ====
</TABLE>
/(1)/ Interest income on tax exempt securities does not reflect the tax
equivalent yield and the yield information does not give effect to
changes in fair value that are reflected as a component of stockholder's
equity.
/(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.
The following table reflects the changes in net interest income resulting
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 rate and volume on a pro rata basis.
-29-
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1995
-----------------------------------
Interest
Average Income/ Average
Balance Expense Rate
------------- ---------- --------
<S> <C> <C> <C>
ASSETS
Interest-earning assets:
Interest-bearing deposits $ 1,388,817 $ 101,408 7.3%
U.S. Treasury and agency
securities/(1)/ 16,659,034 1,173,748 7.1
Federal funds sold 11,102,928 657,809 5.9
Loans/(2)/ /(3)/ 64,644,273 7,050,949 10.9
Medical claims receivables 3,239,985 550,867 17.0
Allowance for credit losses ( 713,629) - -
------------ ---------- ----
Total interest-earning assets $ 96,321,408 $9,534,781 9.9%
------------ ---------- ----
Cash and due from banks 4,637,833
Premises and equipment 2,495,279
Accrued interest receivable 646,012
Other real estate owned 77,197
Other assets 3,076,316
------------
Total assets $107,254,045
============
LIABILITIES
Interest-bearing liabilities:
Interest-bearing demand deposits $ 23,106,404 $ 678,303 2.9%
Savings deposits 5,329,462 127,211 2.4
Time deposits 54,873,148 2,749,386 5.0
Notes payable 1,114,355 122,579 11.0
------------ ---------- ----
Total interest-bearing liabilities $ 84,423,369 $3,677,479 4.4%
------------ ---------- ----
Noninterest-bearing deposits 12,889,281
Other liabilities 630,055
------------
Total liabilities 97,942,705
Shareholders' equity 9,311,340
------------
Total liabilities and equity $107,254,045
============
Net interest income $5,857,302
==========
Net interest spread 5.5%
====
Net interest margin 6.1%
====
</TABLE>
/(1)/ Interest income on tax exempt securities does not reflect the tax
equivalent yield and the yield information does not give effect to changes
in fair value that are reflected as a component of stockholder's equity.
/(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.
The following table reflects the changes in net interest income resulting
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 rate and volume on a pro rata basis.
-30-
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Years Ended Years Ended
December 31, 1997 December 31, 1996
Compared with Compared with
December 31, 1996 December 31, 1995
------------------------------------------------------------------------------
Increase/ Increase/ Increase/ Increase/
(Decrease) (Decrease) Due to (Decrease) (Decrease) Due to
Volume /(1)/ Rate Changes Volume /(1)/ Rate Changes
------------- ------------ ----------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Interest-bearing deposits
in financial institutions $ (39,733) $ 16,384 $ (23,349) $ (68,743) $ 9,452 $ (59,291)
U.S. Treasury and Agency
Securities (163,674) (25,705) (189,379) 1,397,764 (81,606) 1,316,158
Federal funds sold (485,270) (77,008) (562,278) 455,576 (34,767) 420,809
Loans 1,948,532 (376,250) 1,572,282 2,319,170 177,139 2,496,309
Medical claims receivables 1,121,471 (876,424) 245,047 79,677 601,919 681,596
---------- ----------- ---------- ---------- -------- ----------
Total interest income $2,381,326 $(1,339,003) $1,042,323 $4,183,444 $672,137 $4,855,581
---------- ----------- ---------- ---------- -------- ----------
Interest Expense:
Interest-bearing demand
deposits $ 29,375 $ 136,545 $ 165,920 $ 294,815 $(92,342) $ 202,473
Savings deposits (6,637) 19,972 13,335 59,812 (10,915) 48,897
Time deposits 299,270 (83,804) 215,466 1,353,797 195,010 1,548,807
Federal funds purchased
and other borrowed funds (3,306) (3,306) (6,612) (115,969) 2 (115,967)
---------- ----------- ---------- ---------- -------- ----------
Total interest expense 318,702 69,407 388,109 1,592,455 91,755 1,684,210
---------- ----------- ---------- ---------- -------- ----------
Net interest margin $2,062,624 $(1,408,410) $ 654,214 $2,590,989 $580,382 $3,171,371
========== =========== ========== ========== ======== ==========
</TABLE>
/(1)/ Non-accrual loans are included in the average volumes used in calculating
this table.
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 insurance premium financing and non-insurance premium financing
loans. The Company's loss experience on insurance premium financing lending was
adversely affected during the second half of 1991 by the failure of a non-Best
rated insurance company. The Company has implemented certain changes in its
lending policies and procedures with respect to insurance premium financing
lending which have reduced the maximum concentration by insurance carrier except
as approved by the Board of Directors and have also reduced the amount of loans
collateralized by unearned premiums of insurance policies written by non-rated
carriers. See "Item 1. Business - Insurance Premium Financing."
The Company recorded a $140,000 provision for credit losses during the year
ended December 31, 1997 compared with $72,314 in 1996, $27,622 in 1995, $90,574
in 1994 and $26,333 in 1993. The 93.6% increase in the 1997 provision when
compared with 1996 was necessary to keep pace with loan growth and
-31-
<PAGE>
to accrue for potential losses on the two IPF lawsuits. The 161.8% increase in
the 1996 provision when compared with 1995 was necessitated by the growth in the
loan portfolio.
PROVISION FOR MEDICAL CLAIMS RECEIVABLES LOSSES
The amount of the provision for medical claims receivables losses is based
on periodic (not less than quarterly) evaluations of the medical claims
receivables portfolio, with particular attention directed toward nonperforming
and other potential problem medical claims receivables. During these
evaluations, consideration is given to such factors as: management's evaluation
of specific medical claims receivables; the level and composition of
nonperforming medical claims receivables; historical loss experience; results of
examinations by regulatory agencies; an internal asset review process;
concentrations of credits; and other judgmental factors. The Company's loss
experience on medical claims receivables factoring was adversely affected during
the fourth quarter of 1997 by an increase in the amount of medical claims
receivables outstanding greater than 120 days since funding date. As of
December 31, 1997, the Company had approximately $6.2 million of medical claims
receivables outstanding 120 days or more from the date of funding by the
Company, or 61% of its total medical claims receivables. At December 31, 1996
the Company had approximately $1.4 million of medical claims receivables, 22% of
total medical 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 staffing for collections commensurate with the growth in medical claims
receivables. Management's fourth quarter and year-end evaluation of Surety
Capital's medical claims factoring portfolio, indicated that at December 31,
1997, $6,216,651 in medical receivables were outstanding over 120 days.
Consequently, management determined that charge-offs of $2,033,587 of the
$6,216,651 were warranted in the fourth quarter as well as a provision for an
additional $3,686,409 of such receivables. Upon recognition of the charge-offs
and additional reserves for the factored receivables, the Company believes that
it was adequately reserved for all receivables greater than 120 days outstanding
since funding date.
New management of the medical claims factoring division was in place by the
end of January 1998. The new management has made a commitment to vigorously
pursue collecting the portfolio of outstanding receivables over 120 days old. At
this time, however, the Company can not predict the likely amount of any such
recoveries. The Company has decreased the level of acquisition of new medical
claims receivables.
The Company could incur losses in its medical receivables factoring
business for a number of reasons, including fraud and the failure of the
insurance company or the government agency to pay the receivable for any reason.
The Company generally has no recourse against the health care provider for
payment of a medical receivable which is not otherwise paid, although the
Company generally obtains and perfects a security interest in all medical
receivables of that health care provider to secure payment of the receivables.
Therefore, payments on any other receivable in excess of the balance due the
Bank regarding that receivable may, under certain circumstances, be applied to
an unpaid receivable. Medical receivables factoring, like insurance premium
financing, is a specialty type of financing which provides high yields and
requires specialized expertise and systems. The Company considers the market
for this type of financing to be relatively broad, and to extend beyond the
local markets served by the Company's branches.
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 year ended December 31, 1997 was
$2,538,918, an increase of $661,464 or 35.2% compared with noninterest income
-32-
<PAGE>
of $1,877,454 for the year ended December 31, 1996. The increase in noninterest
income is attributed to the increase in average insurance premium finance loans
outstanding during 1997 of $44,188,830 when compared to the average balance
outstanding during 1996 of $29,210,848. Insurance premium finance generates most
of its noninterest income from late fees. Late fees for the year ended 1997 were
$1,169,407 as compared $681,644 for the same period during 1996.
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 acquisition of First Midlothian Corporation and its wholly-
owned subsidiary, First National Bank, Midlothian, Texas, during 1996, as well
as an increase in loans outstanding. The acquisition of First National Bank
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.
The following table sets forth the various categories of noninterest income
for the years ended December 31, 1997, 1996 and 1995.
NONINTEREST INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Noninterest income
Nonsufficient fund charges $ 569,649 $ 460,156 $ 291,954
Late fee charges 1,169,407 681,644 501,960
Service charges 305,494 372,756 220,086
Collection fees 162,297 135,533 115,478
Credit life insurance 42,456 57,509 75,435
Secured credit card annual fee 4,447 6,561
Other 289,615 165,409 207,593
---------- ---------- ----------
Total noninterest income $2,538,918 $1,877,454 $1,419,067
========== ========== ==========
</TABLE>
NONINTEREST EXPENSE
Noninterest expense was $11,113,183 for the year ended December 31, 1997, an
increase of $2,978,171 or 36.6% compared with noninterest expense of $8,135,012
for the year ended December 31, 1996. This increase resulted principally from
the decision by the Company's management to recognize an impairment for goodwill
relating to the factoring division during 1997 in the amount of $1,151,111, and
certain fixed assets within the factoring division in the amount of $46,112.
Additionally, the Company's management decided that it was necessary to accrue
approximately $370,000 for the preparation of the planned registration statement
during the fourth quarter of 1997 and this amount was treated as professional
fees. The remaining balance of the increase related to professional fees
associated with the proposed acquisition of TexStar as well as additional
staffing associated with the acquisition of First National, Midlothian and the
increase in staffing required by the medical claims receivables division.
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 acquisition of First Midlothian Corporation and its wholly-owned subsidiary,
First National Bank, and Providers Funding Corporation. The addition of First
National Bank and Providers Funding Corporation 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
-33-
<PAGE>
amount of $106,426 associated with the acquisition of First National Bank and
the addition of goodwill and costs in the amount of $58,021 associated with the
acquisition of Providers Funding Corporation.
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 fund. On August 8, 1995 the FDIC's Board of Directors voted to
significantly reduce the deposit insurance premiums paid by most banks. Under
this structure which became effective September 1995, the best-rated
institutions insured by the BIF paid $0.04 per $100 of domestic deposits, down
from the rate of $0.23 per $100. Effective January 1996 the FDIC's Board of
Directors voted again to reduce the deposit insurance premiums paid by most
banks. Under the new rate structure, assessments ranged from zero to $0.27 per
$100 of domestic deposits, subject to a minimum annual assessment of $2,000.
Under this structure, in 1996 the Bank was assessed at a zero rate and paid the
minimum assessment rate of $2,000. In November 1996, the FDIC's Board of
Directors voted to retain the existing BIF assessment schedule for 1997, but
eliminated the minimum assessment amount, and 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 1998 FICO assessment for the Bank is
approximately $4,700. See "Item 1. Business - Supervision and Regulation."
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Salaries and employee benefits $ 4,748,097 $4,244,874 $2,923,118
Occupancy and equipment 1,517,662 1,244,551 907,286
General and administrative expense:
Professional fees 1,126,351 467,662 416,006
Office supplies 290,533 386,114 253,542
Travel and entertainment 132,476 96,577 68,987
Telephone 342,161 283,564 166,858
Advertising 189,510 174,335 104,499
Postage 374,233 299,388 230,807
Amortization of intangibles 506,172 359,717 184,332
Dues and subscriptions 72,847 70,559 49,331
Insurance 95,957 167,245 130,335
Credit cards - 7,472 19,868
Bank service charge 116,631 110,881 57,196
FDIC assessment 15,626 3,553 123,310
Credit reports 46,314 22,850 40,105
Other 340,325 195,670 202,972
----------- ---------- ----------
Total general and administrative 3,649,136 2,645,587 2,048,148
Impairment of long lived assets 1,198,288 - -
----------- ---------- ----------
Total noninterest expense $11,113,183 $8,135,012 $5,878,552
=========== ========== ==========
</TABLE>
-34-
<PAGE>
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
34.1% and has recognized income tax benefit of $(1,800,070) on a loss before
taxes of $(5,276,374) for the year ended December 31, 1997 as compared with
income tax expense of $938,128, or an effective tax rate of 35.6% on income
before taxes of $2,636,115 for the year ended December 31, 1996.
INTEREST RATE SENSITIVITY MANAGEMENT
The operating income and net income of the Bank depend, to a substantial
extent, on "rate differentials" i.e., the differences between the income the
Bank receives from loans, securities and other earning assets, and the interest
expense it pays to obtain deposits and other liabilities. These rates are
highly sensitive to many factors which are beyond the control of the Bank,
including general economic conditions and the policies of various governmental
and regulatory authorities.
The objective of monitoring and managing the interest rate risk position of
the balance sheet is to contribute to earnings and to minimize the adverse
changes in net interest income. The potential for earnings to be affected by
changes in interest rates is inherent in a financial institution. Interest rate
sensitivity is the relationship between changes in market interest rates and
changes in net interest income due to the repricing characteristics of assets
and liabilities. An asset sensitive position in a given period will result in
more assets being subject to repricing; therefore, as interest rates rise, such
a position will have a positive effect on net interest income. Conversely, in a
liability sensitive position, where liabilities reprice more quickly than assets
in a given period, a rise in interest rates will have an adverse effect on net
interest income.
One way to analyze interest rate risk is to evaluate the balance of the
interest rate sensitivity position. A mix of assets and liabilities that are
roughly equal in volume and term and repricing represents a matched interest
rate sensitivity position. Any excess of assets or liabilities in a particular
period results in an interest rate sensitivity gap. The following table
presents the interest rate sensitivity for the Company's interest-earning
assets and interest-bearing liabilities at December 31, 1997:
-35-
<PAGE>
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 $ 94,939 $ 94,939
Investment securities $ 6,832,998 $ 2,610,837 $ 8,954,525 5,195,258 $ 5,191,544 28,785,162
Federal funds sold 22,257,266 22,257,266
Loans 31,283,490 28,175,197 18,020,067 16,208,703 4,946,462 98,633,919
Medical claims receivable 4,244,503 2,802,369 334,168 7,381,040
------------ ----------- ------------ ----------- ----------- -------------
Interest-earning assets $ 64,618,257 $33,588,403 $ 27,308,760 $21,498,900 $ 10,138,006 $157,152,326
------------ ----------- ------------ ----------- ------------ ------------
Interest-bearing
liabilities:
Interest-bearing demand
deposits -
Savings deposits $ 36,264,663 $ 36,264,663
8,212,761 8,212,761
Time deposits 29,382,891 $15,941,523 $ 31,883,046 $10,671,288 87,878,748
------------ ----------- ------------ ----------- ----------- ------------
Interest-bearing
liabilities $ 73,860,315 $15,941,523 $ 31,883,046 $10,671,288 $132,356,172
------------ ----------- ------------ ----------- ----------- ------------
Period interest sensitivity
gap $( 9,242,058) $17,646,880 $( 4,574,286) $10,827,612 $10,138,006 $ 24,796,154
Cumulative interest ============ =========== ============ =========== =========== ============
sensitivity
gap $( 9,242,058) $ 8,404,882 $ 3,830,536 $14,658,148 $24,796,154 $ 24,796,154
============ =========== =========== =========== =========== ============
Cumulative gap as a
percent of total assets (5.4)% 4.9% 2.2% 8.5% 14.5% 14.5%
Cumulative interest-
sensitive assets as
percent of cumulative
interest-sensitive
liabilities 87.5% 109.4% 103.2% 111.1% 118.7% 118.7%
</TABLE>
The cumulative rate-sensitive gap position at one year was an asset-
sensitive position of $3.8 million, or a positive 2.2%. Accordingly, the Company
believes it will not experience a significant impact from changes in interest
rates.
The Company undertakes this interest rate-sensitivity analysis to monitor
the potential risk to future earnings from the impact of possible future changes
in interest rates on currently existing net assets or net liability positions.
However, this type of analysis is as of a point-in-time, when in fact the
Company's interest rate sensitivity can quickly change as market conditions,
customer needs, and management strategies change. Thus, interest rate changes
do not affect all categories of assets and liabilities equally or at the same
time. The Company's investment policy does not permit the purchase of
derivative financial instruments or structured notes.
The preceding table does not necessarily indicate the impact of general
interest rate movements on the Company's net interest income because the
repricing of certain assets and liabilities is discretionary and is subject to
competitive and other pressures. At December 31, 1997, the Bank held $442,699
in mortgage-backed securities. Although the mortgage-backed securities have a
stated maturity greater than five years,
-36-
<PAGE>
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 December 31, 1997, 1996, 1995, 1994 and 1993:
LOAN PORTFOLIO AND MEDICAL CLAIMS RECEIVABLES ANALYSIS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate Principal Amount
--------------------------
Loans
Insurance premium financing $ 40,373,695 $39,168,604 $22,409,356 $20,931,642 $14,518,680
Commercial loans 23,171,566 22,745,139 16,301,840 13,205,698 5,204,120
Installment loans 10,632,451 12,631,520 10,645,406 12,029,243 9,016,179
Real estate loans 26,668,598 24,774,167 16,281,558 17,297,636 1,878,030
------------ ----------- ----------- ----------- -----------
Total loans 100,846,310 99,319,430 65,638,160 63,464,219 30,617,009
Less: Unearned interest (2,212,391) (2,501,747) (1,869,751) (1,506,843) (1,370,229)
Allowance for credit losses (950,809) (1,067,041) (535,250) (562,649) (282,253)
------------ ----------- ----------- ----------- -----------
Total loans, net $ 97,683,110 $95,750,642 $63,233,159 $61,394,727 $28,964,527
============ =========== =========== =========== ===========
Medical claims receivables
Medical claims receivables, net
of unearned interest $ 7,381,040 $ 6,334,005 $ 3,333,830 $ 2,705,974 $ 2,379,482
Allowance for medical claims
receivables losses (4,307,885) (217,733) (167,677) (135,299) (118,974)
------------ ----------- ----------- ----------- -----------
Total medical claims
receivables, net $ 3,073,155 $ 6,116,272 $ 3,166,153 $ 2,570,675 $ 2,260,508
============ =========== =========== =========== ===========
Percentage of Loan Portfolio
----------------------------
Loans:
Insurance premium financing 40.0% 39.4% 34.1% 33.0% 47.4%
Commercial loans 23.0 22.9 24.8 20.8 17.0
Installment loans 10.5 12.7 16.2 19.0 29.4
Real estate loans 26.5 25.0 24.9 27.2 6.2
------------ ----------- ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ =========== =========== =========== ===========
</TABLE>
-37-
<PAGE>
The concentration of insurance premium financing loans may expose the Bank
to greater risk of loss than would a more diversified loan portfolio.
As of December 31, 1997 and 1996 commitments of the Bank under standby
letters of credit and unused lines of credit totaled approximately $5,048,000
and $3,976,000, respectively.
Stated loan maturities (including floating rate loans reset to market
interest rates) of the total loan portfolio, net of unearned income, as of
December 31, 1997 were:
STATED LOAN MATURITIES
<TABLE>
<CAPTION>
One
Within Year to After
One Five Five
Year Years Years Total
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Stated Loan Maturities/Floating Rates Reset:
Insurance premium financing $40,373,695 $40,373,695
Commercial and real estate loans 34,869,439 $18,674,291 $4,716,494 58,260,224
----------- ----------- ---------- -----------
Total $75,243,134 $18,674,291 $4,716,494 $98,633,919
=========== =========== ========== ===========
Medical claims receivable $ 7,381,040 $ 7,381,040
=========== ===========
</TABLE>
Rate sensitivities of the total loan portfolio before unearned income as of
December 31, 1997 were as follows:
LOAN REPRICING
<TABLE>
<CAPTION>
One Year After
Within to Five Five
One Year Years Years Total
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Fixed Rate $50,827,401 $18,041,216 $4,716,494 $73,585,111
Variable Rate 24,387,436 569,504 24,956,940
Non Accrual 28,297 63,571 91,868
----------- ----------- ---------- -----------
Total $75,243,134 $18,674,291 $4,716,494 $98,633,919
=========== =========== ========== ===========
</TABLE>
The maturities presented above are based upon contractual maturities. Many
of these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
NONPERFORMING ASSETS
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual
basis when there are serious doubts regarding the complete collectibility of
principal and interest. Amounts received on nonaccrual loans generally are
applied first to principal and then to interest after all principal has been
collected. Troubled debt restructurings are those for which concessions,
including reduction of interest rates or deferral of interest or principal, have
been granted, due to a
-38-
<PAGE>
borrower's weakened financial condition. Interest on restructured loans is
accrued at the restructured rates when it is anticipated that no loss of
original principal will occur. It is the policy of the Bank not to renegotiate
the terms of a loan simply because of a delinquent status. Rather, a loan is
generally transferred to a nonaccrual status if it is not in the process of
collection and is delinquent in payment of either principal or interest beyond
90 days. Loans which are 90 days delinquent but are well secured and in the
process of collection are not included in nonperforming assets.
Other nonperforming assets consist of real estate acquired through loan
foreclosures, other workout situations and other assets acquired through
repossessions or medical factoring receivables aged beyond 120 days since the
initial funding. The following table summarizes nonperforming assets by
category as of December 31, 1997 and 1996:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Nonaccrual loans $ 91,868 $ 143,856
Loans 90 days past due and still accruing interest 97,537 111,797
---------- ----------
Total nonperforming loans 189,405 255,653
Medical claims receivable aged beyond 120 days 4,183,064 1,079,889
Other real estate owned and other assets 158,271 738,198
---------- ----------
Total nonperforming assets $4,530,740 $2,073,740
========== ==========
Nonperforming assets to total assets 2.6% 1.2%
Nonperforming loans to total loans 0.2% 0.3%
</TABLE>
The classification of a loan on nonaccrual status does not necessarily
indicate that the principal is uncollectible, in whole or in part. A
determination as to collectibility is made by the Bank on a case-by-case basis.
The Bank considers both the adequacy of the collateral and the other resources
of the borrower in determining the steps to be taken to collect nonaccrual
loans. The final determination as to these steps is made on a case-by-case
basis. Alternatives that are considered are foreclosure, collecting on
guarantees, restructuring the loan or collection lawsuits.
The following table sets forth a summary of other real estate owned and
other collateral acquired as of December 31, 1997:
OTHER REAL ESTATE OWNED & OTHER COLLATERAL ACQUIRED
<TABLE>
<CAPTION>
Net Book
Number of Carrying
Description Parcels/Autos Value
-----------------------------------------------------------
<S> <C> <C>
Vacant land or unsold lots 3 $107,556
Repossessed automobiles 11 50,715
--------
$158,271
========
</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 collateralized loan,
the quality
-39-
<PAGE>
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 determination by
the Company of the appropriate level of allowance amount, excluding medical
receivables factoring, was $950,809 at December 31, 1997.
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 year ended December 31, 1997, 1996, 1995, 1994 and 1993:
-40-
<PAGE>
ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,067,041 $ 535,250 $ 562,649 $ 282,253 $ 270,005
------------ ----------- ----------- ----------- -----------
Charge-offs:
Commercial loans (32,519) (6,245) (13,151) (41,537) (48,681)
Installment loans (367,493) (188,419) (104,295) (163,669) (179,713)
Real estate loans (38,046) (21,185) (5,350)
Insurance premium finance (939) ( 1,710) ( 19,380)
------------ ----------- ----------- ----------- -----------
Total charge-offs ( 438,058) ( 216,788) ( 117,446) ( 212,266) ( 247,774)
Recoveries:
Commercial loans 6,258 5,067 1,012 15,698 1,412
Installment loans 92,511 43,538 37,366 43,070 88,511
Real estate loans 40,455 10,240 13,288
Insurance premium finance 42,602 2,720 2,488 71,790
------------ ----------- ----------- ----------- -----------
Total recoveries 181,826 61,565 51,666 61,256 161,713
------------ ----------- ----------- ----------- -----------
Net charge-offs (256,232) (155,223) (65,780) (151,010) ( 86,061)
Bank acquisition 614,700 10,759 340,832 71,976
Provision for credit losses, general 140,000 72,314 27,622 90,574 26,333
------------ ----------- ----------- ----------- -----------
Ending balance $ 950,809 $ 1,067,041 $ 535,250 $ 562,649 $ 282,253
============ =========== =========== =========== ===========
Period end total loans, net of $ 98,633,919 $96,817,683 $63,768,409 $61,957,376 $29,246,780
unearned interest ============ =========== =========== =========== ===========
Average loans $103,321,220 $85,325,222 $64,644,273 $38,127,350 $24,392,001
============ =========== =========== =========== ===========
Ratio of net charge-offs to average 0.3% 0.2% 0.1% 0.4% 0.4%
loans ============ =========== =========== =========== ===========
Ratio of provision for credit losses to
average loans 0.1% 0.1% 0.0% 0.2% 0.1%
============ =========== =========== =========== ===========
Ratio of allowance for credit losses to
ending total loans 1.0% 1.1% 0.8% 0.9% 1.0%
============ =========== =========== =========== ===========
Ratio of allowance for credit losses to
total nonperforming loans 502.0% 417.4% 758.5% 463.4% 299.5%
============ =========== =========== =========== ===========
Ratio of allowance for credit losses
to total nonperforming assets 21.0% 51.5% 44.1% 144.8% 145.3%
============ =========== =========== =========== ===========
</TABLE>
In the purchase of medical claims receivables, the Company recognizes that
losses will be experienced and the risk of loss will vary with, among other
things, general economic conditions, the type of receivable being purchased, and
the quality of the collateral for such loan. The allowance for medical claims
receivables losses represents the Company's estimate of the allowance necessary
to provide for losses incurred in the medical claims receivables portfolio. In
making this determination, the Company analyzes the ultimate collectibility of
the Company's medical claims receivables 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 medical claims receivables losses. To
establish the appropriate level of the allowance, all medical claims receivables
-41-
<PAGE>
(including nonperforming medical claims receivables) are reviewed and classified
as to potential loss exposure. Specific allowances are then established for
those medical claims receivables with identified loss exposure and an
additional allowance is maintained based upon the size, quality, and
concentration characteristics of the remaining medical claims receivables
portfolio using both historical quantitative trends and the Company's evaluation
of qualitative factors including future economic and industry outlooks. The
determination by the Company of the appropriate level of allowance amount for
medical receivables factoring was $4,307,885 at December 31, 1997.
The allowance for medical claims receivables loses 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 medical claims receivables losses for the year ended December 31,
1997, 1996, 1995, 1994 and 1993:
ALLOWANCE FOR MEDICAL CLAIMS RECEIVABLE LOSSES
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
----------- ---------- ---------- ---------- ----------
Beginning balance $ 217,734 $ 167,677 $ 135,299 $ 118,974 $ 54,723
----------- ---------- ---------- ---------- ----------
Charge-offs (2,156,355) (12,629)
Recoveries 1,510
----------- ---------- ---------- ---------- ----------
Net charge-offs (2,154,845) (12,629)
Provision for medical claims receivable
losses, general 6,244,996 62,686 32,378 16,325 64,251
----------- ---------- ---------- ---------- ----------
Ending balance $ 4,307,885 $ 217,734 $ 167,677 $ 135,299 $ 118,974
=========== ========== ========== ========== ==========
Period end medical claims receivables,
net of unearned interest $ 7,381,040 $6,334,005 $3,333,830 $2,705,974 $2,379,482
=========== ========== ========== ========== ==========
Average medical claims receivables $ 9,044,262 $3,660,432 $3,239,985 $2,009,576 $1,616,832
=========== ========== ========== ========== ==========
</TABLE>
The following table sets forth an allocation of the allowance for credit
losses among categories as of December 31, 1997 and 1996. 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.
-42-
<PAGE>
ALLOCATION OF ALLOWANCE FOR CREDIT LOSSES
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------------
Percent of Percent of
Allowance Allowance
Amount by Category Amount by Category
--------- ------------ ---------- ------------------
<S> <C> <C> <C> <C>
Insurance premium
financing loans $353,765 37.2% $ 217,734 20.4%
Commercial loans 152,117 16.0% 178,298 16.7%
Installment loans 234,798 24.7% 397,353 37.2%
Real estate loans 210,129 22.1% 273,656 25.7%
-------- ----- ---------- -----
Total $950,809 100.0% $1,067,041 100.0%
======== ===== ========== =====
</TABLE>
INVESTMENT ACTIVITIES
As of December 31, 1997, $28.8 million in investment securities were
classified as available-for-sale. The investment portfolio, which was 19.0% of
the Company's earning asset base as of December 31, 1997, is being managed to
minimize interest rate risk, maintain sufficient liquidity and maximize return.
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
or held-to-maturity at December 31, 1997.
In preparation for the proposed acquisition of TexStar National Bank,
management determined that it was necessary to restructure the investment
portfolio beginning in the fourth quarter of 1997. In order to complete the
restructure, management transferred all securities classified as held-to-
maturity to the available-for-sale classification, totaling $17,370,604. The
reclassification from the held-to-maturity classification to the available-for-
sale classification will prohibit the Bank from utilizing the held-to-maturity
classification for a period time.
On February 29, 1996 the Bank's investment portfolio increased by $21.2
million as a result of the acquisition of First National Bank, Midlothian,
Texas. The securities added to the investment portfolio through the acquisition
increased the size of the investment portfolio by approximately 106%, and
closely matched the investment objectives of the Bank; therefore, no securities
were sold after the acquisition. On December 8, 1994 the Bank's investment
portfolio increased by $14.6 million as a result of the acquisition of the bank
in Whitesboro, Texas. The securities added to the investment portfolio through
the acquisition increased the size of the investment portfolio by approximately
301%. This large increase resulted in a need to restructure the investment
portfolio in an effort to address capital budgeting needs and to address the
Bank's investment objectives. As of December 31, 1997 proceeds from the
maturity of held-to-maturity securities were $5.2 million and the maturity of
available-for- sale securities were $6.2 million. 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.
-43-
<PAGE>
The securities within the available-for-sale classification had an
amortized cost of $28.6 million and an estimated market value of $28.8 million
on December 31, 1997. The unrealized gain in the available-for-sale securities
was $142,212 as of December 31, 1997. These unrealized gains are the result of
interest rate movements during 1997 and other market factors, 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.
As of December 31, 1997, the mortgage-backed securities held by the Bank
are classified as available-for-sale, and all of them are fixed rate securities.
The available-for-sale securities are carried at fair value.
The following tables describe the composition of investment securities
portfolio by major category and maturity at December 31, 1997:
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
Available-
for-Sale
-----------
<S> <C>
U.S. Treasury notes $ 4,993,751
U.S. Government agencies 18,494,687
State and County Municipal securities 3,806,271
Mortgage backed securities 442,699
Other investments 1,047,754
-----------
Total $28,785,162
===========
</TABLE>
INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
<TABLE>
<CAPTION>
Maturing or Repricing
-------------------------------------------------------------------------------------------
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years Other Securities
---------------- ---------------------- ------------------ ---------------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available-for-Sale
- ------------------
U.S. Treasury notes $ 4,993,751 5.7%
U.S. Government agencies 11,766,684 6.0% 3,345,823 6.6% $3,382,180 6.7%
Mortgage-backed
securities $ 442,699 7.4%
Municipals 608,081 5.7% 1,759,844 6.2% 1,438,346 5.9%
Other investments 1,047,754 N/A
----------- ---------- ---------- ----------
Total $17,368,516 $5,105,667 $4,820,526 $1,490,453
=========== ========== ========== ==========
</TABLE>
-44-
<PAGE>
INVESTMENT PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
U.S. U.S. Mortgage
Treasury Government Backed
Notes Agencies Municipals Securities Other Total
------------ ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Within one year $4,993,751 $11,766,684 $ 608,081 $17,368,516
One year to two years 2,345,823 710,430 3,056,253
Two years to three years 442,506 442,506
Three years to four years 1,000,000 92,941 1,092,941
Four years to five years 513,967 513,967
After five years 3,382,180 1,438,346 4,820,526
Other securities $442,699 $1,047,754 1,490,453
------------ ------------ ----------- ------------ ---------- ------------
Total $4,993,751 $18,494,687 $3,806,271 $442,699 $1,047,754 $28,785,162
============ ============ =========== ============ ========== ============
</TABLE>
DEPOSIT ACTIVITIES
Deposits are attracted through the offering of a broad variety of deposit
instruments, including checking accounts, money market accounts, regular savings
accounts, term certificate accounts (including "jumbo" certificates in
denominations of $100,000 or more), and retirement savings plans. The Company's
average balance of total deposits was $154,531,929 for the year ended December
31, 1997, representing an increase of $8,959,928 or 6.2% compared with the
average balance of total deposits for the year ended December 31, 1996. The
Company's average balance of total deposits was $145,572,001 for the year ended
December 31, 1996, representing an increase of $49,373,706 or 51.3% compared
with the average balance of total deposits for the year ended December 31, 1995.
The increases in deposits during 1997 are due to internally generated growth and
the increases in deposits during 1996 are due to both acquisitions and
internally generated growth.
The following table sets forth certain information regarding the Bank's
average deposits as of December 31, 1997 and 1996:
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------------------------- ------------------------------------------
Average Percent Average Average Percent Average
Amount of Total Rate Paid Amount of Total Rate Paid
------------ --------- ---------- ------------ --------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing demand
deposits $ 22,420,160 14.5% - $ 20,089,712 13.8% -
Interest-bearing demand 38,109,284 24.7% 2.8% 36,910,314 25.3% 2.4%
deposits
Savings deposits 7,846,458 5.1% 2.4% 8,174,212 5.6% 2.1%
Time deposits 86,156,027 55.7% 5.2% 80,397,763 55.3% 5.3%
------------ ----- --- ------------ ----- ---
Total average deposits $154,531,929 100.0% 4.4% $145,572,001 100.0% 4.3%
============ ===== === ============ ===== ===
</TABLE>
-45-
<PAGE>
As of December 31, 1997 non-brokered time deposits over $100,000
represented 15.2% of total deposits, compared with 13.0% of total deposits as of
December 31, 1996. As of December 31, 1997 jumbo certificates of deposits in
excess of $100,000 accounted for $23,492,179 of the Bank's deposits. Of this
amount, $21,719,000 had a maturity of one year or less. The Bank does not have
and does not solicit brokered deposits.
The following table sets forth the remaining maturities for time deposits
of $100,000 or more at December 31, 1997 and 1996:
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
Maturity Range December 31, 1997 December 31, 1996
-------------- ----------------- -----------------
<S> <C> <C>
Three months or less $ 9,924,000 $ 8,626,000
Three through six months 3,932,000 3,844,000
Six through twelve months 7,863,000 7,687,000
Over one year and less than two years 1,773,000 119,000
Over two years and less than three years - -
Over three years and less than four years - -
Over four years and less than five years - -
Over five years - -
----------- -----------
Total $23,492,000 $20,276,000
=========== ===========
</TABLE>
RETURN ON EQUITY AND ASSETS
The following are various ratios for the Company for the years ended
December 31, 1997 and 1996:
RETURN ON EQUITY AND ASSETS
<TABLE>
<CAPTION>
For the Year Ended December 31,
----------------------------------
1997 1996
---- ----
<S> <C> <C>
Return (loss) on average assets (2.0)% 1.0%
Return (loss) on average equity (18.7)% 9.8%
Average equity to average assets 10.6% 10.5%
</TABLE>
LIQUIDITY
The Bank's investment securities portfolio, including federal funds sold,
and its cash and due from bank deposit balances serve as the primary sources of
liquidity. At December 31, 1997, 17.8% of the Bank's interest-bearing
liabilities were in the form of time deposits of $100,000 and over.
Substantially all of such large deposits were obtained from the Bank's market
area, and none were obtained through brokers. Management believes these deposits
to be a stable source of funds. However, if a large number of these time
deposits matured at approximately the same time and were not renewed, the Bank's
liquidity could be
-46-
<PAGE>
adversely affected. Currently, the maturities of the Bank's large time deposits
are spread throughout the year, with approximately 42% maturing in the first
quarter of 1997, 17% maturing in the second quarter of 1997, 33% maturing in the
second half of 1997, and the remaining 8% maturing thereafter. The Bank monitors
those maturities in an effort to minimize any adverse effect on liquidity. The
Bank is limited through regulatory commitments from using brokered funds without
prior approval.
On February 28, 1996 the Company completed a primary and secondary offering
of its Common Stock. 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 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
National Bank, Midlothian, Texas ("First National"), through the consolidation
of First National and the Bank. In connection with the transaction, the Bank
changed its main office to the former main office of First National in
Midlothian, Texas, and operated its own former main office in Lufkin, Texas as a
branch. Effective April 18, 1996, the Bank changed the location of its main
office to Hurst, Texas, and operates its former main office in Midlothian, Texas
as a branch.
With the completion of this acquisition, the Bank increased its asset size
by approximately 42%. As of December 31, 1995 First National had total assets of
$51,253,000 and the Bank had total assets of $121,262,000. In the transaction,
a subsidiary of the Bank was first merged with and into First National's parent
holding company, First Midlothian Corporation ("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. Immediately following the merger, First National and the Bank
consolidated under the charter of the Bank. The assets and liabilities of First
National have been recorded at their fair values as of February 29, 1996.
The Company raised approximately $116,000 during 1997, $7.4 million during
1996, $1.2 million during 1995, $2.3 million during 1994, and $852,000 during
1993 through the sale, in registered offerings, private offerings and incentive
stock option exercises, of the Company's common stock. Management anticipates
that future registered and private offerings of the Company's common stock may
be used to raise additional capital, in connection with acquisitions or if the
regulatory capital requirements with which the Bank must comply necessitate the
injection of additional capital by the Company into the Bank. Failure to raise
such additional capital could adversely impact the growth of the Bank or result
in its failure to comply with applicable regulatory capital requirements, which
could necessitate a reduction in the volume of assets and deposits of the Bank.
Such reductions could adversely affect the Bank's earnings and liquidity. See
"Item 1. Business - Supervision and Regulation: Capital Adequacy Guidelines."
In September 1997, the Bank made application to become a member of the
Federal Home Loan Bank. Upon acceptance, on October 9, 1997, the Bank purchased
5,247 shares of Federal Home Loan Bank of Dallas capital stock for $524,700. As
a member, the Bank has the option of borrowing up to $10,700,000 from the
Federal Home Loan Bank, subject to a borrowing base that is determined from the
Bank's first mortgage loans and Federal Home Loan Bank stock.
-47-
<PAGE>
The payment of dividends by the Bank is subject to the provisions of 12
U.S.C. 60 which provides that no dividend may be declared or paid without the
prior approval of the Office of the Comptroller of the Currency (the "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 2 years. The Bank incurred an accumulated
loss for fiscal years 1997 and 1996 in the amount of $1,544,756. Under 12 U.S.C.
60 the Bank will not be able to declare a dividend, without the prior approval
of the OCC, until it has profits in excess of $1,544,756. No assurance can be
given if and when the Bank will attain such level of profitability.
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 "Item 1.
Business - Supervision and Regulation."
CAPITAL RESOURCES
The Company's shareholders' equity at December 31, 1997 was $15.9 million,
compared with $19.2 million at December 31, 1996. The decrease in equity is the
result of management's decision to charge-off certain medical claims receivables
and to make provisions for other receivables outstanding over 120 days, due to
concerns regarding the collectibility of such receivables. Management's fourth
quarter and year-end evaluation of the Company's medical claims factoring
portfolio indicated that at December 31, 1997 approximately $6,216,651 in
medical claims receivables were outstanding over 120 days. Consequently,
management determined that charge-offs of approximately $2,033,587 of the
$6,216,651 were warranted in the fourth quarter as well as a provision for an
additional $3,686,409 of such receivables. Due to the above, management
determined that the goodwill of $1,151,111 relating to medical claims factoring
division was impaired, and recognized a valuation allowance for the entire
amount during the fourth quarter of 1997. 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 and a leverage ratio of 3%. 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), Tier 2 (supplementary) capital to risk-
weighted assets, and leverage ratio for the Bank were 9.92%, 11.28%, 6.24%,
respectively, at December 31, 1997, and 11.10%, 12.29%, and 7.02%, respectively,
at December 31, 1996. The Bank is currently, and expects to continue to be, in
compliance with these guidelines. See "Item 1. Business -Supervision and
Regulation: Capital Adequacy Guidelines."
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 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.
-48-
<PAGE>
The following table sets forth an analysis of the Bank's capital ratios:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
Minimum Well-
Capital Capitalized
December 31, Ratios Ratios
-------------------------------------------------
1997 1996
------------- -------------
<S> <C> <C> <C> <C>
Tier I risk-based capital $ 10,277,000 $ 12,013,000
Tier II risk-based capital 1,402,000 1,285,000
Total capital 11,679,000 13,298,000
Risk-weighted assets 103,559,000 108,208,000
Capital ratios:
Tier I risk-based capital 9.92% 11.10% 4.00% 6.00%
Tier II risk-based capital 11.28 12.29 8.00 10.00
Leverage ratio 6.24 7.02 4.00 5.00
</TABLE>
STOCKHOLDERS' RIGHTS AGREEMENT:
Pursuant to the Rights Agreement dated June 17, 1997 between the Company and
Securities Transfer Corporation, as rights agent, the Company declared a
dividend of one common stock purchase right (a "Right") for each outstanding
share of common stock, $0.01 par value, of the Company (the "Common Stock
Purchase Plan") 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 Company's Board of
Directors. 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.
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
-49-
<PAGE>
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 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"
("SFAS 131"). SFAS 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. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
SFAS 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.
SFAS 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.
YEAR 2000 SAFETY AND SOUNDNESS
Year 2000 guidelines on the risks posed to financial institutions by the Year
2000 problem was issued by the Federal Financial Institutions Examination
Council ("FFIEC"). The guidance underscores that Year 2000 preparation is not
only an information systems issue, according to the FFIEC, but also an
enterprise-wide challenge that must be addressed at the highest level of a
financial institution.
The guidance sets out the responsibilities of senior management and boards of
directors in managing their Year 2000 projects. Among the responsibilities of
institution managers and directors is that of managing the internal and external
risks presented by providers of data-processing products and services, business
partners, counterparties, major loan customers, correspondent banks, and
institutions or entities in which the Bank owns securities.
-50-
<PAGE>
Under the guidance, senior management must provide the board of directors
with status reports, at least quarterly, on efforts to reach Year 2000 goals
both internally and by the institution's major vendors. Senior management and
directors must allocate sufficient resources to ensure that high priority is
given to seeing that remediation plans are fulfilled, and that the project
receives the quality personnel and timely support it requires.
A Year 2000 management committee has been formed by the Company to identify
potential problems associated with the turn of the century and to develop
resolutions to these problems. Renovation activities such as hardware and
software upgrades, system replacements, and vendor certifications are
anticipated to be completed by the fourth quarter of 1998. Current costs and
estimated future expenditures do not appear to be material and are expected to
have negligible effects on the Company's results of operations, liquidity and
capital resources.
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 financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. The primary
effect of inflation on the operations of the Company is reflected in increased
operating costs. Unlike most industrial companies, virtually all of the assets
and liabilities of a financial institution are monetary in nature. As a result,
changes in interest rates have a more significant effect on the performance of a
financial institution than do the effects of changes in the general rate of
inflation and changes in prices. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Interest rates are highly sensitive to many factors which are beyond the control
of the Bank, including the influence of domestic and foreign economic conditions
and the monetary and fiscal policies of the United States government and federal
agencies, particularly the 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 Bank and its results of operations are not predictable.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank 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.
As of December 31, 1997 and 1996, loans to director-related companies totaled
approximately $479,000 and $398,000, respectively.
ACQUISITION OF TEXSTAR
On October 10, 1997 the Company and Surety Bank entered into an agreement to
acquire TexStar National Bank ("TexStar"), located in Universal 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.
-51-
<PAGE>
As of December 31, 1997, TexStar had total assets of $71,119,150, total deposits
of $64,934,028, total loans of $32,559,659, total equity of $5,787,838 and net
income for the twelve months ended December 31, 1997 of $584,633. 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 $241,000,000. This will represent an approximate 40.4%
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.
INSURANCE PREMIUM FINANCE PURCHASE AGREEMENT
On March 17, 1998 the Company announced that the Bank entered into an agreement
with CAA Premium Finance Company, L.L.C. ("CAA") for the purchase of insurance
premium finance ("IPF") loans. Pursuant to the five-year agreement, CAA agreed
to sell all of its IPF loans to the Surety Premium Finance division of Surety
Bank ("Surety Premium") on an exclusive basis. The agreement provides for the
sale by CAA to Surety Premium of a minimum of $4,000,000 in IPF loans per year
($20,000,000 over the five-year term of the agreement). Surety Premium has
agreed to purchase CAA's IPF loans which are in compliance with Surety Premium's
underwriting standards.
-52-
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company faces market risk to the extent that the fair values of its
financial instruments are affected by changes in interest rates. The
asset/liability management discipline as applied to the Company seeks to limit
the volatility, to the extent possible, of both earnings and the fair value of
equity that can result from changes in market interest rates. This is
accomplished by limiting the maturities of fixed rate investments, loans and
deposits; matching fixed rate assets and liabilities to the extent possible; and
optimizing the mix of non-interest fee and net interest income. As can be seen
from the table contained in the Interest Rate Sensitivity Management section,
the Company's asset/liability mix is asset sensitive under one year with a
cumulative gap of $3,830,536 or 2.2%. As such, the Company is susceptible to
changes in interest rates, with a increasing net interest margin and fair value
of equity experienced in periods of rising interest rates, correspondingly, a
decrease in the net interest margin and fair value of equity in periods of
declining interest rates.
The following table presents the Company's projected change in fair value of
equity for various rate shock levels as of December 31, 1997 after one year.
All market risk sensitive instruments presented in this table are available-for-
sale. The Company has no trading or held-to-maturity securities.
<TABLE>
<CAPTION>
Change in Basis Points Fair Value % Change
-----------------------------------------------
<S> <C> <C>
-300 $15,721,494 (1.0)%
-200 $15,773,440 (0.7)%
-100 $15,825,387 (0.3)%
-50 $15,851,360 (0.2)%
0 $15,877,333 0.0 %
+50 $15,903,306 0.2 %
+100 $15,929,279 0.3 %
+200 $15,981,226 0.7 %
+300 $16,033,177 1.0 %
</TABLE>
The preceding table indicates that at December 31, 1997, in the event of a
sudden and sustained decrease in prevailing market interest rates, the Company's
fair value of equity would be expected to decline. In the event of a sudden and
sustained increase in prevailing market interest rates, the Company's fair value
of equity would be expected to increase.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions including relative levels of market interest rates
and repricing opportunities of loans which are adjustable and should not be
relied upon as indicative of actual expected results. Furthermore, the
computations do not contemplate any actions managment could undertake in
response to such changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in the
computation of fair value of equity. Actual values may differ from the
projections presented, should market conditions vary from the assumptions used
in the calculation of fair value of equity.
-53-
<PAGE>
Emphasis will continue to be placed on granting loans with short maturities
and floating rates where posssible. This strategy increases liquidity and is
necessitated by the continued shortening and more frequent repricing
opportuinities of the Company's funding sources. Management will continue to
monitor the Company's interest rate risk position to minimize adverse impact of
earnings caused by changes in interest rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required to be included in
this Item 8 are set forth in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has had no changes in accountants or disagreements with its
accountants on accounting and disclosure to report under this Item 9.
-54-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1998 annual meeting for the fiscal year ended
December 31, 1997, to be filed no later than April 30, 1998.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1998 annual meeting for the fiscal year ended
December 31, 1997, to be filed no later than April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1998 annual meeting for the fiscal year ended
December 31, 1997, to be filed no later than April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1998 annual meeting for the fiscal year ended
December 31, 1997, to be filed no later than April 30, 1998.
-55-
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS PART OF REPORT.
<TABLE>
<CAPTION>
<S> <C> <C>
1. FINANCIAL STATEMENTS PAGE
The following financial statements of the Company required to be included
in Item 8 are filed under Item 14 at the page indicated:
Report of Independent Accountants F-1
Consolidated Balance Sheets at December 31, 1997 and 1996 F-2
Consolidated Statements of Operations for the years ended December 31, 1997, F-3
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended December F-4
31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31, F-5
1997, 1996 and 1995
Notes to Consolidated Financial Statements F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES
No schedules are required because they are inapplicable or the information
is otherwise shown in the financial statements or notes thereto.
3. EXHIBITS
<TABLE>
<C> <S>
2.01 Reorganization Agreement by and between Bancwell Financial Corp.; Dan W. Brent, Jody Pearson
and Joe M. Pearson; Texas Bank, N.A.; and Surety Capital Corporation dated July 23, 1992; and
Agreement to Merge Bank of East Texas with and into Texas Bank, N.A. under the Charter of
Texas Bank, N.A. and under the Title of Texas Bank, N.A., dated July 23, 1992. /(4)/
2.02 Reorganization Agreement by and between Newell Bancshares, Inc.; Dan W. Brent, Jody Pearson
and Joe M. Pearson; Texas Bank, N.A.; and Surety Capital Corporation dated July 23, 1992; and
Agreement to Merge First State Bank with and into Texas Bank, N.A. under the Charter of Texas
Bank, N.A. and under the Title of Texas Bank, N.A., dated July 23, 1992. /(4)/
2.03 Reorganization Agreement by and between The Farmers Guaranty State Bank of Kennard; Dr.
Frank A. Smith, III; Surety Bank, National Association; and Surety Capital Corporation, dated
February 4, 1994; and Agreement to Merge The Farmers Guaranty State Bank of Kennard with and
into Surety Bank, National Association under the Charter of Surety Bank, National Association
and under the title of Surety Bank, National Association, dated February 4, 1994. /(6)/
</TABLE>
-56-
<PAGE>
<TABLE>
<S> <C>
2.04 Reorganization Agreement by and between First National Bank; Lloyd W. Butts, D. C. Degan,
Norman Denton, Murriel Gilbreath, Robert S. Light, and Joe B. Turner, Jr. (the "Shareholders");
Surety Bank, National Association; and Surety Capital Corporation, dated May 24, 1994; and
Agreement to Merge between Surety Bank, National Association, First National Bank and joined
in by the Shareholders and Surety Capital Corporation, dated May 24, 1994. /(7)/
2.05 Reorganization Agreement by and between First Midlothian Corporation; First National Bank;
certain individual shareholders and directors of First Midlothian Corporation and First National
Bank; Surety Bank, National Association; and Surety Capital Corporation, dated October 17, 1995.
/(10)/
2.06 Amendment Number One to Reorganization Agreement, dated January 16, 1996. /(11)/
2.07 Amendment Number Two to Reorganization Agreement, dated February 29, 1996. /(11)/
2.08 Agreement to Merge SCC Acquisition, Inc. with and into First Midlothian Corporation Under the
Charter of First Midlothian Corporation and Under the Title of First Midlothian Corporation
between First Midlothian Corporation and SCC Acquisition, Inc., and joined in by Surety Bank,
National Association and the directors of First Midlothian Corporation and First National Bank,
dated October 17, 1995. /(10)/
2.09 Amendment Number One to Agreement to Merge SCC Acquisition, Inc. with and into First
Midlothian Corporation Under the Charter of First Midlothian Corporation and Under the Title of
First Midlothian Corporation, dated February 29, 1996. /(11)/
2.10 Agreement to Consolidate First National Bank and Surety Bank, National Association under the
Charter of Surety Bank, National Association and Under the Title of Surety Bank, National
Association between Surety Bank, National Association and First National Bank, and joined in by
SCC Acquisition, Inc. and Surety Capital Corporation, dated January 16, 1996. /(10)/
2.11 Agreement and Plan of Reorganization by and among Surety Bank, National Association, TexStar
National Bank, Surety Capital Corporation, and certain shareholders of TexStar National Bank,
dated as of October 10, 1997; and Agreement to Merge TexStar National Bank with and into
Surety Bank, National Association Under the Charter of Surety Bank, National Association and
Under the Title of Surety Bank, National Association, between Surety Bank, National Association
and TexStar National Bank and joined in by Surety Capital Corporation and certain shareholders
of TexStar National Bank, dated as of October 10, 1997. *
3.01 Certificate of Incorporation. /(1)/
3.02 Certificate of Amendment of Certificate of Incorporation, as filed with the Delaware Secretary of
State on April 8, 1987. /(2)/
3.03 Certificate of Amendment to the 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, as filed with the Delaware
Secretary of State on January 31, 1992. /(5)/
</TABLE>
-57-
<PAGE>
<TABLE>
<S> <C>
3.06 Certificate of Amendment to the Certificate of Incorporation, as filed with Delaware Secretary of
State on June 14, 1993. /(6)/
3.07 Form of Common Stock certificate (specimen). /(6)/
3.08 Restated Bylaws of the Company. /(8)/
4.01 Rights Agreement between Surety Capital Corporation and Securities Transfer Corporation as
Rights Agent, dated as of June 17, 1997 /(14)/; as amended by Amendment No. 1 to Rights Agreement
of Surety Capital Corporation, dated as of March 10, 1998. *
10.01 Pledge Agreement by and between Surety Capital Corporation and Overton Bank and Trust, N.A.,
dated December 9, 1994. /(9)/
10.02 Guaranty Agreement entered into by C. Jack Bean with Overton Bank and Trust, N.A. with respect
to the repayment by Surety Capital Corporation of loan from Overton Bank and Trust, N.A., dated
December 9, 1994. /(9)/
10.03 Uniform Commercial Code Financing Statement UCC-1 completed with respect to Overton Bank
& Trust, N.A.'s security interest in the Shares of Stock of Surety Bank, National Association
owned by Surety Capital Corporation. /(9)/
10.04 Promissory Note in the original principal amount of $500,000 with Surety Capital Corporation as
borrower and Overton Bank and Trust, N.A. as lender, dated June 23, 1995 with a maturity date
of January 23, 1996; and related Security Agreement (Collateral Pledge Agreement) dated June
23, 1995. /(10)/
10.05 Surety Capital Corporation 1988 Incentive Stock Option Plan. /(5)/
10.06 Form of Change in Control Agreement entered into between Surety Capital Corporation and C.
Jack Bean, Bobby W. Hackler and G. M. Heinzelmann, III, dated August 16, 1994. /(8)/
10.07 Lease agreement between Precinct Campus, Inc., as landlord, and Surety Capital Corporation, as
tenant, regarding offices located in Hurst, Texas, dated February 14, 1994. /(6)/
10.08 Surety Capital Corporation 1995 Incentive Stock Option Plan. /(8)/
10.09 Form of Amended and Restated Executive Deferred Compensation Agreements and related
Adoption Agreements with Designation of Beneficiaries entered into between Surety Capital
Corporation and B. J Curley, Bobby W. Hackler and G. M. Heinzelmann, III, dated August 29,
1997. *
10.10 Form of Amended and Restated Letter Agreements between Surety Capital Corporation and B. J.
Curley, Bobby W. Hackler and G. M. Heinzelmann, III regarding provision by Surety Capital
Corporation of term life insurance coverage, dated August 29, 1997. *
10.11 Change in Control Agreement entered into between Surety Capital Corporation and B. J. Curley,
dated February 9, 1996. /(12)/
</TABLE>
-58-
<PAGE>
<TABLE>
<S> <C>
10.12 Asset Purchase Agreement by and among Surety Bank, National Association, Surety Capital
Corporation, Providers Funding Corporation, and Lawrence C. Blanton, Barry T. Carroll and Bill
M. Ward; Employment, Non-Competition and Confidentiality Agreement by and between Surety
Bank, National Association, Surety Capital Corporation, and Barry T. Carroll; Non-Competition
and Confidentiality Agreement by and between Surety Bank, National Association, Surety Capital
Corporation, and Lawrence C. Blanton; and Non-Competition and Confidentiality Agreement by
and between Surety Bank, National Association, Surety Capital Corporation, and Bill M. Ward;
all dated March 15, 1996. /(12)/
10.13 Surety Capital Corporation Amended and Restated Stock Option Plan for Directors, and Form of
Stock Option Agreement. /(13)/
10.14 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Officers and Key
Employees, and Form of Stock Option Agreement. *
10.15 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors,
and Form of Stock Option Agreement. *
10.16 Post Retirement Services Agreement Between Surety Capital Corporation and C. Jack Bean, dated
January 20, 1998. *
10.17 Surety Capital Corporation 1998 Incentive Stock Option Plan. *
21 Subsidiaries of the Registrant. *
23 Consent of Coopers & Lybrand L.L.P. *
24 Special Power of Attorney. *
27 Financial Data Schedule. *
</TABLE>
<TABLE>
<S> <C>
/(1)/ Filed with Registration Statement No. 33-1983 on Form S-1 and incorporated by reference herein.
/(2)/ Filed with the Company's Form 10-K dated October 31, 1987 and incorporated by reference herein.
/(3)/ Filed with the Company's Form 10-Q for the quarter ended April 30, 1988 and incorporated by
reference herein.
/(4)/ Filed with Registration Statement No. 33-44893 on Form S-3 and incorporated by reference herein.
/(5)/ Filed with the Company's Form 10-K dated December 31, 1991 and incorporated by reference
herein.
/(6)/ Filed with the Company's Form 10-K dated December 31, 1993 and incorporated by reference
herein.
/(7)/ Filed with the Company's Form 8-K dated December 8, 1994 and incorporated by reference herein.
/(8)/ Filed with the Company's Form 10-K dated December 31, 1994 and incorporated by reference
herein.
/(9)/ Filed with Registration Statement No. 33-89264 on Form S-2 and incorporated by reference herein.
</TABLE>
-59-
<PAGE>
<TABLE>
<S> <C>
/(10)/ Filed with Registration Statement No. 33-64789 on Form S-1 and incorporated by reference herein.
/(11)/ Filed with the Company's Form 8-K dated February 29, 1996 and incorporated by reference herein.
/(12)/ Filed with the Company's Form 10-K dated December 31, 1995 and incorporated by reference
herein.
/(13)/ Filed with the Company's Form 10-K dated December 31, 1996 and incorporated by reference
herein.
/(14)/ Filed with the Company's Form 8-K dated June 17, 1997 and incorporated by reference herein.
* Filed herewith.
</TABLE>
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the fourth quarter
of 1997.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K.
The exhibits listed in Part IV, Item 14(a)(3) of this report, and not
incorporated by reference to a separate file, are included after "Signatures,"
below.
(d) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X. (INCLUDED UNDER
PART IV, ITEM 14(a)(2)).
All schedules are omitted because they are not required, inapplicable or
the information is otherwise shown in the financial statements or notes thereto.
-60-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SURETY CAPITAL CORPORATION
Date: March 26, 1998 By: /s/ C. Jack Bean
-----------------
C. Jack Bean, Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated on this _____ day of March, 1998.
<TABLE>
<CAPTION>
Signature Capacity
--------- --------
<S> <C>
/s/ C. Jack Bean Chairman of the Board, Chief Executive Officer
- -------------------------------------------- and Director (Principal Executive Officer)
C. Jack Bean
/s/ G. M. Heinzelmann, III President and Director
- --------------------------------------------
G. M. Heinzelmann, III
/s/ Bobby W. Hackler Vice Chairman of the Board, Chief Operating
- -------------------------------------------- Officer and Director
Bobby W. Hackler
/s/ B. J. Curley Vice President, Chief Financial Officer and
- -------------------------------------------- Secretary (Principal Financial Officer and Chief
B. J. Curley Accounting Officer)
* Director
- --------------------------------------------
William B. Byrd
* Director
- --------------------------------------------
Joseph S. Hardin
* Director
- --------------------------------------------
Margaret E. Holland
</TABLE>
-61-
<PAGE>
* Director
- --------------------------------------------
Michael L. Milam
* Director
- --------------------------------------------
Garrett Morris
* Director
- --------------------------------------------
Cullen W. Turner
* By: /s/ C. Jack Bean
-------------------------------------
C. Jack Bean, as Attorney-in-Fact
for each of the persons indicated
-62-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------------------------------------------------------------------------------------------------------
<C> <S>
2.11 Agreement and Plan of Reorganization by and among Surety Bank, National Association,
TexStar National Bank, Surety Capital Corporation, and certain shareholders of TexStar National
Bank, dated as of October 10, 1997; and Agreement to Merge TexStar National Bank with and
into Surety Bank, National Association Under the Charter of Surety Bank, National Association
and Under the Title of Surety Bank, National Association, between Surety Bank, National
Association and TexStar National Bank and joined in by Surety Capital Corporation and certain
shareholders of TexStar National Bank, dated as of October 10, 1997
4.01 Amendment No. 1 to Rights Agreement of Surety Capital Corporation, dated as of March 10,
1998
10.09 Form of Amended and Restated Executive Deferred Compensation Agreements and related
Adoption Agreements with Designation of Beneficiaries entered into between Surety Capital
Corporation and B. J Curley, Bobby W. Hackler and G. M. Heinzelmann, III, dated August 29,
1997
10.10 Form of Amended and Restated Letter Agreements between Surety Capital Corporation and B.
J. Curley, Bobby W. Hackler and G. M. Heinzelmann, III regarding provision by Surety Capital
Corporation of term life insurance coverage, dated August 29, 1997
10.14 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Officers and Key
Employees, and Form of Stock Option Agreement
10.15 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors,
and Form of Stock Option Agreement
10.16 Post Retirement Services Agreement Between Surety Capital Corporation and C. Jack Bean,
dated January 20, 1998
10.17 Surety Capital Corporation 1998 Incentive Stock Option Plan
21 Subsidiaries of the Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Special Power of Attorney
27 Financial Data Schedule
</TABLE>
-63-
<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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Fort Worth, Texas
February 4, 1998 except
as to the information
presented in the last
paragraph of Note 17,
for which the date is
March 17, 1998
F-1
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------- ---------------
<S> <C> <C>
Assets:
Cash and due from banks $ 6,204,177 $ 6,094,457
Federal funds sold 22,257,266 16,772,000
Interest bearing deposits in financial institutions 94,939 285,842
Investment securities:
Available-for-sale 28,785,162 15,701,435
Held-to-maturity -- 22,561,270
------------ ------------
Total investment securities 28,785,162 38,262,705
Loans 100,846,310 99,319,430
Less: Unearned interest (2,212,391) (2,501,747)
Allowance for credit losses (950,809) (1,067,041)
------------ ------------
Loans, net 97,683,110 95,750,642
Medical claims receivables, net 3,073,155 6,116,272
Premises and equipment, net 3,760,550 3,970,193
Accrued interest receivable 908,487 1,083,336
Other real estate and repossessed assets 158,271 738,198
Deferred tax asset 1,622,394 --
Other assets 2,381,887 1,127,052
Excess of cost over fair value of net assets acquired, net of
accumulated amortization of $2,377,636 and $719,288
at December 31, 1997 and 1996, respectively (Note 6) 4,722,220 6,238,613
------------ ------------
Total assets $171,651,618 $176,439,310
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 22,185,320 $ 23,878,744
Savings, NOW and money markets 44,477,424 48,372,642
Time deposits, $100,000 and over 23,492,179 20,276,235
Other time deposits 64,386,569 63,162,720
------------ ------------
Total deposits 154,541,492 155,690,341
Accrued interest payable and other liabilities 1,232,793 1,518,417
------------ ------------
Total liabilities 155,774,285 157,208,758
------------ -------------
Commitments and contingent liabilities (Notes 12 & 17)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued at December 31, 1997 and 1996 -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
5,790,171 and 5,763,737 shares issued at December 31, 1997
and 1996, respectively, and 5,755,882 and 5,748,119
outstanding at December 31, 1997 and 1996, respectively 57,902 57,637
Additional paid-in capital 16,867,777 16,752,003
Retained (deficit) earnings (1,024,435) 2,509,771
Stock rights issuable 57,902 --
Treasury stock, 34,289 and 15,618 shares carried at cost at
December 31, 1997 and 1996, respectively (172,828) (74,539)
Unrealized gain/(loss) on available-for-sale securities, net of tax 91,015 (14,320)
------------ ------------
Total shareholders' equity 15,877,333 19,230,552
-------------- ---------------
Total liabilities and shareholders' equity $171,651,618 $176,439,310
============== ===============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Interest income:
Commercial and real estate loans $ 4,917,092 $ 4,539,602 $3,113,257
Consumer loans 1,266,732 1,444,189 1,198,632
Insurance premium financing 4,935,716 3,563,467 2,739,060
Medical claims receivable factoring 1,477,510 1,232,463 550,867
Federal funds sold 516,340 1,078,618 657,809
Investment securities
Taxable 1,984,533 2,165,301 905,046
Tax-exempt 315,994 324,605 268,702
Interest bearing deposits 18,768 42,117 101,408
----------- ----------- ----------
Total interest income 15,432,685 14,390,362 9,534,781
----------- ----------- ----------
Interest expense:
Savings, NOW and money market 1,236,139 1,056,884 805,514
Time deposits, $100,000 and over 1,144,071 1,106,754 792,098
Other time deposits 3,369,588 3,191,439 1,957,288
Other interest expense -- 6,612 122,579
----------- ----------- ----------
Total interest expense 5,749,798 5,361,689 3,677,479
----------- ----------- ----------
Net interest income before provision 9,682,887 9,028,673 5,857,302
Provision for credit losses on loans 140,000 72,314 27,622
Provision for medical claims receivables losses 6,244,996 62,686 32,378
----------- ----------- ----------
Net interest income 3,297,891 8,893,673 5,797,302
----------- ----------- ----------
Noninterest income 2,538,918 1,877,454 1,419,067
----------- ----------- ----------
Noninterest expense:
Salaries and employee benefits 4,748,097 4,244,874 2,923,118
Occupancy and equipment 1,517,662 1,244,551 907,286
General and administrative 3,649,136 2,645,587 2,048,148
Impairment of long lived assets 1,198,288 -- --
----------- ----------- ----------
Total noninterest expense 11,113,183 8,135,012 5,878,552
----------- ----------- ----------
(Loss) income before income taxes (5,276,374) 2,636,115 1,337,817
Income tax (benefit) expense:
Current -- 938,128 263,007
Deferred (1,800,070) -- 187,924
----------- ----------- ----------
Net (loss) income $(3,476,304) $ 1,697,987 $ 886,886
=========== =========== ==========
Basic (loss) earnings per share of common stock $ (.60) $ .32 $ .27
=========== =========== ==========
Weighted average shares outstanding 5,751,847 5,389,366 3,279,448
=========== ============ ==========
Diluted (loss) earnings per share of common stock $(.60) $.31 $.26
=========== ============ ==========
Weighted average shares outstanding
and common stock equivalents 5,990,815 5,437,661 3,441,448
=========== ============ ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain/
Common Stock (Loss) on
-------------------- Additional Retained Stock Available-
Par Paid-in (Deficit)/ Rights Treasury for-Sale Total
Shares Value Capital Earnings Issuable Stock Securities Equity
-------------------- ---------- ---------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 3,040,829 $30,408 $ 8,113,214 $ (75,102) - - $ (2,839) $ 8,065,681
1994
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/(gain) 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/(loss) 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
--------- ------- ------------ ------------ ------- --------- -------- -----------
Stock rights issuable (57,902) $57,902
Purchase of Treasury Stock (98,289) (98,289)
Net loss (3,476,304) (3,476,304)
Exercise of stock options 26,434 265 115,774 116,039
Change in unrealized
gain/(loss) on available-
for-sale securities,
net of tax of $59,251 105,335 105,335
--------- ------- ------------ ------------ ------- --------- -------- -----------
Balance at December 31,
1997 5,790,171 $57,902 $16,867,777 $(1,024,435) $57,902 $(172,828) $ 91,015 $15,877,333
========= ======= ============ ============ ======= ========= ======== ===========
</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 years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1997 1996 1995
---------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (3,476,304) $ 1,697,987 $ 886,886
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Provision for losses 6,384,996 135,000 60,000
Impairment of long lived assets 1,198,288
Depreciation 673,362 573,745 500,725
Amortization of intangible assets 506,172 359,717 184,332
Net gain on sale of available-for-sale securities (173,361)
Net loss (gain) on sale or disposal of assets 4,758 (22,879) (8,477)
Deferred income taxes (1,800,070)
Changes in assets and liabilities:
Unearned interest on loans (289,356) 655,342 382,618
Accrued interest receivable 174,849 (302,305) (157,294)
Other assets (1,288,718) 317,230 (196,209)
Accrued interest payable and other liabilities (167,199) (101,725) 411,209
------------ ------------ ------------
Net cash provided by operating activities 1,747,417 3,312,112 2,063,790
------------ ------------ ------------
Cash flows from investing activities:
Net increase in loans (2,002,404) (15,070,139) (1,486,861)
Payments received on purchased medical claims receivables 18,633,244 14,229,677 15,716,784
Purchases of medical claims receivables (21,835,125) (17,480,467) (16,688,775)
Purchases of available-for-sale securities (14,223,479) (7,239,958) (7,356,633)
Proceeds from sales of available-for-sale securities 12,680,593 4,736,638
Proceeds from maturities of available-for-sale securities 6,167,712 909,492 2,670,121
Purchases of held-to-maturity securities (3,081,744) (7,048,483)
Proceeds from maturities of held-to-maturity securities 5,190,666 15,515,641 2,808,990
Purchases of interest bearing deposits in financial institutions (99,081)
Proceeds from maturities of interest bearing deposits in
financial institutions 190,903 1,034,697 576,972
Purchases of bank premises and equipment (604,999) (518,010) (609,135)
Proceeds from sales of bank premises and equipment 136,898 4,437 6,000
Proceeds from sale of other real estate and repossessed assets 644,659 428,217 507,208
Net cash acquired in acquisitions 3,731,462 15,370,125
------------ ------------ ------------
Net cash provided by (used in) investing activities 4,978,668 (7,536,695) 9,103,870
------------ ------------ ------------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,148,849) (3,145,274) 1,032,815
Principal payments on note payable (375,000) (1,375,000)
Purchase of treasury stock (98,289) (23,709) (50,830)
Exercise of stock options 116,039 23,712 50,831
Proceeds from the sale of stock 7,394,293 1,197,182
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,131,099) 3,874,022 854,998
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,594,986 (350,561) 12,022,658
Beginning cash and cash equivalents 22,866,457 23,217,018 11,194,360
------------ ------------ ------------
Ending cash and cash equivalents $ 28,461,443 $ 22,866,457 $ 23,217,018
============ ============ ============
</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 years ended December 31, 1997, 1996 and 1995
(continued)
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Supplemental disclosure:
Cash paid during the year for interest $ 5,821,868 $ 5,190,521 $ 3,421,225
Cash paid during the year for federal income taxes $ 995,000 $ 545,000 $ 22,733
Supplemental schedule of noncash investing and financing
activities:
Transfer of held-to-maturity to available-for-sale
investment securities $17,370,604
Transfers of repossessed collateral to other assets $ 576,329 $ 752,648 $ 457,483
Additions to loans to facilitate the sale of OREO and
other assets $ 357,037 $ 212,715
Declaration of stock rights dividend $ 57,902
Supplemental schedule of investing activities:
Interest bearing deposits in financial institutions $ 274,242
Investment securities 21,214,629
Loans, net 18,476,948 $ 875,159
Premises and equipment, net 1,270,401 273,677
Other assets 959,648 6,569
Excess of cost over fair value of net assets acquired 3,939,773 151,365
Deposits (49,237,113) (16,538,565)
Other liabilities (629,990) (138,330)
----------- ------------ ------------
Net cash acquired in acquisitions $ (3,731,462) $(15,370,125)
=========== ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
---------------------
The accompanying consolidated financial statements include the accounts of
the Company and its 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
---------------------
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 held-to-maturity or trading as of
December 31, 1997, and no securities classified as trading as of December
31, 1996. The cost of securities sold is based on the specific
identification method.
Loans, Medical Claims, and Allowance for Credit Losses
-------------------------------------------------------
Loans and medical claims receivables 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. Origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the related
receivable. Loans and medical claims 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 and a medical claim are 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 or receivable
balance when due, according to the contracted terms of the loan agreement
or the claim receivable. The evaluations take into consideration such
factors as changes in the nature and volume of the loan and medical claims
portfolios, overall portfolio quality, review of specific problem loans or
medical claims, and current economic conditions that may affect the
borrower's ability to pay or the likelihood of collection. The measurement
of impaired receivables 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 and medical claims are charged against the allowance for credit
losses when management believes that the collectibility of the receivable
is unlikely.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income subsequently recognized only to the
extent cash payments are received. The fees on medical claims are recorded
into income as the claims are collected.
F-7
<PAGE>
2. Summary of Significant Accounting Policies, continued:
------------------------------------------
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
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.
Earnings Per Share
------------------
For the year ended December 31, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
This Statement requires the disclosure of basic earnings per share using
the weighted average number of shares outstanding during the period. It
also requires disclosure of diluted earnings per share which uses the
weighted average number of shares outstanding during the period plus
additional shares that would be issued upon exercise of all outstanding
stock options, as computed by the treasury method. As required by this
Statement, all prior period earnings per share amounts have been restated
to conform to the method prescribed by the Statement.
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 (using undiscounted cash flows) 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.
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.
F-8
<PAGE>
2. Summary of Significant Accounting Policies, continued:
------------------------------------------
Reclassification
----------------
Certain amounts in the December 31, 1996 financial statements have bee
reclassified to conform to the presentation adopted for the year ended
December 31, 1997. These reclassifications had no effect on net income, total
assets, total liabilities, or shareholders' equity as previously reported.
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 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"
("SFAS 131"). SFAS 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. SFAS 131 also establishes standards for related disclosures
about products and services, geographic areas, and major customers.
SFAS 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.
SFAS 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.
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.
F-9
<PAGE>
3. Acquisitions, continued:
-----------------------
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. 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 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 Midlothian 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 were 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.
PROVIDERS FUNDING CORPORATION
On March 15, 1996, the Bank completed the acquisition of Providers Funding
Corporation ("PFC"), a 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. 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 purchase
of PFC resulted in cost in excess of net assets acquired amounting to
$1,338,364. During the fourth quarter of 1997, management determined that the
value of the goodwill, certain fixed assets, and the noncompete agreements of
PFC were impaired. The Company recognized the impairment for the unamortized
goodwill and noncompete agreements of $1,151,111, and $47,177 for the fixed
assets.
F-10
<PAGE>
4. Investment Securities:
----------------------
Investment securities consisted of the following at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
December 31, 1997: Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE:
U.S. Treasury $ 4,994,786 $ 1,035 $4,993,751
Obligations of other U.S.
Government agencies and
corporations 18,448,670 $ 56,870 10,853 18,494,687
State and county municipals 3,714,719 92,030 478 3,806,271
Mortgage-backed securities 437,021 5,678 442,699
Other securities 1,047,754 1,047,754
----------- -------- ---------- -----------
Total available-for-sale $28,642,950 $154,578 $ 12,366 $28,785,162
=========== ======== ========== ===========
December 31, 1996: Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- --------- -----------
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 523,054 523,054
----------- -------- ---------- -----------
Total available-for-sale $15,723,811 $ 58,919 $ 81,295 $15,701,435
=========== ======== ========== ===========
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>
The amortized cost and estimated market value of investment securities at
December 31, 1997 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
F-11
<PAGE>
4. Investment Securities, continued:
---------------------------------
Estimated
December 31, 1997: Amortized Fair
Cost Value
----------- -----------
AVAILABLE-FOR-SALE:
Due within one year $17,353,497 $17,368,516
Due after one year through five years 5,042,584 5,105,667
Due after five years through ten years 4,762,094 4,820,526
Mortgage-backed securities 437,021 442,699
Other securities 1,047,754 1,047,754
----------- -----------
Total available-for-sale $28,642,950 $28,785,162
=========== ===========
In anticipation of the proposed acquisition of TexStar National Bank,
management determined that it was necessary to restructure the investment
portfolio beginning in the fourth quarter of 1997. In order to complete the
restructure, management transferred all securities classified as held-to-
maturity to the available-for-sale classification. The amount transferred
from the held-to-maturity classification to the available-for-sale
classification as of December 31, 1997 was $17,370,604 with a net unrealized
gain of $142,212. The reclassification from the held-to-maturity
classification to the available-for-sale classification will prohibit the
Bank from utilizing the held-to-maturity classification for a period of time.
Proceeds from sales of available-for-sale investment securities during the
year ended December 31, 1997 were $12,680,593 with gross recognized gains of
$180,978 and gross recognized losses of $7,613. 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.
At December 31, 1997 and 1996 the carrying values of Federal Reserve Bank
stock was $446,250, and $446,250, 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, 1997 and 1996 the carrying value of Federal Home
Loan Bank stock was $524,700, and $0, respectively. The Federal Home Loan
Bank stock's market value was estimated to be the same as its carrying value
at all dates.
At December 31, 1997 and 1996 securities with a carrying amount of
$12,999,000 and $20,927,000, respectively, were pledged as collateral for
public deposits, as required or permitted by law.
5. Loans, net:
-----------
At December 31, 1997 and 1996, the loan portfolio was composed of the
following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Insurance premium financing $ 40,373,695 $39,168,604
Installment loans 10,632,451 12,631,520
Commercial loans 23,171,566 22,745,139
Real estate loans 26,668,598 24,774,167
------------ -----------
Total gross loans 100,846,310 99,319,430
Unearned interest (2,212,391) (2,501,747)
Allowance for credit losses (950,809) (1,067,041)
------------ -----------
Loans, net $ 97,683,110 $95,750,642
============ ===========
</TABLE>
F-12
<PAGE>
5. Loans, net, continued:
----------
Loans on which the accrual of interest has been discontinued amounted to
approximately $92,000 and $144,000 at December 31, 1997 and 1996,
respectively.
A summary of changes in allowance for credit losses for the years ended
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Balance at beginning of year $1,067,041 $ 535,250
Additions (deductions):
Provision for credit losses 140,000 72,314
Bank acquisition - 614,700
Loans charged off (403,454) (216,788)
Recoveries of loans previously charged-off 147,222 61,565
---------- ----------
Balance at end of year $ 950,809 $1,067,041
========== ==========
</TABLE>
At December 31, 1997 and December 31, 1996, 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,
1997 1996
------------ ------------
<S> <C> <C>
Impaired loans $2,811,944 $2,266,812
Impaired loans with related allowance calculated under SFAS 114 2,306,501 1,069,007
Allowance on impaired loans calculated under SFAS 114 331,174 196,433
Impaired loans with no allowance calculated under SFAS 114 505,443 1,197,805
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Average impaired loans $2,304,892 $1,723,362
Interest income recognized on impaired loans 253,538 189,570
</TABLE>
As of December 31, 1997 and December 31, 1996, there were no commitments to
lend additional funds for loans considered impaired.
6. Medical Claims Receivables:
--------------------------
At December 31, 1997 and 1996, the medical claims receivables portfolio was
composed of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Medical claims receivables $ 8,079,524 $6,377,061
Unearned interest (698,484) (43,056)
Allowance for medical claims
receivables losses (4,307,885) (217,733)
----------- ----------
Medical claims receivables, net $ 3,073,155 $6,116,272
=========== ==========
</TABLE>
F-13
<PAGE>
6. Medical Claims Receivables, continued:
--------------------------
As of December 31, 1997, the Company had $6,216,651 of medical claims
receivables outstanding 120 days or more from the date of funding by the
Company, or 61% of its total medical claims receivables. At December 31,
1996 the Company had approximately $1.4 million of medical claims
receivables, 22% of total medical receivables, outstanding 120 days or
more. 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 staffing for collections commensurate with the
growth in medical claims receivables. Management determined that charge-
offs of $2,033,587 of the $6,216,651 were warranted in the fourth quarter
as well as a provision for an additional $3,686,409 of such receivables. As
a result of the condition of the portfolio, management recognized an
impairment to the unamortized goodwill of $1,151,111 relating to medical
claims factoring division during the fourth quarter of 1997, and
undepreciated fixed assets of $47,177.
7. Premises and Equipment:
-----------------------
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Estimated Useful
Lives 1997 1996
---------------- ------------ ------------
<S> <C> <C> <C>
Buildings 5 - 30 years $ 2,214,170 $ 2,203,262
Furniture, fixtures and computers 3 - 10 years 3,295,948 2,795,616
Automobiles 3 - 5 years 196,611 375,361
Leasehold improvements 3 - 5 years 105,222 100,470
----------- -----------
5,811,951 5,474,709
Less accumulated depreciation (2,467,430) (1,920,545)
Land 416,029 416,029
---------- -----------
Premises and equipment, net $3,760,550 $ 3,970,193
========== ===========
</TABLE>
8. Deposits:
--------
At December 31, 1997, the scheduled maturities of time deposits are
approximately as follows:
Years Ending
December 31,
------------
1998 $75,213,000
1999 10,737,000
2000 1,612,000
2001 209,000
2002 108,000
-----------
$87,879,000
===========
9. 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.
F-14
<PAGE>
9. Shareholders' Equity, continued:
--------------------
Under the provisions of SFAS 128, which became effective December 31, 1997,
basic earnings per share applicable to common stock are based on the
weighted average number of common shares outstanding during the year.
Diluted earnings per share include the effect of potential common shares
resulting from the assumed exercise of all outstanding stock options. For
the twelve months ended December 31, 1997, 1996, and 1995, 238,968, 48,295,
162,000 common stock equivalent shares were added to the weighted average
shares outstanding for each year, respectively.
10. 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 the 1988 and 1995 Incentive Stock Option Plans of
Surety Capital Corporation and the 1997 Non-Qualified Stock Option Plan for
Officers and Key Employees of Surety Capital Corporation (the "Stock Option
Plans") for officers and/or key employees of the Company. Options for the
purchase of Common Stock under the Stock Option Plans may be granted to
officers or key employees selected from time to time by the Stock Option
Committee of the Board of Directors. The exercise price for any options
granted pursuant to the Stock Option Plans must be at least equal to the
fair market value of the Common Stock on the date the options are granted.
Under the Stock Option Plans an aggregate of 700,000 shares of Common Stock
of the Company were set aside for issuance pursuant to the exercise of
options granted thereunder, of which 604,856 shares are subject to
outstanding options or remain available for grant. To exercise the
options, grantees must pay the exercise price in cash or Common Stock, or
any combination of cash and Common Stock.
The Company has also adopted the 1996 Stock Option Plan for Directors (the
"1996 Directors Plan") and the 1997 Non-Qualified Stock Option Plan for
Non-Employee Directors (the "1997 Directors Plan"). Under the 1996 and 1997
Directors Plans an aggregate of 250,000 shares of Common Stock of the
Company were set aside for issuance pursuant to the exercise of options
granted thereunder, of which 244,000 shares are subject to outstanding
options or remain available for grant. The 1996 Directors Plan 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
at fair market value. All options under the 1996 Directors Plan are
nonstatutory stock options. On the first business day of calendar each
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 1997 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. The 1997 Directors Plan provides for the one
time grant of 25,000 non-statutory stock options to directors of the
Company who are not employees of the Company or the Bank at fair market
value. In 1997 each non-employee director of the Company received an option
to purchase 25,000 shares of Common Stock of the Company at exercise prices
ranging from $4.18 to $5.375 per share.
A summary of the status of the Company's stock options as of December 31,
1997, 1996, and 1995 and the changes during the year ended on that date is
presented below:
F-15
<PAGE>
10. Stock-Based Compensation Plans, continued:
------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------
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 87,292 $4.13 55,216 $4.36 31,713 $5.27
Granted 708,195 $4.24 40,000 $3.59 39,769 $3.13
Exercised 26,434 $4.39 7,924 $2.99 16,266 $3.13
Expired 13,196 $6.42 -- -- -- --
Outstanding at
end of year 755,857 $4.18 87,292 $4.13 55,216 $4.36
Exercisable at
end of year 75,856 $3.80 62,292 $4.28 55,216 $4.36
Weighted-average
fair value of options $1.98 1.79 1.15
granted during the
year
</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 1997, 1996 and 1995, respectively: dividend yield of
0.00% for all three years; expected volatility of 43.46% for 1997 and 48.85%
for 1996 and 1995; risk-free interest rates of 6.28% for 1997, 5.68% for 1996,
and 7.76% for 1995, and the expected lives of the options are 4.96 years for
1997 grants, 5 years for 1996 grants and 2.5 years for 1995 grants.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<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>
$3.13 to $4.19 707,662 8.74 $4.12 52,661 $3.39
$4.44 to $5.38 48,195 5.03 $5.06 23,195 $4.71
- -----------------------------------------------------------------------------------------------
$3.13 to $5.38 755,857 8.51 $4.18 75,856 $3.80
</TABLE>
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net (loss) income and
net (loss) income per common share for 1997 and 1996 would approximate the pro
forma amounts below:
F-16
<PAGE>
10. Stock-Based Compensation Plans, continued:
------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge -- $ 368,194 -- $ 59,189 -- $ 45,713
APB 25 charge -- -- -- -- -- --
Net (loss) income $(3,476,304) $(3,844,498) $1,697,987 $1,642,519 $886,886 $856,583
Net (loss) income per
basic common share $ (.60) $ (.67) $ 0.32 $ 0.30 $ 0.27 $ 0.26
Net (loss) income per
diluted common share $ (.60) $ (.67) $ 0.31 $ 0.29 $ 0.26 $ 0.25
</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.
11. Stockholder's Rights Agreement:
------------------------------
Pursuant to the Rights Agreement dated June 17, 1997 between the Company
and Securities Transfer Corporation, as rights agent, the Company declared
a dividend of one common stock purchase right (a "Right") for each
outstanding share of common stock, $0.01 par value, of the Company (the
"Common Stock Purchase Plan") 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
Company's Board of Directors. 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.
12. 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.
F-17
<PAGE>
12. Financial Instruments With Off-Balance-Sheet Risk and Concentration of
----------------------------------------------------------------------
Credit Risk, continued:
-----------
The total amounts of financial instruments with off-balance sheet risk at
December 31, 1997 and 1996 are as follows:
December 31,
----------------------
1997 1996
---------- ----------
Unfunded loan commitments $4,901,000 $3,721,000
Letters of credit $ 147,000 $ 255,000
Since many of the loan commitments may expire without being drawn upon, the
total commitment amount does not necessarily represent future cash
requirements. Loans are made in accordance with formal written loan
policies. The 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
$41,000 and $220,500 at December 31, 1997 and 1996, respectively, as
collateral supporting those letter of credit commitments for which
collateral is deemed necessary.
The Bank sold $22,257,000 and $16,772,000 in federal funds at December 31,
1997 and 1996, 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 $40,374,000
or 40% and $39,169,000 or 39% of consolidated total loans as of December
31, 1997 and 1996, respectively.
13. 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 $479,000, and $398,000 as of December 31, 1997 and 1996,
respectively. During 1997, the Company paid approximately $110,000 for
legal services to a law firm in which a director of the Company is a
partner.
14. 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, 1997, 1996 and 1995 was $93,773, $85,886, and $88,982,
respectively.
F-18
<PAGE>
15. Federal Income Tax:
------------------
The components of the net deferred asset/(liability) recognized at December
31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax liability:
Premises and equipment $ (374,241) $(463,817)
Securities (1,011) (1,011)
Deferred loan costs (172,705) (63,050)
Other (41,217) (830)
Net unrealized gain on
available-for-sale investment securities (2,686) --
---------- ---------
(591,860) (528,708)
---------- ---------
Deferred tax asset:
Net unrealized loss on
available-for-sale investment securities -- 8,056
Tax net operating losses 208,415 35,326
Depreciation 21,254 24,878
Allowance for credit losses 1,522,354 194,274
Intangibles 404,980
Securities -- 59,409
Other 47,576 27,183
Other real estate losses 9,675 61,155
---------- ---------
2,214,254 410,281
---------- ---------
Net deferred tax asset/(liability) 1,622,394 $(118,427)
========== =========
</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,
---------------------
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
U.S. statutory rate (34.0)% 34.0% 34.0%
Other .07 0.9 1.7
Goodwill (2.9) 4.4 4.2
Tax-exempt interest 2.1 (3.7) (6.2)
----- ---- ----
Effective tax rate (34.1)% 35.6% 33.7%
===== ==== ====
</TABLE>
As of December 31, 1997, the Company has a current net operating loss
carryforward of approximately $509,000 for income tax reporting purposes
which expires, if not used, in 2012. As of December 31, 1997, the Company
has an additional loss carryforward of approximately $104,000 for income
tax reporting purposes which expires, if not used, in 2012. The
utilization of this additional net operating loss carryforward is limited
by Section 382 of the Internal Revenue Code to approximately $15,000
annually until its expiration.
F-19
<PAGE>
15. Federal Income Tax, continued:
------------------
The comprehensive (benefit) provision for federal income taxes for the
years ended December 31, 1997, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Current:
Federal - $916,674 $247,359
State - 33,826 15,648
----------- -------- --------
- 950,500 263,007
Deferred:
Federal $(1,800,070) (12,372) 187,924
State - - -
----------- -------- --------
(1,800,070) (12,372) 187,924
----------- -------- --------
(Benefit) provision for tax expense charged
to results of operations (1,800,070) 938,128 450,931
Tax expense charged to goodwill - - 86,706
Tax on unrealized gain (loss) on available-for-sale
securities 59,251 (81,147) 74,544
----------- --------- --------
Comprehensive (benefit) provision for federal
income taxes $(1,740,819) $856,981 $612,181
=========== ======== ========
</TABLE>
16. Other Noninterest Income and Expense:
------------------------------------
Other noninterest income for the years ended December 31, 1997, 1996 and
1995 was composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Noninterest Income:
Nonsufficient fund charges $ 569,649 $ 460,156 $ 291,954
Late fee charges 1,169,407 681,644 501,960
Service charges 305,494 372,756 220,086
Collection fees 162,297 135,533 115,478
Credit life insurance 42,456 57,509 75,435
Secured credit card annual fee - 4,447 6,561
Other 289,615 165,409 207,593
---------- ---------- ----------
Total $2,538,918 $1,877,454 $1,419,067
========== ========== ==========
</TABLE>
F-20
<PAGE>
16. Other Noninterest Income and Expense, continued:
------------------------------------
General and administrative expense for the years ended December 31, 1997,
1996 and 1995 was composed of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
General and administrative expense:
Professional fees $1,126,351 $ 467,662 $ 416,006
Office supplies 290,533 386,114 253,542
Travel and entertainment 132,476 96,577 68,987
Telephone 342,161 283,564 166,858
Advertising 189,510 174,335 104,499
Postage 374,233 299,388 230,807
Amortization of intangibles 506,172 359,717 184,332
Dues and subscriptions 72,847 70,559 49,331
Insurance 95,957 167,245 130,335
Credit cards - 7,472 19,868
Bank service charge 116,631 110,881 57,196
FDIC assessment 15,626 3,553 123,310
Credit reports 46,314 22,850 40,105
Other 340,325 195,670 202,972
---------- ---------- ----------
$3,649,136 $2,645,587 $2,048,148
========== ========== ==========
</TABLE>
17. Commitments and Contingencies:
-----------------------------
As of December 31, 1997 the Company leased its office space in Hurst, Texas
under a noncancellable operating lease. The lease expires January 31, 2001.
Future minimum lease payments for all noncancellable operating leases are
as follows:
<TABLE>
<CAPTION>
For the years ending:
---------------------
<S> <C>
1998 $218,459
1999 224,011
2000 61,233
2001 1,167
--------
Total $504,870
========
</TABLE>
Rent expense was $183,738 for the year ended December 31, 1997, $161,862
for the year ended December 31, 1996 and $94,713 for the year ended
December 31, 1995.
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.
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-21
<PAGE>
17. Commitments and Contingencies, continued:
-----------------------------
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.
Shortline and Tennessee appealed the ruling of the Fort Worth Court of
Appeals. Oral argument has been made to the Texas Supreme Court. The
matter is pending before that Court, and no ruling has been made at this
time.
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 has not
been completed, and the damages sought by Tennessee are not yet certain.
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.
However, in management's opinion the outcome of these cases will not be
material to the Company.
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. 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. An
Assignment and Release Agreement has been executed between the Bank and
Auto-Owners. Pursuant to this agreement, the Bank has assigned and
transferred its claims and causes of action against Greenway and O'Malley
to Auto-Owners. In consideration for this agreement, Auto-Owners has paid
the Bank $650,000 and will pursue the claims and causes of action against
Greenway and O'Malley pursuant to the terms of the agreement. Should a
recovery be made, Auto-Owners agrees to pay the Bank 50% of the amounts
collected until the Bank has received payments totaling approximately
$197,000, in addition to the $650,000 previously paid. This constitutes a
settlement of this case insofar as the Bank
F-22
<PAGE>
17. Commitments and Contingencies, continued:
-----------------------------
is concerned. The Bank continues to have a bond claim presented to St.
Paul, and St. Paul 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 Defendants filed an Answer, challenging the
jurisdiction of the Court in which the case was filed. Subsequently, the
attorneys for the Defendants withdrew, and the Defendants are currently
without counsel. The Bank has received notice that Rhoda Nottingham has
filed bankruptcy proceedings under Chapter 13 of the Bankruptcy Code, which
imposes an automatic stay on the proceedings in this case. The potential
exists for a bond claim in this case, similar to the bond claim that was
filed in the Greenway case. In management's opinion, the outcome of this
case will not be material to the Company.
On October 10, 1997 the Company and Surety Bank entered into an agreement
to acquire TexStar National Bank ("TexStar"), located in Universal 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 December 31, 1997, TexStar had total assets of $71,119,150, total
deposits of $64,934,028, total loans of $32,559,659, total equity of
$5,787,838 and net income for the twelve months ended December 31, 1997 of
$584,633. 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 $241,000,000. This will represent an
approximate 40.4% 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 in
the spring of 1998.
On March 17, 1998 the Company announced that the Bank entered into an
agreement with CAA Premium Finance Company, L.L.C. ("CAA") for the purchase
of insurance premium finance ("IPF") loans. Pursuant to the five-year
agreement, CAA agreed to sell all of its IPF loans to the Surety Premium
Finance division of Surety Bank ("Surety Premium") on an exclusive basis.
The agreement provides for the sale by CAA to Surety Premium of a minimum
of $4,000,000 in IPF loans per year ($20,000,000 over the five-year term
of the agreement). Surety Premium has agreed to purchase CAA's IPF loans
which are in compliance with Surety Premium's underwriting standards.
18. 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.
F-23
<PAGE>
18. Regulatory Matters, continued:
------------------
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, 1997, 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, 1997 and 1996.
<TABLE>
<CAPTION>
December 31, Minimum Well-
---------------------------- Capital Capitalized
1997 1996 Ratios Ratios
------------- ------------- ------------------------
<S> <C> <C> <C> <C>
Tier I risk-based capital $ 10,277,000 $ 12,013,000
Tier II risk-based capital 1,402,000 1,285,000
Total capital 11,679,000 13,298,000
Risk-weighted assets 103,559,000 108,208,000
Capital ratios:
Tier I risk-based capital 9.92% 11.10% 4.00% 6.00%
Tier II risk-based capital 11.28 12.29 8.00 10.00
Leverage ratio 6.24 7.02 4.00 5.00
</TABLE>
19. Fair Value of Financial Instruments:
-----------------------------------
The following methods are assumptions which were used in estimating fair
values 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,
medical claims receivables, and notes 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.
F-24
<PAGE>
19. Fair Value of Financial Instruments, continue:
-----------------------------------
<TABLE>
<CAPTION>
At December 31, 1997 At December 31, 1996
----------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(in Thousands) (in Thousands)
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 6,204 $ 6,204 $ 6,094 $ 6,094
Federal funds sold 22,257 22,257 16,772 16,772
Available-for-sale securities 28,785 28,785 15,701 15,701
Held-to-maturity securities - - 22,561 22,763
Loans receivable 97,683 98,044 95,751 95,182
Medical claims receivable 3,073 3,073 6,116 6,116
Financial Liabilities:
Noninterest bearing deposits 22,186 22,186 23,879 23,879
Interest bearing deposits 132,356 132,380 131,811 131,845
Off-balance sheet instruments - 50 - 2,550
</TABLE>
F-25
<PAGE>
20. Parent Company Financial Information:
------------------------------------
Condensed Parent Company Only
Balance Sheets
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Assets:
Cash $ 730,094 $ 756,813
Receivable from subsidiary - 103,760
Investment in subsidiary, at equity 15,090,094 18,318,004
Other assets 57,145 51,975
----------- -----------
Total assets $15,877,333 $19,230,552
=========== ===========
Shareholders' equity:
Common stock $ 57,902 $ 57,637
Additional paid-in capital 16,867,777 16,752,003
Retained (deficit) earnings (1,024,435) 2,509,771
Stock rights issuable 57,902 -
Treasury stock (172,828) (74,539)
Unrealized gain (loss) on available-for-sale securities 91,015 (14,320)
----------- -----------
Total shareholders' equity 15,877,333 19,230,552
----------- -----------
Total liabilities and shareholders' equity $15,877,333 $19,230,552
=========== ===========
</TABLE>
F-26
<PAGE>
20. Parent Company Financial Information, continued:
------------------------------------
Condensed Parent Company Only
Statements of Operations
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Interest income $ 20,533 $ 40,045 $ 7,395
Interest expense - 6,612 122,579
----------- ---------- ----------
Net interest income/(expense) 20,533 33,433 (115,184)
Noninterest expense (244,120) (169,610) (230,252)
Equity in net (loss) income of subsidiary (3,333,245) 1,788,489 1,140,603
----------- ---------- ----------
Net (loss) income before income taxes (3,556,832) 1,652,312 795,167
Income tax (benefit) expense:
Current - (45,675) (120,612)
Deferred (80,528) - 28,893
----------- ---------- ----------
Net (loss) income $(3,476,304) $1,697,987 $ 886,886
=========== ========== ==========
</TABLE>
F-27
<PAGE>
20. Parent Company Financial Information, continued:
------------------------------------
Condensed Parent Company Only
Statements of Cash Flows
for the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(3,476,304) $ 1,697,987 $ 886,886
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Net decrease (increase) in receivable from
subsidiary 103,760 (35,762) 174,495
Equity in net loss (income) of subsidiary 3,333,245 (1,810,509) (1,137,764)
Net decrease in deferred tax asset - - 30,232
Net (increase) decrease in other assets (5,170) 55,082 (86,057)
Net increase (decrease) in accrued liabilities - (58,806) 44,892
----------- ----------- -----------
Net cash used in operating activities (44,469) (152,008) (87,316)
----------- ----------- -----------
Cash flows from investing activities:
Investment in subsidiary - (6,170,000) -
------------ ----------- -----------
Net cash used in investing activities - (6,170,000) -
----------- ----------- -----------
Cash flows from financing activities:
Sale of common stock - 7,394,293 1,197,182
Exercise of stock options 116,039 23,712 50,831
Payments on borrowings - (375,000) (1,375,000)
Purchase of treasury stock (98,289) (23,709) (50,830)
----------- ----------- -----------
Net cash provided by (used in) financing activities 17,750 7,019,296 (177,817)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents (26,719) 697,288 (265,133)
Beginning cash and cash equivalents 756,813 59,525 324,658
----------- ----------- -----------
Ending cash and cash equivalents $ 730,094 $ 756,813 $ 59,525
=========== =========== ===========
</TABLE>
F-28
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
- -------------------------------------------------------------------------------
2.11 Agreement and Plan of Reorganization by and among Surety Bank, National
Association, TexStar National Bank, Surety Capital Corporation, and
certain shareholders of TexStar National Bank, dated as of October 10,
1997; and Agreement to Merge TexStar National Bank with and into Surety
Bank, National Association Under the Charter of Surety Bank, National
Association and Under the Title of Surety Bank, National Association,
between Surety Bank, National Association and TexStar National Bank and
joined in by Surety Capital Corporation and certain shareholders of
TexStar National Bank, dated as of October 10, 1997
4.01 Amendment No. 1 to Rights Agreement of Surety Capital Corporation,
dated as of March 10, 1998
10.09 Form of Amended and Restated Executive Deferred Compensation Agreements
and related Adoption Agreements with Designation of Beneficiaries
entered into between Surety Capital Corporation and B. J Curley, Bobby
W. Hackler and G. M. Heinzelmann, III, dated August 29, 1997
10.10 Form of Amended and Restated Letter Agreements between Surety Capital
Corporation and B. J. Curley, Bobby W. Hackler and G. M. Heinzelmann,
III regarding provision by Surety Capital Corporation of term life
insurance coverage, dated August 29, 1997
10.14 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for
Officers and Key Employees, and Form of Stock Option Agreement
10.15 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for
Non-Employee Directors, and Form of Stock Option Agreement
10.16 Post Retirement Services Agreement Between Surety Capital Corporation
and C. Jack Bean, dated January 20, 1998
10.17 Surety Capital Corporation 1998 Incentive Stock Option Plan
21 Subsidiaries of the Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Special Power of Attorney
27 Financial Data Schedule
<PAGE>
EXHIBIT 2.11
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") entered into as of
October 10, 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, 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.
<PAGE>
(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 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,"
-2-
<PAGE>
"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) 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 reg ulations in such a way as could, if such ordinances
or regulations were enforced, result in any material impairment of the uses of
the respective properties for the purposes for which they are now operated, and
no covenants, easements, rights-of-way or regulations of record materially
impair such uses.
(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,
-3-
<PAGE>
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,
(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.
-4-
<PAGE>
(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 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
-5-
<PAGE>
(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.
(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 governmen tal 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 require ments 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 distribut ed 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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(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 threatened 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
(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,
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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 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;
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(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;
(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.
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(z) COMPENSATION. TexStar has furnished to Surety Bank a schedule,
designated SCHEDULE 1(z), containing the name and 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.
(ab) 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).
(ac) 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.
(ad) 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 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
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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,
(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
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(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 warrants that such schedules and such written disclosures,
as so amended or supplement ed, 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 Sharehold ers, 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 sharehold ers, 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
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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 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 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
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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 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
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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 commence ment 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 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
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of or resulting from any action or agreement on the part of such indemnifying
party. This indemnifica tion 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 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
SHAREHOLD ERS. 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
Sharehold ers 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 (appointed at the meeting of the shareholders of TexStar
pursuant to SECTION 3(L) hereof) of the Escrow Agreement.
(c) OTHER CERTIFICATES. TexStar shall have furnished to Surety Bank
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(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.
(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.
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(k) 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:
(l) 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.
(m) FURTHER ACTION. Each and every action required of Surety Bank to
effect the Merger will have been taken.
(n) 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.
8. 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 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.
9. 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.
10. 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
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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 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.
11. 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
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<PAGE>
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
or at such other address for a party as shall be specified by like notice.
12. 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.
13. 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.
14. 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.
15. 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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16. 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 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: /s/ Bobby W. Hackler
--------------------------------------------
Bobby W. Hackler, Vice Chairman of the Board,
President and Chief Executive Officer
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ATTEST:
/s/ Robert E. Crews
- ---------------------------
Robert E. Crews, Cashier
TEXSTAR: TEXSTAR NATIONAL BANK
By: /s/ Byron K. Bexley
------------------------------------
Byron K. Bexley, President
ATTEST:
/s/ Janie L. Harrison
- --------------------------
Janie L. Harrison, Cashier
SURETY: SURETY CAPITAL CORPORATION
By: /s/ C. Jack Bean
-------------------------------------
C. Jack Bean, Chairman of the
Board and Chief Executive Officer
ATTEST:
/s/ B. J. Curley
- --------------------------
B. J. Curley, Secretary
SHAREHOLDERS:
/s/ W. Marvin Rush
----------------------------------------
W. Marvin Rush
/s/ W. Maurice Rush
----------------------------------------
W. Maurice Rush
/s/ James Pearl
----------------------------------------
James Pearl
/s/ Robert B. Thornton
----------------------------------------
Robert B. Thornton
/s/ Jesse Rodriguez
----------------------------------------
Jesse Rodriguez
/s/ Byron K. Bexley
----------------------------------------
Byron K. Bexley
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SCHEDULE A
SHAREHOLDERS OF TEXSTAR NATIONAL BANK
W. Marvin Rush
W. Maurice Rush
James Pearl
Robert B. Thornton
Jesse Rodriguez
Byron K. Bexley
<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 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:
<PAGE>
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 (hereinafter
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
Continuing 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 nominations,
and all other rights and interests as trustee, executor, administrator, transfer
agent and registrar of stocks and bonds, guardian of estates, assignee,
receiver, and in every other fiduciary capacity, and in every agency capacity,
in the same manner and to the same extent as such rights, franchises and
interests were held or enjoyed by Surety Bank and 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, 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
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period September 1, 1997 to the Closing Date before taxes but after all other
charges of TexStar (including normal year-end adjustments) 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 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.
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<PAGE>
(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, Continuing 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;
(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
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<PAGE>
(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 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.
-5-
<PAGE>
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
-------------------------------------------
William B. Byrd
-------------------------------------------
Bobby W. Hackler
-------------------------------------------
Joseph S. Hardin
-------------------------------------------
G. M. Heinzelmann, III
-------------------------------------------
Michael L. Milam
-------------------------------------------
Garrett Morris
-------------------------------------------
Cullen W. Turner
-6-
<PAGE>
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.
Heinzel mann, III, Michael L. Milam, Garrett Morris and Cullen W. Turner, being
all of the Board of Directors of said association and each of them acknowledged
said instrument to be the act and deed of said association and of himself as
director thereof.
WITNESS my official seal and signature this day and year aforesaid.
-------------------------------------------
NOTARY PUBLIC 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
-7-
<PAGE>
-----------------------------------------
James Pearl
-----------------------------------------
Robert B. Thornton
-----------------------------------------
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
Board and Chief Executive Officer
-8-
<PAGE>
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. William Rush
-----------------------------------------
W. Mauricce Rush
-----------------------------------------
James Pearl
-----------------------------------------
Robert B. Thornton
-----------------------------------------
Jesse Rodriquez
-----------------------------------------
Byron K. Bexley
-9-
<PAGE>
ANNEX A
ARTICLES OF ASSOCIATION 1996
FIRST. The title of the association shall be Surety Bank, National
Association.
SECOND. The main office of the association shall be in Hurst, County of
Tarrant, State of Texas. The general business of the association shall be
conducted at its main office and its branches.
THIRD. The board of directors of the association shall consist of not less
than 5 nor more than 25 persons, the exact number to be fixed and determined
from time to time by resolution of a majority of the full board of directors or
by resolution of a majority of the shareholders at any annual or special meeting
thereof. Each director shall own common or preferred stock of the association
with an aggregate par value of not less than $1,000, or common or preferred
stock of a bank holding company owning the association with an aggregate par,
fair market or equity value of not less than $1,000, as of either (i) the date
of purchase, (ii) the date the person became a director, or (iii) the date of
that person's most recent election to the board of directors, whichever is
greater. Any combination of common or preferred stock of the association or
holding company may be used.
Any vacancy in the board of directors may be filled by action of a majority
of the remaining directors between meetings of shareholders. The board of
directors may not increase the number of directors between meetings of
shareholders to a number which: (1) exceeds by more than 2 the number of
directors last elected by shareholders where the number was 15 or less; and (2)
exceeds by more than 4 the number of directors last elected by shareholders
where the number was 16 or more, but in no event shall the number of directors
exceed 25.
Terms of directors, including directors selected to fill vacancies, shall
expire at the next regular meeting of shareholders at which directors are
elected, unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
Honorary or advisory members of the board of directors, without voting
power or power of final decision in matters concerning the business of the
association, may be appointed by resolution of a majority of the full board of
directors, or by resolution of shareholders at any annual or special meeting.
Honorary or advisory directors shall not be counted for purposes of determining
the number of directors of the association or the presence of a quorum in
connection with any board action, and shall not be required to own qualifying
shares.
FOURTH. There shall be an annual meeting of the shareholders to elect
directors and transact whatever other business may be brought before the
meeting. It shall be held at the main office or any other convenient place the
board of directors may designate, on the day of each year specified therefore in
the bylaws, or if that day falls on a legal holiday in the state in which the
association is located, on the next following banking day. If no election is
held on the day fixed or in event of a legal holiday, an election may be held on
any subsequent day within 60 days of the day fixed, to be designated by the
board of directors, or, if the directors fail to fix the day, by shareholders
representing two-thirds of the shares issued and outstanding. In all cases at
least 10 days' advance notice of the meeting shall be given to the shareholders
by first class mail.
<PAGE>
In all elections of directors, the number of votes each common shareholder
may cast will be determined by multiplying the number of shares he or she owns
by the number of directors to be elected. Those votes may be cumulated and cast
for a single candidate or may be distributed among two or more candidates in the
manner selected by the shareholder. On all other questions, each common
shareholder shall be entitled to one vote for each share of stock held by him or
her.
Nominations for election to the board of directors may be made by the board
of directors or by any stockholder of any outstanding class of capital stock of
the association entitled to vote for election of directors. Nominations other
than those made by or on behalf of the existing management shall be made in
writing and be delivered or mailed to the president of the association and to
the Comptroller of the Currency, Washington, D.C., not less than 14 days nor
more than 50 days prior to any meeting of shareholders called for the election
of directors; provided, however, that if less than 21 days' notice of the
meeting is given to shareholders, such nominations shall be mailed or delivered
to the president of the association and to the Comptroller of the Currency not
later than the close of business on the seventh day following the date on which
the notice of meeting was mailed. Such notification shall contain the following
information to the extent known to the notifying shareholder:
(1) The name and address of each proposed nominee.
(2) The principal occupation of each proposed nominee.
(3) The total number of shares of capital stock of the association that
will be voted for each proposed nominee.
(4) The name and residence address of the notifying shareholder, and
(5) The number of shares of capital stock of the association owned by the
notifying shareholder.
Nominations not made in accordance herewith may, in his/her discretion, be
disregarded by the chairperson of the meeting, and the vote tellers may
disregard all votes cast for each such nominee. No bylaw may unreasonably
restrict the nomination of directors by shareholders.
A director may resign at any time by delivering written notice to the board
of directors, its chairperson, or to the association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by shareholders at a meeting called to remove him
or her, when notice of the meeting stating that the purpose or one of the
purposes is to remove him or her is provided, if there is a failure to fulfill
one of the affirmative requirements for qualification, or for cause; provided,
however, that a director may not be removed if the number of votes sufficient to
elect him or her under cumulative voting is voted against his or her removal.
FIFTH. The authorized amount of capital stock of this association shall be
6,000,000 shares of common stock with a par value of ninety-one cents ($0.91)
each; but said capital stock may be increased or decreased from time to time,
according to the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the association
shall have any preemptive or preferential right of subscription to any shares of
any class of stock of the association, whether now or hereafter authorized, or
to any obligations convertible into stock of the association,
-2-
<PAGE>
issued, or sold, nor any right of subscription to any thereof other than such,
if any, as the board of directors, in its discretion may from time to time
determine and at such price as the board of directors may from time to time fix.
Unless otherwise specified in the articles of association or required by
law, (1) all matters requiring shareholder action, including amendments to the
articles of association must be approved by shareholders owning a majority
voting interest in the outstanding voting stock, and (2) each shareholder shall
be entitled to one vote per share.
Unless otherwise specified in the articles of association or required by
law, all shares of voting stock shall be voted together as a class on any
matters requiring shareholder approval. If a proposed amendment would affect
two or more classes or series in the same or a substantially similar way, all
the classes or series so affected must vote together as a single voting group on
the proposed amendment.
Shares of the same class or series may be issued as a dividend on a pro
rata basis and without consideration. Shares of another class or series may be
issued as a share dividend in respect of a class or series of stock if approved
by a majority of the votes entitled to be cast by the class or series to be
issued unless there are no outstanding shares of the class or series to be
issued. Unless otherwise provided by the board of directors, the record date
for determining shareholders entitled to a share dividend shall be the date the
board of directors authorizes the share dividend.
Unless otherwise provided in the bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders, provided that in no event may a record date be more than 70 days
before the meeting.
If a shareholder is entitled to fractional shares pursuant to a stock
dividend, consolidation or merger, reverse stock split or otherwise, the
association may (a) issue fractional shares; (b) in lieu of the issuance of
fractional shares, issue script or warrants entitling the holder to receive a
full share upon surrendering enough script or warrants to equal a full share;
(c) if there is an established and active market in the association's stock,
make reasonable arrangements to provide the shareholder with an opportunity to
realize a fair price through sale of the fraction, or purchase of the additional
fraction required for a full share; (d) remit the cash equivalent of the
fraction to the shareholder; or (e) sell full shares representing all the
fractions at public auction or to the highest bidder after having solicited and
received sealed bids from at least 3 licensed stock brokers; and distribute the
proceeds pro rata to shareholders who otherwise would be entitled to the
fractional shares. The holder of a fractional share is entitled to exercise the
rights of a shareholder, including the right to vote, to receive dividends, and
to participate in the assets of the association upon liquidation, in proportion
to the fractional interest. The holder of script or warrants is not entitled to
any of these rights unless the script or warrants explicitly provide for such
rights. The script or warrants may be subject to such additional conditions as:
(1) that the script or warrants will become void if not exchanged for full
shares before a specified date; and (2) that the shares for which the script or
warrants are exchangeable may be sold at the option of the association and the
proceeds paid to scriptholders.
The association, at any time and from time to time, may authorize and issue
debt obligations, whether or not subordinated, without the approval of the
shareholders. Obligations classified as debt, whether or not subordinated,
which may be issued by the association without the approval of shareholders, do
not carry voting rights on any issue, including an increase or decrease in the
aggregate number of the securities, or the exchange or reclassification of all
or part of securities into securities of another class or series.
-3-
<PAGE>
SIXTH. The board of directors shall appoint one of its members as
president of this association, and one of its members as chairperson of the
board and shall have the power to appoint one or more vice presidents, a
secretary who shall keep minutes of the directors' and shareholders' meetings
and be responsible for authenticating the records of the association, and such
other officers and employees as may be required to transact the business of this
association. A duly appointed officer may appoint one or more officers or
assistant officers if authorized by the board of directors in accordance with
the bylaws.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees and agents of the
association.
(2) Delegate the performance of its duties, but not the responsibility for
its duties, to the officers, employees and agents of the association.
(3) Fix the compensation and enter into employment contracts with its
officers and employees upon reasonable terms and conditions consistent with
applicable law.
(4) Dismiss officers and employees.
(5) Require bonds from officers and employees and fix the penalty thereof.
(6) Ratify written policies authorized by the association's management or
committees of the board.
(7) Regulate the manner in which any increase or decrease of the capital of
the association shall be made, provided that nothing herein shall restrict the
power of shareholders to increase or decrease the capital of the association in
accordance with law, and nothing shall raise or lower from two-thirds the
percentage required for shareholder approval to increase or reduce the capital.
(8) Manage and administer the business and affairs of the association.
(9) Adopt initial bylaws, not inconsistent with law or the articles of
association, for managing the business and regulating the affairs of the
association.
(10) Amend or repeal bylaws, except to the extent that the articles of
association reserve this power in whole or in part to shareholders.
(11) Make contracts.
(12) Generally perform all acts that are legal for a board of directors to
perform.
SEVENTH. The board of directors shall have the power to change the
location of the main office to any other place within the limits of Hurst, Texas
without the approval of the shareholders, and shall have the power to establish
or change the location of any branch or branches of the association to any other
location permitted under applicable law, without the approval of the
shareholders subject to approval by the Office of the Comptroller of the
Currency.
EIGHTH. The corporate existence of this association shall continue until
terminated according to the laws of the United States.
-4-
<PAGE>
NINTH. The board of directors of this association, or any 3 or more
shareholders owning, in the aggregate, not less than 10% of the stock of this
association, may call a special meeting of shareholders at any time. Unless
otherwise provided by the bylaws or the laws of the United States, or waived by
shareholders, a notice of the time, place and purpose of every annual and
special meeting of the shareholders shall be given by first-class mail, postage
prepaid, mailed at least 10, and no more than 60, days prior to the date of the
meeting to each shareholder of record at his/her address as shown upon the books
of this association. Unless otherwise provided by the bylaws, any action
requiring approval of shareholders must be effected at a duly called annual or
special meeting.
TENTH. The association shall indemnify to the fullest extent permitted
under the Texas Business Corporation Act any person who is made a named
defendant or respondent in any action, suit or proceeding, other than in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency which proceeding or action results in a final order assessing civil
monetary penalties or requiring affirmative action by such person in the form of
payments to the association, whether civil, criminal, administrative,
arbitrative or investigative, or in any appeal in such an action, suit or
proceeding, by reason of the fact that he or she is or was a director, advisory
director or officer of the association, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such director, advisory director or officer in connection
with any such action, suit or proceeding. The association may indemnify other
persons, as permitted by the Texas Business Corporation Act and other applicable
laws. The association may purchase and maintain insurance on behalf of
directors, advisory directors, officers or other persons against any liability
asserted against such persons in their capacities as directors, advisory
directors, officers or otherwise, other than for liability asserted against such
persons pursuant to a formal order assessing civil monetary penalties.
ELEVENTH. No director of the association shall be liable to the
association or its shareholders for monetary damages for an act or omission in
such director's capacity as a director of the association, except that this
Article Eleventh shall not eliminate or limit the liability of a director of the
association for:
(i) a breach of such director's duty of loyalty to the association or its
shareholders;
(ii) an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of the law;
(iii) a transaction from which a director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office; or
(iv) an act or omission for which the liability of a director is expressly
provided for by statute.
Any repeal or amendment of this Article Eleventh by the shareholders of the
association shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the association existing
at the time of such repeal or amendment. Anything herein to the contrary
notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended
after approval by the shareholders of this Article Eleventh to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the association shall be
eliminated or limited to the full extent then permitted by the Texas
Miscellaneous Corporation Laws Act, as so amended from time to time.
-5-
<PAGE>
TWELFTH. These articles of association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the stock of this association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount. The association's board of directors may
propose one or more amendments to the articles of association for submission to
the shareholders.
-6-
<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:
"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.
<PAGE>
"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.
"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
-2-
<PAGE>
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 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.
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<PAGE>
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 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 seven (7) 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 five (5) 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 Representa tive 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.
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 Representa-
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<PAGE>
tive, 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 Indemnify ing 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, 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 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:
__________________________
__________________________
__________________________
__________________________
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<PAGE>
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
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,
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<PAGE>
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 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
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<PAGE>
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.
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, 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
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<PAGE>
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:
-----------------------------------------
W. Marvin Rush, individually and as
attorney-in-fact for the shareholders of
TexStar listed on SCHEDULE A
------------------------------------------
ESCROW AGENT: By:
------------------------------------------
Its:
------------------------------------------
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<PAGE>
SCHEDULE A
INDEMNIFYING PARTIES, ESCROW PROPORTIONS
AND CONTRIBUTIONS TO ESCROWED PRINCIPAL FUNDS
Contributions to
Indemnifying Parties Escrow Proportions Escrowed Principal Funds
-------------------- ------------------ ------------------------
<PAGE>
SCHEDULE B
<PAGE>
List of schedules to Agreement and Plan of Reorganization by and among Surety
Bank, National Association, TexStar National Bank, Surety Capital Corporation,
and certain shareholders of TexStar National Bank, dated as of October 10, 1997,
which are not filed herewith:
SCHEDULE DESCRIPTION
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1(b) Capital Stock
1(f) Liabilities and Obligations
1(h) Loans
1(j) Investment Securities
1(l) Physical Properties
1(m) Compliance with Environmental Laws
1(o) Patents, Trademarks, Etc.
1(q) Insurance
1(r) Material Contracts
1(t) Employee Benefits
1(z) Compensation
1(ab) Claims and Deposits
The registrant will furnish supplementally a copy of any omitted exhibit or
schedule to the Securities and Exchange Commission upon request.
<PAGE>
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 10, 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 W. Marvin Rush, W. Maurice Rush, James Pearl, Robert B. Thornton,
Jesse Rodriguez and Byron K. Bexley (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 10, 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 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:
<PAGE>
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 (hereinafter
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
Continuing 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 nominations,
and all other rights and interests as trustee, executor, administrator, transfer
agent and registrar of stocks and bonds, guardian of estates, assignee,
receiver, and in every other fiduciary capacity, and in every agency capacity,
in the same manner and to the same extent as such rights, franchises and
interests were held or enjoyed by Surety Bank and 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, 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
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<PAGE>
period September 1, 1997 to the Closing Date before taxes but after all other
charges of TexStar (including normal year-end adjustments) 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 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.
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<PAGE>
(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, Continuing 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;
(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
-4-
<PAGE>
(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 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.
-5-
<PAGE>
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: /s/ Bobby W. Hackler
-------------------------------------
Bobby W. Hackler, Vice Chairman of
the Board, President and Chief
Executive Officer
ATTEST:
/s/ Robert E. Crews
- --------------------
Robert E. Crews, Cashier
ALL OF THE DIRECTORS OF
SURETY BANK, NATIONAL ASSOCIATION
/s/ C. Jack Bean
-------------------------------------
C. Jack Bean
/s/ William B. Byrd
-------------------------------------
William B. Byrd
/s/ Bobby W. Hackler
-------------------------------------
Bobby W. Hackler
/s/ Joseph S. Hardin
-------------------------------------
Joseph S. Hardin
/s/ G. M. Heinzelmann, III
-------------------------------------
G. M. Heinzelmann, III
/s/ Margaret E. Holland
-------------------------------------
Margaret E. Holland
/s/ Michael L. Milam
-------------------------------------
Michael L. Milam
-6-
<PAGE>
/s/ Garrett Morris
-------------------------------------
Garrett Morris
/s/ Cullen W. Turner
-------------------------------------
Cullen W. Turner
THE STATE OF TEXAS )
)
COUNTY OF TARRANT )
On this 21st day of October, 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 fore going 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. Heinzel mann,
III, Margaret E. Holland, 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.
/s/ Cindy M. Yale
-------------------------------------
NOTARY PUBLIC IN AND FOR THE STATE
OF TEXAS
08-22-98
-------------------------------------
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: /s/ Byron K. Bexley
-------------------------------------
Byron K. Bexley, President
ATTEST:
/s/ Janie McNair Harrison
- -------------------------------
Janie McNair Harrison, Cashier
-7-
<PAGE>
ALL OF THE DIRECTORS OF
TEXSTAR NATIONAL BANK
/s/ W. Marvin Rush
-------------------------------------
W. Marvin Rush
/s/ W. Maurice Rush
-------------------------------------
W. Maurice Rush
/s/ James Pearl
-------------------------------------
James Pearl
/s/ Robert B. Thornton
-------------------------------------
Robert B. Thornton
/s/ Jesse Rodriguez
-------------------------------------
Jesse Rodriguez
/s/ Byron K. Bexley
-------------------------------------
Byron K. Bexley
THE STATE OF TEXAS )
)
COUNTY OF BEXAS )
On this 27th day of January, 1998, before me, a Notary Public for the State
and County aforesaid, personally came Byron K. Bexley, as President and Janie
McNair Harrison, 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.
/s/ Kathleen Nagelmueller
-------------------------------------
NOTARY PUBLIC IN AND FOR THE STATE
OF TEXAS
01-10-01
-------------------------------------
My Commission Expires
-8-
<PAGE>
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: /s/ C. Jack Bean
-------------------------------------
C. Jack Bean, Chairman of the
Board and Chief Executive Officer
ATTEST:
/s/ B. J. Curley
- --------------------------------
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:
/s/ W. Marvin Rush
-------------------------------------
W. Marvin Rush
/s/ W. Maurice Rush
-------------------------------------
W. Maurice Rush
/s/ James Pearl
-------------------------------------
James Pearl
/s/ Robert B. Thornton
-------------------------------------
Robert B. Thornton
/s/ Jesse Rodriguez
-------------------------------------
Jesse Rodriguez
/s/ Byron K. Bexley
-------------------------------------
Byron K. Bexley
-9-
<PAGE>
ANNEX A
ARTICLES OF ASSOCIATION 1996
FIRST. The title of the association shall be Surety Bank, National
Association.
SECOND. The main office of the association shall be in Hurst, County of
Tarrant, State of Texas. The general business of the association shall be
conducted at its main office and its branches.
THIRD. The board of directors of the association shall consist of not less
than 5 nor more than 25 persons, the exact number to be fixed and determined
from time to time by resolution of a majority of the full board of directors or
by resolution of a majority of the shareholders at any annual or special meeting
thereof. Each director shall own common or preferred stock of the association
with an aggregate par value of not less than $1,000, or common or preferred
stock of a bank holding company owning the association with an aggregate par,
fair market or equity value of not less than $1,000, as of either (i) the date
of purchase, (ii) the date the person became a director, or (iii) the date of
that person's most recent election to the board of directors, whichever is
greater. Any combination of common or preferred stock of the association or
holding company may be used.
Any vacancy in the board of directors may be filled by action of a majority
of the remaining directors between meetings of shareholders. The board of
directors may not increase the number of directors between meetings of
shareholders to a number which: (1) exceeds by more than 2 the number of
directors last elected by shareholders where the number was 15 or less; and (2)
exceeds by more than 4 the number of directors last elected by shareholders
where the number was 16 or more, but in no event shall the number of directors
exceed 25.
Terms of directors, including directors selected to fill vacancies, shall
expire at the next regular meeting of shareholders at which directors are
elected, unless the directors resign or are removed from office.
Despite the expiration of a director's term, the director shall continue to
serve until his or her successor is elected and qualifies or until there is a
decrease in the number of directors and his or her position is eliminated.
Honorary or advisory members of the board of directors, without voting
power or power of final decision in matters concerning the business of the
association, may be appointed by resolution of a majority of the full board of
directors, or by resolution of shareholders at any annual or special meeting.
Honorary or advisory directors shall not be counted for purposes of determining
the number of directors of the association or the presence of a quorum in
connection with any board action, and shall not be required to own qualifying
shares.
FOURTH. There shall be an annual meeting of the shareholders to elect
directors and transact whatever other business may be brought before the
meeting. It shall be held at the main office or any other convenient place the
board of directors may designate, on the day of each year specified therefore in
the bylaws, or if that day falls on a legal holiday in the state in which the
association is located, on the next following banking day. If no election is
held on the day fixed or in event of a legal holiday, an election may be held on
any subsequent day within 60 days of the day fixed, to be designated by the
board of directors, or, if the directors fail to fix the day, by shareholders
representing two-thirds of the shares issued and outstanding. In all cases at
least 10 days' advance notice of the meeting shall be given to the shareholders
by first class mail.
<PAGE>
In all elections of directors, the number of votes each common shareholder
may cast will be determined by multiplying the number of shares he or she owns
by the number of directors to be elected. Those votes may be cumulated and cast
for a single candidate or may be distributed among two or more candidates in the
manner selected by the shareholder. On all other questions, each common
shareholder shall be entitled to one vote for each share of stock held by him or
her.
Nominations for election to the board of directors may be made by the board
of directors or by any stockholder of any outstanding class of capital stock of
the association entitled to vote for election of directors. Nominations other
than those made by or on behalf of the existing management shall be made in
writing and be delivered or mailed to the president of the association and to
the Comptroller of the Currency, Washington, D.C., not less than 14 days nor
more than 50 days prior to any meeting of shareholders called for the election
of directors; provided, however, that if less than 21 days' notice of the
meeting is given to shareholders, such nominations shall be mailed or delivered
to the president of the association and to the Comptroller of the Currency not
later than the close of business on the seventh day following the date on which
the notice of meeting was mailed. Such notification shall contain the following
information to the extent known to the notifying shareholder:
(1) The name and address of each proposed nominee.
(2) The principal occupation of each proposed nominee.
(3) The total number of shares of capital stock of the association that
will be voted for each proposed nominee.
(4) The name and residence address of the notifying shareholder, and
(5) The number of shares of capital stock of the association owned by the
notifying shareholder.
Nominations not made in accordance herewith may, in his/her discretion, be
disregarded by the chairperson of the meeting, and the vote tellers may
disregard all votes cast for each such nominee. No bylaw may unreasonably
restrict the nomination of directors by shareholders.
A director may resign at any time by delivering written notice to the board
of directors, its chairperson, or to the association, which resignation shall be
effective when the notice is delivered unless the notice specifies a later
effective date.
A director may be removed by shareholders at a meeting called to remove him
or her, when notice of the meeting stating that the purpose or one of the
purposes is to remove him or her is provided, if there is a failure to fulfill
one of the affirmative requirements for qualification, or for cause; provided,
however, that a director may not be removed if the number of votes sufficient to
elect him or her under cumulative voting is voted against his or her removal.
FIFTH. The authorized amount of capital stock of this association shall be
6,000,000 shares of common stock with a par value of ninety-one cents ($0.91)
each; but said capital stock may be increased or decreased from time to time,
according to the provisions of the laws of the United States.
No holder of shares of the capital stock of any class of the association
shall have any preemptive or preferential right of subscription to any shares of
any class of stock of the association, whether now or hereafter authorized, or
to any obligations convertible into stock of the association,
-2-
<PAGE>
issued, or sold, nor any right of subscription to any thereof other than such,
if any, as the board of directors, in its discretion may from time to time
determine and at such price as the board of directors may from time to time fix.
Unless otherwise specified in the articles of association or required by
law, (1) all matters requiring shareholder action, including amendments to the
articles of association must be approved by shareholders owning a majority
voting interest in the outstanding voting stock, and (2) each shareholder shall
be entitled to one vote per share.
Unless otherwise specified in the articles of association or required by
law, all shares of voting stock shall be voted together as a class on any
matters requiring shareholder approval. If a proposed amendment would affect
two or more classes or series in the same or a substantially similar way, all
the classes or series so affected must vote together as a single voting group on
the proposed amendment.
Shares of the same class or series may be issued as a dividend on a pro
rata basis and without consideration. Shares of another class or series may be
issued as a share dividend in respect of a class or series of stock if approved
by a majority of the votes entitled to be cast by the class or series to be
issued unless there are no outstanding shares of the class or series to be
issued. Unless otherwise provided by the board of directors, the record date
for determining shareholders entitled to a share dividend shall be the date the
board of directors authorizes the share dividend.
Unless otherwise provided in the bylaws, the record date for determining
shareholders entitled to notice of and to vote at any meeting is the close of
business on the day before the first notice is mailed or otherwise sent to the
shareholders, provided that in no event may a record date be more than 70 days
before the meeting.
If a shareholder is entitled to fractional shares pursuant to a stock
dividend, consolidation or merger, reverse stock split or otherwise, the
association may (a) issue fractional shares; (b) in lieu of the issuance of
fractional shares, issue script or warrants entitling the holder to receive a
full share upon surrendering enough script or warrants to equal a full share;
(c) if there is an established and active market in the association's stock,
make reasonable arrangements to provide the shareholder with an opportunity to
realize a fair price through sale of the fraction, or purchase of the additional
fraction required for a full share; (d) remit the cash equivalent of the
fraction to the shareholder; or (e) sell full shares representing all the
fractions at public auction or to the highest bidder after having solicited and
received sealed bids from at least 3 licensed stock brokers; and distribute the
proceeds pro rata to shareholders who otherwise would be entitled to the
fractional shares. The holder of a fractional share is entitled to exercise the
rights of a shareholder, including the right to vote, to receive dividends, and
to participate in the assets of the association upon liquidation, in proportion
to the fractional interest. The holder of script or warrants is not entitled to
any of these rights unless the script or warrants explicitly provide for such
rights. The script or warrants may be subject to such additional conditions as:
(1) that the script or warrants will become void if not exchanged for full
shares before a specified date; and (2) that the shares for which the script or
warrants are exchangeable may be sold at the option of the association and the
proceeds paid to scriptholders.
The association, at any time and from time to time, may authorize and issue
debt obligations, whether or not subordinated, without the approval of the
shareholders. Obligations classified as debt, whether or not subordinated,
which may be issued by the association without the approval of shareholders, do
not carry voting rights on any issue, including an increase or decrease in the
aggregate number of the securities, or the exchange or reclassification of all
or part of securities into securities of another class or series.
-3-
<PAGE>
SIXTH. The board of directors shall appoint one of its members as
president of this association, and one of its members as chairperson of the
board and shall have the power to appoint one or more vice presidents, a
secretary who shall keep minutes of the directors' and shareholders' meetings
and be responsible for authenticating the records of the association, and such
other officers and employees as may be required to transact the business of this
association. A duly appointed officer may appoint one or more officers or
assistant officers if authorized by the board of directors in accordance with
the bylaws.
The board of directors shall have the power to:
(1) Define the duties of the officers, employees and agents of the
association.
(2) Delegate the performance of its duties, but not the responsibility for
its duties, to the officers, employees and agents of the association.
(3) Fix the compensation and enter into employment contracts with its
officers and employees upon reasonable terms and conditions consistent with
applicable law.
(4) Dismiss officers and employees.
(5) Require bonds from officers and employees and fix the penalty thereof.
(6) Ratify written policies authorized by the association's management or
committees of the board.
(7) Regulate the manner in which any increase or decrease of the capital of
the association shall be made, provided that nothing herein shall restrict the
power of shareholders to increase or decrease the capital of the association in
accordance with law, and nothing shall raise or lower from two-thirds the
percentage required for shareholder approval to increase or reduce the capital.
(8) Manage and administer the business and affairs of the association.
(9) Adopt initial bylaws, not inconsistent with law or the articles of
association, for managing the business and regulating the affairs of the
association.
(10) Amend or repeal bylaws, except to the extent that the articles of
association reserve this power in whole or in part to shareholders.
(11) Make contracts.
(12) Generally perform all acts that are legal for a board of directors to
perform.
SEVENTH. The board of directors shall have the power to change the
location of the main office to any other place within the limits of Hurst, Texas
without the approval of the shareholders, and shall have the power to establish
or change the location of any branch or branches of the association to any other
location permitted under applicable law, without the approval of the
shareholders subject to approval by the Office of the Comptroller of the
Currency.
EIGHTH. The corporate existence of this association shall continue until
terminated according to the laws of the United States.
-4-
<PAGE>
NINTH. The board of directors of this association, or any 3 or more
shareholders owning, in the aggregate, not less than 10% of the stock of this
association, may call a special meeting of shareholders at any time. Unless
otherwise provided by the bylaws or the laws of the United States, or waived by
shareholders, a notice of the time, place and purpose of every annual and
special meeting of the shareholders shall be given by first-class mail, postage
prepaid, mailed at least 10, and no more than 60, days prior to the date of the
meeting to each shareholder of record at his/her address as shown upon the books
of this association. Unless otherwise provided by the bylaws, any action
requiring approval of shareholders must be effected at a duly called annual or
special meeting.
TENTH. The association shall indemnify to the fullest extent permitted
under the Texas Business Corporation Act any person who is made a named
defendant or respondent in any action, suit or proceeding, other than in an
administrative proceeding or action instituted by an appropriate bank regulatory
agency which proceeding or action results in a final order assessing civil
monetary penalties or requiring affirmative action by such person in the form of
payments to the association, whether civil, criminal, administrative,
arbitrative or investigative, or in any appeal in such an action, suit or
proceeding, by reason of the fact that he or she is or was a director, advisory
director or officer of the association, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such director, advisory director or officer in connection
with any such action, suit or proceeding. The association may indemnify other
persons, as permitted by the Texas Business Corporation Act and other applicable
laws. The association may purchase and maintain insurance on behalf of
directors, advisory directors, officers or other persons against any liability
asserted against such persons in their capacities as directors, advisory
directors, officers or otherwise, other than for liability asserted against such
persons pursuant to a formal order assessing civil monetary penalties.
ELEVENTH. No director of the association shall be liable to the
association or its shareholders for monetary damages for an act or omission in
such director's capacity as a director of the association, except that this
Article Eleventh shall not eliminate or limit the liability of a director of the
association for:
(i) a breach of such director's duty of loyalty to the association or its
shareholders;
(ii) an act or omission not in good faith or that involves intentional
misconduct or a knowing violation of the law;
(iii) a transaction from which a director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office; or
(iv) an act or omission for which the liability of a director is expressly
provided for by statute.
Any repeal or amendment of this Article Eleventh by the shareholders of the
association shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the association existing
at the time of such repeal or amendment. Anything herein to the contrary
notwithstanding, if the Texas Miscellaneous Corporation Laws Act is amended
after approval by the shareholders of this Article Eleventh to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the association shall be
eliminated or limited to the full extent then permitted by the Texas
Miscellaneous Corporation Laws Act, as so amended from time to time.
-5-
<PAGE>
TWELFTH. These articles of association may be amended at any regular or
special meeting of the shareholders by the affirmative vote of the holders of a
majority of the stock of this association, unless the vote of the holders of a
greater amount of stock is required by law, and in that case by the vote of the
holders of such greater amount. The association's board of directors may
propose one or more amendments to the articles of association for submission to
the shareholders.
-6-
<PAGE>
EXHIBIT 4.01
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
OF SURETY CAPITAL CORPORATION
THIS AMENDMENT NO. 1 ("Amendment No. 1") to that certain Rights
Agreement of Surety Capital Corporation dated June 17, 1997 by and between
Surety Capital Corporation (the "Company") and Securities Transfer Corporation
(the "Rights Agent") is made and entered into this 10th day of March, 1998, by
and between the Company and the Rights Agent.
For and in consideration of the covenants, terms and conditions of the
Rights Agreement, and the mutual benefits to the Company and the Rights Agent
established by this Amendment No. 1, the Company and the Rights Agent agree as
follows:
1. Section 7(b) of the Rights Agreement is hereby deleted in its
entirety and the following is substituted in its entirety for such paragraph
7(b):
"(b) The Purchase Price for each share of Common Stock to be
purchased pursuant to the exercise of a Right shall initially be Ten No/100
Dollars ($10.00), shall be subject to adjustment from time to time as
provided in SECTIONS 11 and 13 hereof and shall be payable in lawful money
of the United States of America in accordance with paragraph (c) below."
2. Exhibit A-1 is hereby amended by deleting it in its entirety and
the following is substituted in lieu thereof:
"EXHIBIT A-1
[Form of Rights Certificate]
Certificate No. R- Rights
-------------
NOT EXERCISABLE AFTER JUNE 16, 2000 OR EARLIER IF NOTICE OF REDEMPTION IS
GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF THE COMPANY,
AT $0.0001 PER RIGHT ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. THIS
RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BECOME VOID TO THE
EXTENT PROVIDED IN AND UNDER THE CIRCUMSTANCES SPECIFIED IN THE RIGHTS
AGREEMENT.
Rights Certificate
SURETY CAPITAL CORPORATION
This certifies that ______________________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms,
<PAGE>
provisions and conditions of the Rights Agreement dated as of June 17, 1997 (the
"Rights Agreement") between SURETY CAPITAL CORPORATION (the "Company") and
SECURITIES TRANSFER CORPORATION (the "Rights Agent"), to purchase from the
Company at any time after the Distribution Date (as such term is defined in the
Rights Agreement) and prior to 5:00 P.M. (Fort Worth, Texas time) on June 16,
2000 at the principal office of the Rights Agent one fully paid, nonassessable
share of Common Stock (the "Common Stock") of the Company, at an initial
purchase price of $10.00 per share, subject to adjustment as provided in the
Rights Agreement (the "Purchase Price"), upon presentation and surrender of this
Rights Certificate with the appropriate Form of Election to Purchase duly
executed. The number of Rights evidenced by this Rights Certificate (and the
number of shares which may be purchased upon exercise thereof) set forth above,
and the Purchase Price set forth above, are the numbers and Purchase Price as of
____________, 19__, based on the Common Stock as constituted at such date.
As provided in the Rights Agreement, the Purchase Price and the number of
shares of Common Stock or other securities which may be purchased upon the
exercise of the Rights evidenced by this Rights Certificate are subject to
modification and adjustment upon the happening of certain events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates. Copies of
the Rights Agreement are on file at the principal office of the Company and are
also available upon written request to the Company.
This Rights Certificate, with or without other Rights Certificates, upon
surrender at the principal office of the Rights Agent, may be exercised for
another Rights Certificate or Rights Certificates of like tenor and date
evidencing Rights entitling the holder to purchase a like aggregate number of
shares of Common Stock as the Rights evidenced by the Rights Certificate or
Rights Certificates surrendered shall have entitled such holder to purchase. If
this Rights Certificate shall be exercised (other than pursuant to SECTION
11(a)(ii) of the Rights Agreement) in part, the holder shall be entitled to
receive upon surrender hereof another Rights Certificate or Rights Certificates
for the number of whole Rights not exercised. If this Rights Certificate shall
be exercised in whole or in part pursuant to SECTION 11(a)(ii) of the Rights
Agreement, the holder shall be entitled to receive this Rights Certificate duly
marked to indicate that such exercise has occurred as set forth in the Rights
Agreement.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Company at its option at a redemption
price of $0.0001 per Right. Subject to the provisions of the Rights Agreement,
the Company, at its option, may elect to mail payment of the redemption price to
the registered holder of the Right at the time of redemption, in which event
this Certificate may become void without any further action by the Company.
The Company is not obligated to issue fractional shares of Common Stock
upon the exercise of any Right or Rights evidenced hereby, but in lieu thereof a
cash payment may be made, as provided in the Rights Agreement.
No holder of this Rights Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Common
Stock or of any other securities of the Company which may at any time be
issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter
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<PAGE>
submitted to stockholders at any meeting thereof, or to give or withhold consent
to any corporate action, or to receive notice of meetings or other actions
affecting stockholders (except as provided in the Rights Agreement), or to
receive dividends or subscription rights, or otherwise, until the Right or
Rights evidenced by this Rights Certificate shall have been exercised as
provided in the Rights Agreement."
3. Exhibit B is hereby amended by deleting it in its entirety and the
following is substituted in lieu thereof:
"EXHIBIT B
SUMMARY OF RIGHTS
TO PURCHASE COMMON STOCK
OF SURETY CAPITAL CORPORATION
Pursuant to the Surety Capital Corporation Rights Agreement dated as of
June 17, 1997 (the "Rights Agreement"), between Surety Capital Corporation (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 (the "Record
Date").
A SUMMARY OF THE RIGHTS AGREEMENT IS SET FORTH BELOW. HOWEVER, THIS
SUMMARY IS PROVIDED FOR CONVENIENCE ONLY, AND DOES NOT PURPORT TO FULLY
REPRESENT THE TERMS AND CONDITIONS GOVERNING THE RIGHTS. FOR A FULL DESCRIPTION
OF SUCH TERMS AND CONDITIONS, CONSULT THE RIGHTS AGREEMENT.
Each Right, when exercisable, entitles the registered holder (a) to
purchase from the Company one share of Common Stock, at a price of $10.00 per
share (the "Purchase Price"), subject to adjustment; (b) to purchase additional
shares of Common Stock ("Adjustment Shares") at a rate set forth below; and (c)
under certain circumstances to purchase shares of stock of a corporation that
merges with or into the Company (the "Merger Right"), as described below. The
Rights are not exercisable until the Distribution Date (as defined below).
The "Distribution Date" is defined as the earlier of (a) the first date of
public announcement by the Company or by a person (an "Acquiring Person") who or
which shall be the beneficial owner of securities representing fifteen percent
(15%) or more of the voting power of all securities of the Company outstanding
or such date within ten (10) business days thereafter as shall be determined by
the Board of Directors of the Company in its sole discretion (the "Stock
Acquisition Date"); or (b) the tenth (10th) day after the date of the
commencement of, or first public announcement of the intent of any person (other
than the Company, any subsidiary of the Company, or any employee benefit plan of
the Company or any of its subsidiaries) to commence (which intention to commence
remains in effect for five (5) business days after such announcement), a tender
or exchange offer which would result in such person becoming an Acquiring
Person, unless such date is extended by the Board of Directors of the Company
(provided such extended date shall be no later than the Stock Acquisition Date).
Once an Acquiring Person becomes such, then any Rights that are or were
beneficially owned by the Acquiring Person or any associate or affiliate of such
Acquiring Person shall become void, and any holder of such Rights shall
thereafter have no right to exercise such Rights.
-3-
<PAGE>
Until the Distribution Date (or earlier redemption or expiration of the
Rights), the following will apply to the Rights:
(a) Rights will be evidenced, with respect to any of the Common Stock
certificates outstanding as of the Record Date, by such Common Stock
certificates together with this Summary of Rights.
(b) Rights will be transferred with and only with Common Stock
certificates, and the surrender for transfer of any certificates for Common
Stock outstanding as of the Record Date (with or without this Summary of Rights
attached) will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificates.
(c) New Common Stock certificates issued after the Record Date upon
transfer or new issuances of Common Stock will contain a notation incorporating
the Rights Agreement by reference.
After the Distribution Date, the Rights will separate from the shares of
Common Stock. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Rights Certificates") will be mailed to
holders of record of the Common Stock as of the close of business on the
Distribution Date, and the separate Rights Certificates alone will evidence the
Rights.
The Rights will expire on the earliest of (a) June 16, 2000, (b) redemption
by the Company as described below, or (c) consummation of a merger transaction
with a person or group who acquires Common Stock pursuant to a Permitted Offer
(as defined below), and who offers in the merger the same price per share and
form of consideration paid in the Permitted Offer.
A "Permitted Offer" is defined as a tender offer or exchange offer for all
outstanding shares of Common Stock at a price and on terms determined by at
least a majority of the members of the Board of Directors who are not officers
of the Company to be both adequate and otherwise in the best interests of the
Company and its stockholders.
The Purchase Price payable, and the number of shares of Common Stock or
other securities or property issuable, upon exercise of the Rights, are subject
to adjustment from time to time to prevent dilution (a) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Common
Stock, (b) upon the grant to holders of the Common Stock of certain rights,
options or warrants to subscribe for Common Stock, certain convertible
securities or securities having the same or more favorable rights, privileges
and preferences as the Common Stock at less than the current market price of the
Common Stock, or (c) upon the distribution to holders of the Common Stock of
evidences of indebtedness, cash or assets (excluding regular quarterly cash
dividends out of earnings or retained earnings and dividends payable in Common
Stock) or of subscription rights or warrants (other than those referred to
above).
The right to purchase Adjustment Shares arises at the time any person
becomes an Acquiring Person (unless pursuant to a Permitted Offer). At such
time, proper provision shall be made so that each holder of a Right (except for
the Acquiring Person) will for a 60-day period thereafter have the right to
receive upon exercise of each Right at the Purchase Price, that number of shares
of Common Stock equal to the result obtained by dividing the Purchase Price by
fifty percent (50%) of the then current market price of the Common Stock. If
there is an insufficient number of shares of Common Stock available, then the
holder of a Right shall receive (after all authorized and unreserved shares of
Common Stock have been issued) a common stock equivalent (such as preferred
stock or another equity
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<PAGE>
security with at least the same economic value as the Common Stock) or such
number of shares of Common Stock or common stock equivalents as the Board of
Directors of the Company shall determine to be available on a pro rata basis.
However, in the event that the Merger Right arises (as described below), the
right to purchase Adjustment Shares shall become void.
The Merger Right arises in the event that, after the first date of public
announcement by the Company or an Acquiring Person that an Acquiring Person has
become such, 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 fifty percent (50%) or more of the Company's assets or
earning power are sold. At such time, each holder of a Right (except for the
Acquiring Person) shall thereafter have the right to receive, upon the exercise
of the Right at the Purchase Price, that number of shares of common stock of the
surviving or acquiring company equal to the result obtained by dividing the
Purchase Price by fifty percent (50%) of the then current market price of the
common stock of the surviving or acquiring company.
With certain exceptions, no adjustments in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least one
percent (1%) in such Purchase Price. No fractions of shares will be issued and,
in lieu thereof, an adjustment in cash will be made based on the market price of
the Common Stock on the last trading date prior to the date of exercise.
At any time prior to the earlier to occur of (a) ten (10) business days
after the time any person becomes an Acquiring Person or (b) the expiration of
the Rights, the Company may redeem the Rights in whole, but not in part, at a
price of $0.0001 per Right (the "Redemption Price") which redemption shall be
effective upon the action of the Board of Directors. Additionally, the Company
may thereafter redeem the then outstanding Rights in whole, but not in part, at
the Redemption Price (i) provided that such redemption is incidental to a merger
or other business combination transaction or series of transactions involving
the Company but not involving an Acquiring Person or any person who was an
Acquiring Person, or (ii) following an event giving rise to, and the expiration
of the exercise period for, the right to purchase Adjustment Shares if and for
as long as an Acquiring Person ceases to beneficially own securities
representing fifteen percent (15%) or more of the voting power of the Company's
voting securities and at the time of redemption there are no other persons who
are Acquiring Persons. The redemption of Rights described in the preceding
sentence shall be effective only as of such time when the right to purchase
Adjustment Shares is not exercisable, and in any event, only after ten (10)
business days prior notice.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends.
A COPY OF THE RIGHTS AGREEMENT IS AVAILABLE FREE OF CHARGE FROM THE
COMPANY. THIS SUMMARY DESCRIPTION OF THE RIGHTS DOES NOT PURPORT TO BE COMPLETE
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE RIGHTS AGREEMENT, WHICH IS
INCORPORATED HEREIN BY REFERENCE."
4. Except as specifically amended by this Amendment No. 1, the Rights
Agreement by and between the Company and the Rights Agent shall remain in full
force and effect.
-5-
<PAGE>
Executed in counterparts as of the date first above written.
Attest: SURETY CAPITAL CORPORATION
/s/ B. J. Curley By: /s/ Bobby W. Hackler
- ----------------------------- -----------------------------
Name: B. J. Curley Name: Bobby W. Hackler
Title: Secretary Title: Vice Chairman and Chief
Operating Officer
Attest: SECURITIES TRANSFER CORPORATION
/s/ By: /s/ Kevin Halter, Jr.
- ----------------------------- ------------------------------
Name: Name: Kevin Halter, Jr.
Title: Title: President
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<PAGE>
EXHIBIT 10.09
AMENDED
EXECUTIVE DEFERRED COMPENSATION AGREEMENT
BETWEEN SURETY CAPITAL CORPORATION
AND
----------------
This Agreement ("Agreement") is entered into by Surety Capital
Corporation, a Delaware corporation (the "Corporation"), and ________________
("________"), and it amends and restates, in its entirety, the Executive
Deferred Compensation Agreement between the Corporation and ________ dated
_________, 199___. The Corporation and ________ are collectively referred to as
the "Parties."
In consideration of the mutual covenants set forth below, it is
agreed as follows:
1. PURPOSE. The purpose of this Agreement is to assist the
Corporation in attracting and retaining in its employ executives of outstanding
competence by providing such executives with an economic incentive to continue
their employment with the Corporation.
2. DEFINITIONS. For purposes of this Agreement, the following terms
shall have the following meanings:
(a) "CAUSE" shall mean any act that is materially adverse to the
best interests of the Corporation and constitutes, on the part of ________,
common law fraud, a felony or other gross malfeasance of duty.
(b) "DISABILITY" shall mean the inability of ________ to manage
the Corporation's property, business or financial affairs by reason of illness,
infirmity, insanity, mental incompetency or otherwise, determined to be (or
reasonably expected to be, based upon then available medical information) of not
less than twelve (12) calendar months' duration. The initial determination (or
reasonable expectancy) shall be determined by the opinion of the Physician
(defined as a person licensed to practice medicine in Texas) regularly attending
________. If the Corporation's Board of Directors (the "Corporation's Board")
disagree with the Physician's opinion, or if ________ has not engaged a
Physician, the Corporation's Board may engage at the Corporation's expense a
Physician to examine ________, and ________ consents to such examination and to
waive, if applicable, any privilege between the Physician and ________ that may
arise as a result of said examination. If ________ has not engaged a Physician,
the opinion of the Physician engaged by the Corporation's Board shall control.
If ________ has engaged a Physician, and if, after conferring, ________'s
Physician and the Corporation's Physician cannot agree on a final opinion, they
shall within thirty (30) days thereafter choose a third consulting Physician
whose opinion shall control. The expense of the third consulting Physician shall
be borne equally by ________ and the Corporation.
(c) "GOOD REASON" shall mean:
(1) a material reduction of ________'s duties,
responsibilities and status with the Corporation;
(2) a reduction of ________'s base salary; or
(3) ________'s relocation to offices of the Corporation more
than thirty (30) miles from the current location of the Corporation's principal
offices.
<PAGE>
3. AMOUNT OF DEFERRAL. Subject to the limitations set forth in this
Agreement, ________ shall be entitled to deferred compensation payments on his
continuing employment with the Corporation until he reaches age sixty-five (65)
or at such earlier age as provided for in this Agreement. Although the varying
amounts payable to ________ as deferred compensation in the event of a
termination of his employment prior to his reaching age sixty-five (65) are set
forth in this Agreement, no funds or other property shall be set aside for the
payment of any amounts due to ________. ________'s rights are limited to the
rights to receive payments as provided under this Agreement, and his position
with respect thereto is that of a general, unsecured creditor of the
Corporation.
(a) DEFERRAL AMOUNT AT AGE SIXTY-FIVE. On ________'s reaching age
sixty-five (65) and his employment by the Corporation not having been terminated
as provided for in subsections (b) and (d) below prior to such date, ________
shall be entitled to, and the Corporation agrees to pay to ________, fifteen
(15) annual payments equal to the greater of:
(1) twenty-five percent (25%) of his then annual base salary,
(2) twenty-five percent (25%) of his average annual base
salary for the Corporation's two (2) fiscal years prior to, and the
Corporation's fiscal year of, his reaching age sixty-five (65), or
(3) Twenty-Five Thousand and 00/100 Dollars ($25,000.00).
(b) DEFERRAL AMOUNT PRIOR TO AGE SIXTY-FIVE - EMPLOYMENT
TERMINATION FOR REASONS OTHER THAN FOR CAUSE. ________ shall be entitled to the
payments provided for in SECTION 3(C) if his employment by the Corporation is
terminated prior to his reaching age sixty-five (65) for any of the following
reasons:
(1) for any reason other than for Cause (as herein defined),
(2) by ________ with Good Reason (as herein defined),
(3) as a result of the Disability (as herein defined) of
________, or
(4) as a result of the death of ________.
(c) PAYMENTS FOR EMPLOYMENT TERMINATION PRIOR TO AGE SIXTY-FIVE.
(1) If ________'s employment is terminated prior to age sixty-
five for any of the reasons under SECTION 3(B), he shall be entitled to the
following payment (the "Early Termination Payment"):
(A) the greater of (i) twenty-five percent (25%) of
________'s annual base salary on the date of termination, (ii) twenty-five
percent (25%) of ________'s average annual base salary for the Corporation's two
(2) fiscal years prior to, and the Corporation's fiscal year of, the year of his
termination of employment; or (iii) Twenty-Five Thousand Dollars ($25,000.00),
(B) multiplied times Fifteen (15), and
(C) the result multiplied times that percentage obtained
by dividing (i) the number of years of ________'s service to the Corporation
commencing with calendar year 199___
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<PAGE>
and ending with the calendar year in which ________'s employment by the
Corporation is terminated pursuant to SECTION 3(B) (the "Termination Year")
(such numerator to be inclusive of 199___ and the Termination Year by (ii)
_____.
(2) If the Early Termination Payment pursuant to SECTION
3(C)(1) exceeds $250,000, the Corporation shall pay the Early Termination
Payment in fifteen (15) equal annual payments.
(3) If the Early Termination Payment pursuant to SECTION
3(C)(1) is equal to or less than $250,000, ________ shall be entitled, as he may
elect, to either of the following payment schedules:
(A) a single lump sum payment in an amount equal to the
Early Termination Payment; or
(B) Fifteen (15) equal annual payments collectively equal
to the Early Termination Payment.
(d) DEFERRAL AMOUNT PRIOR TO AGE SIXTY-FIVE - FOR CAUSE EMPLOYMENT
TERMINATION. If ________'s employment by the Corporation is terminated for
Cause prior to his reaching age sixty-five (65), he shall not be entitled to any
amounts under this Agreement, and the Corporation's obligations under this
Agreement shall terminate on the date of termination of ________'s employment.
4. PAYMENT PROCEDURES FOR DEFERRED AMOUNTS.
(a) DEFERRAL PAYMENTS AT AGE SIXTY-FIVE. If the deferred compensation
payable to ________ is determined under the provisions of SECTION 3(A), the
first installment of the annual deferred compensation amount shall be paid to
him on or before thirty (30) days following his reaching age sixty-five (65),
and the fourteen successive annual installments shall be paid to him on or
before the annual anniversary date of the first installment. If ________'s
employment by the Corporation continues after he reaches age sixty-five (65), he
may elect to: (1) defer the commencement of the payments until his employment
terminates, but with the deferred payments to be determined at age sixty-five
(65) as provided for in SECTION 3(A), or (2) have the payments begin during his
continued employment by the Corporation.
(b) DEFERRAL PAYMENTS PRIOR TO AGE SIXTY-FIVE.
(1) If ________'s employment by the Corporation is terminated
under the provisions of SECTION 3(B) and he elects to receive a single payment
under SECTION 3(C)(3)(A), the single payment shall be paid to ________ within
ninety (90) days after the termination of his employment, and such payment shall
terminate all obligations of the Corporation under this Agreement.
(2) If ________'s employment by the Corporation is terminated
under the provisions of SECTION 3(B) and the provisions of SECTION 3(C)(2) apply
or he elects to receive fifteen (15) payments under SECTION 3(C)(3)(B), the
first installment shall be paid to him on or before thirty (30) days following
the employment termination date, and the fourteen successive annual installments
shall be paid to him on or before the annual anniversary date of the first
installment.
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<PAGE>
(3) If ________ fails to notify the Corporation in writing of his
election under SECTION 3(C)(3) within twenty-five (25) days after his employment
termination date, the Corporation may select either of the payment options and
such selection shall be binding on ________.
(4) If ________'s employment by the Corporation is terminated
under the provisions of SECTION 3(D), no payment shall be owed to ________, and
the Corporation's obligations under this Agreement shall terminate on the
effective date of ________'s termination of employment.
(c) PARTY TO RECEIVE PAYMENT. All payments owed under this Agreement
shall be made to ________ or, in the event of ________'s death, to the
beneficiary designated by ________ or to ________'s estate in the event he does
not designate a beneficiary. ________ shall have the right to designate a
beneficiary to receive any payments under this Agreement which may remain unpaid
at the time of his death. The designation shall be delivered in writing to the
Corporation's Board. The designation may be changed by ________ at any time in
a similar manner without the consent of any prior designated beneficiary. If no
designation of a beneficiary is delivered by ________ to the Corporation's
Board, any payments remaining unpaid at the time of the ________'s death shall
be paid to his estate. If in the judgment of the Corporation's Board ________
or his beneficiary is legally, physically or mentally incapable of personally
receiving any payments due under this Agreement, the payment shall be made to
the guardian or other legal representative of ________ or his beneficiary, or to
such other person or institution who in the opinion of the Corporation's Board
is then maintaining or has custody of ________ or the beneficiary. Payment
shall constitute a full discharge with respect to such benefits.
5. INSURANCE. To provide a fund with which to pay any amounts owed under
this Agreement, the Corporation may (but shall not be obligated to) apply for
insurance on ________'s life. The Corporation shall be the owner and beneficiary
of any such insurance policy, and it may discontinue the insurance coverage at
any time without any obligation to obtain replacement insurance. ________ agrees
to submit to such reasonable physical examinations and to provide any
information as may be necessary in connection with the purchase of such
insurance. The Corporation shall collect all proceeds or termination value of
the insurance, if any, and may (but shall not be obligated to) apply the
proceeds toward the payment of any amounts owed under this Agreement. Any
insurance policy owned by the Corporation on ________'s life, and the proceeds
or termination value of such policy, shall not be encumbered or otherwise
restricted by the Corporation's obligations under this Agreement, except to the
extent such policy or proceeds are the general assets of the Corporation. If
________'s employment by the Corporation is terminated for any reason other than
his death and the Corporation then owns a life insurance policy on his life, the
Corporation agrees that, if permitted by the issuing company and not prohibited
by any agreement or limitation to which the Corporation may then be subject,
________ may acquire the life insurance policy from the Corporation for the
lesser of: (1) the then cash surrender value of the policy, or (2) the total
premium payments made by the Corporation with respect to the policy prior to
such date (as same is determined by the issuing company).
6. RESTRICTIONS. No right or benefit under this Agreement shall be subject
to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge
and any such actions shall be void. No right or benefit under this Agreement
shall in any manner be liable for or subject to the debts, contracts,
liabilities, or torts of the person entitled to such benefits. If ________ or a
beneficiary of ________ should become bankrupt or attempt to anticipate,
alienate, sell, assign, pledge, encumber, or charge any right to a benefit under
this Agreement, the right or benefit shall automatically terminate as to
________ or the beneficiary; but, in such event, the Corporation may hold or
apply the same or any part thereof for the benefit of ________'s spouse,
children, or other dependents or any of them, in such manner and in such portion
as the Corporation's Board may deem proper in its sole discretion.
-4-
<PAGE>
7. UNSECURED PROMISE. This Agreement shall create only an unfunded,
unsecured promise by the Corporation to pay the benefits provided herein.
________ does not have, nor will ________ have, any claim, by means of a
security or collateral interest or otherwise, to any of the assets of the
Corporation, the same being owned solely by the Corporation.
8. ADJUSTMENT TO PAYMENT AMOUNT. The deferred compensation amount payable
to ________ under this Agreement, if any, shall be reduced by any amounts
________ owes the Corporation. These amounts may include, but are not limited
to, amounts owed by ________ for loans, advances, and expense reimbursements.
9. CONTINUATION OF EMPLOYMENT. Neither this Agreement nor ________'s right
to receive payment of any benefits under this Agreement shall be construed as
giving ________ any right to be retained as an employee of the Corporation.
10. INVALID PROVISION. In the event any of the provisions, or portions
thereof, of this Agreement are held to be invalid, illegal or unenforceable by
any court of competent jurisdiction, the validity, legality and enforceability
of the remaining provisions, or portions thereof, shall not be affected.
Moreover, so far as is reasonable and possible, effect shall be given to the
intent manifested by the portion held invalid, illegal, or unenforceable.
11. CONSTRUCTION.
(a) FORM AND GENDER. Whenever required by the context in which it is
used, the singular number shall include the plural, and the plural number shall
include the singular. In like manner, the masculine gender shall include the
feminine, and the feminine gender shall include the masculine.
(b) CAPTIONS. The captions or headings in this Agreement are made for
convenience and general reference only and shall not be construed to describe,
define, or limit the scope or intent of the provisions of this Agreement.
12. GOVERNING LAW. This Agreement has been executed in and shall be
governed by the laws of the State of Texas. The Parties agree that the terms of
this Agreement shall be performed and all legal proceedings involving this
Agreement shall be conducted in Tarrant County, Texas.
13. INUREMENT. This Agreement shall extend to and be binding upon
________ and his heirs, legatees, legal representatives, and successors, and on
the Corporation, its successors or assigns. The rights of ________ under this
Agreement may not be assigned.
14. AMENDMENT. All amendments or changes to this Agreement shall be in
writing.
15. COUNTERPARTS. This Agreement may be executed in multiple counterparts,
each of which shall be an original Agreement. All counterparts together shall
represent but one and the same instrument. The counterpart executed and held in
the Corporation's corporate minute book shall control in the event of any
dispute or in cases of difference between the counterparts.
16. FURTHER ASSURANCES. Each Party to this Agreement agrees to
perform any further acts and to execute and deliver any documents or legal
instruments which may be reasonably necessary to carry out the provisions of
this Agreement. Each Party also agrees not to enter into any Agreement or
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<PAGE>
contract with others that will tend to alter, amend, abrogate or in any way
adversely affect the provisions of the Agreement.
17. ENTIRE AGREEMENT. This Agreement contains the entire understanding
between the undersigned concerning the subject matter of the Agreement. There
are no other representations, agreements, arrangements, or understandings, oral
or written, between or among the Parties, relating to the subject matter of this
Agreement, which are not fully expressed herein.
18. AUTHORIZATION. The Corporation is authorized to enter into this
Agreement by virtue of resolutions duly adopted by Corporation's Board.
19. EFFECTIVE DATE. The effective date of this Agreement is August 29,
1997.
SURETY CAPITAL CORPORATION
By:
------------------------ ------------------------
C. Jack Bean, Chairman ------------------------
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<PAGE>
SURETY CAPITAL CORPORATION
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
August 29, 1997
Mr. _________________
Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Re: Amended Executive Deferred Compensation Agreement
Between Surety Capital Corporation and _______________
Dear ________:
A copy of your Amended Executive Deferred Compensation Agreement (the
"Agreement") with Surety Capital Corporation ("Surety") is attached for your
review and records. This Agreement has been approved by the Board of Directors
of Surety, and it contains the entire agreement between yourself and Surety with
regard to all deferred compensation benefits previously discussed with you. The
Agreement replaces the _________, 199___ Executive Deferred Compensation
Agreement previously entered into by Surety.
If the Agreement is acceptable to you, please sign the enclosed copy of
this letter and return the signed copy to my attention. Also, please complete,
sign, have notarized, and return the enclosed beneficiary designation form.
Your signature on the enclosed letter and your completion of the beneficiary
designation form will complete the paperwork for the Agreement.
If any questions arise, please do not hesitate to let me know.
Sincerely,
C. Jack Bean, Chairman
Agreed and Accepted Effective
August 29, 1997
By:
-------------------------------
------------------------
Attachments:
Beneficiary Designation Form
Executive Deferred Compensation Agreement
<PAGE>
DESIGNATION OF BENEFICIARY
TO: Surety Capital Corporation
Board of Directors
FROM:
----------------------------
- --------------------------------------------------------------------------------
Pursuant to SECTION 4(C) of the Amended Executive Deferred Compensation
Agreement Between _________________ and Surety Capital Corporation (the
"Agreement") dated August 29, 1997, permitting the designation of a beneficiary
or beneficiaries by myself for benefits payable under the Agreement, I hereby
designate the following person or persons as primary and secondary beneficiaries
of any amounts under the Agreement payable by reason of my death:
Primary Beneficiary
- -------------------
Name:
----------------------------------------
Address:
-------------------------------------
-------------------------------------
Social Security Number:
----------------------
Relationship:
--------------------------------
Secondary Beneficiary
- ---------------------
Name:
----------------------------------------
Address:
-------------------------------------
-------------------------------------
Social Security Number:
-----------------------
Relationship:
-------------------------------------
I RESERVE THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY DESIGNA TION. I
HEREBY REVOKE ALL PRIOR DESIGNATIONS (IF ANY) OF PRIMARY BENEFICIARIES AND
SECONDARY BENEFICIARIES.
All sums payable under the Agreement by reason of my death shall be paid to
my primary beneficiary, if he or she survives me. If no primary beneficiary
survives me, the sums shall be paid to the secondary beneficiary. If none of
the named beneficiaries survive me, any amounts payable under the Agreement
shall be paid in accordance with the provisions of the Agreement.
---------------------------------
------------------
<PAGE>
STATE OF TEXAS
COUNTY OF TARRANT
This instrument was acknowledged before me on __________, 1997, by
_________________.
----------------------------------------------
Notary Public in and for the State of Texas
<PAGE>
EXHIBIT 10.10
SURETY CAPITAL CORPORATION
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
August 29, 1997
Mr. _________________
Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Re: Level Term Life Insurance
Dear ________:
This letter amends and restates, in its entirety, that certain letter
agreement dated _________, 199___ from Surety Capital Corporation ("Surety")
addressed to you regarding level term life insurance.
We have previously discussed Surety's providing life insurance coverage for
you during the period you are an employee of Surety, and this letter is intended
to outline the revised agreement we have reached for such coverage.
1. INSURANCE COVERAGE AND PREMIUM PAYMENTS.
(a) You have applied for and received a term life insurance policy
insuring your life in the face amount of $250,000. This policy was issued by
First Colony Life Insurance Company (Policy #_______), and Surety will be
provided with a copy of the insurance application and policy. You are the owner
of the policy and Surety has no ownership interest in the policy or the proceeds
payable under the policy, but Surety will pay the policy premiums until the
earlier of (1) your reaching age sixty-five (65), or (2) a termination of your
employment by Surety (subject to the other provisions in this letter).
(b) During the term of your employment by Surety, you will provide
Surety with a copy of the periodic premium statement, and Surety will either pay
same prior to its due date or, if you have previously paid the statement, Surety
will reimburse the premium amount to you within thirty (30) days after Surety's
receipt of the statement. The premium amount that Surety is obligated to
reimburse shall be limited to the cost of level term life insurance from the
issuing insurance company for a male who is your age and who qualifies for the
company's standard rating for a non-smoker without any restrictive health
conditions.
2. PREMIUM PAYMENTS - EMPLOYMENT TERMINATION PRIOR TO AGE SIXTY-FIVE.
The following provisions shall apply with regard to Surety's obligation to pay
the premium payments in the event of a termination of your employment prior to
your reaching age sixty-five (65).
(a) If your employment by Surety is terminated prior to your reaching
age sixty-five (65):
(1) for any reason other than for Cause (as herein defined),
(2) by you with Good Reason (as herein defined), or
<PAGE>
Mr.__________________
August 29, 1997
Page 2
(3) as a result of your Disability,
Surety shall be obligated to continue the premium payments until
the earlier of your reaching age sixty-five (65) or your death.
(b) If your employment by Surety is terminated for Cause prior to your
reaching age sixty-five (65), Surety shall have no further obligations to pay
the premiums on the policy, and Surety's obligations under this Agreement shall
terminate on the date of your employment termination.
(c) For purposes of this letter, the following terms shall have the
following meanings:
(1) "Cause" shall mean any act that is materially adverse to the
best interests of Surety and constitutes, on your part, common law fraud, a
felony or other gross malfeasance of duty.
(2) "Disability" shall mean your inability to manage Surety's
property, business or financial affairs by reason of illness, infirmity,
insanity, mental incompetency or otherwise, determined to be (or reasonably
expected to be, based upon then available medical information) of not less than
twelve (12) calendar months' duration. The initial determination (or reasonable
expectancy) shall be determined by the opinion of your regularly attending
Physician (defined as a person licensed to practice medicine in Texas). If
Surety's Board of Directors ("Surety's Board") disagree with your Physician's
opinion, or if you have not engaged a Physician, Surety's Board may engage, at
its expense, a Physician to examine you, and you consent to such examination and
waive, if applicable, any privilege between the Physician and yourself that may
arise as a result of said examination. If you have not engaged a Physician, the
opinion of the Physician engaged by Surety's Board shall control. If you have
engaged a Physician, and if, after conferring, your Physician and Surety's
Physician cannot agree on a final opinion, they shall within thirty (30) days
thereafter choose a third consulting Physician whose opinion shall control. The
expense of the third consulting Physician shall be borne equally by you and
Surety.
(3) "Good Reason" shall mean:
(a) a material reduction of your duties, responsibilities
and status with Surety;
(b) a reduction of your base salary; or
(c) your relocation to offices of Surety more than thirty
(30) miles from the location of Surety's principal offices.
3. OTHER DOCUMENTS. Both you and Surety agree to enter into such other
documents or agreements that may be necessary to fulfill the provisions of this
letter.
<PAGE>
Mr.__________________
August 29, 1997
Page 3
If this letter properly outlines your understanding of Surety's
obligations, please sign one copy of this letter and return it to the
undersigned.
Sincerely,
C. Jack Bean, Chairman
Agreed and Accepted:
_________________________________
_________________
Date: ________________, 1997
<PAGE>
EXHIBIT 10.14
1997 NON-QUALIFIED STOCK OPTION PLAN
FOR OFFICERS AND KEY EMPLOYEES OF
SURETY CAPITAL CORPORATION
SECTION 1. PURPOSES.
The purposes of this 1997 Non-Qualified Stock Option Plan (the "Plan")
for Officers and Key Employees are to promote the continued prosperity of
Surety Capital Corporation (the "Corporation") and its Subsidiary by aligning
the long-term financial interests of the officers and key employees of the
Corporation and its Subsidiary with those of the stockholders of the Corporation
and to provide an additional incentive for such individuals to remain as
officers and key employees of the Corporation and its Subsidiary.
SECTION 2. DEFINITIONS.
A. The following words and phrases, wherever capitalized, shall have
the following meanings, unless the context otherwise requires:
1. "Agreement" means the written agreement which sets forth the
terms and conditions of the Option granted to a Participant under the Plan,
including any amendment to such written agreement. Agreements shall be subject
to the express terms and conditions set forth herein.
2. "Board" means the Board of Directors of the Corporation.
3. "Cause" means any act that is materially adverse to the best
interests of the Corporation and constitutes, on the Participant's part, common
law fraud, a felony or other gross malfeasance of duty.
4. "Change in Control of the Corporation" shall be deemed to have
occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing twenty percent (20%)
or more of the combined voting power of the Corporation's then outstanding
securities; (2) during any period of two (2) consecutive years, individuals who
at the beginning of such period constitute the Board 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 two-thirds (2/3rds) of the directors then in
office who were directors at the beginning of the period; (3) the stockholders
of the Corporation approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation which would result in
the voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least seventy-five (75%) of
the combined voting power of the voting securities of the Corporation or such
surviving entity outstanding immediately after such merger or consolidation; or
(4) the stockholders of the Corporation approve a plan of complete liquidation
of the Corporation or an agreement for the sale or disposition of all or
substantially all of its assets.
5. "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
6. "Committee" means the Stock Option Committee of the Board.
<PAGE>
7. "Common Stock" means shares of $0.01 par value common stock of
the Corporation, subject to adjustment and substitution pursuant to SECTION 7.
8. "Corporation" means Surety Capital Corporation, a Delaware
corporation.
9. "Disability" means a Participant's inability to continue the full
time performance of the requirements of his position of employment by the
Corporation or its Subsidiary, as the case may be, immediately prior to the
disability by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-continued and
indefinite duration. An individual shall not be considered to be disabled unless
he furnishes proof of the existence of a disability in such form as the
Committee may require.
10. "Effective Date" means January 2, 1997.
11. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
12. "Exercise Price" means, with respect to each share of Common
Stock subject to an Option, $4.18.
13. "Expiration Date" means January 1, 2006.
14. "Fair Market Value" means the closing price of the Common Stock
on the American Stock Exchange as reported on the composite tape, or if it is
not listed on the American Stock Exchange, the closing price on the exchange or
established market system on which the Common Stock is then listed; if, however,
there is no trading of the Common Stock on the date in question, then the
closing price of the Common Stock, as so reported, on the last preceding date on
which there was trading shall instead be used to determine Fair Market Value; or
if Fair Market Value for any date in question cannot be determined as
hereinabove provided, Fair Market Value shall be determined by the Committee by
whatever method or means its members, in the good faith exercise of their
discretion, at that time shall deem appropriate.
15. "Good Reason" means:
a. a material reduction of Participant's duties,
responsibilities and status with the Corporation or the Subsidiary, as the case
may be;
b. a reduction of Participant's base salary;
c. Participant's relocation to offices of the Corporation more
than thirty (30) miles from the location of the Corporation's principal offices
at 1845 Precinct Line Road, Suite 100, Hurst, Texas; or
d. the death, Disability or Retirement of Participant.
16. "Grant Date" means January 2, 1997.
17. "Legal Representative" means the guardian or legal
representative of a Participant who, upon the Disability or incapacity of the
Participant, shall have acquired on behalf of the Participant, by legal
proceeding or otherwise, the right to exercise the Participant's rights and
receive his benefits under the Plan.
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<PAGE>
18. "Option" means a stock option granted under the Plan to a
Participant on the Grant Date pursuant to SECTION 5. All Options granted under
the Plan shall be "nonstatutory stock options," i.e., options which do not
qualify under Sections 422 or 423 of the Code.
19. "Participant" means C. Jack Bean, Bobby W. Hackler, G. M.
Heinzelmann, III, B. J. Curley, Barry Carroll and Robert E. Crews.
20. "Personal Representative" means the executor, administrator or
personal representative appointed to administer a Participant's probate estate,
or if the individual has no probate estate, then the successor trustee(s) of any
revocable living trust the individual established during his lifetime.
21. "Plan" means the plan set forth herein which shall be known as
the "1997 Non-Qualified Stock Option Plan for Officers and Key Employees of
Surety Capital Corporation," as same may from time to time be amended.
22. "Qualified Domestic Relations Order" means a "qualified domestic
relations order" as defined in the Code.
23. "Retirement" means the withdrawal from the active employment
(either part-time or full-time) with the Corporation and/or the Subsidiary of a
Participant at the age of 65 or more with the intent not to be actively employed
(either part-time or full-time) by the Corporation and/or the Subsidiary as an
employee in the future.
24. "Subsidiary" means Surety Bank, National Association, a national
banking association.
B. Except when otherwise indicated by the context, any masculine or
feminine terminology when used in the Plan shall also include the opposite
gender; and the definition of any term herein in the singular shall also include
the plural, and vice versa.
SECTION 3. SHARES AVAILABLE UNDER THE PLAN.
The aggregate number of shares of Common Stock which may be issued,
and as to which grants of Options may be made, under the Plan is 500,000 shares
of Common Stock, subject to adjustment and substitution as set forth in SECTION
7. The shares of Common Stock which may be issued under the Plan may be either
authorized but unissued shares or treasury shares or partly each.
SECTION 4. ADMINISTRATION OF THE PLAN.
A. The Plan shall be administered by the Committee, which shall have
full power and authority, subject to the provisions of the Plan, to supervise
the administration of the Plan and interpret the provisions of the Plan and any
Options granted under the Plan. Any decision by the Committee shall be final
and binding on all parties. No member of the Committee shall be liable for any
determination, decision or action made in good faith with respect to the Plan or
any Options granted under the Plan. The Committee may delegate the day-to-day
administration of the Plan to any individual or individuals it deems appropriate
and may retain advisors to advise it.
-3-
<PAGE>
B. A majority of the Committee shall constitute a quorum at any
meeting, and the acts of a majority of the members present at any meeting at
which a quorum is present, or acts approved in writing by all the members of the
Committee, shall constitute acts of the Committee.
C. Subject to SECTION 4.D., the Committee shall have full authority
to carry out the provisions of the Plan, including authority to interpret the
Plan and prescribe such rules, regulations and procedures in connection with the
operation of the Plan as it shall deem to be necessary and advisable for the
administration of the Plan consistent with the purposes of the Plan. All
questions of interpreta tion and application of the Plan, or as to Options
granted under the Plan, shall be subject to the determination of the Committee,
which shall be final and binding.
D. The selection of Participants to whom Options are to be granted,
the timing of such grants, the number of shares subject to any Option, the
exercise price of any Option, the periods during which any Option may be
exercised and the term of any Option shall be as set forth in the Plan, and the
Committee shall have no discretion as to such matters.
E. The Committee shall have overall responsibility for keeping
records and providing necessary communications to Participants under the Plan.
The records of the Committee with respect to the Plan shall be conclusive and
binding on all Participants and all persons or entities claiming through or
under them.
F. The expenses of administering the Plan shall be borne by the
Corporation.
G. Any action which the Committee is authorized to take under this
Agreement may be taken by the Board and such action by the Board shall have the
same force and effect as if taken by the Committee.
SECTION 5. GRANT OF OPTIONS.
A. The persons eligible to receive Options under the Plan are the
Participants.
B. Each Participant shall be granted, without further action by the
Board or the Committee, effective as of the Grant Date, an Option to purchase
that number of shares of Common Stock, subject to adjustment and substitution as
set forth in SECTION 7, set forth below next to the name of such Participant:
Participants No. of Shares
------------ --------------
C. Jack Bean 125,000 shares
Bobby W. Hackler 125,000 shares
G. M. Heinzelmann, III 125,000 shares
B. J. Curley 75,000 shares
Barry Carroll 25,000 shares
Robert E. Crews 25,000 shares
No additional Options may be granted under the Plan.
SECTION 6. TERMS AND CONDITIONS APPLICABLE TO OPTION GRANTS.
A. Options granted under the Plan shall be subject to the following
terms and conditions:
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<PAGE>
1. The Exercise Price with respect to each share of Common Stock
covered by an Option shall be $4.18, which is one hundred percent (100%) of the
Fair Market Value of such share as of the Grant Date.
2. The term of each Option shall be ten (10) years, commencing on the
Grant Date and terminating on the Expiration Date.
3. Unless vesting is accelerated in accordance with the provisions of
SECTION 6.A.4., each Option shall vest with respect to twenty percent (20%) of
the shares of Common Stock covered by the Option on December 31, 1997, with
respect to forty percent (40%) of the shares of Common Stock covered by the
Option on December 31, 1998, with respect to sixty percent (60%) of the shares
of Common Stock covered by the Option on December 31, 1999, with respect to
eighty percent (80%) of the shares of Common Stock covered by the Option on
December 31, 2000, and with respect to one hundred percent (100%) of the shares
of Common Stock covered by the Option on December 31, 2001 if the Participant is
employed by the Corporation or Subsidiary on such dates; provided, however, that
such vesting schedule shall continue in effect after a termination of a
Participant's employment if such termination is by the Participant for Good
Reason or by the Corporation or the Subsidiary without Cause. Unless the
vesting schedule continues under the foregoing or vesting is accelerated under
SECTION 6.A.4., an Option that is not vested on the termination of a
Participant's employment shall lapse and terminate as of such date of
termination.
4. Notwithstanding the provisions of SECTION 6.A.3., each Option
shall become fully vested upon the occurrence of either: (a) a Participant's
termination of employment by the Corporation and/or the Subsidiary, as the case
may be, by reason of death, Disability or Retirement, or (b) a Change in Control
of the Corporation.
5. No Option shall be transferable by a Participant otherwise than by
will, or if a Participant dies intestate, by the laws of descent and
distribution of the state of domicile of the Participant at the time of death or
pursuant to a Qualified Domestic Relations Order. Options, to the extent
vested, shall be exercisable during the lifetime of a Participant only by the
Participant or by the Participant's Legal Representative.
6. An Option, to the extent vested, is exercisable by the Participant
or by his Legal Representative or Personal Representative, as the case may be,
at any time or from time to time on or before the Expiration Date of such
Option.
7. Subject to the foregoing provisions of this SECTION 6 and the
other provisions of the Plan, any Option granted under the Plan shall be subject
to such restrictions and other terms and conditions, if any, as shall be
determined by the Committee in its discretion and set forth in an Agreement.
Furthermore, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act.
To the extent any provision of the Plan or action by the Committee fails to so
comply, it shall be deemed null and void, to the extent permitted by law and
deemed advisable by the Committee.
8. All grants of Options shall be evidenced by an Agreement.
B. Options granted under the Plan may be exercised as follows:
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<PAGE>
1. Each vested Option may be exercised by delivery of written notice
to the Corporation stating the number of shares of Common Stock covered by the
exercise, form of payment, and proposed closing date. An Option may be
exercised in whole or in part.
2. The Participant shall furnish the Corporation before closing such
other documents or representations as the Corporation may require to assure
compliance with applicable laws and regulations.
3. The Exercise Price for each Option shall be paid in full upon
exercise and shall be payable in cash (including check, bank draft or money
order); provided, however, that in lieu of cash, the individual exercising the
Option may pay the Exercise Price, in whole or in part, by delivering to the
Corporation shares of Common Stock having a Fair Market Value on the date of
exercise of the Option equal to the Exercise Price of the shares being
purchased, except that (a) any portion of the Exercise Price representing a
fraction of a share shall in any event be paid in cash, and (b) no shares of
Common Stock which have been held for less than six (6) months may be delivered
in payment of the Exercise Price of an Option.
4. A Participant shall not be, and will not have any of the rights or
privileges of, a stockholder of the Corporation in respect to any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Corporation to the
Participant.
C. The obligation of the Corporation to issue shares of Common Stock
under the Plan shall be subject to (1) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to such
shares, if deemed necessary or appropriate by counsel for the Corpora tion; (2)
the condition that any shares to be issued shall have been listed (or authorized
for listing upon official notice of issuance) upon each stock exchange, if any,
on which the Common Stock may then be listed; and (3) compliance with all other
applicable laws, regulations, rules and orders which may then be in effect.
SECTION 7. ADJUSTMENT AND SUBSTITUTION OF SHARES.
A. In the event any change occurs in the number of shares of Common
Stock outstanding as a result of any stock split, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares, split-up, split-off, spin-off, liquidation or other similar change in
capitalization, or any distribution to holders of Common Stock other than cash
dividends, the number or kind of shares of Common Stock that may be issued under
the Plan pursuant to SECTION 3, including shares covered by existing Options,
shall be automatically adjusted to preserve the proportionate interests of the
Participants in the Corporation as represented by their outstanding Options, and
the proportionality of the share pool under the Plan in relation to the total
number of shares outstanding.
B. If the outstanding shares of the Common Stock shall be changed
into or become exchangeable for a different number or kind of shares of stock or
other securities of the Corporation or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up, combination
of shares, merger or consolidation, then there shall be substituted for each
share of the Common Stock that may be issued under the Plan pursuant to SECTION
3, including shares covered by existing Options, the number and kind of shares
of stock or other securities into which each outstanding share of Common Stock
shall be so changed or for which each such share shall become exchangeable.
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<PAGE>
C. In case of any adjustment or substitution as provided for in
SECTIONS 7.A. or 7.B., the aggregate Exercise Price for all shares subject to
each then outstanding Option prior to such adjustment or substitution shall be
the aggregate Exercise Price for all shares of stock or other securities
(including any fraction) into which such shares shall have been converted or
which shall have been substituted for such shares. Any new Exercise Price per
share shall be carried to at least three decimal places with the last decimal
place rounded upwards to the nearest whole number.
D. If the outstanding shares of Common Stock shall be changed in
value by reason of any spin-off, split-off or split-up, or dividend in partial
liquidation, dividend in property other than cash or extraordinary distribution
to holders of Common Stock, the Committee shall make any adjustments to any then
outstanding Options which it determines are equitably required to prevent
dilution or enlargement of the rights of the Participants which would otherwise
result from any such transaction.
E. No adjustment or substitution provided for in this SECTION 7 shall
require the Corporation to issue or sell a fraction of a share or other
security. Accordingly, all fractional shares or other securities which result
from any such adjustment or substitution shall be eliminated and not carried
forward to any subsequent adjustment or substitution.
F. Except as provided in this SECTION 7, a Participant shall have no
rights by reason of issuance by the Corporation of stock of any class or
securities convertible into stock of any class, any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.
SECTION 8. AMENDMENT AND TERMINATION.
A. The right to amend and terminate the Plan is hereby specifically
reserved to the Board; provided, however, that no termination of the Plan shall
result in the cancellation of any outstanding Options theretofore granted under
the Plan; and provided further that no amendment of the Plan shall: (1)
adversely affect the rights of the holder of an Option granted under the Plan,
unless such holder consents in writing to such amendment, or (2) cause Options
granted under the Plan to not qualify for the exemption from Section 16(b) of
the Exchange Act provided by Rule 16b-3, or any successor rule.
B. In the event of any such amendment to the Plan, the holder of any
Option outstanding under the Plan shall, upon request of the Committee and as a
condition to the exercisability of such Option, execute a conforming amendment
in the form prescribed by the Committee to the Agreement referred to in SECTION
6.A.8. within such reasonable time as the Committee shall specify in such
request.
SECTION 9. EFFECTIVE DATE AND DURATION OF PLAN.
A. The Plan shall become effective on the Effective Date.
B. The Plan shall continue in effect until all Options granted under
the Plan have been exercised or have lapsed or otherwise been terminated
pursuant to the Plan. Expiration or other termination of the Plan shall not
affect outstanding Options.
SECTION 10. MISCELLANEOUS.
A. Nothing in the Plan, in any Option granted under the Plan, or in
any Agreement shall confer any right on a Participant to continue as an employee
of the Corporation and/or the Subsidiary,
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<PAGE>
as the case may be, or interfere in any way with the rights of the Corporation
and/or the Subsidiary, as the case may be, to terminate the employment of such
Participant.
B. The Corporation shall have the right, in connection with the
exercise of an Option, to require a Participant to pay to the Corporation an
amount sufficient to provide for any withholding tax liability imposed with
respect to such exercise.
C. To the extent that federal laws (such as the Code and the federal
securities laws) do not otherwise control, the Plan shall be governed and
construed in all respects in accordance with Texas law.
-8-
<PAGE>
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT ("Agreement") is made this 2nd day of January,
1997 between Surety Capital Corporation, a Delaware corporation (the
"Corporation"), and ______________ (the "Participant"). Capitalized terms used
but not defined in this Agreement are defined in the Plan.
WHEREAS, on January 2, 1997 the Board of Directors of the Corporation (the
"Board") adopted the 1997 Non-Qualified Stock Option Plan for Officers and Key
Employees of Surety Capital Corporation (the "Plan"); and
WHEREAS, the Plan provides for the grant of non-statutory stock options to
purchase shares of common stock, $0.01 par value, of the Corporation (the
"Common Stock"), to certain officers and key employees of the Corporation; and
WHEREAS, the Participant is eligible to participate under the Plan; and
WHEREAS, the Corporation desires to grant to the Participant an option to
purchase shares of Common Stock pursuant to the Plan on the terms and conditions
herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. GRANT OF OPTION. The Corporation hereby irrevocably grants to the
Participant the option (the "Option") to purchase all or any part of an
aggregate of ________ shares of Common Stock (such number being subject to
adjustment as provided in SECTION 7 of the Plan) on the terms and conditions
herein set forth.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") of the
Common Stock covered by the Option shall be $4.18 per share, which is one
hundred percent (100%) of the Fair Market Value of such Common Stock on the
Grant Date (as defined in this Agreement).
3. TERM OF OPTION. The term of the Option shall be for a period of ten
(10) years from the date hereof, commencing on the date hereof (the "Grant
Date") and terminating on January 1, 2006 (the "Expiration Date").
4. VESTING.
(A) Unless vesting is accelerated in accordance with PARAGRAPH 4(B) of
this Agreement, the Option shall vest with respect to twenty percent (20%) of
the shares of Common Stock covered by the Option on December 31, 1997, with
respect to forty percent (40%) of the shares of Common Stock covered by the
Option on December 31, 1998, with respect to sixty percent (60%) of the shares
of Common Stock covered by the Option on December 31, 1999, with respect to
eighty percent (80%) of the shares of Common Stock covered by the Option on
December 31, 2000, and with respect to one hundred percent (100%) of the shares
of Common Stock covered by the Option on December 31, 2001 if Participant is
employed by the Corporation or Subsidiary on such dates; provided, however, that
such vesting schedule shall continue in effect after a termination of
Participant's employment if such termination is by the Participant for Good
Reason or by the Corporation or the Subsidiary without Cause. Unless the
vesting schedule continues under the foregoing or vesting is accelerated under
SECTION 4(B), the Option to the extent not vested on the termination of the
Participant's employment shall lapse and terminate as of such date of
termination.
<PAGE>
(B) Notwithstanding PARAGRAPH 4(A) of this Agreement, the Option shall
become fully vested upon the occurrence of either: (i) the Participant's
termination of employment by the Corporation and/or the Subsidiary, as the case
may be, by reason of death, Disability or Retirement, or (ii) a Change in
Control of the Corporation.
5. EXERCISE OF OPTION. The Option, to the extent vested, is exercisable
by the Participant or by his Legal Representative or Personal Representative, as
the case may be, at any time or from time to time on or before the Expiration
Date of such Option. The Option, to the extent vested, may be exercised at one
time or on several successive occasions by delivery of written notice to the
Corporation stating the number of shares of Common Stock covered by the
exercise, form of payment and proposed closing date, and such other documents as
the Corporation may require to assure compliance with applicable laws and
regulations. The Option, to the extent vested, may be exercised in whole or in
part; provided, however, the Option may not be exercised as to less than 100
shares at any one time (or the remaining shares then purchasable under the
Option, if less than 100 shares).
6. PAYMENT OF EXERCISE PRICE. The Exercise Price for the Option shall be
paid in full upon exercise and shall be payable in cash (including check, bank
draft or money order); provided, however, that in lieu of cash, the Participant
may pay the Exercise Price, in whole or in part, by delivering to the
Corporation shares of Common Stock having a Fair Market Value on the date of
exercise of the Option equal to the Exercise Price of the shares being
purchased, except that (a) any portion of the Exercise Price representing a
fraction of a share shall in any event be paid in cash, and (b) no shares of
Common Stock which have been held for less than six (6) months may be delivered
in payment of the Exercise Price of the Option.
7. FURTHER RESTRICTIONS. The Participant shall not be, and will not have
any of the rights or privileges of, a stockholder of the Corporation in respect
to any shares purchasable upon the exercise of any part of the Option unless and
until certificates representing such shares have been issued by the Corporation
to the Participant. The obligation of the Corporation to issue shares of Common
Stock pursuant to the exercise of the Option shall be subject to (a) the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, with respect to such shares, if deemed necessary or appropriate by
counsel for the Corporation; (b) the condition that any shares to be issued
shall have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange, if any, on which the Common Stock may then
be listed; and (c) compliance with all other applicable laws, regulations, rules
and orders which may then be in effect.
8. NONTRANSFERABILITY. The Option shall not be transferable by the
Participant otherwise than by will, or if the Participant dies intestate, by the
laws of descent and distribution of the state of domicile of the Participant at
the time of death or pursuant to a Qualified Domestic Relations Order. The
Option shall be exercisable during the lifetime of the Participant only by the
Participant or by the Participant's Legal Representative or Personal
Representative, as the case may be.
9. NON-QUALIFICATION OF OPTION. The Option herein granted is not
intended to be an "incentive stock option" within the meaning of Sections 422 or
423 of the Code and shall be so construed.
10. INCORPORATION BY REFERENCE. The Plan is incorporated herein by
reference, with the provisions thereof being given the same force and effect as
if expressly contained in this Agreement. If there is an inconsistency in the
terms of this Agreement and the Plan, the terms of the Plan shall control.
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<PAGE>
11. NOTICES. Any notice required or permitted by either party must be in
writing and must be delivered either personally to the other party or by
certified mail, return receipt requested, at the party's address indicated
below, and 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 the Corporation: Surety Capital Corporation
Attn: Secretary
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
If to Participant: _________________________
_________________________
_________________________
The names and addresses of the parties to receive notice as stated in this
PARAGRAPH 11 may be changed at any time by notice given in accordance with this
PARAGRAPH 11. As used in this 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 national banks are open for
business.
12. ACKNOWLEDGMENT. The Participant acknowledges receipt of a copy of the
Plan, a copy of which is annexed hereto, and represents that the Participant is
familiar with the terms and provisions thereof. The Participant hereby accepts
the Option subject to all of the terms and provisions of the Plan. The
Participant hereby agrees to accept as binding, conclusive and final all
decisions and interpretations of the Board and, where applicable, the Committee,
upon any questions arising under the Plan or this Agreement. As a condition to
the issuance of shares of Common Stock of the Corporation pursuant to the
exercise of the Option granted under this Agreement, the Participant authorizes
the Corporation to withhold in accordance with applicable law from any regular
cash compensation payable to him any taxes required to be withheld by the
Corporation under federal, state or local law as a result of his exercise of the
Option.
Executed as of the date first above written.
CORPORATION: SURETY CAPITAL CORPORATION
By:
----------------------------------
--------------------, ------------
PARTICIPANT: ----------------------------------
-------------------------
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<PAGE>
EXERCISE FORM
(To be completed and delivered to the Corporation for exercise)
The undersigned hereby: (1) irrevocably subscribes for ______ shares of
the Common Stock pursuant to his Stock Option Agreement dated January 2, 1997,
and encloses payment of $__________ therefor; (2) requests that a certificate
for the shares be issued in the name of the undersigned and delivered to the
undersigned at the address below; and (3) if such number of shares is not all of
the shares purchasable under the Stock Option Agreement, that a new Stock Option
Agreement of like tenor for the balance of the remaining shares be issued in the
name of the undersigned and delivered to the undersigned at the address below.
Date:
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(Address)
<PAGE>
EXHIBIT 10.15
1997 NON-QUALIFIED STOCK OPTION PLAN
FOR NON-EMPLOYEE DIRECTORS
OF SURETY CAPITAL CORPORATION
SECTION 1. PURPOSES.
The purposes of this 1997 Non-Qualified Stock Option Plan (the "Plan")
for Non-Employee Directors are to promote the continued prosperity of Surety
Capital Corporation (the "Corporation") by aligning the long-term financial
interests of the Non-Employee Directors of the Corporation with those of the
stockholders of the Corporation, to provide an additional incentive for such
individuals to remain as directors of the Corporation, and to provide a means
through which the Corporation may attract well-qualified individuals to serve as
directors of the Corporation.
SECTION 2. DEFINITIONS.
A. The following words and phrases, wherever capitalized, shall have
the following meanings, unless the context otherwise requires:
1. "Agreement" means the written agreement which sets forth the
terms and conditions of the Option granted to a Participant under the Plan,
including any amendment to such written agreement. Agreements shall be subject
to the express terms and conditions set forth herein.
2. "Board" means the Board of Directors of the Corporation.
3. "Change in Control of the Corporation" shall be deemed to have
occurred if (1) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Corporation, is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation representing twenty percent (20%)
or more of the combined voting power of the Corporation's then outstanding
securities; (2) during any period of two (2) consecutive years, individuals who
at the beginning of such period constitute the Board 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 two-thirds (2/3rds) of the directors then in
office who were directors at the beginning of the period; (3) the stockholders
of the Corporation approve a merger or consolidation of the Corporation with any
other corporation, other than a merger or consolidation which would result in
the voting securities of the Corporation outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least seventy-five (75%) of
the combined voting power of the voting securities of the Corporation or such
surviving entity outstanding immediately after such merger or consolidation; or
(4) the stockholders of the Corporation approve a plan of complete liquidation
of the Corporation or an agreement for the sale or disposition of all or
substantially all of its assets.
4. "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
5. "Committee" means the Stock Option Committee of the Board.
6. "Common Stock" means shares of $0.01 par value common stock of
the Corporation, subject to adjustment and substitution pursuant to SECTION 7.
<PAGE>
7. "Corporation" means Surety Capital Corporation, a Delaware
corporation.
8. "Disability" means a Participant's inability to continue the
periodic performance of the requirements of his position as a member of the
Board by reason of any medically determinable physical or mental impairment
which can be expected to result in death or to be of long-continued and
indefinite duration. An individual shall not be considered to be disabled unless
he furnishes proof of the existence of a disability in such form as the
Committee may require.
9. "Effective Date" means January 2, 1997.
10. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
11. "Exercise Price" means, with respect to each share of Common
Stock subject to an Option, the price at which such share may be purchased from
the Corporation pursuant to the exercise of such Option.
12. "Expiration Date" means the date immediately preceding the tenth
anniversary date of the Grant Date.
13. "Fair Market Value" means the closing price of the Common Stock
on the American Stock Exchange as reported on the composite tape, or if it is
not listed on the American Stock Exchange, the closing price on the exchange or
established market system on which the Common Stock is then listed; if, however,
there is no trading of the Common Stock on the date in question, then the
closing price of the Common Stock, as so reported, on the last preceding date on
which there was trading shall instead be used to determine Fair Market Value; or
if Fair Market Value for any date in question cannot be determined as
hereinabove provided, Fair Market Value shall be determined by the Committee by
whatever method or means its members, in the good faith exercise of their
discretion, at that time shall deem appropriate.
14. "Grant Date" means the date an Option is granted pursuant to the
Plan.
15. "Legal Representative" means the guardian or legal
representative of a Participant who, upon the Disability or incapacity of the
Participant, shall have acquired on behalf of the Participant, by legal
proceeding or otherwise, the right to exercise the Participant's rights and
receive his benefits under the Plan.
16. "Non-Employee Director" means a member of the Board in his
capacity as a director of the Corporation, provided such individual is not an
employee of the Corporation or of any Subsidiary of the Corporation.
17. "Option" means a stock option granted under the Plan to a
Participant on a Grant Date pursuant to SECTION 5. All Options granted under the
Plan shall be "nonstatutory stock options," i.e., options which do not qualify
under Sections 422 or 423 of the Code.
18. "Participant" means a Non-Employee Director granted an Option
under the Plan.
19. "Personal Representative" means the executor, administrator or
personal representative appointed to administer a Participant's probate estate,
or if the individual has no probate estate, then the successor trustee(s) of any
revocable living trust the individual established during his lifetime.
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<PAGE>
20. "Plan" means the plan set forth herein which shall be known as
the "1997 Non-Qualified Stock Option Plan for Non-Employee Directors of Surety
Capital Corporation," as same may from time to time be amended.
21. "Qualified Domestic Relations Order" means a "qualified domestic
relations order" as defined in the Code.
22. "Resignation" means the resignation by a Participant as a member
of the Board at the age of 70 or more.
23. "Subsidiary" means any corporation of which at least fifty
percent (50%) of the outstanding voting capital stock is owned, directly or
indirectly, by the Corporation.
B. Except when otherwise indicated by the context, any masculine or
feminine terminology when used in the Plan shall also include the opposite
gender; and the definition of any term herein in the singular shall also include
the plural, and vice versa.
SECTION 3. SHARES AVAILABLE UNDER THE PLAN.
The aggregate number of shares of Common Stock which may be issued,
and as to which grants of Options may be made, under the Plan is 150,000 shares
of Common Stock, subject to adjustment and substitution as set forth in SECTION
7. The shares of Common Stock which may be issued under the Plan may be either
authorized but unissued shares or treasury shares or partly each.
SECTION 4. ADMINISTRATION OF THE PLAN.
A. The Plan shall be administered by the Committee, which shall have
full power and authority, subject to the provisions of the Plan, to supervise
the administration of the Plan and interpret the provisions of the Plan and any
Options granted under the Plan. Any decision by the Committee shall be final and
binding on all parties. No member of the Committee shall be liable for any
determination, decision or action made in good faith with respect to the Plan or
any Options granted under the Plan. The Committee may delegate the day-to-day
administration of the Plan to any individual or individuals it deems appropriate
and may retain advisors to advise it.
B. A majority of the Committee shall constitute a quorum at any meeting,
and the acts of a majority of the members present at any meeting at which a
quorum is present, or acts approved in writing by all the members of the
Committee, shall constitute acts of the Committee.
C. The Committee shall have full authority to carry out the provisions
of the Plan, including authority to interpret the Plan and prescribe such rules,
regulations and procedures in connection with the operation of the Plan as it
shall deem to be necessary and advisable for the administration of the Plan
consistent with the purposes of the Plan. All questions of interpretation and
application of the Plan, or as to Options granted under the Plan, shall be
subject to the determination of the Committee, which shall be final and binding.
D. The Committee shall have overall responsibility for keeping records
and providing necessary communications to Participants under the Plan. The
records of the Committee with respect to the Plan shall be conclusive and
binding on all Participants and all persons or entities claiming through or
under them.
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<PAGE>
E. The expenses of administering the Plan shall be borne by the
Corporation.
F. Any action which the Committee is authorized to take under this
Agreement may be taken by the Board and such action by the Board shall have the
same force and effect as if taken by the Committee.
SECTION 5. GRANT OF OPTIONS.
A. Subject to the terms and provisions of the Plan, the Committee shall
select the Non-Employee Directors to whom an Option is to be granted under the
Plan, the timing of such grants, the number of shares subject to the Option, the
Exercise Price of the Option, the periods during which the Option may be
exercised and the other terms and conditions of the Options.
B. No Options under the Plan may be granted after December 31, 1997.
SECTION 6. TERMS AND CONDITIONS APPLICABLE TO OPTION GRANTS.
A. Options granted under the Plan shall be subject to the following
terms and conditions:
1. The Exercise Price with respect to each share of Common Stock
covered by an Option shall be one hundred percent (100%) of the Fair Market
Value of such share as of the Grant Date.
2. The term of each Option shall be ten (10) years, commencing on the
Grant Date and terminating on the Expiration Date.
3. Unless vesting is accelerated in accordance with the provisions of
SECTION 6.A.4., each Option shall vest with respect to twenty percent (20%) of
the shares of Common Stock covered by the Option on December 31, 1997, with
respect to forty percent (40%) of the shares of Common Stock covered by the
Option on December 31, 1998, with respect to sixty percent (60%) of the shares
of Common Stock covered by the Option on December 31, 1999, with respect to
eighty percent (80%) of the shares of Common Stock covered by the Option on
December 31, 2000, and with respect to one hundred percent (100%) of the shares
of Common Stock covered by the Option on December 31, 2001 if the Participant is
serving as a member of the Board on such dates.
4. Notwithstanding the provisions of SECTION 6.A.3., each Option
shall become fully vested upon the occurrence of either: (a) a Participant's
withdrawal from the Board by reason of death, Disability or Resignation, or (b)
a Change in Control of the Corporation.
5. No Option shall be transferable by a Participant otherwise than by
will, or if a Participant dies intestate, by the laws of descent and
distribution of the state of domicile of the Participant at the time of death or
pursuant to a Qualified Domestic Relations Order. Options, to the extent vested,
shall be exercisable during the lifetime of a Participant only by the
Participant or by the Participant's Legal Representative.
6. An Option, to the extent not vested on the termination of a
Participant's service as a member of the Board, shall lapse and terminate as of
such date of termination. An Option, to the extent vested on the termination of
a Participant's service as a member of the Board, is exercisable by the
Participant or by his Legal Representative or Personal Representative, as the
case may be, at any time or from time to time on or before the Expiration Date
of such Option.
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<PAGE>
7. Subject to the foregoing provisions of SECTION 6 and the other
provisions of the Plan, any Option granted under the Plan shall be subject to
such restrictions and other terms and conditions, if any, as shall be determined
by the Committee in its discretion and set forth in an Agreement. Furthermore,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent
any provision of the Plan or action by the Committee fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Committee.
8. All grants of Options shall be evidenced by an Agreement.
B. Options granted under the Plan may be exercised as follows:
1. Each vested Option may be exercised by delivery of written notice
to the Corporation stating the number of shares of Common Stock covered by the
exercise, form of payment, and proposed closing date. An Option may be exercised
in whole or in part.
2. The Participant shall furnish the Corporation before closing such
other documents or representations as the Corporation may require to assure
compliance with applicable laws and regulations.
3. The Exercise Price for each Option shall be paid in full upon
exercise and shall be payable in cash (including check, bank draft or money
order); provided, however, that in lieu of cash, the individual exercising the
Option may pay the Exercise Price, in whole or in part, by delivering to the
Corporation shares of Common Stock having a Fair Market Value on the date of
exercise of the Option equal to the Exercise Price of the shares being
purchased, except that (a) any portion of the Exercise Price representing a
fraction of a share shall in any event be paid in cash, and (b) no shares of
Common Stock which have been held for less than six (6) months may be delivered
in payment of the Exercise Price of an Option.
4. A Participant shall not be, and will not have any of the rights or
privileges of, a stockholder of the Corporation in respect to any shares
purchasable upon the exercise of any part of an Option unless and until
certificates representing such shares have been issued by the Corporation to the
Participant.
C. The obligation of the Corporation to issue shares of Common Stock
under the Plan shall be subject to (1) the effectiveness of a registration
statement under the Securities Act of 1933, as amended, with respect to such
shares, if deemed necessary or appropriate by counsel for the Corpora tion; (2)
the condition that any shares to be issued shall have been listed (or authorized
for listing upon official notice of issuance) upon each stock exchange, if any,
on which the Common Stock may then be listed; and (3) compliance with all other
applicable laws, regulations, rules and orders which may then be in effect.
SECTION 7. ADJUSTMENT AND SUBSTITUTION OF SHARES.
A. In the event any change occurs in the number of shares of Common
Stock outstanding as a result of any stock split, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares, split-up, split-off, spin-off, liquidation or other similar change in
capitalization, or any distribution to holders of Common Stock other than cash
dividends, the number or kind of shares of Common Stock that may be issued under
the Plan pursuant to SECTION 3, including shares covered by existing Options,
shall be automatically adjusted to preserve the proportionate
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<PAGE>
interests of the Participants in the Corporation as represented by their
outstanding Options, and the proportionality of the share pool under the Plan in
relation to the total number of shares outstanding.
B. If the outstanding shares of the Common Stock shall be changed into
or become exchangeable for a different number or kind of shares of stock or
other securities of the Corporation or another corporation, whether through
reorganization, reclassification, recapitalization, stock split-up, combination
of shares, merger or consolidation, then there shall be substituted for each
share of the Common Stock that may be issued under the Plan pursuant to SECTION
3, including shares covered by existing Options, the number and kind of shares
of stock or other securities into which each outstanding share of Common Stock
shall be so changed or for which each such share shall become exchangeable.
C. In case of any adjustment or substitution as provided for in SECTIONS
7.A. or 7.B., the aggregate Exercise Price for all shares subject to each then
outstanding Option prior to such adjustment or substitution shall be the
aggregate Exercise Price for all shares of stock or other securities (including
any fraction) into which such shares shall have been converted or which shall
have been substituted for such shares. Any new Exercise Price per share shall be
carried to at least three decimal places with the last decimal place rounded
upwards to the nearest whole number.
D. If the outstanding shares of Common Stock shall be changed in value
by reason of any spin-off, split-off or split-up, or dividend in partial
liquidation, dividend in property other than cash or extraordinary distribution
to holders of Common Stock, the Committee shall make any adjustments to any then
outstanding Options which it determines are equitably required to prevent
dilution or enlargement of the rights of the Participants which would otherwise
result from any such transaction.
E. No adjustment or substitution provided for in this SECTION 7 shall
require the Corporation to issue or sell a fraction of a share or other
security. Accordingly, all fractional shares or other securities which result
from any such adjustment or substitution shall be eliminated and not carried
forward to any subsequent adjustment or substitution.
F. Except as provided in this SECTION 7, a Participant shall have no
rights by reason of issuance by the Corporation of stock of any class or
securities convertible into stock of any class, any subdivision or consolidation
of shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class.
SECTION 8. AMENDMENT AND TERMINATION.
A. The right to amend and terminate the Plan is hereby specifically
reserved to the Board; provided, however, that no termination of the Plan shall
result in the cancellation of any outstanding Options theretofore granted under
the Plan; and provided further that no amendment of the Plan shall: (1)
adversely affect the rights of the holder of an Option granted under the Plan,
unless such holder consents in writing to such amendment, or (2) cause Options
granted under the Plan to not qualify for the exemption from Section 16(b) of
the Exchange Act provided by Rule 16b-3, or any successor rule.
B. In the event of any such amendment to the Plan, the holder of any
Option outstanding under the Plan shall, upon request of the Committee and as a
condition to the exercisability of such Option, execute a conforming amendment
in the form prescribed by the Committee to the Agreement referred to in SECTION
6.A.8. within such reasonable time as the Committee shall specify in such
request.
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<PAGE>
SECTION 9. EFFECTIVE DATE AND DURATION OF PLAN.
A. The Plan shall become effective on the Effective Date.
B. The Plan shall continue in effect until all Options granted under the
Plan have been exercised or have lapsed or otherwise been terminated pursuant to
the Plan. Expiration or other termination of the Plan shall not affect
outstanding Options.
SECTION 10. MISCELLANEOUS.
A. Nothing in the Plan, in any Option granted under the Plan, or in any
Agreement shall confer any right on a Participant to continue as a director of
the Corporation, or interfere in any way with the rights of the stockholders of
the Corporation to elect and remove directors.
B. The Corporation shall have the right, in connection with the exercise
of an Option, to require a Participant to pay to the Corporation an amount
sufficient to provide for any withholding tax liability imposed with respect to
such exercise.
C. To the extent that federal laws (such as the Code and the federal
securities laws) do not otherwise control, the Plan shall be governed and
construed in all respects in accordance with Texas law.
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<PAGE>
STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT ("Agreement") is made this 2nd day of January,
1997 between Surety Capital Corporation, a Delaware corporation (the
"Corporation"), and ______________ (the "Participant"). Capitalized terms used
but not defined in this Agreement are defined in the Plan.
WHEREAS, on January 2, 1997 the Board of Directors of the Corporation (the
"Board") adopted the 1997 Non-Qualified Stock Option Plan for Non-Employee
Directors of Surety Capital Corporation (the "Plan"); and
WHEREAS, the Plan provides for the grant of non-statutory stock options to
purchase shares of common stock, $0.01 par value, of the Corporation (the
"Common Stock"), to the directors of the Corporation who are not employees of
the Corporation or any of its Subsidiaries; and
WHEREAS, the Participant is eligible to participate under the Plan; and
WHEREAS, the Corporation desires to grant to the Participant an option to
purchase shares of Common Stock pursuant to the Plan on the terms and conditions
herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth and for other good and valuable consideration, the parties hereto agree as
follows:
1. GRANT OF OPTION. The Corporation hereby irrevocably grants to the
Participant the option (the "Option") to purchase all or any part of an
aggregate of ________ shares of Common Stock (such number being subject to
adjustment as provided in SECTION 7 of the Plan) on the terms and conditions
herein set forth.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") of the
Common Stock covered by the Option shall be $4.18 per share, which is one
hundred percent (100%) of the Fair Market Value of such Common Stock on the
Grant Date (as defined in this Agreement).
3. TERM OF OPTION. The term of the Option shall be for a period of ten
(10) years from the date hereof, commencing on the date hereof (the "Grant
Date") and terminating on January 1, 2006 (the "Expiration Date").
4. VESTING.
(a) Unless vesting is accelerated in accordance with PARAGRAPH 4(b) of
this Agreement, the Option shall vest with respect to twenty percent (20%) of
the shares of Common Stock covered by the Option on December 31, 1997, with
respect to forty percent (40%) of the shares of Common Stock covered by the
Option on December 31, 1998, with respect to sixty percent (60%) of the shares
of Common Stock covered by the Option on December 31, 1999, with respect to
eighty percent (80%) of the shares of Common Stock covered by the Option on
December 31, 2000, and with respect to one hundred percent (100%) of the shares
of Common Stock covered by the Option on December 31, 2001 if the Participant is
serving as a member of the Board on such dates.
(b) Notwithstanding PARAGRAPH 4(a) of this Agreement, the Option shall
become fully vested upon the occurrence of either: (i) the Participant's
withdrawal from the Board by reason of death, Disability or Resignation, or (ii)
a Change in Control of the Corporation.
<PAGE>
5. EXERCISE OF OPTION. The Option, to the extent not vested on the
termination of the Participant's service as a member of the Board, shall lapse
and terminate as of such date of termination. The Option, to the extent vested
on the termination of the Participant's service as a member of the Board, is
exercisable by the Participant or by his Legal Representative or Personal
Representative, as the case may be, at any time or from time to time on or
before the Expiration Date of such Option. The Option, to the extent vested,
may be exercised at one time or on several successive occasions by delivery of
written notice to the Corporation stating the number of shares of Common Stock
covered by the exercise, form of payment and proposed closing date, and such
other documents as the Corporation may require to assure compliance with
applicable laws and regulations. The Option, to the extent vested, may be
exercised in whole or in part; provided, however, the Option may not be
exercised as to less than 100 shares at any one time (or the remaining shares
then purchasable under the Option, if less than 100 shares).
6. PAYMENT OF EXERCISE PRICE. The Exercise Price for the Option shall be
paid in full upon exercise and shall be payable in cash (including check, bank
draft or money order); provided, however, that in lieu of cash, the Participant
may pay the Exercise Price, in whole or in part, by delivering to the
Corporation shares of Common Stock having a Fair Market Value on the date of
exercise of the Option equal to the Exercise Price of the shares being
purchased, except that (a) any portion of the Exercise Price representing a
fraction of a share shall in any event be paid in cash, and (b) no shares of
Common Stock which have been held for less than six (6) months may be delivered
in payment of the Exercise Price of the Option.
7. FURTHER RESTRICTIONS. The Participant shall not be, and will not have
any of the rights or privileges of, a stockholder of the Corporation in respect
to any shares purchasable upon the exercise of any part of the Option unless and
until certificates representing such shares have been issued by the Corporation
to the Participant. The obligation of the Corporation to issue shares of Common
Stock pursuant to the exercise of the Option shall be subject to (a) the
effectiveness of a registration statement under the Securities Act of 1933, as
amended, with respect to such shares, if deemed necessary or appropriate by
counsel for the Corporation; (b) the condition that any shares to be issued
shall have been listed (or authorized for listing upon official notice of
issuance) upon each stock exchange, if any, on which the Common Stock may then
be listed; and (c) compliance with all other applicable laws, regulations, rules
and orders which may then be in effect.
8. NONTRANSFERABILITY. The Option shall not be transferable by the
Participant otherwise than by will, or if the Participant dies intestate, by the
laws of descent and distribution of the state of domicile of the Participant at
the time of death or pursuant to a Qualified Domestic Relations Order. The
Option shall be exercisable during the lifetime of the Participant only by the
Participant or by the Participant's Legal Representative or Personal
Representative, as the case may be.
9. NON-QUALIFICATION OF OPTION. The Option herein granted is not
intended to be an "incentive stock option" within the meaning of Sections 422 or
423 of the Code and shall be so con strued.
10. INCORPORATION BY REFERENCE. The Plan is incorporated herein by
reference, with the provisions thereof being given the same force and effect as
if expressly contained in this Agreement. If there is an inconsistency in the
terms of this Agreement and the Plan, the terms of the Plan shall control.
11. NOTICES. Any notice required or permitted by either party must be in
writing and must be delivered either personally to the other party or by
certified mail, return receipt requested, at the
<PAGE>
party's address indicated below, and 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 the Corporation: Surety Capital Corporation
Attn: Secretary
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
If to Participant: _________________________
_________________________
_________________________
The names and addresses of the parties to receive notice as stated in this
PARAGRAPH 11 may be changed at any time by notice given in accordance with this
PARAGRAPH 11. As used in this 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 national banks are open for
business.
12. ACKNOWLEDGMENT. The Participant acknowledges receipt of a copy of the
Plan, a copy of which is annexed hereto, and represents that the Participant is
familiar with the terms and provisions thereof. The Participant hereby accepts
the Option subject to all of the terms and provisions of the Plan. The
Participant hereby agrees to accept as binding, conclusive and final all
decisions and interpretations of the Board and, where applicable, the Committee,
upon any questions arising under the Plan or this Agreement. As a condition to
the issuance of shares of Common Stock of the Corporation pursuant to the
exercise of the Option granted under this Agreement, the Participant authorizes
the Corporation to withhold in accordance with applicable law from any
directors' fees payable to him any taxes required to be withheld by the
Corporation under federal, state or local law as a result of his exercise of the
Option.
Executed as of the date first above written.
CORPORATION: SURETY CAPITAL CORPORATION
By:
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PARTICIPANT:
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<PAGE>
EXERCISE FORM
(To be completed and delivered to the Corporation for exercise)
The undersigned hereby: (1) irrevocably subscribes for ______ shares of
the Common Stock pursuant to his Stock Option Agreement dated January 2, 1997,
and encloses payment of $__________ therefor; (2) requests that a certificate
for the shares be issued in the name of the undersigned and delivered to the
undersigned at the address below; and (3) if such number of shares is not all of
the shares purchasable under the Stock Option Agreement, that a new Stock Option
Agreement of like tenor for the balance of the remaining shares be issued in the
name of the undersigned and delivered to the undersigned at the address below.
Date:
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(Address)
<PAGE>
EXHIBIT 10.16
POST RETIREMENT SERVICES AGREEMENT BETWEEN
SURETY CAPITAL CORPORATION
AND C. JACK BEAN
This Agreement ("Agreement") is entered into by Surety Capital
Corporation, a Delaware corporation (the "Corporation"), and C. Jack Bean
("Bean"). The Corporation and Bean are collectively referred to as the
"Parties." The Corporation's business operations that are conducted by its
subsidiaries are referred to as its "Banking Business."
In consideration of the mutual covenants set forth below, it is agreed
as follows:
1. SATISFACTION OF THE CORPORATION'S OBLIGATIONS. The Corporation's
obligations under this Agreement may be satisfied directly by the Corporation
or, at the Corporation's election, by its subsidiary Surety Bank, National
Association (the "Bank").
2. PURPOSES. The purposes of this Agreement are to provide:
(a) Bean with compensation and benefits for certain consulting
services to be rendered by Bean on behalf of the Corporation on a part-time
basis after his retirement as a full-time employee of the Corporation; and
(b) the Corporation with the part-time consulting services of Bean
after his retirement as a full-time employee of the Corporation in the
activities of (1) promoting the Corpora tion's ongoing operations with
businesses and business professionals in the service areas covered by the
Corporation's Banking Business, (2) representing the Corporation at functions
and events relating to the Corporation's business activities and its Banking
Business, (3) providing the Corporation with information that may come to Bean's
attention as to potential business acquisitions for the Corporation or its
subsidiaries, (4) providing the Corporation with advisory services specifically
related to acquisitions for the Banking Business, and (5) providing the
Corporation with services in connection with the furtherance of stockholder
relations (all of the foregoing being referred to in this Agreement as the
"Services").
3. DEFINITIONS. For purposes of this Agreement, certain terms are
defined as follows:
(a) "ACCELERATED PAYMENT" means either the payment by the
Corporation pursuant to SECTION 7 or pursuant to SECTION 8.
(b) "CAUSE" means any act that is materially adverse to the best
interests of the Corporation and constitutes, on the part of Bean, common law
fraud, a felony or other gross malfeasance of duty.
(c) "CHANGE IN CONTROL OF THE CORPORATION" shall be deemed to have
occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended, the "Exchange Act"), other
than a trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Corporation representing twenty percent (20%) or more of the combined voting
power of the Corporation's then outstanding voting securities; or (B) during any
period of two (2) consecutive years during the term of this Agreement,
individuals who at the beginning of such period constitute the Corporation's
Board of Directors (the "Board") 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
<PAGE>
by directors representing at least two-thirds (2/3rds) of the directors then in
office who were directors at the beginning of the period.
(d) "DISABILITY" means the inability of Bean to perform the
Services required by this Agreement by reason of illness, infirmity, insanity,
mental incompetency or otherwise. This determination will be made in good faith
by Board and concurred in by Bean. If there is a dispute between the Parties as
to the existence of a Disability, Bean, the Board, and Bean's physician (defined
as a person licensed to practice medicine in Texas who is regularly attending
Bean) will consult and reach a determination. If Bean does not have a regularly
engaged physician, the Board may engage at the Corporation's expense a physician
to examine Bean, and Bean consents to such examination and to waive, if
applicable, any privilege between the physician and Bean that may arise as a
result of said examination. If Bean has not engaged a physician, the opinion of
the physician engaged by the Board shall control.
4. BEAN'S SERVICES. The Services to be provided by Bean under this
Agreement will be furnished by Bean as an independent contractor and not as an
employee and will commence at the time Bean retires from providing his active,
full-time services to the Corporation in its day-to-day operations and will
terminate on the fifteenth (15th) anniversary date of Bean's retirement date,
unless terminated earlier, in accordance with the provisions of this SECTION 4.
The nature and extent of the actual activities to be conducted by Bean will be
mutually agreed to by Bean and the Corporation from time to time during such
period; however, the manner and means by which such activities are performed by
Bean shall be determined by Bean. Bean will devote such time to the performance
of his duties under this Agreement as is reasonably necessary for a satisfactory
performance of his duties under this Agreement.
(a) This Agreement may be terminated by the Corporation under the
following circumstances: (1) for Cause or (2) in the event of Bean's Disability
or death.
(b) This Agreement may be terminated by Bean under the following
circumstances: (1) in the event of a default by the Corporation of its
obligations under this Agreement, immediately after providing the Corporation
with written notice thereof, or (2) at any time for any reason, in his sole
discretion, after providing the Corporation with thirty (30) days written notice
of such intent.
(c) This Agreement shall terminate upon the occurrence of a Change
in Control of the Corporation.
(d) In the event of a termination of this Agreement by the
Corporation pursuant to SECTION 4(a), the Corporation will have no further
obligations under this Agreement, except to the extent payments and benefits are
owed pursuant to SECTION 6 for periods prior to the termination of this
Agreement. In the event of a termination of this Agreement by Bean pursuant to
SECTION 4(b)(2), the Corporation will have no further obligations under this
Agreement, except to the extent payments and benefits are owed pursuant to
SECTION 6 for periods prior to the termination of this Agreement. If the
termination of this Agreement is pursuant to SECTION 4(b)(1) as a result of a
default by the Corporation in the performance of its obligations hereunder or
pursuant to SECTION 4(c) as a result of a Change in Control of the Corporation,
the Corporation will be obligated to pay any amounts owed under SECTION 6 and to
also pay the Accelerated Payment due pursuant to either SECTION 7 or SECTION 8,
as the case may be, which obligation shall survive the termination of this
Agreement. The Corporation shall also pay to Bean all legal fees and expenses
incurred by Bean in seeking to obtain or enforce any right or benefit provided
by this Agreement.
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<PAGE>
5. COMPENSATION FOR SERVICES. During the period that Bean performs
the Services for the Corporation after he retires from providing his active,
full-time services to the Corporation in its day-to-day operations, the
Corporation will provide the following working benefits to Bean:
(a) OFFICE AND STAFF. The Corporation will maintain an office and
secretarial staff for Bean at the Corporation's main facility for its Banking
Business similar to that provided for the Corporation's senior executive
officers. If the Bank's main facility, currently located at 1845 Precinct Line
Road, Hurst, Texas, is moved more than twenty (20) miles from its current
location, the office may be maintained in any full service facility that is used
in the Banking Business and that is within such twenty (20) mile area. If there
is no such facility in the area, the office and staff will be maintained in a
Class A office facility within such area.
(b) HOME OFFICE. The Corporation will provide or reimburse Bean
for his costs related to maintaining a business office at his home. These costs
are to include, but are not limited to, those for a fax machine, mobile
telephone and home business telephone line.
(c) OUT-OF-POCKET EXPENSES. The Corporation will reimburse Bean
for meals and other out-of-pocket expenses that he incurs in connection with his
providing the Services. Bean agrees in this regard to follow the Corporation's
normal substantiation and reimbursement policies in connection with such
expenses.
6. PAYMENTS AND BENEFITS FOR SERVICES RENDERED. At the time Bean
retires from providing his active, full-time services to the Corporation in its
day-to-day operations, the Corporation agrees to provide to Bean the
compensation and benefits listed below.
(a) ANNUAL PAYMENT. Upon Bean's retirement from full-time
employment, the Corporation will begin payments to Bean in the amount of $53,825
per year. This amount will be pro-rated for partial years and will be paid to
Bean, at his option, in annual, monthly or bi-monthly installments.
(b) INSURANCE COVERAGE. The Corporation will provide Bean, or
reimburse Bean for the cost of, health, accident and medical insurance coverage
that is equivalent to the coverage provided to those persons serving from time
to time as the senior executive officers of the Corporation and the Bank.
(c) AUTOMOBILE. The Corporation will provide Bean with a
Corporation-owned automobile equivalent to the type provided to those person's
serving from time to time as the senior executive officers of the Corporation
and the Bank. The automobile may be replaced from time to time as determined by
the Corporation, but at least once each three years. The Corporation will pay or
reimburse Bean for gas, insurance, maintenance and other automobile-related
expenses. Bean will maintain automobile mileage and other records as requested
by the Corporation, and the Corporation will make the necessary personal use
reports to the Internal Revenue Service.
7. DEFAULT. If the Corporation defaults in its performance of any
provision under SECTION 6 of this Agreement, the payments, insurance coverage,
reimbursements and benefits under SECTION 6(a), (b) AND (c) shall be accelerated
and immediately due and payable to Bean. In such event, the Parties agree that
it may be difficult, if not impossible, to accurately determine the amount of
damages that Bean may incur by reason of such default; therefore, the Parties
agree that the sum of the amounts calculated under the following subsections
shall be used to determine the amount then owed to Bean for such default (the
"Accelerated Payment"). The Accelerated Payment shall be immediately due and
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<PAGE>
payable to Bean (payable by certified or cashier's check) upon the occurrence of
the default. All or any portion of such total that is not paid to Bean within
thirty (30) days of the default will bear interest at ten percent (10%) per
annum until paid.
(a) ANNUAL PAYMENT. The amount owed under SECTION 6(a) shall be
equal to the discounted present value of $53,825 per year for the number of
years equal to eighty-five (85) minus Bean's age at the time of the default. The
discount interest rate for these purposes will be five percent (5%) per year.
(b) INSURANCE COVERAGE. The amount owed under SECTION 6(b) shall
be equal to the "insurance cost" (as defined below) times the number of years
equal to eighty-five (85) minus Bean's age at the time of the default. The
insurance cost for these purposes will be the cost of the coverage and
reimbursement provided under SECTION 6(b) for the immediately preceding twelve
(12) calendar month period.
(c) AUTOMOBILE. The amount owed under SECTION 6(c) shall be equal
to the "automobile cost" (as defined below) times the number of years equal to
eighty-five (85) minus Bean's age at the time of the default. The automobile
cost for these purposes will be equal to the amount paid or reimbursed to Bean
by the Corporation for gas, insurance, maintenance and other automobile-related
expenses under SECTION 6(c) for the immediately preceding twelve (12) calendar
month period. In addition to the foregoing dollar amount, the Corporation will
transfer to Bean the title to the automobile then in his possession under
SECTION 6(c).
8. CHANGE IN CONTROL OF THE CORPORATION. In the event of a Change in
Control of the Corporation, the Corporation shall pay to Bean the Accelerated
Payment, calculated in accordance with SECTION 7 as of the effective date of the
Change in Control. The Accelerated Payment shall be due and payable to Bean
(payable by certified or cashier's check) immediately prior to the effectiveness
of the Change in Control of the Corporation. All or any portion of such total
that is not paid to Bean immediately prior to the effectiveness of the Change in
Control of the Corporation will bear interest at ten percent (10%) per annum
until paid.
9. NATURE OF ACCELERATED PAYMENT AS A RESULT OF A CHANGE IN CONTROL
PAYMENT. The benefits payable to Bean under this Agreement in the event of a
Change in Control of the Corporation shall be considered severance pay in
consideration of Bean's past service and Bean's continued service after the date
this Agreement. Bean shall not be required to mitigate the amount of any
payment provided for in SECTION 8 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in SECTION 8 be reduced
by any compensation earned by Bean as the result of employment by another
employer or by retirement benefits after the date of termination, or otherwise.
10. RESTRICTIONS. Bean's rights or benefits under this Agreement
shall not be subject to anticipation, alienation, sale, assignment, pledge,
encumbrance or charge and any such actions shall be void. Bean's rights or
benefits under this Agreement shall not in any manner be liable for or subject
to the debts, contracts, liabilities or torts of the person entitled to such
benefits.
11. TAXES. As an independent contractor, Bean shall be responsible
for the payment of all federal income taxes and his own self-employment and
social security taxes, the liability for which arises from or relates to any and
all payments made by the Corporation to Bean under this Agreement, including
payments pursuant to SECTIONS 6, 7 AND 8. Bean hereby agrees to indemnify and
hold harmless the Corporation from and for any liability or claim respecting the
foregoing taxes which are
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<PAGE>
the sole obligation and liability of Bean. Bean's obligation to indemnify the
Corporation as provided by this SECTION 11 shall survive the termination of this
Agreement.
12. NOTICES. Any notice required or permitted by either Party must
be in writing and must be delivered either personally to the other Party or by
certified mail, return receipt requested, at the Party's address indicated
below, and 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 Corporation: Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Telephone: 817-788-7558
Telecopy: 817-428-0054
With a copy to: Margaret E. Holland
Tracy & Holland, L.L.P.
306 West Seventh Street, Suite 500
Fort Worth, Texas 76102-4982
Telephone: 817-335-1050
Telecopy: 817-332-3140
If to Bean: Mr. C. Jack Bean
2721 Heritage Hills Drive
Fort Worth, Texas 76109
Telephone: 817-922-0446
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 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 national banks are open for business.
13. INDEPENDENT CONTRACTOR STATUS. It is expressly agreed and
stipulated by the Parties hereto that Bean in an independent contractor and that
Bean shall not be deemed nor construed to be an employee of the Corporation or
the Bank for federal income tax purposes or within the meaning of the Workers'
Compensation Act of the state of Texas.
14. INVALID PROVISION. In the event any of the provisions, or
portions thereof, of this Agreement are held to be invalid, illegal or
unenforceable by any court of competent jurisdiction, the validity, legality and
enforceability of the remaining provisions, or portions thereof, shall not be
affected. Moreover, so far as is reasonable and possible, effect shall be given
to the intent manifested by the portion held invalid, illegal or unenforceable.
15. CAPTIONS. The captions or headings in this Agreement are made
for convenience and general reference only and shall not be construed to
describe, define or limit the scope or intent of the provisions of this
Agreement.
16. GOVERNING LAW. This Agreement has been executed in and shall be
governed by the laws of the state of Texas. The Parties agree that the terms of
this Agreement will be performed and all legal proceedings involving this
Agreement will be conducted in Tarrant County, Texas.
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<PAGE>
17. INUREMENT. This Agreement shall extend to and be binding upon
Bean and his heirs, legatees, legal representatives and successors, and on the
Corporation, its successors or assigns. The rights of the Corporation under
this Agreement may not be assigned without Bean's consent.
18. AMENDMENT. All amendments or changes to this Agreement shall be in
writing.
19. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be an original Agreement. All counterparts
together shall represent but one and the same instrument.
20. FURTHER ASSURANCES. Each Party to this Agreement agrees to
perform any further acts and to execute and deliver any documents or legal
instruments which may be reasonably necessary to carry out the provisions of
this Agreement.
21. ENTIRE AGREEMENT. This Agreement contains the entire
understanding between the undersigned concerning the subject matter of the
Agreement. There are no other representations, agreements, arrangements or
understandings, oral or written, between or among the Parties, relating to the
subject matter of this Agreement, which are not fully expressed herein.
22. AUTHORIZATION. The Corporation is authorized to enter into this
Agreement by virtue of resolutions duly adopted by Board.
23. EFFECTIVE DATE. The effective date of this Agreement is
January 20, 1998.
SURETY: SURETY CAPITAL CORPORATION
By: /s/ Bobby W. Hackler
-----------------------------------
Name: Bobby W. Hackler
Title: Vice Chairman of the Board
BEAN: /s/ C. Jack Bean
--------------------------------------
C. Jack Bean
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<PAGE>
EXHIBIT 10.17
1998 INCENTIVE STOCK OPTION PLAN
OF SURETY CAPITAL CORPORATION
This is the 1998 Incentive Stock Option Plan (the "Plan") of SURETY
CAPITAL CORPORA TION, a Delaware corporation (the "Company"), under which
incentive stock options (the "Options") may be granted to the officers and/or
key employees of the Company and/or its subsidiaries to purchase shares of the
Company's $0.01 par value common stock (the "Common Stock"). Options granted
pursuant to the Plan are intended to be "incentive stock options" within the
meaning of Section 422A of the Code (as defined below).
SECTION 1. PURPOSE. The purpose of the Plan is to permit officers
and/or key employees of the Company and/or its subsidiaries (now existing or
hereafter acquired) to acquire a proprietary interest in the Company, thereby
providing them with an additional incentive for further promoting the success of
the Company's business operations, to encourage them to remain as officers
and/or key employees of the Company and/or its subsidiaries and to assist the
Company and its subsidiaries in attracting and retaining key personnel through
the grant of Options under the Plan.
SECTION 2. ADMINISTRATION OF PLAN. The Plan will be administered by
the Stock Option Committee (the "Committee") of the Board of Directors of the
Company (the "Board of Directors"). The Committee shall consist of two (2) or
more members of the Board of Directors. Each member of the Committee must be a
director of the Company who is ineligible to receive a grant of Options under
the Plan. Subject to the provisions of the Plan, the Committee will have
authority in its discretion: (a) to select the individuals to whom and the time
or times at which Options will be granted under the Plan, to determine the
number of shares subject to each Option under the Plan and the exercise price
thereof, to determine the terms, conditions, restrictions and other provisions
of such Options, and, subject to the restrictions imposed by SECTION 16, to
cancel Options granted under the Plan; (b) to construe and interpret the Plan
and all Options granted under the Plan; (c) to prescribe, amend and rescind
rules and regulations relating to the Plan; and (d) to make all other
determinations necessary or advisable for the administration of the Plan. All
determinations and interpretations made by the Committee will be binding and
conclusive on all persons to whom Options are granted and on their legal
representatives and beneficiaries. In administering the Plan, the Committee
shall act by majority vote of its then members, by meeting or by writing filed
without a meeting. The Committee shall maintain and keep adequate records
concerning the Plan and concerning its proceedings and acts in such form and
detail as the Committee may decide.
SECTION 3. SHARES SUBJECT TO PLAN. Subject to adjustment as provided
in SECTION 10, the number and kind of shares which may be offered and sold under
the Plan is 500,000 shares of Common Stock. If any Option granted under the
Plan is forfeited, expires or is cancelled for any reason without having been
exercised in full, the unpurchased shares of Common Stock subject thereto will
(unless the Plan has been terminated) again be available for other Options to be
granted under the Plan. Shares which are the subject of Options under the Plan
may be made available from authorized and unissued stock or treasury stock of
the Company.
SECTION 4. SELECTION OF OPTIONEES. Options may be granted under the
Plan to present and future officers and/or key employees of the Company and/or
its subsidiaries (whether now existing or hereafter acquired), all such persons
being hereafter referred to as "Optionees." In determining the persons to whom
Options will be granted and the number of shares of Common Stock to be covered
by each Option, the Committee may take into account the nature of the services
rendered by such persons, their present and potential contributions to the
success of the Company and such other factors as the Committee in its discretion
may deem relevant. An Optionee who has been granted an Option
<PAGE>
under the Plan may be granted an additional Option or Options under the Plan if
the Committee so determines.
SECTION 5. OPTION PRICE. Options granted under the Plan will be
subject to such exercise price as may be determined by the Committee, except
that in no event may such exercise price be less than the fair market value of
the Common Stock on the date of the grant (the "Option Price"). In determining
such fair market value, the Committee shall use the average of the closing bid
and asked prices if such Common Stock is traded on the over-the-counter market,
or the closing price on a securities exchange (except that if there was no
trading in such Common Stock on the date of the grant, the closing price on the
earliest preceding day during which there was trading in such Common Stock shall
be used). If the Common Stock is not publicly traded, the Board of Directors
shall make a good faith effort and attempt to determine the fair market value
based on such factors as recent sales prices, book value, etc. Notwithstanding
what is stated above, in the event an Option is granted to a person who, at the
time the Option is granted, owns stock of the Company possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company, then the Option Price must be at least one hundred ten percent (110%)
of the fair market value of the Common Stock at the time such Option is granted.
SECTION 6. TERM OF OPTIONS. All Options which may be granted
pursuant to the Plan must be granted within ten (10) years from the Effective
Date. Subject to earlier termination as provided in SECTION 7, each Option
granted pursuant to the Plan must be exercised within ten (10) years after the
date of granting of such Option; provided however, in the event an Option is
granted to a person who, at the time the Option is granted, owns stock of the
Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company, such Option shall not be
exercisable in full or in part after the expiration of five (5) years from the
date such Option is granted.
SECTION 7. TERMS AND CONDITIONS RELATING TO EMPLOYMENT.
(a) A primary reason for the Company's granting of the Options under
the Plan is to encourage each Optionee to remain an officer and/or key employee
of the Company and/or its subsidiaries. Accordingly, if an Optionee voluntarily
or involuntarily terminates his employment with the Company and/or its
subsidiaries for any reason whatsoever, whether with or without cause, other
than as a result of death or permanent and total disability within the meaning
of Section 22(e)(3) of the Code, such Optionee may exercise his Options, to the
extent vested on the date of termination of employment, at any time within three
(3) months following the date of such termination of employment (but in no event
later than the termination date of the Options), after which period the Options
shall expire. Under no circumstances may any Options of an Optionee be in any
way affected by any change of the Optionee's activities, title or position
within the group consisting of the Company and/or its subsidiaries.
(b) If an Optionee dies while in the employ of the Company and/or its
subsidiaries, or within three (3) months following the date of termination of
his employment by the Company and/or its subsidiaries, any Options of the
Optionee on the date of death of the Optionee may be exercised, to the extent
vested on the date of death of the Optionee, at any time within one (1) year
after the date of such Optionee's death (but in no event later than the
termination date of the Options), after which period the Options shall expire,
but only if exercised by an heir, devisee or personal representative of the
deceased Optionee's estate who acquired the Options directly from the Optionee
through the latter's will or pursuant to the applicable laws of descent and
distribution.
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(c) In the case of an Optionee who becomes permanently and totally
disabled within the meaning of Section 22(e)(3) of the Code while in the employ
of the Company and/or its subsidiaries, any Options of such Optionee, to the
extent vested on the date when such Optionee becomes disabled, may be exercised
within one (1) year after such Optionee ceases employment (but in no event later
than the termination date of the Options), after which period the Options shall
expire.
SECTION 8. OTHER TERMS.
(a) Subject to the provisions of this Plan and applicable securities,
tax and other laws and regulations, Options may be granted at such time or times
and pursuant to such terms and conditions as may be determined by the Committee
during the period this Plan is in effect. Each Option granted under the Plan
shall be evidenced by a Stock Option Agreement in the form attached hereto as
EXHIBIT A between the Company and the Optionee which shall set forth such terms
and conditions. Stock Option Agreements shall contain such provisions,
restrictions, and conditions as are not inconsistent with this Plan, but need
not be identical. The provisions of this Plan shall be set forth in full or
incorporated by reference in each Stock Option Agreement.
(b) The Committee may, in its discretion, include in any Option
granted under the Plan a condition that the Optionee shall agree to remain in
the employ of, and to render services to, the Company or any of its subsidiaries
for a period of time (specified in the Stock Option Agreement) following the
date the Option is granted. No such agreement shall impose upon the Company or
any of its subsidiaries, however, any obligation to employ the Optionee for any
period of time.
SECTION 9. METHOD OF EXERCISING OPTIONS.
(a) Provided all of the provisions of the Plan have been fully
complied with, each Option may be exercised by forwarding to the Company's
business office in Hurst, Texas, by certified letter, a written instrument
stating that the Option is being exercised and giving the number of shares of
Common Stock with respect to which the Option is being exercised. Such written
instrument shall be signed by the person exercising the Option and shall be
accompanied by a certified check or cashier's check for the full amount of the
Option Price. In lieu of paying the Option Price in cash, and subject to the
ability of the Company to repurchase its Common Stock, the Optionee may tender
and deliver to the Company with proper stock powers and required endorsements so
many shares of Common Stock previously acquired, owned and held by the Optionee
for at least seven (7) months, which have a fair market value as of the date of
exercise of the Option equal to the Option Price. In the event a person or
persons other than an Optionee attempts to exercise the Option, such written
statement mailed to the Company shall demonstrate compliance with SECTION 11
hereof and be accompanied by such proof of right to ownership as is required by
applicable law to be given to transfer agents in connection with the transfer of
securities. The Company shall issue a certificate representing the shares being
received upon exercise of the Option. All shares represented by any such
certificate shall be fully paid and non-assessable. Subject to the limitations
set forth in the Plan, each Option may be exercised at one time or on several
successive occasion; however, each Option may not be exercised in an amount less
than one hundred shares at any one time (unless such exercise is being made as
to the entire portion of Common Stock which may be purchased pursuant to the
Option).
(b) The aggregate fair market value (determined at the time the Option
is granted) of the Common Stock with respect to which such Options are
exercisable for the first time during any calendar year under the Plan, or under
any other plan of the Company or a corporation which is a parent or subsidiary
of the Company, as those terms are defined in Sections 425(e) and (f),
respectively, of the Code, shall not exceed $100,000, with respect to any
Optionee. The Committee may grant in any one
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<PAGE>
calendar year Options to any Optionee respecting Common Stock having a fair
market value in excess of $100,000; provided, however, the Stock Option
Agreement shall expressly provide that the Options granted therein shall be
subject to successive annual rights of exercise such that Common Stock having a
fair market value not in excess of $100,000 is first subject to exercise under
the Stock Option Agreement during any one calendar year.
SECTION 10. CHANGES IN CAPITAL STRUCTURE.
(a) Subject to any required action by the shareholders, the number of
shares of Common Stock covered by each outstanding Option, the Option Price, and
the aggregate number of shares remaining available under the Plan shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a subdivision or consolidation of shares,
the payment of a stock dividend (but only on the Common Stock), or any other
increase or decrease in the number of such shares effected without receipt of
consideration by the Company, provided that no fractional shares shall be
subject to any Option and each Option shall be adjusted downward to the nearest
full share.
(b) Subject to any required action by the shareholders, if the Company
is the surviving corporation in any merger or consolidation, each outstanding
Option will pertain to and apply to the securities to which a holder of the
number of shares of Common Stock subject to the Option would have been entitled.
A dissolution or liquidation of the Company, or a merger or consolidation in
which the Company is not the surviving corporation, will cause each outstanding
Option to terminate, provided that in such event each Optionee may (immediately
prior to such dissolution or liquidation, or merger or consolidation in which
the Company is not the surviving corporation) exercise such Optionee's Option,
to the extent then vested.
(c) In the event of a conversion or exchange of all of the Common
Stock with par value into the same number of shares with a different par value
or without par value, the shares resulting from any such conversion or exchange
shall be deemed to be Common Stock within the meaning of the Plan.
(d) To the extent that the foregoing adjustments relate to stock or
securities of the Company, such adjustments shall be made by the Committee whose
determination in that respect shall be final, binding and conclusive.
(e) Except as hereinbefore expressly provided in this SECTION 10, an
Optionee will have no rights by reason of any subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any other
increase or decrease in the number of shares of stock of any class resulting
from a dissolution, liquidation, merger, consolidation or other reorganization
with another corporation. Any issue by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall not
affect, and no adjustment by reason thereof shall be made with respect to, the
number of shares of Common Stock subject to the Option or the Option Price.
(f) The grant of an Option pursuant to the Plan will not affect in any
way the right or power of the Company to make adjustments, reclassifications,
reorganizations or changes in its capital or business structure; nor affect in
any way the right or power of the Company to merge, consolidate, dissolve,
liquidate, sell or otherwise transfer all or any part of its business or assets.
SECTION 11. NONTRANSFERABILITY. No Option may be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will or by the laws of descent and distribution. Each Option is exercisable,
during the lifetime of an Optionee, only by the Optionee. Any
-4-
<PAGE>
attempted assignment, transfer, pledge, hypothecation or other encumbrance of
any Option contrary to the provisions hereof, and any execution, attachment or
similar process upon any Option, will be null, void and of no effect.
SECTION 12. RIGHTS AS SHAREHOLDER. No Optionee may have any rights
as a shareholder with respect to any shares of Common Stock covered by these
Options until the date of issuance of a stock certificate to such Optionee for
such shares after exercise. Except as is otherwise provided in SECTION 10, no
adjustment will be made for dividends (ordinary or extraordinary and whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued.
SECTION 13. COMPANY'S OBLIGATIONS. The Company agrees to maintain at
all times sufficient authorized stock to meet the requirements of the Plan. The
proceeds received by the Company from the sale of the Common Stock pursuant to
these Options shall be used for general corporate purposes. The Company further
agrees to pay all fees and expenses necessarily incurred by the Company in
connection with these Options. Although the Company shall in no event be
obligated to register any securities covered hereby pursuant to the Securities
Act of 1933, as amended (the "Act"), it will use its best efforts to comply with
all laws and regulations which, in the opinion of the Company's counsel, are
applicable thereto. The inability of the Company to obtain from any regulatory
body having jurisdiction the authority deemed necessary by counsel for the
Company for the lawful issuance and sale of Common Stock hereunder shall relieve
the Company of any liability in respect of the failure to issue or sell Common
Stock as to which the requisite authority has not been obtained.
SECTION 14. REQUIREMENTS OF LAW.
(a) The Company shall not be required to sell or issue any shares of
Common Stock subject to the Options if the issuance of such shares shall
constitute a violation of any provision of any law or regulation of any
governmental authority. Specifically, in connection with the Act, upon exercise
of an Option, unless a registration statement under the Act is in effect with
respect to the shares of Common Stock covered by the Option, the Company shall
not be required to issue such shares of Common Stock unless the Company has
received an opinion of counsel that registration of such shares is not required.
Any reasonable determination in this connection by the Company shall be final,
binding and conclusive. If required by the Act or applicable state law in the
opinion of counsel for the Company, an appropriate legend shall be placed on
certificates representing shares of Common Stock issued pursuant to the exercise
of an Option.
(b) As a condition to the exercise of any portion of an Option, the
Company may require the Optionee exercising such Option to represent and warrant
at the time of such exercise that any shares of Common Stock acquired at
exercise are being acquired only for investment and without any present
intention to sell or distribute such shares, if, in the opinion of counsel for
the Company, such a representation is required under the Act or any other
applicable law, regulation or rule of any governmental agency.
SECTION 15. RELIANCE ON REPORTS. Each member of the Committee and
each member of the Board of Directors shall be fully justified in relying or
acting in good faith upon any report made by the independent public accountants
of the Company and its subsidiaries and upon any other information furnished in
connection with the Plan by any person or persons other than himself. In no
event shall any person who is or shall have been a member of the Committee or of
the Board of Directors be liable for any determination made or other action
taken or any omission to act in reliance
-5-
<PAGE>
upon any such report or information or for any action, including the furnishing
of information, taken or failure to act, if in good faith.
SECTION 16. AMENDMENT OR TERMINATION OF PLAN. The Board of Directors
may at any time amend, alter or terminate the Plan, except that no amendment,
alteration or termination may be made which would impair the rights of any
Optionee under any Option previously granted without such Optionee's consent,
and except that no amendment, alteration or termination may be made which,
without the further approval of the shareholders, would: (a) increase the
aggregate number of shares of Common Stock as to which Options may be granted
under the Plan, except as provided in SECTION 10; (b) change the class of
employees eligible to receive Options; (c) change the manner of determining the
minimum Option Price; or (d) extend the term of the Plan or the period during
which Options may be granted or exercised under the Plan.
SECTION 17. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. Subject
to the terms and conditions and within the limitations of the Plan, the
Committee may modify, extend or renew outstanding Options granted under the
Plan, or accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in substitution
therefor (to the extent not theretofore exercised), including canceling
outstanding Options and reissuing new Options at a lower Option Price in the
event that the fair market value per share of Common Stock at any time prior to
the date of exercise falls below the Option Price of Options granted pursuant to
the Plan. Notwithstanding the foregoing, however, no modification of an Option
shall, without the consent of the Optionee, alter or impair any rights or
obligations under any Option theretofore granted under the Plan.
SECTION 18. INTERNAL REVENUE CODE. The term "Code" means the
Internal Revenue Code of 1986, as amended, and any successor revenue law
thereto, and as same may be interpreted from time to time by Treasury Income Tax
Regulations, Treasury Department Administrative rulings and court decisions.
SECTION 19. EFFECTIVE DATE. The Plan shall become effective as of
the date of its adoption by the Board of Directors, subject to the approval by
holders of a majority of the Common Stock present in person or by proxy and
entitled to vote at the 1998 Annual Meeting of Stockholders of the Company.
Options may be granted under the Plan prior to receipt of such approval,
provided that, in the event such approval is not obtained, the Plan and all
Options granted under the Plan shall be null and void and of no force and
effect.
The Secretary of the Company hereby certifies that the Plan was
adopted by the Board of Directors effective the 10th day of March, 1998.
/s/ B. J. Curley
--------------------------------
B. J. Curley, Secretary
-6-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SURETY CAPITAL CORPORATION
JURISDICTION
SUBSIDIARY OF ORGANIZATION
Surety Bank, National National Banking
Association Association
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Surety Capital Corporation on Form S-8 (File No. 33-35415), Form S-8 (File No.
33-63695), Form S-8 (File No. 333-20615), Form S-3 (File No. 33-89264) and
Form S-3 (File No. 33-44893) of our report dated February 4, 1998, except as to
the information presented in the last paragraph of Note 17, for which the date
is March 17, 1998, on our audits of the consolidated financial statements of
Surety Capital Corporation as of December 31, 1997 and 1996, and for the years
ended December 31, 1997, 1996 and 1995, which report is included in the Annual
Report on Form 10-K for the year ended December 31, 1997. We also consent to the
reference to our Firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Fort Worth, Texas
March 25, 1998
<PAGE>
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoint C. Jack Bean and Bobby W. Hackler, and each
of them severally, as attorneys and agents for the undersigned, with full power
of substitution, for and in the name, place and stead of the undersigned, to
sign and file with the Securities and Exchange Commission the Annual Report on
Form 10-K of Surety Capital Corporation (the "Form 10-K") for the fiscal year
ended December 31, 1997, with said attorneys and agents to have full power and
authority to do and perform in the name of and on behalf of the undersigned,
every act whatsoever necessary or advisable to be done in the premises as fully
and to all intents and purposes as the undersigned might or could do in person,
such power to extend to the execution of any amendment to the Form 10-K.
Executed this 17th day of February, 1998.
/s/ C. Jack Bean
--------------------------------
C. Jack Bean
/s/ William B. Byrd
--------------------------------
William B. Byrd
/s/ Bobby W. Hackler
-------------------------------
Bobby W. Hackler
/s/ Joseph S. Hardin
-------------------------------
Joseph S. Hardin
/s/ G. M. Heinzelmann, III
-------------------------------
G. M. Heinzelmann, III
/s/ Margaret E. Holland
-------------------------------
Margaret E. Holland
/s/ Michael L. Milam
-------------------------------
Michael L. Milam
/s/ Garrett Morris
-------------------------------
Garrett Morris
/s/ Cullen W. Turner
-------------------------------
Cullen W. Turner
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<PERIOD-START> JAN-01-1997
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