<PAGE>
FORM 8-K/A
(Amendment No. 1)
Securities and Exchange Commission
Washington, D.C. 20549
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (date of earliest event reported): April 1, 1998
Surety Capital Corporation
------------------------------------------------------
(exact name of registrant as specified in its charter)
Delaware 33-1983 75-2065607
- --------------- ------------ --------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) Number)
1845 Precinct Line Road, Suite 100, Hurst, Texas 76054
-------------------------------------------------------
(address of principal executive offices)
Registrant's telephone number, including area code: 817-498-2749
Not applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
PAGE
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following audited financials statements of the acquired
bank are included with this Form 8-K in accordance with the
provisions of Rule 3-05 of Regulation S-X:
TexStar National Bank
Report of Independent Accountants F-1
Balance Sheets as of December 31, 1997 and 1996 F-2
Statements of Income for the Years Ended F-3
December 31, 1997 and 1996
Statements of Changes in Stockholders' Equity F-4
for the Years Ended December 31, 1997 and 1996
Statements of Cash Flows for the Years Ended F-5
December 31, 1997 and 1996
Notes to Financial Statements F-6
Independent Accountants' Report on Supplemental F-22
Schedules
Financial Highlights for the years ended F-23
December 31, 1997 and 1996
(b) The following pro forma financial statements are included
with this Form 8-K:
Pro Forma Balance Sheet as of March 31, 1998 F-24
(unaudited)
Pro Forma Income Statement for the Three F-25
Months ended March 31, 1998 (unaudited)
Pro Forma Income Statement for the Twelve F-26
Months ended December 31, 1997 (unaudited)
(c) Exhibits
The following exhibits are included with this Form 8-K in
accordance with the provisions of Item 601 of Regulation S-K:
2.11 Agreement and Plan of Reorganization by and among
Surety Bank, National Association, TexStar National
Bank, Surety Capital Corporation, and certain
shareholders of TexStar National Bank, dated as of
October 10, 1997; and Agreement to Merge TexStar
National Bank with and into Surety Bank, National
Association Under the Charter of Surety Bank, National
Association and Under the Title of Surety Bank,
National Association, between Surety Bank, National
Association and TexStar National Bank and joined in by
Surety Capital Corporation and certain shareholders of
TexStar National Bank, dated as of October 10, 1997 (1)
20 Press Release dated April 6, 1998 (2)
23 Consent of Independent Accountants *
_______________
(1) Filed with the Company's Form 10-K for the fiscal year
ended December 31, 1997 and incorporated by reference
herein.
(2) Filed with the Company's Current Report on Form 8-K for
an event dated April 1, 1998 and incorporated by refer-
ence herein.
* Filed herewith.
PAGE
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
SURETY CAPITAL CORPORATION
Date: May 15, 1998 By: /s/ B. J. Curley
----------------------------
B. J. Curley, Vice President
and Chief Financial Officer
PAGE
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
The Board of Directors
TexStar National Bank
We have audited the accompanying balance sheets of TexStar National
Bank (the "Bank") as of December 31, 1997 and 1996, and the related
statements of income, changes in stockholders' equity, and cash flows
for the years then ended. These financial statements are the
responsibility of the Bank's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of TexStar
National Bank as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Burnside & Rishebarger
January 23, 1998
F-1
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes 1997 1996
----- ----------- ----------
<S> <C> <C> <C>
ASSETS:
Cash and due from banks $ 3,685,214 $2,463,424
Federal funds sold 5,300,000 155,000
Investment securities: 1,2
Available-for-sale 15,200,663 16,343,497
Held-to-maturity 9,577,720 8,654,714
----------- ----------
Total investment securities 24,778,383 24,998,211
Loans - Net of allowance for loan losses 3,9 32,559,659 31,238,143
Bank premises and equipment - Net 4 2,729,822 1,793,815
Premiums receivable 121,000
Accrued interest receivable 577,273 516,802
Prepaid expenses and other assets 234,822 395,244
Other real estate and repossessed assets 484,986 521,200
Deferred federal income tax asset 5 70,738 180,799
Excess of cost over fair value of net
assets acquired -
Net of accumulated amortization of $13,119 15 577,253
----------- ----------
TOTAL ASSETS $71,119,150 $62,262,638
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits:
Demand $12,346,275 $11,714,622
Savings, NOW, and money market accounts 17,044,070 15,168,876
Time, $100,000 and over 19,254,716 16,308,289
Other time 16,288,967 14,648,540
----------- ----------
Total deposits 64,934,028 57,840,327
Note payable 143,811 198,113
Accrued interest payable and other liabilities 253,473 373,507
----------- ----------
TOTAL LIABILITIES 65,331,312 58,411,947
----------- ----------
COMMITMENTS AND CONTINGENT
LIABILITIES 6,7,8,9,10,11,16
Stockholders' equity:
Common stock - $5 par; 775,000 shares
authorized, 485,000 issued and
outstanding in 1997, 375,000 in 1996 11,15 2,425,000 1,875,000
Additional paid-in capital 2,357,616 1,682,616
Unrealized investment holding (losses) on
available-for-sale securities - Net of tax 1,2 (14,349) (141,863)
Retained earnings 1,019,571 434,938
----------- ----------
Total stockholders' equity 5,787,838 3,850,691
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $71,119,150 $62,262,638
=========== ==========
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
F-2
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
Notes 1997 1996
----- ---------- ----------
INTEREST INCOME:
Commercial loans $1,815,472 $1,796,097
SBA loans 1,081,719 772,346
Real estate loans 519,964 371,822
Consumer loans 320,801 261,559
Federal funds sold 110,556 49,927
Investment securities:
Taxable 1,571,676 1,368,013
Tax-exempt 60,640 471
---------- ----------
Total interest income 5,480,828 4,620,235
---------- ----------
INTEREST EXPENSE:
Interest on savings, NOW, and
money market accounts 553,174 496,250
Interest on time deposits 1,953,025 1,789,581
---------- ----------
Total interest expense 2,506,199 2,285,831
---------- ----------
NET INTEREST INCOME 2,974,629 2,334,404
---------- ----------
PROVISION FOR LOAN LOSSES 1,3 97,000 215,000
---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,877,629 2,119,404
---------- ----------
OTHER INCOME:
Service charges on deposit accounts 429,926 437,212
Other service charges, collection
and exchange charges, commissions,
and fees 184,612 99,308
Gain on sale of other real estate owned
and repossessions, net 5,326
Gain on sale of securities, net 2 29,624 18,799
---------- ----------
Total other income 644,162 560,645
---------- ----------
OTHER EXPENSES:
Salaries and wages 1,057,635 876,358
Employee benefits 149,663 124,876
Occupancy expense 226,319 144,906
Furniture and equipment expense 199,765 133,736
Other operating expenses 15 963,535 731,878
Amortization of goodwill 13,119
---------- ----------
Total other expenses 2,610,036 2,011,754
---------- ----------
INCOME BEFORE INCOME TAXES 911,755 668,295
Income tax expense 5 327,122 121,006
---------- ----------
NET INCOME $ 584,633 $ 547,289
========== ==========
EARNINGS PER SHARE 1 $1.38 $1.46
===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 422,357 375,000
======= =======
See notes to financial statements.
- -------------------------------------------------------------------------------
F-3
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Additional Investment Retained
Common Paid-In Holding Earnings
Notes Stock Capital Gains(Losses) (Deficit) Total
----- ---------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1996 $1,875,000 $1,682,616 $ 63,545 $ (112,351) $3,508,810
Change in unrealized investment
holding gains (losses),
net of tax 1,2,5 (205,408) (205,408)
Net income 547,289 547,289
---------- ---------- ---------- ------------ -----------
BALANCE DECEMBER 31, 1996 1,875,000 1,682,616 (141,863) 434,938 3,850,691
Sale of common stock 15 550,000 675,000 1,225,000
Change in unrealized investment
holding gains (losses),
net of tax 1,2,5 127,514 127,514
Net income 584,633 584,633
---------- ---------- ---------- ------------ -----------
BALANCE DECEMBER 31, 1997 $2,425,000 $2,357,616 $(14,349) $1,019,571 $5,787,838
========== ========== ========== ============ ===========
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
F-4
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Notes 1997 1996
----- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 584,633 $ 547,289
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 3 97,000 215,000
Depreciation and amortization 142,401 60,332
Premium amortization - Net of discount
accretion on investment securities 47,587 64,221
Gain on sale of other real estate owned
and repossessions, net (5,326)
(Gain) on sales, calls, or maturities of
available-for-sale securities 2 (29,624) (18,799)
Increase in premium receivable (121,000)
Increase in accrued interest receivable (60,471) (38,506)
(Increase) decrease in prepaid expenses
and other assets 160,422 (392,358)
(Increase) decrease in deferred federal
income tax 5 110,061 (180,799)
Increase (decrease) in accrued interest
payable and other liabilities (120,035) 44,734
------------ ------------
Net cash provided by (used in) operating
activities 810,974 295,788
------------ ------------
INVESTING ACTIVITIES:
Purchases of held-to-maturity securities 2 (2,998,412) (1,031,268)
Purchases of available-for-sale securities 2 (10,764,191) (10,781,596)
Proceeds from sales, calls, or maturities of
held-to-maturity securities 2 1,745,000 2,000,000
Proceeds from sales, calls, or maturities of
available-for-sale securities 2 12,346,983 6,851,282
Proceeds from the sale of other real estate
owned and repossessed assets - Net of
gain/loss 17,959
(Increase) decrease in other real estate
owned and repossessions 36,214 (6,000)
Increase in loans 3 (1,418,516) (3,288,950)
(Increase) decrease in federal funds sold (5,145,000) 1,745,000
Purchases of premises and equipment 4 (1,078,408) (928,978)
Excess of cost over fair value of net assets
acquired 15 (577,253)
Proceeds from sale of fixed asset -
Net of gain 4,961
------------ ------------
Net cash used by investing activities (7,853,583) (5,417,590)
------------ ------------
FINANCING ACTIVITIES:
Net increase in noninterest bearing deposits,
savings, NOW and money market accounts 2,506,847 4,111,286
Net increase in time deposits 4,586,854 1,142,136
Proceeds from issuance of notes payable 1,379,660
Payments on notes payable (1,433,962)
Proceeds from sale of stock 15 1,225,000
------------ ------------
Net cash provided by financing activities 8,264,399 5,253,422
------------ ------------
NET INCREASE IN CASH AND DUE FROM BANKS 1,221,790 131,620
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR 1 2,463,424 2,331,804
------------ ------------
CASH AND DUE FROM BANKS AT END OF YEAR 1 $ 3,685,214 $ 2,463,424
============ ============
</TABLE>
See notes to financial statements.
- -------------------------------------------------------------------------------
F-5
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - TexStar National Bank (the "Bank") is engaged in the
business of banking, including the acceptance of deposits and the
making of loans to customers in Bexar and surrounding counties and
in Texas. Although the loan portfolio is diversified, a
substantial portion of its debtors' ability to honor their loans is
dependent upon the economic conditions in the area, especially in
the business sector. The Bank competes for deposits and loans
principally with other commercial banks, savings and loan
associations and credit unions. In addition, the Bank is subject
to the regulations of certain Federal agencies and undergoes
periodic examinations by those regulatory authorities.
BASIS OF PRESENTATION - The accounting and reporting policies of
the Bank conform to generally accepted accounting principles and to
general practices within the banking industry.
CASH AND CASH EQUIVALENTS - For purposes of reporting cash flows,
cash and cash equivalents include cash on hand and amounts due from
banks.
INVESTMENT SECURITIES - During 1993 the Bank adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"). SFAS 115
addresses the accounting for and reporting of investments in debt
and equity securities. In accordance with SFAS 115, each of the
Bank's investment securities are classified in one of the three
following categories:
HELD TO MATURITY - Debt securities that the Bank has the
positive intent and ability to hold to maturity. These
securities are reported at amortized cost.
TRADING SECURITIES - Debt and equity securities that are bought
and held principally for the purpose of selling in the near
term. These securities are reported at fair value, with any
unrealized gains or losses included in earnings. The Bank held
no trading securities at December 31, 1997 or 1996.
AVAILABLE FOR SALE - Debt and equity securities not included in
either of the two categories above. These securities are
reported at fair value, with any unrealized gains or losses
excluded from earnings and included as a separate component of
stockholders' equity.
MORTGAGE-BACKED SECURITIES - Mortgage-backed securities represent
participating interests in pools of long-term first mortgage loans
originated and serviced by issuers of the securities.
Mortgage-backed securities are carried as government agency
securities at unpaid principal balances, adjusted for unamortized
premiums and unearned discounts. Premiums and discounts are
amortized using methods approximating the interest method over the
remaining period to contractual maturity, adjusted for anticipated
prepayments. Management intends and has the ability to hold such
securities to maturity. Should any be sold, cost of securities
sold is determined using the specific identification method.
F-6
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
LOANS AND ALLOWANCE FOR CREDIT LOSSES - Loans receivable that
management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off are reported at their
outstanding principal adjusted for any charge-offs, the allowance
for credit losses, and deferred fees or costs on originated loans.
Loan origination fees and certain direct origination costs are
capitalized and recognized as an adjustment of the yield of the
related loan. Loans are stated at the amount of unpaid principal,
reduced by any unearned interest and an allowance for credit
losses. The allowance for credit losses is established through a
provision for credit losses charged against current earnings.
A loan is considered impaired if, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal and interest when due, according to
the contracted terms of the loan agreement. The evaluations take
into consideration such factors as changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of
specific problem loans, and current economic conditions that may
affect the borrower's ability to pay. The measurement of impaired
loans and the related allowance for credit losses is generally
based on the fair value of the collateral. Smaller balance
homogenous loans consisting of residential mortgages and consumer
loans are evaluated for reserves collectibility based on historical
loss experience. Loans are charged against the allowance for
credit losses when management believes that the collectibility of
the principal is unlikely.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments
as they become due. When interest accrual is discontinued, all
unpaid accrued interest is reversed. Interest income is
subsequently recognized only to the extent cash payments are
received.
Interest income on commercial and real estate loans is accrued
daily on the amount of outstanding principal. Accrual of interest
is discontinued on a loan when management believes, after
considering economic and business conditions and collection
efforts, that a borrower's financial condition is such that
collection of interest and principal is doubtful. Management
evaluates the book value (including accrued interest) and
collateral value on loans placed on nonaccrual status and provides
specific allowance for credit losses as deemed appropriate.
BANK PREMISES AND EQUIPMENT - Bank premises and equipment are
stated at cost, net of accumulated depreciation. Depreciation is
recognized on the straight-line method over the estimated useful
lives of the assets. The estimated useful lives range from 3 to 40
years.
CHANGE IN ACCOUNTING ESTIMATE - Effective January 1, 1996, the Bank
increased the estimated useful lives of certain assets. These
revisions were made to more properly reflect true economic lives of
the assets. This change did not have a material effect on the
financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to
conform prior years' data to the current format.
F-7
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
OTHER REAL ESTATE OWNED - Real estate acquired by foreclosure is
carried at the lower of the recorded investment in the property or
its fair value. Prior to foreclosure, the value of the underlying
loan is written down to the fair value of the real estate to be
acquired by a charge to the allowance for loan losses, if
necessary. Any subsequent write-downs are charged against
operating expenses. Operating expenses of such properties, net of
related income, and gains and losses on their disposition are
included in other expenses.
INCOME TAX - The Bank follows Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109").
This statement requires the use of an asset and liability method of
accounting for deferred income taxes. This standard specifies
criteria for the recognition and measurement of deferred tax assets
or liabilities. Under SFAS 109 these items are to be calculated
based on the estimated future tax effects of differences between
the financial statement and tax bases of the Bank's assets and
liabilities.
STATEMENTS OF CASH FLOWS - For purposes of reporting cash flows,
cash and cash equivalents are defined as those amounts included in
the balance sheet caption "cash and due from banks."
EARNINGS PER SHARE - Earnings per share are calculated on the basis
of the weighted average number of shares outstanding.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS - In the ordinary course of
business, the Bank has entered into off-balance-sheet financial
instruments including commitments to extend credit and standby
letters of credit. Such financial instruments are recorded in the
financial statements when they become payable.
POSTRETIREMENT BENEFITS - In December 1990, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Under SFAS 106,
beginning in 1993, postretirement benefits other than pensions must
be accounted for in a manner similar to current standards for
accounting for pensions. SFAS No. 106 will require that the
accumulated postretirement benefit obligation be either charged in
the income statement as a cumulative effect of a change in
accounting in the period of adoption or delayed and amortized over
future periods as part of future postretirement benefit costs.
Since the Company did not provide postretirement benefits during
1997 or 1996, SFAS No. 106 is not applicable.
ESTIMATES AND ASSUMPTIONS - The preparation of financial statements
in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
F-8
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
HEDGING CONTRACTS - In October 1994, the Financial Accounting
Standards Board issued SFAS No. 119, "Disclosure About Derivative
Financial Instruments and Fair Value of Financial Instruments."
Under SFAS No. 119, beginning in 1994, disclosures are required in
connection with certain off-balance sheet derivative financial
instruments, including interest rate floors and swaps. These
contracts are divided between the following categories:
HELD FOR TRADING PURPOSES - Including dealing and other trading
activities measured at fair value with gains and losses
recognized in earnings, and
HELD FOR PURPOSES OTHER THAN TRADING - Including hedges of
anticipated transactions, any gains and losses of which may be
deferred.
At December 31, 1997, management of the Bank believes the Bank had
no contracts that qualify as off-balance sheet derivative financial
instruments for purposes of SFAS 119.
ACCOUNTING FOR LONG-LIVED ASSETS - In March 1995, the FASB issued
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS 121"), which
became effective for years beginning after January 1, 1996.
SFAS 121 requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Under
SFAS 121, a loss is to be recognized to the extent that the fair
value of an impaired asset is less than the asset's carrying
amount. The Bank's adoption of SFAS 121 as of January 1, 1996 did
not have any material current effect on the financial condition or
results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1996, the FASB issued Statement of Financial Accounting
Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" (SFAS 125).
This Statement provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that
are secured borrowings. This Statement requires that after a
transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been
surrendered, and derecognizes liabilities when extinguished. This
Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December
31, 1996. In December 1996, the FASB issued Statement of Financial
Accounting Standards No. 127, "Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125." This Statement
deferred the effective date of FASB Statement No. 125 for secured
lending, repurchase agreement, dollar-roll, securities lending, and
similar transactions to transactions occurring after December 31,
1997.
(continued)
F-9
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS - continuation:
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128
simplifies the standards for computing earnings per share (EPS)
previously found in APB Opinion No. 15, "Earnings per Share"
(Opinion 15), and make them comparable to international EPS
standards. SFAS 128 replaces the presentation of primary EPS with
a presentation of basic EPS. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the
weighted- average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. Diluted EPS is computed similarly to fully diluted EPS
pursuant to Opinion 15. SFAS 128 also requires dual presentation
of basic and diluted EPS on the face of the income statement for
entities with complex capital structures and a reconciliation of
the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. SFAS 128
is effective for financial statements issued for periods ending
after December 31, 1997, including interim periods; earlier
application is not permitted. SFAS 128 requires restatement of all
prior-period EPS data presented.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information About Capital
Structure" ("SFAS 129"). SFAS 129 establishes standards for
disclosing information about an entity's capital structure,
including the pertinent rights and privileges of various securities
outstanding. SFAS 129 is effective for financial statements issued
for periods ending after December 15, 1997.
In June 1997, FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130").
SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains,
and losses) in a full set of general-purpose financial statements.
SFAS 130 requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
SFAS 130 does not require a specific format for the financial
statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that
financial statement. SFAS 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required.
Management believes that the adoption of these pronouncements will
not have a material impact on the financial statements of the Bank.
F-10
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
2. INVESTMENT SECURITIES
Carrying amounts and approximate fair values of investment
securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
----------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Investment Securities Expected
to be Held at Maturity:
U.S. Government agency securities $ 8,974,791 $ 32,355 $ 8,942,436
Federal Reserve Bank stock 143,500 143,500
Federal Home Loan Bank stock 487,200 487,200
----------- ---------- ---------- -----------
Total held to maturity $ 9,605,491 $ 32,355 $ 9,573,136
=========== ========== ========== ===========
Investment Securities Available
for Sale:
U.S. Government agency securities $15,218,172 $19,403 $ 36,912 $15,200,663
U.S. Treasury securities
----------- ---------- ---------- -----------
Total available for sale $15,218,172 $19,403 $ 36,912 $15,200,663
=========== ========== ========== ===========
December 31, 1996
-----------------
Investment Securities Expected
to be Held at Maturity:
U.S. Government agency securities $ 8,088,464 $212,729 $ 7,875,735
Federal Reserve Bank stock 106,750 106,750
Federal Home Loan Bank stock 459,500 459,500
----------- ---------- ---------- -----------
Total held to maturity $ 8,654,714 $212,729 $ 8,441,985
=========== ========== ========== ===========
Investment Securities Available
for Sale:
U.S. Government agency securities $15,539,912 $11,091 $209,928 $15,341,075
U.S. Treasury securities 1,007,402 4,980 1,002,422
----------- ---------- ---------- -----------
Total available for sale $16,547,314 $11,091 $214,908 $16,343,497
=========== ========== ========== ===========
</TABLE>
F-11
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
During 1994, the Bank transferred from investment securities
available for sale to investment securities held to maturity,
securities with an amortized cost of $4,800,327 and a market value
at the date of transfer of $4,773,765. The unrealized holding loss
of $26,562 was reported in the unrealized investment holding gains
(losses) section of stockholders' equity and is being amortized
over the remaining life of the securities as an adjustment of yield
in a manner consistent with the amortization of any premium or
discount. The unamortized unrealized holding loss at December 31,
1997 and 1996 was $2,793 and $7,343, respectively. The Bank did
not transfer any securities from investment securities available
for sale during 1996 or 1997.
At December 31, 1997 the balance of the cumulative unrealized
investment holding gains or losses on securities available for sale
have been reduced by deferred taxes as follows:
1997 1996
--------- ----------
Gross unrealized gains on securities
available for sale $ 19,403 $ 11,091
Gross unrealized losses on securities
available for sale (36,912) (214,909)
--------- ----------
Subtotal, net gains (losses) (17,509) (203,818)
Gross unrealized holding loss on
securities transferred (2,793) (7,343)
Deferred federal income tax (34% of
subtotal) 5,953 69,298
--------- ----------
Net effect on stockholders' equity $(14,349) $(141,863)
========= ==========
The carrying value of investment securities pledged as collateral
for public funds amounted to approximately $7,493,952 and
$9,747,086 at December 31, 1997 and 1996, respectively.
The market value of investment securities pledged to secure public
funds amounted to approximately $7,425,138 and $9,512,031 at
December 31, 1997 and 1996, respectively.
The Bank has pledged additional securities in the amount of
$2,357,613 and $4,617,147 to large depositors at December 31, 1997
and 1996, respectively. The market value of these securities is
$2,353,107 and $4,581,861 at December 31, 1997 and 1996,
respectively.
The carrying amount and approximate fair value of investment
securities at December 31, 1996, by contractual maturity, are shown
below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
F-12
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
December 31, 1997
--------------------------
Approximate
Carrying Fair
Securities Expected to be Held to Maturity: Amount Value
------------------------------------------- ---------- -----------
Due in one year or less $ 3,523,834 $ 3,497,577
Due after one year through five years 1,007,731 982,947
Due after five years through ten years 1,000,000 1,000,160
Due after ten years of greater 1,990,784 2,018,772
Federal Reserve Bank stock 143,500 143,500
Federal Home Loan Bank stock 487,200 487,200
----------- -----------
Subtotal 8,153,049 8,130,156
Mortgage-backed securities and
collateralized mortgage obligations 1,452,374 1,442,911
----------- -----------
Total $ 9,605,423 $ 9,573,067
=========== ===========
Securities Available for Sale:
------------------------------
Due after one year through five years $ 6,002,589 $ 5,981,095
Due after five years through ten years 5,015,314 5,013,430
----------- -----------
Subtotal 11,017,903 10,994,525
Mortgage-backed securities and
collateralized mortgage obligations 4,200,269 4,206,138
----------- -----------
Total $15,218,172 $15,200,663
=========== ===========
Gross realized losses on sales of investment securities in 1997
were $9,370, which is comprised of losses on U.S. Treasury
securities.
Gross realized gains on sales of investment securities in 1997 were
$38,994, which is comprised of gains of $13,542 on U.S. Treasury
securities and $25,452 on U.S. Government agency securities.
Gross realized losses on sales of investment securities in 1996
were $10,764, which is comprised of gains on U.S. Government agency
securities.
Gross realized gains on sales of investment securities in 1996 were
$29,563, which was comprised of gains of $19,954 on U.S. Treasury
securities and $9,609 on U.S. Government agency securities.
3. LOANS AND ALLOWANCE FOR LOAN LOSSES
Major classifications of loans are as follows:
1997 1996
----------- -----------
Commercial $10,414,003 $12,602,552
Mortgage 18,152,805 13,797,958
Construction 688,232 1,899,194
Installment 3,768,988 3,392,493
----------- -----------
33,024,028 31,692,197
Allowance for loan losses (464,369) (454,054)
----------- -----------
Total $32,559,659 $31,238,143
=========== ===========
F-13
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
Nonperforming loans at December 31, 1997 and 1996 were composed of
nonaccrual loans totaling $189,685 and $234,748, respectively.
The reduction in interest income associated with nonaccrual loans
amounted to $18,221 and $27,373 for the years ended December 31,
1997 and 1996, respectively.
At December 31, 1997 and 1996, there were no commitments to lend
additional funds to borrowers whose loans were classified as
nonperforming.
The loan portfolio consists of $17,345,829 and $16,735,816 of
variable rate loans and $15,372,012 and $14,956,381 of fixed rate
loans at December 31, 1997 and December 31, 1996, respectively.
Changes in the allowance for loan losses were as follows:
1997 1996
-------- --------
Balance at beginning of year $454,054 $297,259
Provision charged to operations 97,000 215,000
Loans charged-off (86,685) (100,511)
Recoveries 42,306
-------- --------
Balance at end of year $464,369 $454,054
======== ========
At December 31, 1997 and December 31, 1996, the Bank's recorded
investment in loans for which impairment has been recognized in
accordance with Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan," ("SFAS
114") consists primarily of commercial loans and installment loans
as follows:
December 31, December 31,
1997 1996
------------ ------------
Impaired loans $2,188,960 $1,010,257
Impaired loans with related allowance
calculated under SFAS 114 $1,213,223 $ 534,363
Allowance on impaired loans calculated
under SFAS 114 $ 290,000 $ 128,000
Impaired loans with no allowance
calculated under SFAS 114 $ 905,737* $ 475,894*
*Represents the guaranteed portion of SBA guaranteed loans and that
portion of impaired loans secured by TexStar National Bank
certificates of deposit.
F-14
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
For the year ended December 31,
-------------------------------
1997 1996
---------- --------
Average impaired loans $1,291,635 $871,768
Interest income recognized
on impaired loans $ 124,389 $ 74,449
As of December 31, 1997 and December 31, 1996, there were no
commitments to lend additional funds for loans considered impaired.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following:
1997 1996
---------- ----------
Land $ 712,460 $ 712,460
Buildings and improvements 1,307,583 797,832
Leasehold improvements 133,482 176,851
Furniture 168,627 120,501
Equipment 813,438 372,361
Automobiles 19,718 19,718
---------- ----------
Total 3,155,308 2,199,723
Less accumulated depreciation 425,486 405,908
---------- ----------
Total - Net $2,729,822 $1,793,815
========== ==========
F-15
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
5. INCOME TAXES
Net operating loss carryforwards (which differ for financial
statement and federal tax reporting purposes) amounted to $622,872
for tax purposes at December 31, 1997. The net operating loss
carryforwards are subject to annual limitations because of a change
in Bank ownership (see Note 11). The tax net operating loss
carryforwards expire in varying amounts between 2001 and 2006.
1997 1996
-------- --------
Current income tax expense $295,459 $232,541
Deferred income tax expense 31,663 (111,535)
-------- --------
Total income tax expense $327,122 $121,006
======== ========
The reason income taxes for financial reporting purposes differ
from the amount computed by applying the statutory federal income
tax rate at December 31, 1997 and 1996 are as follows:
1997 1996
-------- --------
Tax provision computed at the
statutory rate $309,997 $227,220
Tax benefit including utilization
of net operating loss
carryforward for financial
statement purposes (Note 11) (151,949)
Tax exempt interest income - Net of
disallowed interest expense of
$60,640 and $46,515 (14,125) (63)
Meals and entertainment disallowance 5,578 2,446
Nondeductible dues 6,312 1,604
Other 19,360 41,748
-------- --------
Provision for federal income tax $327,122 $121,006
======== ========
F-16
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
Statement of Financial Accounting Standards No. 109 ("SFAS 109")
was effective in 1994 and requires the recognition of deferred tax
assets and liabilities for both the expected future tax impact of
differences between the financial statement and tax bases of assets
and liabilities, and for the expected future tax benefit to be
derived from tax loss and tax credit carryforwards. SFAS 109
additionally requires the establishment of a valuation allowance to
reflect the likelihood of realization of deferred tax assets. As
of December 31, 1997, the Bank had total deferred tax liabilities
and total deferred tax assets as follows:
Accrued income $(326,532)
Fixed asset depreciation (46,181)
Net operating loss carryforwards
(see Note 11) 211,776
Unrealized investment holding losses (5,953)
Accrued expenses 70,890
Other real estate owned 56,308
Allowance for loan losses 127,349
Accrued interest on short-term loans (17,337)
Contribution carryforward 418
--------
Net deferred asset 70,738
Valuation allowance
--------
Deferred tax asset $ 70,738
========
6. COMMITMENTS AND CONTINGENT LIABILITIES
The Bank leases its branch banking premises under a noncancellable
agreement. A portion of the lease payments for 1997 were prepaid
at December 31, 1996. Future minimum lease payments at December
31, 1997 are as follows:
Year Ending December 31, 1998 $18,720
=======
Rental expense for the branch banking premises was $17,400 and
$42,775 in 1997 and 1996, respectively.
The Bank has commitments and contingencies in the normal course of
business and lawsuits pending that are not expected to result in
material adverse effects. The Bank is a defendant in a
case: Mitchell Coach Manufacturing Company, Inc. vs. Ronny
Stephens and TexStar National Bank, pending in the United States
District Court for the Northern District of Oklahoma. This is an
action for declaratory judgment to determine the ownership and
title to one Vogue Motor Coach, the original purchase price of
which was approximately $305,000. Ronny Stephens purchased the
motor coach from a company which has since gone bankrupt. Ronny
Stephens financed the purchase price in large part through a loan
from the Bank. Plaintiff claims that it was not paid for the motor
coach and as a result, it maintains title. Ronny Stephens claims
title and the Bank claims a purchase money security interest in the
motor coach. The matter is set for trial in February 1998. The
Bank believes this case lacks merit and intends to defend it
vigorously.
F-17
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
7. RELATED-PARTY TRANSACTIONS
The Bank has entered into transactions with its directors,
significant shareholders, and their affiliates. Such transactions
were made in the ordinary course of business on substantially the
same terms and conditions, including interest rates and collateral,
as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable
features. The aggregate amount of loans to such related parties at
December 31, 1997 and 1996 was $2,780,674 and $2,946,218,
respectively. During 1997 and 1996, new loans to such related
parties amounted to $482,759 and $466,534, respectively, and
repayments amounted to $783,533 and $231,751, respectively. Of the
loans to related parties at December 31, 1997 and 1996, $1,765,000
and $1,760,000, respectively, were secured by time deposits at the
Bank.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs
of its customers.
The Bank's exposure to credit loss in the event of nonperformance
by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial
guarantees written is represented by the contractual notional
amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it
does for on- balance-sheet instruments.
The amount of commitments at December 31, 1997 are as follows:
Unused lines of credit -
Real estate and
commercial loans $3,764,403
Standby letters of credit 271,858
----------
Total $4,036,261
==========
Unused lines of credit are agreements to lend to a customer as long
as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's
credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension
of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities
to customers.
F-18
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
9. SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The Bank grants loans to customers in Bexar and surrounding
counties and elsewhere in Texas. Many of such customers are
depositors of the Bank. Investment in state and municipal
securities also includes governmental entities, some within the
Bank's market area. As shown in Note 3, the Bank has a
diversified loan portfolio, although approximately 54% of its loans
are secured by real estate.
10. REGULATORY MATTERS
The Bank, as a National Bank, is subject to the dividend
restrictions set forth by the Comptroller of the Currency. Under
such restrictions, the Bank may not, without the prior approval of
the Comptroller of the Currency, declare dividends in excess of the
sum of the current year's earnings (as defined) plus the retained
earnings (as defined) from the prior two years. No dividends were
declared in 1997.
Risk-based capital guidelines require a bank to maintain Tier 1
capital at a minimum of 4.0% of total risk-adjusted assets. Tier 1
capital consists primarily of common equity, excluding the effects
of net unrealized gains or losses on securities available-for-sale
net of taxes. Risk-adjusted assets are the sum of total assets and
specific off-balance-sheet items after the appropriate risk weights
and/or credit conversion factors ranging from 0% to 100% have been
applied.
Total capital, consisting of Tier 1 capital plus Tier 2 capital,
must be maintained at a minimum of 8.0% of risk-adjusted assets.
Tier 2 capital generally consists of the allowance for loan losses
limited to a maximum of 1.25% of gross risk-weighted assets. Tier
2 capital may not exceed Tier 1 capital.
The leverage ratio is required to be equal to or greater than 3.0%
depending on each bank's particular regulatory rating. The
leverage ratio is computed as Tier 1 capital divided by average
assets outstanding for the quarter, excluding the effects of net
unrealized gains or losses on securities available-for-sale net of
taxes.
The following summarizes certain capital ratios for the Bank at
December 31, 1997 and 1996 as compared to the regulatory minimums:
Regulatory
Minimum 1997 1996
---------- ------ ------
Tier 1 capital ratio 4.0% 13.29% 11.37%
Total capital ratio 8.0% 14.45% 12.62%
Tier 1 leverage ratio 3.0% 7.31% 6.61%
The Bank did not extend credit to any single borrower or group of
related borrowers in excess of its legal lending limit of $900,066
and $666,991 at December 31, 1997 and 1996, respectively.
F-19
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
11. FACTOR THAT LIMITS RATE OF UTILIZATION OF NET OPERATING LOSS
In October 1994, the Bank issued 75,000 shares of its common stock
at $7.70 per share in a common stock offering. Proceeds from the
offering, net of legal expenses of $19,884, were $557,616. In
February 1994, approximately 50% of the outstanding shares of the
Bank's stock were purchased by one individual, which gave this
individual controlling interest. In a letter dated December 10,
1992, the Office of the Comptroller of the Currency stated that
they did not disapprove of this transaction. This change in
control is a factor that limits the rate of utilization of the
Bank's net operating loss for income tax purposes which has been
recognized in full as a deferred tax asset (see Note 5).
12. EMPLOYEE BENEFIT PLAN
During 1994, the Bank adopted a 401(k) employee benefit plan that
covers all employees who meet certain age and service requirements.
Employees may make contributions to the plan through salary
deferrals. Additionally, the Bank will match employee
contributions in an amount equal to 25% of employee contributions
with a limitation not to exceed 10% of compensation. The Bank
contributed $12,489 and $6,107 of matching contributions to the
plan in 1997 and 1996, respectively.
13. CASH FLOW INFORMATION
1997 1996
------------ -----------
Supplemental schedule of noncash
investing and financing activities:
Transfers of repossessed collateral
to land $ - $ 100,667
Additions to loans to facilitate the
sale of other real estate and other
assets $ - $ 13,840
Net cash acquired through acquisitions:
Net loans $ 199,397
Premises and equipment, net 8,179
Other assets 12,378
Excess of cost over fair value of net
assets acquired 590,372
Deposits (14,455,320)
-------------
Net cash acquired through acquisitions $(13,644,994)
=============
Cash paid during the period for interest $ 2,581,543 $ 2,247,325
Cash paid during the period for federal
income taxes 232,600 72,400
F-20
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (Continued)
- -------------------------------------------------------------------------------
14. ADVERTISING EXPENSES
The Bank accounts for its advertising as prepaid assets and it
charges a monthly amount to expense over the life of the asset not
exceeding one year. The Bank's advertising charged to expense was
$22,319 and $12,505 during 1997 and 1996, respectively.
15. ACQUISITION AND SALE OF STOCK
During August 1997, the Bank consummated the acquisition of certain
assets and assumption of certain liabilities relating to the branch
of Pacific Southwest Bank Savings and Loan Association ("Pacific
Southwest Bank") located in Schertz, Texas (the "Schertz Branch").
In June 1997, the Bank administered a primary offering of its
common stock. A total of 110,000 shares of common stock were sold
at a price of $11.50 per share. All proceeds were received by
September 23, 1997 and were used to finance the retirement of
liabilities incurred in connection with the purchase of the Schertz
Branch.
At the closing of the purchase of the Schertz Branch, the Bank
assumed deposits and other liabilities totaling approximately
$14,455,000. In addition, the Bank acquired certain small business
and consumer loans totaling approximately $199,000, certain real
property, furniture and equipment related to the Schertz Branch
totaling approximately $8,000, other assets totaling approximately
$13,000, and cash totaling approximately $13,645,000. After paying
a deposit premium, of approximately four percent (4%) on the
deposits assumed, totaling approximately $590,000, the Bank
received approximately $13,645,000 in cash from Pacific Southwest
Bank as consideration for the net deposit liabilities assumed. The
Schertz Branch and deposits acquired in the acquisition have been
incorporated into the Bank's existing branch network.
16. PENDING MERGER
On October 10, 1997 the Bank and Surety Bank, N.A. entered into an
agreement under which Surety Bank will acquire TexStar National
Bank. The purchase price for TexStar is projected to be
approximately $19.59 per share of TexStar common stock outstanding
(total cash consideration: approximately $9,500,000), which will
be paid to the shareholders of TexStar in connection with the
merger of TexStar with and into Surety Bank.
The completion of the merger is subject to a number of
contingencies, including regulatory approvals by applicable banking
authorities, due diligence review by Surety Bank of TexStar's
business operations, the raising of sufficient funds by its parent
Surety Capital Corporation to facilitate the transaction, approval
by TexStar's shareholders, and other matters. If consummated, the
transaction is expected to close in April 1998.
F-21
PAGE
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT ON SUPPLEMENTAL SCHEDULES
The Board of Directors
TexStar National Bank
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying financial
highlights of TexStar National Bank (the "Bank") are presented for
supplementary analysis purposes and are not a required part of the
basic financial statements. The financial highlights have been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, are fairly stated in all
material respects in relation to the financial statements taken as a
whole.
/s/ Burnside & Rishebarger
January 23, 1998
F-22
PAGE
<PAGE>
TEXSTAR NATIONAL BANK
- ---------------------
FINANCIAL HIGHLIGHTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
Percent
1997 1996 Increase
(000's Omitted) (Decrease)
------------------------ ----------
FOR THE YEAR:
Interest income $ 5,481 $ 4,620 18.64%
Interest expense $ 2,506 $ 2,286 9.62%
Net interest income $ 2,975 $ 2,334 27.46%
Provision for loan losses $ 97 $ 215 (54.88)%
Other income and expense - Net $ 1,984 $ 1,451 36.73%
Income tax expense $ 309 $ 121 155.37%
Net income $ 585 $ 547 6.95%
AT YEAR END:
Total assets $ 71,119 $ 62,263 14.22%
Total loans $ 32,560 $ 31,238 4.23%
Total deposits $ 64,934 $ 57,840 12.26%
Stockholders' equity $ 5,788 $ 3,851 50.30%
See independent accountants' report on supplemental schedules.
- -------------------------------------------------------------------------------
F-23
PAGE
<PAGE>
PRO FORMA BALANCE SHEET
as of March 31, 1998
<TABLE>
<CAPTION>
Surety TexStar
Capital National Pro Forma
Corporation Bank Debits Credits Combined
(unaudited) (unaudited) (unaudited)
------------ ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 6,959,708 $ 2,928,011 $ - $9,772,000 (A) $ 115,719
Federal funds sold 32,319,522 9,800,000 42,119,522
------------ ----------- ----------- ---------- ------------
Cash and cash equivalents 39,279,230 12,728,011 9,772,000 42,235,241
Interest bearing deposits in
financial institutions 94,939 - 94,939
Investment securities 24,559,359 19,372,403 110,696 (A) 43,821,066
Net loans 98,603,542 33,839,277 132,442,819
Medical claims receivables, net 2,531,874 - 2,531,874
Premises and equipment, net 3,650,054 2,681,300 1,164,535 (A) 7,495,889
Accrued interest receivable 798,392 451,002 1,249,394
Other real estate and
repossessed assets 174,639 459,486 634,125
Deferred tax asset 1,622,394 47,441 47,441 (A) 1,776,644
Other assets 1,928,748 189,095 1,963,593
Excess of cost over fair value
of net assets acquired, net 4,627,719 567,413 3,817,208 (A) 9,012,340
------------ ----------- ----------- ---------- ------------
Total assets $ 177,870,890 $70,335,428 $ 4,981,743 $9,930,137 $243,257,924
============ =========== =========== ========== ============
Liabilities:
Demand deposits $ 23,096,665 $13,775,458 $ - $ - $ 36,872,123
Savings, NOW and money markets 44,277,731 16,852,743 61,130,474
Time deposits, $100,000 and over 24,202,845 15,417,413 39,620,258
Other time deposits 64,551,690 18,716,026 83,267,716
------------ ----------- ----------- ---------- ------------
Total deposits 156,128,931 64,761,640 220,890,571
Accrued interest payable and
other liabilities 1,235,429 550,394 75,000 (A) 1,860,823
Convertible subordinated debt 4,350,000 - 4,350,000
------------ ----------- ----------- ---------- ------------
Total liabilities 161,714,360 65,312,034 75,000 227,101,394
------------ ----------- ----------- ---------- ------------
Shareholders' equity:
Common stock 57,922 2,425,000 2,425,000 (A) 57,922
Additional paid in capital 16,876,119 2,357,616 2,357,616 (A) 16,876,119
Retained earnings (692,089) 244,992 244,992 (A) (692,089)
Stock rights issuable 57,922 - 57,922
Treasury stock (172,828) - (172,828)
Unrealized gain/(loss) on
available-for-sale securities 29,484 (4,214) 4,214 (A) 29,484
------------ ----------- ----------- ---------- ------------
Total equity 16,156,530 5,023,394 5,027,608 79,214 16,156,530
------------ ----------- ----------- ---------- ------------
Total liabilities
and equity $ 177,870,890 $70,335,428 $ 5,027,608 $ 79,214 $ 243,257,924
============ =========== =========== ========== ============
</TABLE>
(A) To record purchase of TexStar National Bank, Universal
City, Texas. The purchase price for TexStar National
Bank was based on a fixed price of $9,500,000 subject
to adjustments. The purchase accounting for the
acquisition of TexStar National Bank includes an
adjustment to investment securities to estimated fair
market value in the amount of $(110,696), an adjustment
to fixed assets to estimated fair market value in the
amount of $1,164,535, an adjustment to eliminate a
deferred tax asset in the amount of $47,441, an
adjustment to other liabilities to accrue for estimated
unrecorded liabilities in the amount of $75,000, and an
adjustment to eliminate the equity of TexStar National
Bank at closing in the amount of $5,023,393. The
difference of $3,817,208 is recorded as goodwill and is
amortized over a 15 year period.
F-24
PAGE
<PAGE>
PRO FORMA INCOME STATEMENT
for the three months ended March 31, 1998
<TABLE>
<CAPTION>
Surety TexStar Pro Forma
Capital National Adjustments Pro Forma
Corporation Bank Debits Credits Combined
----------- ----------- -------- ---------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans $2,434,307 $ 811,208 $ - $ - $ 3,245,515
Medical claims receivable
factoring 636,366 - 636,366
Interest on federal funds sold 350,202 111,497 - - 461,699
Interest on securities and
interest bearing deposits 390,040 278,277 - - 668,317
---------- ----------- -------------
Total interest income 3,810,915 1,200,982 - - 5,011,897
---------- ----------- -------------
Interest expense:
Interest on deposits 1,427,548 604,478 - - 2,032,026
Interest expense on borrowings - 2,597 97,875 (F) - 100,472
---------- ----------- -------- ---------- -------------
Total interest expense 1,427,548 607,075 97,875 2,132,498
---------- ----------- -------- ---------- -------------
Net interest income before
provision for credit losses 2,383,367 593,907 97,875 - 2,879,399
Provision for credit losses and
medical claims receivables
losses 25,000 356,000 - - 381,000
---------- ----------- -------- ---------- -------------
Net interest income 2,358,367 237,907 97,875 - 2,498,399
---------- ----------- -------- ---------- -------------
Non interest income 570,970 171,532 - - 742,502
---------- ----------- -------- ---------- -------------
Non interest expense:
Salaries and employee benefits 1,196,262 319,302 - - 1,515,564
Occupancy & equipment 402,308 179,937 29,113 (C) - 611,358
General & administrative 805,440 718,902 63,620 (B) 13,000 (A) 1,574,962
---------- ----------- -------- ---------- -------------
Total noninterest expense 2,404,010 1,218,141 92,733 13,000 3,701,884
---------- ----------- -------- ---------- -------------
Income before income taxes 525,327 (808,702) 190,608 13,000 (460,983)
Income tax expense: 192,981 23,156 (68,619)(E) (4,680)(E) 152,198
---------- ----------- -------- ---------- -------------
Net income $ 332,346 $ (831,858) $121,989 (D) $ 8,320 (D) $ (613,181)
========== =========== ======== ========== =============
Basic earnings (loss) per share
of Common stock $ 0.06 $ (0.11)
Weighted average shares
outstanding 5,756,838 5,756,838
Diluted earnings per share of
common stock $ 0.06 $ (0.11)
Weighted average shares
outstanding and common stock
equivalents 5,991,740 5,991,740
</TABLE>
(A) To record savings to be realized by merger. These
adjustments are a direct result of the elimination of director
fees which will not continue after the merger.
(B) To record amortization of the goodwill added through the
acquisition of the TexStar National Bank.
(C) To record the additional depreciation to premises and equipment
as a result of the write up to estimated fair market value for
TexStar National Bank.
(D) This pro forma income statement does not reflect all
adjustments to, or projected changes in, income Surety Bank expects
to realize following consummation of the acquisition.
(E) To record tax effect of adjustments.
(F) To record debt expense on 9% convertible subordinated
debt of $4,350,000.
F-25
PAGE
<PAGE>
PRO FORMA INCOME STATEMENT
for the twelve months ended December 31, 1997
<TABLE>
<CAPTION>
Surety TexStar Pro Forma
Capital National Adjustments Pro Forma
Corporation Bank Debits Credits Combined
----------- ----------- -------- ---------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans 11,119,540 3,737,956 - - 14,857,496
Medical claims receivable
factoring 1,477,510 - - - 1,477,510
Interest on federal funds sold 516,340 110,556 - - 626,896
Interest on securities and
interest bearing deposits 2,319,295 1,632,316 - - 3,951,611
---------- ----------- -------------
Total interest income 15,432,685 5,480,828 - - 20,913,513
---------- ----------- -------------
Interest expense:
Interest on deposits 5,749,798 2,506,199 - - 8,255,997
Interest expense on borrowings - - 391,500 (F) - 391,500
---------- ----------- -------- ---------- -------------
Total interest expense 5,749,798 2,506,199 391,500 8,647,497
---------- ----------- -------- ---------- -------------
Net interest income before
provision for credit losses 9,682,887 2,974,629 391,500 - 12,266,016
Provision for credit losses and
medical claims receivables
losses 6,384,996 97,000 - - 6,481,996
---------- ----------- -------- ---------- -------------
Net interest income 3,297,891 2,877,629 391,500 - 5,784,020
---------- ----------- -------- ---------- -------------
Non interest income 2,538,918 644,162 - - 3,183,080
---------- ----------- -------- ---------- -------------
Non interest expense:
Salaries and employee benefits 4,748,097 1,207,298 - - 5,955,395
Occupancy & equipment 1,517,662 426,084 116,454 (C) - 2,060,200
General & administrative 3,649,136 976,654 254,481 (B) 44,800 (A) 4,835,471
Impairment of long lived assets 1,198,288 - - 1,198,288
---------- ----------- -------- ---------- -------------
Total noninterest expense 11,113,183 2,610,036 370,935 44,800 14,049,354
---------- ----------- -------- ---------- -------------
Income before income taxes (5,276,374) 911,755 762,435 44,800 (5,082,254)
Income tax expense (1,800,070) 327,122 (274,477)(E) (16,128)(E) (1,731,297)
---------- ----------- -------- ---------- -------------
Net income $(3,476,304) $ 584,633 $ 487,958 (D) $ 28,672 (D) (3,350,957)
========== =========== ======== ========== =============
Basic earnings (loss) per share
of Common stock $ 0.60 $ (0.58)
Weighted average shares
outstanding 5,751,847 5,751,847
Diluted earnings per share of
common stock $ 0.60 $ (0.58)
Weighted average shares
outstanding and common stock
equivalents 5,990,815 5,990,815
</TABLE>
(A) To record savings to be realized by merger. These
adjustments are a direct result of the elimination of director
fees which will not continue after the merger.
(B) To record amortization of the goodwill added through the
acquisition of the TexStar National Bank.
(C) To record the additional depreciation to premises and equipment
as a result of the write up to estimated fair market value for
TexStar National Bank.
(D) This pro forma income statement does not reflect all
adjustments to, or projected changes in, income Surety Bank expects to
realize following consummation of the acquisition.
(E) To record tax effect of adjustments.
(F) To record debt expense on 9% convertible subordinated debt of
$4,350,000.
F-26
EXHIBIT 23
CONSENT OF BURNSIDE & RISHEBARGER, PLLC
We consent to the inclusion to the Form 8-K (File No. 33-1983) of
Surety Capital Corporation of our report, dated January 23, 1998,
on our audits of the financial statements of TexStar National Bank,
San Antonio, Texas as of December 31, 1997 and 1996, and for the
two years ended December 31, 1997.
/s/ Burnside & Rishebarger, PLLC
BURNSIDE & RISHEBARGER, PLLC
San Antonio, Texas
May 15, 1998
