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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1998 --- 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
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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 31, 1999, was $4,438,186. 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 31, 1999, 5,760,235 shares of Common
Stock were outstanding.
Documents Incorporated by Reference: Portions of the Company's Proxy
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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 1999 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, Hurst, Texas, formerly Texas Bank,
National Association and formerly Texas National Bank (the "Bank"), with full
service offices in Converse, Hurst, Midlothian, New Braunfels, San Antonio,
Schertz, Universal City, Waxahachie, 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
("IPF") company licensed by the State of Texas. Upon its acquisition by the
Company, the Bank began making IPF loans, and the Company ceased writing new IPF
business to allow the Bank to succeed to the existing business of the Company at
that time. The Company conducts all its operations through the Bank.
Recent Developments
The Company's net loss was $1.9 million for the year ended December 31,
1998, compared to a net loss of $3.5 million for the year December 31, 1997.
The major factors contributing to the loss for 1998 were higher loan losses and
charge-offs in the Bank's loan and medical claims receivable portfolios. See
"Item 1. Business - Commercial and Consumer Banking," "Item 1. Business -
Insurance Premium Financing," and "Item 1. Business - Medical Claims Factoring."
On November 19, 1998, the Bank entered into a formal written agreement (the
"Formal Agreement") with the Office of the Comptroller of the Currency (the
"OCC") pursuant to which the Bank was required to achieve certain capital levels
and adopt and implement certain plans, policies and strategies by March 31, 1999
and is required to achieve certain additional capital levels by December 31,
1999. Under the Formal Agreement, the Bank was required to achieve by March 31,
1999 total risk-based capital at least equal to 12% of risk-weighted assets and
Tier I leverage capital at least equal to 7.5% of adjusted total assets, and is
required to achieve by December 31, 1999 total risk-based capital at least equal
to 14% of risk-weighted assets. At December 31, 1998 the Bank had total risk-
based capital of 10.24% of risk weighted assets and Tier I leverage capital of
5.64% of adjusted total assets. The Bank failed to achieve the capital
requirements of the Formal Agreement to be met by March 31, 1999. The Bank
submitted a request to the OCC for an extension from March 31, 1999 to September
30, 1999 to meet the capital requirements of the Formal Agreement. The OCC
granted the extension, subject to revocation based on the results of
examinations by the OCC to be conducted in April and June of 1999 or if the OCC
finds the Bank to not be in substantial compliance with the other articles of
the Formal Agreement. See "Formal Agreement with the OCC" under "Item 1.
Business - Supervision and Regulation: Regulation of the Bank."
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In order to attain the capital levels and the leverage ratio required by
the Formal Agreement, the Bank has decided to sell its Midlothian and Waxahachie
branches (the "Branches"). See "Item 1. Business - Disposition of Assets." The
Bank has entered into a definitive purchase and assumption agreement with
respect to the sale of the Branches. If the sale is consummated, management of
the Company believes the Bank will attain both the total risk-based capital
levels and the leverage ratio required by the Formal Agreement. The
consummation of the sale is subject to a number of contingencies, including due
diligence review of the Branches by the prospective purchaser and receipt of all
regulatory approvals. The prospective purchaser of the Branches is in the
process of conducting a due diligence review of the Branches. If all
contingencies are satisfied, the sale is expected to close between June 30, 1999
and September 30, 1999; however, no assurance can be given that the sale will
close, or if the sale closes, that it will close by September 30, 1999. See
"Formal Agreement with the OCC" under "Item 1. Business - Supervision and
Regulation: Regulation of the Bank."
Additionally, the Company, as a holding company without significant assets
other than its ownership of all the common stock of the Bank, is dependent upon
dividends received from the Bank in order to meet its cash obligations,
including debt service on the $4,350,000 aggregate principal amount of 9%
Convertible Subordinated Notes due 2008 (the "Notes"), issued under an indenture
dated as of March 31, 1998 between the Company and Harris Trust and Savings
Bank, Chicago, Illinois, as trustee (the "Indenture"). The Bank is currently
precluded from declaring and paying any dividends under the Formal Agreement.
The Company will attempt to secure a loan to meet its cash flow needs for the
twelve months ended March 31, 2000, which includes servicing the interest
payment on the Notes. After March 31, 2000, the Company will attempt to pay
dividends from the Bank to the Company in an amount necessary to service the
interest payments on the Notes and for general corporate purposes. No assurance
can be given that the Company will be successful in such efforts in which event
the Company may be required to restrict operations. See "Restrictions on
Distribution of Subsidiary Bank Dividends and Assets" under "Item 1. Business -
Supervision and Regulation: Regulation of the Bank."
Acquisitions
In April 1998 the Company acquired TexStar National Bank, Universal City,
Texas ("TexStar"), with four branch locations in the greater San Antonio, Texas
metropolitan area. At April 1, 1998, TexStar had $70.3 million in total assets,
$64.8 million in deposits and $5.0 million in shareholders' equity. The
purchase price for TexStar was approximately $19.36 per share of TexStar common
stock outstanding (total cash consideration: $9,772,000), which was paid to the
shareholders of TexStar in connection with the merger. The acquisition of
TexStar was financed, in part, through a private placement by the Company of the
Convertible Notes. In February 1996 the Company acquired First National Bank,
Midlothian, Texas, with $53.8 million in assets, for $6,595,707. The Company
financed the Midlothian acquisition through a $7,394,293 underwritten public
offering of its Common Stock.
Dispositions
During 1998 the Company sold the Bank's four Lufkin-area branches located
in Chester, Kennard, Lufkin, and Wells, Texas (the "Lufkin Branches") to
Commercial Bank of Texas, National Association ("Commercial Bank"), Nacogdoches,
Texas. The sale of the Lufkin Branches was consummated on October 16, 1998. As
a result of the sale, a pretax gain of $1.1 million was recognized. The Bank
sold loans totaling
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approximately $10,912,000, real property, furniture and equipment totaling
approximately $610,000, and cash and other assets totaling approximately
$1,067,000, relieved goodwill and other assets associated with the Lufkin
Branches by approximately $677,000, and Commercial Bank assumed deposits and
other liabilities totaling approximately $56,936,000. After giving effect to a
deposit premium of 3% on the deposits assumed totaling approximately $1,703,000,
in addition to the cash at the Lufkin Branches, the Bank paid approximately
$43,632,000 in cash to Commercial Bank as consideration for the net deposit
liabilities assumed by Commercial Bank.
On April 13, 1999 the Bank entered into a definitive Purchase and Assumption
Agreement with The Citizens National Bank in Waxahachie, Waxahachie, Texas
("Citizens"), to sell to Citizens certain assets and assumption of certain
liabilities of the Bank associated with the Bank's branches located in
Midlothian and Waxahachie, Texas. Consummation of the transaction is subject to
numerous contingencies, including a due diligence review of the Midlothian and
Waxahachie branches by Citizens, and receipt of all necessary regulatory
approvals. If all contingencies to closing are satisfied, the transaction is
expected to close between June 30, 1999 and September 30, 1999. No assurance
can be given, however, that the foregoing transaction will be consummated, and
if consummated, that it will be consummated by September 30, 1999.
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 operates
full service branches in Converse, Midlothian, New Braunfels, San Antonio,
Schertz, Universal City, Waxahachie, and Whitesboro, Texas.
The Bank's activities include both traditional community banking loans,
such as commercial, real estate and consumer loans, and the niche lending
product of insurance premium financing ("IPF"). At December 31, 1998
approximately 29.1%, 4.2%, 41.8% and 24.9% of the Company's total loan portfolio
represented commercial loans, consumer banking loans, real estate loans, and IPF
loans, respectively.
Commercial and Consumer Banking
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. The Bank usually requires that these loans also be
guaranteed by the owners of the businesses. The average yield during the twelve
months ended December 31, 1998 for the Company's consumer, commercial and real
estate lending activities was 10.1%. The Company's commercial loans generally
have maturities of twelve months or less. During 1998, the Bank had net charge-
offs of $722,844 on its commercial and consumer loans. The losses were
concentrated within used car floor plan lending losses of $399,000. Management
has discontinued these type of lending activities.
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.
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Insurance Premium Financing
The Company distinguishes itself from other community banking organizations by
supplementing its traditional community bank lending with its specialized niche
lending product of insurance premium financing. The Company funds this
specialized lending activity by using relatively low cost core retail deposits
from its network of community banking offices which gives the Company a pricing
advantage over non-bank competitors for its loan products.
Insurance premium finance ("IPF") lending involves the lending of funds to
companies and individuals for the purpose of financing their purchase of
property and casualty insurance. The Company markets this product through over
1,100 independent insurance agents and maintains a loan portfolio consisting of
insurance policies underwritten by nearly 1,850 insurance companies. At
December 31, 1998 the Company reported total gross IPF loans of $24.9 million
(approximately 25% of gross loans), as compared to the December 31, 1997 total
balance of $40.3 million in IPF loans (40% of gross loans). The loans are
relatively short term, generally with initial maturities of eight to ten months.
The down payment and monthly installments on each loan are calculated so that in
most cases the equity or value of the unearned premium in the policy exceeds the
net balance due on the loan. If the borrower does not make the loan payments on
time, the Company has the right, after notice to the borrower, to cancel the
insurance policy and to receive the entire amount of the unearned premium from
the insurance company writing the insurance. The unearned premium is then
applied to the net loan balance.
The Company charged off IPF loans net of recoveries in the amount of $1.8
million for the twelve months ended December 31, 1998, primarily related to IPF
loans generated by the Bank's southeastern United States insurance premium
financing operation headquartered in Atlanta, Georgia. As a result of the
charge-offs, there was a substantial increase in the provision for credit losses
on IPF loans and IPF loan charge-offs for the twelve months ended December 31,
1998. The Atlanta office has been closed and, with the exception of a few
relationships, loan production from that market has been terminated. Management
will continue to actively and aggressively attempt to collect the charged-off
IPF loans. Management believes that all known losses in the IPF portfolio have
been recognized.
Medical Claims Factoring
From 1990 through 1998 the Company was engaged in medical claims factoring,
purchasing primarily insurance company claims from a variety of health care
providers. Management has planned to discontinue the operations of the medical
claims factoring division by June 1999. At December 31, 1998, the Company
reported $646,000 in gross medical claims receivables, representing 0.44% of
interest-bearing assets of the Company, after net charge-offs of $3.5 million
against the allowance for medical claims receivable losses and a credit of $0.7
million to the allowance. The credit is attributed to the recovery of unearned
revenue as a result of charge-offs accompanied by an overall reduction of the
required reserve due to recoveries during 1998 of $956,024. The interest income
from medical claims receivables accounted for 6.32% of the total gross interest
income of the Company for 1998. The medical claims factoring receivables
charged-off during the twelve month period ended December 31, 1998 were
originated prior to December 31, 1997. The balance of medical claims factoring
receivables net of unearned interest and allowance at December 31, 1998 was
approximately $505,000 and is not expected to increase. Due to the existence of
contractual commitments to nine customers of the Company and in order to enhance
the collectibility of previously charged-off medical claims, the Company is
continuing to factor new medical claims receivables on behalf of these nine
customers. However, as such contractual commitments expire, they will not be
renewed. Management expects that the Company will have totally discontinued
factoring medical claims operations by June 30, 1999, except to actively pursue
the collection of the charged-off
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receivables. At this time, however, the Company cannot predict the likely amount
of any such recoveries. Management believes that all known significant losses in
the portfolio have been recognized.
Competition
There is significant competition among banks and bank holding companies in
the market served by the Company, and the Company believes that such competition
among such banks and bank holding companies, many of which have far greater
assets and financial resources than the Company, will continue to increase in
the future. The Company also encounters intense competition in its commercial
and consumer banking business from savings and loan associations, credit unions,
factors, insurance companies, commercial and captive finance companies, and
certain other types of financial institutions, many of which are larger in terms
of capital, resources and personnel. The casualty IPF business of the Company
is also very competitive. Large insurance companies offer their own financing
plans, and other independent premium finance companies and other financial
institutions offer IPF loans.
The Company believes that such competition will continue and increase in
the future. In addition, the manner in which and the means by which financial
services are delivered to customers have changed significantly in the past and
can be expected to continue to change in the future. It is not possible to
predict the manner in which existing technology, and changes in existing
technology, will affect the Company. Changes in technology are likely to
require additional capital investments to remain competitive. Although the
Company has invested in new technology in the past, there can be no assurance
that the Company will have sufficient financial resources or access to the
proprietary technology which might be necessary to remain competitive in the
future.
Employees
As of December 31, 1998 the Company had 132 full-time employees and 2 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. As of March 31, 1999 the Company has reduced its number of full-time
employees to 119 in connection with its efforts to reduce non interest expense
and correspondingly improve its efficiency ratio.
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,
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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" 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.
As of the date of this report the Company has neither the cash flow nor the
financial flexibility to act as a source of strength for the Bank.
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
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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 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
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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
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.
Formal Agreement with the OCC. On November 19, 1998 the Board of Directors
of the Bank entered into a formal written agreement with the OCC (the "Formal
Agreement") pursuant to which the Bank was required to achieve certain capital
levels and adopt and implement certain plans, policies and strategies by March
31, 1999 and is required to achieve certain additional capital levels by
December 31, 1999. Under the Formal Agreement, the Bank was required to achieve
by March 31, 1999 total risk-based capital at least equal to 12% of risk-
weighted assets and Tier I leverage capital at least equal to 7.5% of adjusted
total assets, and is required to achieve by December 31, 1999 total risk-based
capital at least equal to 14% of risk-weighted assets. At December 31, 1998 the
Bank had total risk-based capital of 10.24% of risk weighted assets and Tier I
leverage capital of 5.64% of adjusted total assets. The Bank failed to achieve
the requirements of the Formal Agreement to be met by March 31, 1999. The Bank
submitted a request to the OCC for an extension from March 31, 1999 to September
30, 1999 to meet the capital requirements of the Formal Agreement. The OCC
granted the extension, subject to revocation based on the results of
examinations by the OCC to be conducted in April and June of 1999 or if the OCC
finds the Bank to not be in substantial compliance with the other articles of
the Formal Agreement. Management expects to achieve the December 31, 1999 Formal
Agreement capital requirements of total risk-based capital ratio at least equal
to 14% of risk-weighted assets and Tier I leverage capital at least equal to
7.5% upon completion of the sale of the branches located in Midlothian and
Waxahachie, Texas.
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Additionally, pursuant to the Formal Agreement the Board of Directors is
required to develop a three year capital plan program, a plan to enhance its
management information systems, a three year strategic plan establishing
objectives for the Bank's earnings performance, growth, balance sheet mix, off-
balance sheet activities, liability structure, capital adequacy, reduction in
the volume of non-performing assets, product line development and market
segments which the Bank intends to promote or develop, together with strategies
to achieve those objectives, a revised loan policy, and a loan classification
policy, each for submission to, and approval by, the OCC. Management has
implemented each of the OCC recommended enhancements, and the three year capital
plan, the plan to enhance Bank's management information systems and the three
year strategic plan have been adopted by the Bank's Board of Directors and have
been submitted to the OCC for their approval.
The Bank is in the process of selling its Midlothian and Waxahachie
branches (the "Branches") in order to attain the capital levels and leverage
ratio required by the Formal Agreement. See "Item 1. Business - Disposition of
Assets." The Bank has entered into a definitive purchase and assumption
agreement with respect to the sale of the Branches. If the sale is consummated,
management of the Company believes that the Bank will attain both the total
risk-based capital levels and the leverage ratio required by the Formal
Agreement. The consummation of the sale is subject to a number of
contingencies, including receipt of all regulatory approvals. If all
contingencies are satisfied, the sale is expected to close between June 30, 1999
and September 30, 1999; however, no assurance can be given that the sale will
close, or if the sale closes, that it will close by September 30, 1999.
The OCC has extensive enforcement authority over the operations of all
national banks, including the Bank. In the event the Company fails to comply
with the Formal Agreement, the OCC may under certain circumstances assess civil
monetary damages against the Bank and the Directors of the Bank, issue cease-
and-desist or removal orders and initiate injunctive actions. Additionally, the
OCC may impose a number of corrective measures on the Bank, including (1) the
imposition of restrictions on certain activities involving asset growth,
acquisitions, branch establishment, expansion into new lines of business,
declaration and payment of dividends, and transactions with affiliates, (2) the
imposition of certain additional mandated capital raising activities, and (3)
merger or sale of the Bank.
The Formal Agreement also prohibits the Board of Directors from declaring
or paying any dividends unless the Bank (1) is in compliance with 12 U.S.C.
(S)(S) 56 and 60 (see "Restrictions on Distribution of Subsidiary Bank Dividends
and Assets" under "Item 1. Business - Supervision and Regulation: Regulation of
Bank"), its approved capital program provided for in the Formal Agreement, and
the capital levels set forth in the Formal Agreement, as more fully described
above, and (2) has obtained the prior written approval of the OCC.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. The
Company owns all the outstanding common stock of the Bank. As a holding company
without significant assets other than its ownership of all the common stock of
the Bank, the Company's ability to meet its cash obligations, including debt
service on the $4,350,000 aggregate principal amount of the Notes is almost
entirely dependent upon the payment of dividends by the Bank on its common
stock. The declaration and payment of dividends by the Bank is subject to the
discretion of the Board of Directors of the Bank and is restricted by the
national banking laws and the regulations of the OCC, as well as by the Formal
Agreement.
Pursuant to 12 U.S.C. (S) 56, a national bank may not pay dividends from
its capital. All dividends must be paid out of undivided profits, subject to
other applicable provisions of law. As of December 31, 1998, the Bank has
undivided profits of $1,249,490. Payment of dividends out of undivided profits
is
-10-
<PAGE>
further limited by 12 U.S.C. (S) 60(a), which prohibits a national bank from
declaring a dividend on its shares of common stock until its surplus equals its
common capital, unless there has been transferred to surplus not less than
1/10th of the national bank's net income of the preceding half year in the case
of quarterly or semi-annual dividends or not less than 1/10th of the national
bank's net income of the preceding two consecutive half year periods in the case
of annual dividends. The payment of dividends by the Bank is also subject to
the provisions of 12 U.S.C. (S) 60(b), which provides that no dividend may be
declared or paid without the prior approval of the OCC if the total of all
dividends, including the proposed dividend, in any calendar year exceeds the
total of the Bank's net income for that year combined with its retained net
income (or loss) of the preceding two years. The Bank incurred an aggregated
loss for fiscal years 1997 and 1998 in the amount of ($4,707,359). Furthermore,
under federal law, a bank cannot pay a dividend if after paying the dividend,
the bank will be "undercapitalized." Moreover, the OCC may find a dividend
payment that meets all of the foregoing statutory requirements to be an unsafe
and unsound practice and on those grounds prohibit the dividend.
Additionally, the Formal Agreement prohibits the Board of Directors of the
Bank from declaring or paying any dividends unless the Bank (1) is in compliance
with 12 U.S.C. (S)(S) 56 and 60, its approved capital program provided for in
the Formal Agreement, and the Tier I capital levels set forth in the Formal
Agreement, and (2) has obtained the prior written approval of the OCC. See
"Formal Agreement with the OCC" under "Item 1. Business - Supervision and
Regulation: Regulation of the Bank."
The Company as a stand alone entity had sufficient cash on hand at March
31, 1999 to pay interest accrued under the Notes as of March 31, 1999. After
the payment of the March 31, 1999 interest payment on the Notes the Company had
$61,000 in cash remaining for future operating expenses. Therefore, the Company
does not have sufficient cash to pay the next installment of interest under the
Notes due on September 30, 1999. Until the restrictions under the Formal
Agreement are lifted and the Bank satisfies the other statutory and regulatory
requirements with respect to the payment of dividends, the Bank is precluded
from paying a dividend to the Company. In order to meet its future operating
expenses, including its interest obligations under the Notes, the Company will
have to raise capital through borrowings from financial institutions or
issuances of equity securities and subordinated debt instruments. The Company
will attempt to secure a loan to meet its cash flow needs for the twelve months
ended March 31, 2000, which includes servicing the interest payment on the
Notes. After March 31, 2000, the Company expects to be permitted to pay
dividends from the Bank to the Company in an amount necessary to service the
interest payments on the Notes and for general corporate purposes. There can be
no assurance that the financing can be obtained on satisfactory terms or that
the Bank will be permitted to pay dividends to the Company by March 31, 2000.
In this event, the Company could be required to restrict its operations.
In the event the Company is unable to receive dividends from the Bank or to
borrow funds or raise additional capital from outside sources, the Company will
not be able to pay accrued interest under the Notes and will be in default under
the Notes. The Indenture pursuant to which the Notes are issued does not
provide for any right of acceleration of the payment of the Notes as a result of
any failure of the Company timely to pay principal of and interest on the Notes,
or to comply with the covenants contained in the Indenture. The Notes may only
be accelerated in the event of the bankruptcy, insolvency or reorganization of
the Company. In the event of a default in the payment of interest, principal or
premium, if any, by the Company, or the failure of the Company to perform any
covenants or agreements contained in the Indenture, the holder of the Note (or
the Trustee on behalf of the holders of all the Notes affected) may, in lieu of
accelerating the maturity of the Notes, seek to enforce payment of such
interest, principal or premium, if any, and the performance of such covenants or
agreements. The initiation of such a course of action by the holders of the
Notes in the event of the failure of the Company to meet its debt servicing
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<PAGE>
obligations under the Notes could have a significant adverse impact on the
future operations of the Company.
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 Department of
Insurance and is governed by the Texas Consumer Loan Law. The Texas Consumer
Loan Law provides that for regular transactions (loans payable in consecutive
monthly installments of substantially equal amounts with the first installment
due within one month and 15 days after the date of the loan), the maximum
interest rate may not exceed the amount of add-on rate equal to $18 per $100 per
year on the first $1,380 and $8 per $100 on amounts of $1,380 up to $11,500.
These amounts are subject to adjustments as of July 1 of each year under the
Texas adjustment of dollar amounts provisions.
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 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
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<PAGE>
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, 1998 and exclusive of the
Formal Agreement, the Bank was "adequately capitalized" under the applicable
regulations. 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. Additionally, the Bank is not in compliance with certain capital level and
leverage ratio requirements set forth in the Formal Agreement, which may result
in the imposition of certain regulatory sanctions by the OCC. See "Formal
Agreement with the OCC" under "Item 1. Business - Supervision and Regulation:
Regulation of the Bank."
Capital Adequacy Guidelines. Capital management consists of providing
equity to support both current and future operations. The Company is subject to
capital adequacy requirements issued by the FRB and the Bank is subject to
similar requirements imposed by the OCC.
The various federal bank regulatory agencies, including the FRB and the
OCC, have adopted risk-based capital requirements for assessing bank holding
company and bank capital adequacy. These standards define capital and establish
minimum capital requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital standards are
designed to make regulatory capital requirements more sensitive to differences
in risk profile among bank holding companies and banks, to account for off-
balance sheet exposure and to minimize disincentives for holding liquid assets.
Assets and off-balance sheet items are assigned to broad risk categories, each
with appropriate relative risk weights. The resulting capital ratios represent
capital as a percentage of total risk-weighted assets and off-balance sheet
items.
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<PAGE>
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, as is the case with the Bank. Due to
recent significant increases in the provision for credit losses and charge-offs
on IPF and medical claims factoring receivables, the Board of Directors of the
Bank on November 19, 1998 entered into the Formal Agreement pursuant to which
the Bank is required to achieve certain capital levels and adopt and implement
certain plans, policies and strategies. Under the Formal Agreement, the Bank
was required to achieve by March 31, 1999 total risk-based capital at least
equal to 12% of risk-weighted assets and Tier I leverage capital at least equal
to 7.5% of adjusted total assets, and is required to achieve by December 31,
1999 total risk-based capital at least equal to 14% of risk-weighted assets.
The table below sets forth the capital requirements for the Bank under the
Capital Adequacy Guidelines of the OCC and the Formal Agreement:
<TABLE>
<CAPTION>
Actual Formal Agreement OCC Regulations
------------------------------------------ --------------------------------- ----------------------------
Capital Ratios Capital Ratios September 30, December 31, Adequately Well
December 31, 1998 December 31, 1997 1999(2) 1999 Capitalized Capitalized
------------------- ------------------ --------------------------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Leverage(1) 5.64% 6.24% 7.50% 7.50% 4.00% 5.00%
Risk-Based Capital:
Tier I 8.98% 9.92% 6.00% 6.00% 4.00% 6.00%
Tier I & II 10.24% 11.28% 12.00% 14.00% 8.00% 10.00%
</TABLE>
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<PAGE>
(1) Calculated as adjusted assets divided by adjusted equity at December 31,
1998 and 1997.
(2) As extended from March 31, 1999.
See "Item 1. Business - Insurance Premium Financing," "Item 1. Business -
Medical Claims Factoring," "Formal Agreement with the OCC" under "Item 1.
Business - Supervision and Regulation: Regulation of the Bank" and "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources."
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.
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. At
present, these requirements do not apply to the Bank, since total assets are
substantially below $500 million.
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<PAGE>
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 27 cents
per $100 in assessable deposits. The FDIC has also established a process for
raising or lowering all rates for insured institutions semi-annually if
conditions warrant a change. Under this system, the FDIC has the flexibility to
adjust the assessment rate schedule twice a year without seeking prior public
comment, but only within a range of five cents per $100 above or below the
premium schedule adopted. Changes in the rate schedule outside the five cent
range above or below the current schedule can be made by the FDIC only after a
full rulemaking with opportunity for public comment. The FDIC assessment for
the twelve months ended December 31, 1998 was $69,976. The FDIC assessment for
the first quarter of 1999 was $146,792. The increased FDIC assessment is
attributed to a higher risk assessment by the FDIC.
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 1.22 basis points,
on an annual basis, on BIF-insured deposits.
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
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<PAGE>
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 possess 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.
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.
ITEM 2. PROPERTIES.
The Company has nine full-service banking facilities, located in Converse,
Hurst, Midlothian, New Braunfels, San Antonio, Schertz, Universal City,
Waxahachie, and Whitesboro, Texas. The Company believes the existing facilities
are adequate for its present needs. The following chart provides information
about the Company's existing facilities.
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<PAGE>
<TABLE>
<CAPTION> Deposits at
Branch/Office Sq. Ft. Location/Ownership December 31, 1998
<S> <C> <C> <C>
Converse 3,750 9154 FM 78 $ 13,641,657
Converse, Texas 78109
Owned
Hurst 14,810 1845 Precinct Line Road $ 6,448,770
Suite 100
Hurst, Texas 76054
Leased
Midlothian(1) 17,116 910 North 9th Street $ 44,872,361
Midlothian, Texas 76065
Owned
New Braunfels 1,250 1012 IH 35 South $ 1,262,313
New Braunfels, Texas 78130
Leased
San Antonio 2,800 426 Wolfe $ 1,266,428
San Antonio, Texas 78216
Owned
Schertz 1,000 420 Schertz Parkway $ 9,113,606
Schertz, Texas 78154
Leased
Universal City 12,000 600 Pat Booker Road $ 31,399,201
Universal City, Texas 78148
Owned
Waxahachie(1) 19,186 104 Elm Street $ 13,101,066
Waxahachie, Texas 75165
Owned
Whitesboro 6,365 2500 Highway 82 East $ 34,057,999
Whitesboro, Texas 76263
Owned
Total $155,163,401
============
</TABLE>
(1) Planned to be sold during 1999. See "Item 1. Business - Recent
Developments" for a discussion of the pending sales.
ITEM 3. LEGAL PROCEEDINGS.
Surety Bank, National Association (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 plaintiff 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 sought 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 alleged course of conduct.
Both the Anchorage case as well as the MacGregor case 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. The Bank also contends
that it had a right to exercise control over its collateral to protect itself
against the possibility of inconsistent orders regarding the same funds.
Tennessee seeks to recover funds allegedly transferred in and out of
Anchorage/MacGregor accounts at the Bank during an approximate four month period
in 1993. Tennessee also claims that the Bank allegedly transferred funds in and
out of Anchorage accounts after receiving notice of a court order prohibiting
such transfer. Tennessee is claiming damages in excess of $2,000,000.
The Anchorage case was called to trial in July 1998, where, immediately
before trial was to begin, the court granted summary judgment in favor of the
Bank and entered a take nothing judgment against the Plaintiff. Tennessee has
since appealed the trial court's summary judgment to the Fifth Circuit Court of
Appeals, where that appeal is pending.
The Plaintiff in the MacGregor case, United Shortline, Inc. Assurance
Services, N.A. ("Shortline"), purports to be 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.
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 those 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. Tennessee then appealed that ruling to the Texas
-18-
<PAGE>
Supreme Court which affirmed the judgment of the Court of Appeals. This case has
recently been remanded to the trial court for disposition of the remaining
issues.
The Bank believes both of these cases lack merit and will continue to
defend them vigorously. The final outcome of both of these cases is uncertain
at this time.
The Bank is also a Defendant in Dr. Christian J. Renna, et al. vs. Barry
Carroll, et al., filed in April 1997 in the 348th Judicial District Court of
Tarrant County, Texas (the "Renna Case"). Christian J. Renna, D.O. ("Renna")
claims that his contract billing and collection manager, James Sharbrough,
signed Renna's name to an agreement with the Bank and begin submitting medical
claims belonging to Renna and his medical practice to the Bank for factoring.
Renna claims that these alleged activities by his billing/collection manager,
who was also Renna's brother-in-law at the time, were without his authority.
The plaintiffs in the Renna case alleged that damages were suffered as a result
of failing to receive advances for collections on the accounts allegedly
factored by the Bank. The plaintiffs also contend that they have been further
damaged as a result of factoring fees paid to factor the accounts. The
plaintiffs assert that they have suffered actual damages of approximately
$1,500,000, consisting of the face amount of the receivables, lost
profits/income and other consequential damages. Exemplary damages and attorneys
fees in an unspecified amount are also sought. The Bank has recently filed a
motion for summary judgment. The case is currently set for trial to begin on May
10, 1999. The Bank will continue to defend this case vigorously.
The Company is a defendant in various other legal proceedings arising in
connection with its ordinary course of business. In the opinion of management,
the financial position of the Company will not be materially affected by the
final outcome of these legal proceedings.
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 1998.
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, 1999, 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 71 Chairman of the Board, Chief Executive February 1999
Officer and Director
- -------------------------------------------------------------------------------------
G. M. Heinzelmann, III 36 President and Director July 1992
- -------------------------------------------------------------------------------------
B. J. Curley 35 Vice President, Secretary and Chief June 1996
Financial Officer
- -------------------------------------------------------------------------------------
</TABLE>
The business experience of each of these executive officers during the past
five (5) years is set forth below:
-19-
<PAGE>
C. Jack Bean has served as Chairman of the Board and Chief Executive
Officer of the Company since he returned from retirement in February 1999, and
has served as a director of the Company since March 1987. Mr. Bean previously
served as Chairman of the Board and Chief Executive Officer of the Company from
March 1987 until his retirement in August 1998, and 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. Mr. Bean has served as Chairman of the Board, Chief Executive
Officer and President of the Bank since he returned from retirement in February
1999, and has served as a director of the Bank since December 1989. He
previously served as Chairman of the Board of the Bank from December 1989 until
his retirement in August 1998. 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.
G. M. Heinzelmann, III has served as 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 served as Secretary of the Company since June 1996, Vice
President and Chief Financial Officer since October 1995, Controller since May
1993 and a director since August 1998. He has also served as Executive Vice
President of the Bank since April 1998, Chief Financial Officer since December
1994, Secretary since June 1996, Controller since May 1993, and as a director
since August 1998. He previously served as Vice President of the Bank from May
1993 to December 1994 and as Senior Vice President from December 1994 to April
1998.
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.
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 1998 and 1997.
-20-
<PAGE>
<TABLE>
<CAPTION>
High Low
- --------------------------------------------------------------------------------
<S> <C> <C>
1998 Fiscal Year
- ----------------
First Quarter $7.06 $4.38
Second Quarter $6.00 $3.88
Third Quarter $4.88 $2.00
Fourth Quarter $2.75 $1.94
1997 Fiscal Year
- ----------------
First Quarter $5.75 $4.13
Second Quarter $5.63 $5.00
Third Quarter $6.50 $5.13
Fourth Quarter $7.25 $5.69
</TABLE>
Stockholders
As of March 31, 1999 there were 398 record holders of the Company's Common
Stock.
Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
(dollars in thousands, First Third Total Year
except per share data) Quarter Second Quarter Quarter Fourth Quarter to Date
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 Fiscal Year
Interest income $ 3,811 $ 4,799 $ 4,601 $ 3,407 $ 16,518
Net interest income 2,358 983 2,605 1,466 7,412
Income (loss) before
income taxes 525 (1,233) 197 (784) (1,295)
Net (loss) income 332 (785) 151 (1,561) (1,863)
Basic earnings per share .06 (.14) .03 (.27) (.32)
Weighted average shares 5,756,838 5,760,502 5,759,338 5,760,235 5,759,579
Diluted (loss) earnings .06 (.14) .03 (.27) (.32)
per share
Weighted average shares
outstanding and
common
stock equivalents 5,991,740 6,007,112 5,759,338 5,760,235 5,759,979
1997 Fiscal Year
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
</TABLE>
-21-
<PAGE>
Dividend Policy
The Company. The Company has not previously paid any cash dividends. The
Company currently intends to retain earnings to make the interest payment on the
Notes and to pay its other operating expenses, rather than using earnings to pay
dividends. The payment of any cash dividends by the Company in the future will
depend to a large extent on the receipt of dividends from the Bank. The ability
of the Bank to pay dividends is dependent upon the Bank's earnings and financial
condition, the Bank's compliance with 12 U.S.C. (S)(S) 56 and 60, and the Bank's
fulfillment of certain requirements set forth in the Formal Agreement. See
"Formal Agreement with the OCC" and "Restrictions on Distribution of Subsidiary
Bank Dividends and Assets" under "Item 1. Business - Supervision and Regulation:
Regulation of the Bank" 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, 1998. 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.
-22-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998(1) 1997 1996(2) 1995(3) 1994(4)
-----------------------------------------------------------------
Income Statement Data: ($ in 000's)
<S> <C> <C> <C> <C> <C>
Interest income $ 16,518 $ 15,433 $ 14,390 $ 9,535 $ 5,387
Interest expense 7,101 5,750 5,362 3,678 1,488
-----------------------------------------------------------------
Net interest income before 9,417 9,683 9,029 5,857 3,899
provision for credit losses
Provision for credit losses and for
Medical claims factoring losses 2,005 6,385 135 60 107
-----------------------------------------------------------------
Net interest income after
provision for credit losses on 7,412 3,298 8,894 5,797 3,792
loans and medical claims
factoring losses
Noninterest income 3,425 2,539 1,877 1,419 1,160
Noninterest expense 12,132 11,113 8,135 5,879 4,462
-----------------------------------------------------------------
(Loss) earnings before income taxes (1,295) (5,276) 2,636 1,338 490
Income taxes 568 (1,800) 938 451 18
-----------------------------------------------------------------
Net (loss) earnings (1,863) (3,476) 1,698 887 472
Common Share Data:
Basic (loss) earnings $ (0.32) $ (0.60) $ 0.32 $ 0.27 $ 0.20
=================================================================
Diluted (loss) earnings $ (0.32) $ (0.60) $ 0.31 $ 0.25 $ 0.20
Book value $ 2.43 $ 2.74 $ 3.34 $ 2.94 $ 2.65
Weighted average common shares 5,759 5,752 5,389 3,279 2,394
outstanding (in 000's)
Weighted average shares outstanding
and common stock 5,759 5,991 5,438 3,614 2,425
Equivalents (in 000's)
Period end shares outstanding (in 5,760 5,756 5,748 3,506 3,041
000's)
Balance Sheet Data: ($ in 000's)
Total assets $175,062 $171,652 $176,439 $121,339 $102,294
Insurance premium finance loans, net 24,146 38,350 38,224 21,905 20,497
Other loans, net 73,323 59,333 58,819 42,211 41,597
Allowance for credit losses on loans 1,962 951 1,067 535 563
Medical claims factoring, net 505 3,073 6,116 3,217 2,693
Total deposits 155,163 154,541 155,690 109,599 92,027
Long term debt 4,350
Shareholders' equity 13,994 15,877 19,231 10,294 8,066
Performance Data
Return (loss) on average total assets (.9)% (2.0)% 1.0% .8% .8%
Return (loss) on average shareholders'
equity (13.2)% (18.7) 9.8 9.5 7.4
Net interest margin 5.2 6.2 6.2 6.1 7.1
Loans to deposits 62.8 63.2 61.5 57.7 66.6
Asset Quality Ratios
Nonperforming assets to total assets 1.2% 2.6% 1.2% 1.0% .6%
Nonperforming loans to total loans(5) 1.8 0.2 0.3 0.1 0.2
Net loan charge-offs to average
loans(5) 2.2 0.3 0.2 0.1 0.4
Allowance for credit losses to total
loans(5) 2.0 1.0 1.1 0.8 0.9
Allowance for credit losses to
nonperforming loans(5) 108.2 502.0 417.4 758.5 463.4
Capital Ratios for the Bank
Tier I risk-based capital 8.98% 9.92% 11.10% 10.76% 10.13%
Total risk-based capital 10.24 11.28 12.29 11.72 11.17
Leverage(6) 5.6 6.2 7.0 6.9 5.6
</TABLE>
-23-
<PAGE>
(1) On April 1, 1998 the Company acquired 100% of the outstanding common stock
of TexStar National Bank, Universal City, Texas.
(2) 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.
(3) 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.
(4) 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.
(5) Exclusive of medical claims factoring.
(6) Calculated as adjusted assets divided by adjusted equity at December 31,
1998 and 1997
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
Management's Discussion and Analysis of Financial Condition and Results of
Operations of the Company analyzes the major elements of the Corporation's
consolidated balance sheets and statements of income. This discussion should be
read in conjunction with the consolidated financial statements, accompanying
notes, and selected financial data appearing elsewhere in this report.
Performance Summary
Net loss for 1998 was $1,863,113, a decrease of $1,613,191, or 46%, from
the $3,476,304 recorded for 1997. On a weighted average share basis, net loss
for 1998 was $.32 per diluted share as compared to $.60 per share for 1997, a
decrease of 47%. The major contribution to the reduced loss during 1998 was a
125% increase in net interest income and a decrease in the provision for credit
losses of $4,380,009 or 68.6%. Further explanation of these results of
operations and changes are set forth below.
The net loss for 1997 was $3,476,304 compared to net income of $1,697,987
for 1996. The loss for 1997 was also attributable to significant credit losses
and recorded impairments of long-lived assets.
During 1998 management discontinued the Company's lending activities in
three areas which gave rise to the majority of losses described above. These
include medical claims factoring, the southeastern United States division of
insurance premium financing and used car floor planning and purchase financing.
-24-
<PAGE>
The information presented below reflects the lending and related funding
business of the Company.
<TABLE>
<CAPTION>
Year Year Year
Ended Ended Ended
December 31, 1998 December 31, 1997 December 31, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
INSURANCE PREMIUM FINANCING:
Average Balance Outstanding $ 36,784,786 $ 44,188,830 $ 29,210,848
Average Yield 10.2% 11.2% 12.2%
Interest Income $ 3,745,792 $ 4,935,716 $ 3,563,467
CONSUMER, COMMERCIAL AND REAL ESTATE
FINANCING:
Average Balance Outstanding $ 79,264,565 $ 59,132,390 $ 52,047,775
Average Yield 10.1% 10.5% 11.5%
Interest Income $ 8,013,705 $ 6,183,824 $ 5,983,791
MEDICAL CLAIMS FACTORING:
Average Balance Outstanding $ 3,582,939 $ 9,044,262 $ 3,660,432
Average Yield 29.1% 16.3% 33.7%
Interest Income $ 1,044,069 $ 1,477,510 $ 1,232,463
COST OF FUNDS:
Average Balance of Deposits $188,242,954 $154,531,929 $145,572,001
Average Interest Rate 3.6% 3.7% 3.7%
Interest Expense $ 6,782,611 $ 5,749,798 $ 5,361,689
COST OF DEBT:
Average Balance of Debt $ 3,262,500 $ 60,108
Average Interest Rate 9.7% 11.0%
Interest Expense $ 318,082 $ 6,612
</TABLE>
Note: Average balances are computed using daily balances throughout each
period.
The following table shows selected key performance ratios over the last
three years:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Return (loss) on average assets (.9)% (2.0)% 1.0%
Return (loss) on average equity (13.2)% (18.7)% 9.8%
Average equity to average assets 6.8% 10.6% 10.5%
</TABLE>
The Company has entered into a Purchase and Assumption Agreement regarding
the sale of the branches of the Bank located in Waxahachie and Midlothian,
Texas. The sale of these branches is expected to bring the Bank into full
compliance with the Formal Agreement capital requirements. The Bank failed to
achieve the capital requirements of the Formal Agreement to be met by March 31,
1999. The Bank submitted a request to the OCC for an extension from March 31,
1999 to September 30, 1999 to meet the capital requirements of the Formal
Agreement, which was granted by the OCC, subject to revocation based on the
results of examinations by the OCC to be conducted in April and June of 1999 or
if the OCC finds the Bank to not be in substantial compliance with the other
articles of the Formal Agreement. Upon full compliance with the Formal
Agreement, the Bank will seek to have the Formal Agreement lifted. There can be
no assurance that, upon meeting the requirements of the Formal Agreement, the
OCC will lift the
-25-
<PAGE>
Formal Agreement. See "Formal Agreement with the OCC" under "Item 1. Business -
Supervision and Regulation: Regulation of the Bank."
The Company's strategy is to comply with the OCC's Formal Agreement and
then return to its basic business plan of acquiring 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."
(Loss) Earnings Before Income Taxes
The loss before income taxes was $(1,295,356) for the year ended December
31, 1998, compared with a loss before income taxes of $(5,276,374) for the year
ended December 31, 1997, a change of $3,981,018 or 75.5%. Even though the Bank
had a loss before income taxes, an income tax expense was incurred during 1998
as a result of valuation allowance for deferred tax assets in the amount of
$868,784. The valuation allowance for the deferred tax assets was needed upon a
determination that the realizability of the deferred tax asset could not be
assured within a reasonable period of time based upon continuing operations.
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 change of $7,912,489 or 300.2%. The substantial
increase in the loss before income taxes for the year ended December 31, 1997
versus the year ended December 31, 1996 was a result of a decision by management
to charge-off certain medical claims receivables, to make provisions for other
medical claims receivables outstanding over 120 days and to recognize an
impairment to the unamortized goodwill and other assets of $1,198,288 relating
to the medical claims factoring division.
Net Interest Income
Net interest income is the difference between interest earned on earning
assets and interest paid for the funds supporting those assets. The largest
category of earning assets consists of loans to businesses and individuals. The
second largest is investment securities. Net interest income is the principal
source of the Company's earnings. Interest rate fluctuations, as well as
changes in the amount and type of earning assets and liabilities supporting
those assets, affect net interest income. Interest rates primarily are
determined by national and international market trends, as well as competitive
pressures in the Company's operating markets.
Net interest income before credit losses for 1998 was $9,417,099, a
decrease of $265,787 or 2.7% compared to the prior year. The net decrease
reflected a $1,085,108 increase in interest income which was offset by a
$1,350,895 increase in interest expense. The Company's yield on earning assets
declined to 9.2% in 1998, from 9.9% for 1997. Rates paid on the Company's
interest-bearing liabilities remained unchanged at 4.4% in 1997 and 1998. These
adverse shifts in yield on earning assets resulted in the net interest margin
declining from 6.2% in 1997 to 5.2% for 1998. Meanwhile, an interest income
effect of a 14.6% increase in average earning assets was more than offset by the
interest expense effect of a 21.2% increase in interest-liabilities. These asset
and liability increases arose primarily from the TexStar acquisition. From 1997
to 1998, the average balance of non-interest bearing demand deposits increased
$9,029,939 or 40.3%. Average demand deposits as a percent of average total
deposits increased to 45.5% in 1998 from 44.2% in 1997.
-26-
<PAGE>
Summary of Earning Assets and Interest Bearing Liabilities
Although the year-end detail provides satisfactory indicators of general
trends, the daily average balance sheets are more meaningful for analysis
purposes than year-end data because averages reflect the day-to-day fluctuations
that are common to bank balance sheets. Also, average balances for earning
assets and interest-bearing liabilities can be related directly to the
components of interest income and interest expense on the statements of income.
This provides the basis for analysis of rates earned and paid, and sources of
increases and decreases in net interest income as derived from changes in
volumes and rates.
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.
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, 1998. 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.
-27-
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Year ended December 31, 1998 Year ended December 31, 1997
---------------------------------------------------------------------------
Interest Interest
Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate
------------- ----------- -------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
ASSETS(1)
Interest-earning assets:
Interest-bearing deposits $ 94,939 $ 5,844 6.2% $ 186,945 $ 18,768 10.0%
U.S. Treasury and agency
securities(2) 32,200,324 1,989,418 6.2 35,693,396 2,300,527 6.4
Federal funds sold 31,027,035 1,718,964 5.5 9,999,199 516,340 5.2
Loans(3) (4) 116,049,351 11,759,497 10.1 103,321,220 11,119,540 10.8
Medical claims receivables 3,582,939 1,044,069 29.1 9,044,262 1,477,510 16.3
Allowance for credit losses
and Factoring (3,501,675) - (1,655,993) - -
------------ ----------- ---- ------------ ----------- -----
Total interest-earning assets 179,452,913 16,517,792 9.2% 156,589,029 15,432,685 9.9%
------------ ----------- ---- ------------ ----------- -----
Cash and due from banks 9,098,676 5,943,102
Premises and equipment 6,191,020 3,865,966
Accrued interest receivable 991,940 951,155
Other real estate owned 505,629 259,828
------------ ------------
Other assets 12,775,599 7,296,715
------------ ------------
Total assets $209,015,777 $174,905,795
============ ============
LIABILITIES(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 44,741,576 1,151,356 2.6% $ 38,109,284 1,046,696 2.8%
Savings deposits 9,499,843 232,491 2.4 7,846,458 189,443 2.4
Time deposits 102,551,436 5,398,764 5.3 86,156,027 4,513,659 5.2
Notes payable 3,262,500 318,082 9.7 - - -
------------ ----------- ---- ------------ ----------- -----
Total interest-bearing liabilities 160,055,355 7,100,693 4.4% 132,111,769 5,749,798 4.4%
------------ ----------- ---- ------------ ----------- -----
Noninterest-bearing deposits 31,450,099 22,420,160
Other liabilities 3,382,877 1,759,679
------------ ------------
Total liabilities 194,888,331 156,291,608
Shareholders' equity 14,127,446 18,614,187
------------ ------------
Total liabilities and equity $209,015,777 $174,905,795
============ ============
Net interest income $ 9,417,099 $ 9,682,887
=========== ===========
Net interest spread 4.8% 5.5%
==== ====
Net interest margin 5.2% 6.2%
==== ====
</TABLE>
-28-
<PAGE>
AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME, continued
<TABLE>
<CAPTION>
Year ended December 31, 1996
----------------------------------------------
Interest
Average Income/ Average
Balance Expense Rate
------------- ----------- -------
<S> <C> <C> <C>
ASSETS(1)
Interest-earning assets:
Interest-bearing deposits $ 531,688 $ 42,117 7.9%
U.S. Treasury and agency
securities(2) 38,229,219 2,489,906 6.5
Federal funds sold 19,291,373 1,078,618 5.6
Loans(3) (4) 85,325,222 9,547,258 11.2
Medical claims receivables 3,660,432 1,232,463 33.7
Allowance for credit losses
and Factoring (1,162,713) - -
------------ ----------- ----
Total interest-earning assets 145,875,221 14,390,362 9.9%
------------ ----------- ----
Cash and due from banks 6,231,693
Premises and equipment 3,806,385
Accrued interest receivable 1,010,323
Other real estate owned 585,587
Other assets 6,965,368
------------
Total assets $164,474,577
============
LIABILITIES(1)
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 36,910,314 $ 880,776 2.4%
Savings deposits 8,174,212 176,108 2.1
Time deposits 80,397,763 4,298,193 5.3
Notes payable 60,108 6,612 11.0
------------ ----------- ----
Total interest-bearing
liabilities 125,542,397 5,361,689 4.3%
------------ ----------- ----
Noninterest-bearing deposits 20,089,712
Other liabilities 1,564,827
------------
Total liabilities 147,196,936
Shareholders' equity 17,277,641
------------
Total liabilities and equity $164,474,577
============ -----------
Net interest income $ 9,028,673
===========
Net interest spread 5.6%
====
Net interest margin 6.2%
====
</TABLE>
(1) The average balance sheet and interest income/expense column include the
balance sheet and income statement accounts of First National Bank,
Midlothian, Texas; Providers Funding Corporation; TexStar National Bank,
Universal City, Texas; and the Lufkin area branches from February 29, 1996,
March 15, 1996, April 1, 1998 and October 16, 1998 (the respective dates of
acquisition or disposition of such bank branches or divisions) through
December 31, 1998.
(2) 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 stockholders' equity.
(3) Loans on nonaccrual status have been included in the computation of average
balances.
(4) The interest income on loans does not include loan fees. Loan fees are
immaterial and are included in noninterest income.
-29-
<PAGE>
Net interest margin, the net return on earning assets which is computed by
dividing net interest income by average total earning assets, was 5.2% for 1998,
a one hundred basis point decline from the previous year. This decline in the
margin reflected a lower yield on earning assets contributed to by a declining
interest rate market in the fourth quarter of 1998 and a more competitive
economic market that resulted in somewhat lower pricing of some loans. Also,
competitive market conditions resulted in higher rates being paid on deposit
products, along with issuance of subordinated debt in mid-1998.
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.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
Compared with Compared with
December 31, 1997 December 31, 1996
--------------------------------------- ---------------------------------------------------
Increase/ Increase/ Increase/ Increase/
(Decrease) (Decrease) Due to (Decrease) (Decrease) Due to
Volume Rate Changes Volume Rate Changes
------------ ----------- ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income(1):
Interest-bearing
deposits $ (7,236) $ (5,688) $ (12,924) $ (39,733) $ 16,384 $ (23,349)
In financial
institutions
U.S. Treasury and
agency Securities (218,586) (92,523) (311,109) (163,674) (25,705) (189,379)
Federal funds sold 1,162,336 40,289 1,202,625 (485,270) (77,008) (562,278)
Loans(2) 1,315,518 (675,561) 639,957 1,948,532 (376,250) 1,572,282
Medical claims
receivables (1,196,476) 763,035 (433,441) 1,121,471 (876,424) 245,047
----------- --------- ---------- ---------- ----------- ----------
Total interest
income 1,055,556 29,552 1,085,108 2,381,326 (1,339,003) 1,042,323
----------- --------- ---------- ---------- ----------- ----------
Interest
Expense(1):
Interest-bearing
demand Deposits 164,143 (59,483) 104,660 29,375 136,545 165,920
Savings deposits 40,430 2,618 43,048 (6,637) 19,972 13,335
Time deposits 863,023 22,082 885,105 299,270 (83,804) 215,466
Federal funds
purchased
and other
borrowed funds 318,082 0 318,082 (3,306) (3,306) (6,612)
----------- --------- ---------- ---------- ----------- ----------
Total interest
expense 1,385,678 (34,783) 1,350,895 318,702 69,407 388,109
----------- --------- ---------- ---------- ----------- ----------
Net interest
margin $ (330,122) $ 64,335 $ (265,787) $2,062,624 $(1,408,410) $ 654,214
=========== ========= ========== ========== =========== ==========
</TABLE>
(1) The average volume and average rate columns include the balance sheet and
income statement accounts of the First National Bank, Midlothian, Texas;
Providers Funding Corporation; TexStar National Bank, Universal City,
Texas; and the Lufkin area branches from February 29, 1996, March 15, 1996,
April 1, 1998 and October 16, 1998 (the respective dates of acquisition or
disposition of such bank branches or divisions) through December 31, 1998.
(2) Non-accrual loans are included in the average volumes used in calculating
this table.
-30-
<PAGE>
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., loan late fees, deposit account service charges, and exchange fees).
Noninterest income for the year ended December 31, 1998 was $3,425,302, an
increase of $886,384 or 35% compared with noninterest income of $2,538,918 for
the year ended December 31, 1997. The increase in noninterest income is
primarily attributed to the gain realized on the sale of the Chester, Kennard,
Lufkin and Wells branches of the Bank. The gain realized on the sale amounted
to $1.1 million. Noninterest income not including the gain on the sale of the
Chester, Kennard, Lufkin and Wells branches was $2,321,819 for the twelve months
ended December 31, 1998, which represents a decrease in the noninterest income
of 8.5% from the noninterest income for the twelve months ended December 31,
1997 of $2,538,918. The decrease is attributed to the Company's decision to
close its Atlanta IPF office. The closure of this office resulted in a decrease
in IPF loans and subsequently a decrease in the noninterest income for the
twelve months ended December 31, 1998.
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 of $1,877,454 for
the year ended December 31, 1996. The increase in noninterest income is
attributed to the increase in late fee charges driven by 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. Late
fees for the year ended December 31, 1997 were $1,169,407 as compared $681,644
for the same period during 1996.
Noninterest Expense
Total non-interest expense increased $1,019,587 or 9.2% in 1998 over 1997
reflecting $2,217,875 of increases in salaries and benefits, occupancy expenses,
amortization of intangibles and other operating expenses (largely arising from
the TexStar acquisition), partially offset by a $1,198,288 decrease in recorded
impairments of goodwill. The increase in noninterest expense is attributed to
the acquisition of TexStar (i.e., additional occupancy expenses and salary
expense), legal expenses of $683,000, settlement and accruals for legal
proceedings for $337,000 and operational losses of $230,000 during 1998. The
operational losses arise from expenses incurred in the acquisition of TexStar.
As a percent of average assets, non-interest expenses were 5.8% in 1998, 6.3% in
1997 and 4.9% in 1996, and the "efficiency ratio" (non-interest expenses divided
by total non-interest income plus net interest income) was 112.0% in 1998,
190.4% in 1997 and 75.5% in 1996. The efficiency ratio measures what percentage
of total revenues are absorbed by non-interest expense. These measures of
operating efficiency compare unfavorably to other financial institutions in the
Company's peer groups.
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 Bank,
Midlothian, Texas, and the increase in staffing required by the medical claims
receivables division.
-31-
<PAGE>
NONINTEREST EXPENSE
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------- ----------------
<S> <C> <C> <C>
Salaries and employee benefits $ 5,620,710 $ 4,748,097 $4,244,874
Occupancy and equipment 2,004,070 1,517,662 1,244,551
General and administrative expense:
Professional fees 1,020,970 1,126,351 467,662
Settlements and accruals for legal 336,698 - -
proceedings
Office supplies 341,028 290,533 386,114
Travel and entertainment 128,961 132,476 96,577
Telephone 363,023 342,161 283,564
Advertising 164,163 189,510 174,335
Postage 447,312 374,233 299,388
Amortization of intangibles 634,821 506,172 359,717
Dues and subscriptions 120,130 72,847 70,559
Insurance 153,260 95,957 167,245
Bank service charge 183,086 116,631 110,881
FDIC assessment 69,976 15,626 3,553
Credit reports 32,796 46,314 22,850
Operational losses 229,761 13,987 23,075
Other 282,005 326,338 180,067
----------- ----------- ----------
Total general and administrative 4,507,990 3,649,136 2,645,587
Impairment of long lived assets - 1,198,288 -
----------- ----------- ----------
Total noninterest expense $12,132,770 $11,113,183 $8,135,012
=========== =========== ==========
</TABLE>
Income Taxes
The Company and the Bank will file a consolidated tax return for 1998. The
Company's effective tax rate for 1998 is 43.8% due to income tax expense of
$567,757 on a loss before taxes of $(1,295,356) for the year ended December 31,
1998 as compared with income tax benefit of $(1,800,070), or an effective tax
rate of 34.1% on a loss before taxes of $(5,276,374) for the year ended December
31, 1997. The tax expense for 1998 is a result of management's decision to
provide a 100% valuation allowance for deferred tax asset in the amount of
$868,784.
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
-32-
<PAGE>
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 Bank's interest-earning assets
and interest-bearing liabilities at December 31, 1998:
-33-
<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 $ 94,939 $ 94,939
financial institutions
Investment securities $ 9,564,813 $ 570,000 $ 500,000 3,373,816 $10,358,237 24,366,866
Federal funds sold 24,761,752 24,761,752
Loans, net of unearned
Interest 39,971,141 15,775,603 13,072,722 24,421,050 6,190,245 99,430,761
Medical claims receivable 646,378 - - - - 646,378
----------- ----------- ------------ ----------- ----------- ------------
Interest-earning assets 74,944,084 16,345,603 13,572,722 27,889,805 16,548,482 149,300,696
----------- ----------- ------------ ----------- ----------- ------------
Interest-bearing
liabilities:
Interest-bearing demand
Deposits 35,235,325 35,235,325
Savings deposits 8,313,889 8,313,889
Time deposits 24,080,103 14,735,581 29,471,162 11,860,792 - 80,147,638
----------- ----------- ------------ ----------- ----------- ------------
Interest-bearing
Liabilities 67,629,317 14,735,581 29,471,162 11,860,792 - 123,696,852
Period interest sensitivity
Gap 7,314,767 1,610,022 (15,898,440) 16,029,013 16,548,482 25,603,844
----------- ----------- ------------ ----------- ----------- ------------
Cumulative interest
sensitivity gap $ 7,314,767 $ 8,924,789 $ (6,973,651) $ 9,055,361 $25,603,844 $ 25,603,844
----------- ----------- ------------ ----------- ----------- ------------
Cumulative gap as a
Percent of total assets 4.19% 5.11% (3.99)% 5.18% 14.65% 14.65%
Cumulative interest-
sensitive assets as
percent of cumulative
interest-sensitive
liabilities 110.8% 110.8% 93.8% 107.3% 120.7% 120.7%
</TABLE>
The cumulative rate-sensitive gap position at one year was a liabilitiy-
sensitive position of $7.0 million, or a negative 4.0%. 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 strategy 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, 1998 the Bank held $3,179,716
in
-34-
<PAGE>
mortgage-backed securities. Although the mortgage-backed securities have a
stated maturity greater than five years, it is not uncommon for mortgage-backed
securities to fully pay down well ahead of stated maturities. As a result,
assets and liabilities indicated as repricing within the same period may, in
fact, reprice at different times and at different rate levels.
ANALYSIS OF FINANCIAL CONDITION
Loans and Asset Quality
The Company's loans are diversified by borrower and industry group. There
was a slight decrease in loans from December 31, 1997 to December 31, 1998 by
approximately $500,000 along with a significant change in the composition of the
loan portfolio, primarily a decrease in the amount of insurance premium finance
loans by approximately 38% and an increase in the amount of real estate loans of
approximately 57%. The decrease in insurance premium finance loans is
attributed to the Company's decision to close its southeast office in Atlanta,
Georgia and the increase in real estate loans is attributed to the acquisition
of TexStar. Loan growth has occurred during 1997, 1996, 1995 and 1994 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, 1998, 1997, 1996, 1995 and 1994:
-35-
<PAGE>
LOAN PORTFOLIO AND MEDICAL CLAIMS RECEIVABLES NALYSIS
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------------------------------------------------------------
Aggregate Principal Amount
--------------------------
<S> <C> <C> <C> <C> <C>
Loans
Insurance premium financing $ 24,887,202 $ 40,373,695 $39,168,604 $22,409,356 $20,931,642
Commercial loans 29,270,444 23,171,566 22,745,139 16,301,840 13,205,698
Installment loans 4,250,159 10,632,451 12,631,520 10,645,406 12,029,243
Real estate loans 41,939,108 26,668,598 24,774,167 16,281,558 17,297,636
------------ ------------ ----------- ----------- -----------
Total loans 100,346,913 100,846,310 99,319,430 65,638,160 63,464,219
Less: Unearned interest (916,152) (2,212,391) (2,501,747) (1,869,751) (1,506,843)
Allowance for credit losses (1,961,840) (950,809) (1,067,041) (535,250) (562,649)
------------ ------------ ----------- ----------- -----------
Total loans, net $ 97,468,921 $ 97,683,110 $95,750,642 $63,233,159 $61,394,727
============ ============ =========== =========== ===========
Medical claims receivables
Medical claims receivables, net
of unearned interest $ 646,378 $ 7,381,040 $ 6,334,005 $ 3,333,830 $ 2,705,974
Allowance for medical claims
Receivables losses (141,184) (4,307,885) (217,733) (167,677) (135,299)
------------ ------------ ----------- ----------- -----------
Total medical claims
receivables, net $ 505,194 $ 3,073,155 $ 6,116,272 $ 3,166,153 $ 2,570,675
============ ============ =========== =========== ===========
Percentage of Loan Portfolio
----------------------------
Loans:
Insurance premium financing 24.9% 40.0% 39.4% 34.1% 33.0%
Commercial loans 29.1 23.0 22.9 24.8 20.8
Installment loans 4.2 10.5 12.7 16.2 19.0
Real estate loans 41.8 26.5 25.0 24.9 27.2
------------ ------------ ----------- ----------- -----------
Total 100.0% 100.0% 100.0% 100.0% 100.0%
============ ============ =========== =========== ===========
</TABLE>
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, 1998 and 1997 commitments of the Bank under standby
letters of credit and unused lines of credit totaled approximately $6,891,000
and $5,048,000, 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, 1998 were:
-36-
<PAGE>
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 $23,341,200 $23,341,200
Reset: 45,478,266 $24,421,050 $6,190,245 76,089,561
Insurance premium financing ----------- ----------- ---------- -----------
$68,819,466 $24,421,050 $6,190,245 $99,430,761
Commercial and real estate loans ----------- ----------- ---------- -----------
Total
$ 646,378 $ 646,378
Medical claims receivable =========== ===========
</TABLE>
Rate sensitivities of the total loan portfolio before unearned income as of
December 31, 1998 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 $44,890,299 $15,609,127 $6,190,245 $66,689,671
Variable Rate 22,530,367 8,811,923 31,342,290
Non Accrual 1,398,800 1,398,800
----------- ----------- ---------- -----------
Total $68,819,466 $24,421,050 $6,190,245 $99,430,761
=========== =========== ========== ===========
</TABLE>
The maturities presented above are based upon contractual maturities. Many
of these loans are made on a short-term basis with the possibility of renewal at
time of maturity. All loans, however, are reviewed on a continuous basis for
creditworthiness.
Nonperforming Assets
The Company's financial statements are prepared on the accrual basis of
accounting, including the recognition of interest income on its loan portfolio,
unless a loan is placed on a nonaccrual basis. Loans are placed on a nonaccrual
basis when there are serious doubts regarding the complete collectibility of
principal and interest. Amounts received on nonaccrual loans generally are
applied first to principal and then to interest after all principal has been
collected. Troubled debt restructurings are those for which concessions,
including reduction of interest rates or deferral of interest or principal, have
been granted, due to a borrower's weakened financial condition. Interest on
restructured loans is accrued at the restructured rates when it is anticipated
that no loss of original principal will occur. It is the policy of the Bank not
to renegotiate the terms of a loan simply because of a delinquent status.
Rather, a loan is generally transferred to a nonaccrual status if it is not in
the process of collection and is delinquent in payment of either principal or
interest beyond 90 days. Loans which are 90 days delinquent but are well
secured and in the process of collection are not included in nonperforming
assets.
Management has established a schedule to be used as a guideline for
insurance premium finance loans in determining what level of reserve is
appropriate and if charge-off of the loan is needed. All insurance premium
finance loans from 120 days to 149 days past the cancellation date are
classified as
-37-
<PAGE>
substandard and require a 25% allowance reserve. All insurance premium finance
loans 150 days to 179 days past cancellation date are classified as doubtful and
require a 50% allowance reserve. All loans which are greater than 179 days are
classified as a loss and are charged-off. Any insurance premium finance loan
which is guaranteed 100% by a state or exchange guarantee fund require a 50%
allowance reserve. Beginning in 1998, insurance premium finance loans which
continue to be outstanding are put on non-accrual status after 120 days past the
cancellation date. A similar set of guidelines have been established for the
medical claims factoring. All medical claims receivables are considered current
if their aging is between zero days and 60 days from funding. Receivables 61
days to 90 days are classified as special mention and require a 10% allowance
reserve. Receivables 91 days to 120 days are classified as substandard and
require a 33% allowance reserve. Receivables 121 days to 180 days are classified
as doubtful and require a 66% allowance reserve. Any receivable which continues
to be outstanding and aged beyond 180 days is classified as a loss and is
charged-off. Receivables are put on non-accrual after 90 days from funding.
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. It is estimated that the nonaccrual loans for 1998 and 1997
would have earned interest income of approximately $141,279 and $9,922 on an
annualized basis. The following table summarizes nonperforming assets by
category as of December 31, 1998 and 1997:
NONPERFORMING ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Nonaccrual loans $1,398,800 $ 91,868
Loans 90 days past due and still accruing
interest 414,969 97,537
---------- ----------
Total nonperforming loans 1,813,769 189,405
Medical claims receivable aged beyond 120 days - 4,183,064
Other real estate owned and other assets 205,877 158,271
---------- ----------
Total nonperforming assets $2,019,646 $4,530,740
---------- ----------
Nonperforming assets to total assets 1.2% 2.6%
Nonperforming loans to total loans 1.8% 0.2%
</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. 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, 1998:
-38-
<PAGE>
OTHER REAL ESTATE OWNED AND OTHER COLLATERAL ACQUIRED
<TABLE>
<CAPTION>
Number of Net Book Carrying
Description Parcels/Autos Value
- -------------------------- ------------- -----------------
<S> <C> <C>
Vacant land or unsold lots 4 $158,545
Repossessed automobiles 14 47,332
-- --------
Total 18 $205,877
</TABLE>
Allowance for Credit Losses on Loans
In originating loans, the Company recognizes that credit losses will be
experienced and the risk of loss will vary with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the quality of the collateral for such loan. The allowance for 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 $1,961,840 at
December 31, 1998.
The Company recorded a $2.7 million provision for credit losses during the
twelve months ended December 31, 1998, and charged off IPF loans net of
recoveries in the amount of $1.8 million and charged off the Bank's
traditional loan products net of recoveries $722,844, for the twelve months
ended December 31, 1998. The substantial increase in the provision for credit
losses on IPF loans and IPF loan charge-offs for the twelve months ended
December 31, 1998 were primarily related to IPF loans generated by the Bank's
southeastern United States insurance premium financing operation, headquartered
in Atlanta, Georgia. The Atlanta office has been closed and, with the exception
of a few relationships, loan production from that market has been terminated.
Management will continue to actively and aggressively attempt to collect the
charged-off IPF loans. Management believes that all known losses in the IPF
portfolio have been recognized. The additional provision in the Bank's
traditional loan portfolio is also attributed to net loan charge-offs of
$722,844. The Bank had charge-offs of $555,230 on commercial loans. This
charge-off was related primarily to the Bank's used car floor plan lending
program. The Bank has discontinued its used car floor plan lending program.
The Bank had a charge-off in its installment loan program of $305,333. This
charge-off is primarily attributed to consumer auto installment loans made in
connection with the Bank's used car floor plan lending program. After the Bank
had determined to discontinue the used car floor plan lending program, the Bank
saw an increase in the amount of defaults on its consumer auto installment loan
program. The Bank made the necessary charge-offs and has discontinued its
consumer auto installment loan program as it relates to the floor plan lending.
The allowance for credit losses is based on estimates, and ultimate results
could 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
-39-
<PAGE>
presents a detailed analysis of the Company's allowance for credit losses for
the five years ended December 31, 1998:
ALLOWANCE FOR CREDIT LOSSES ON LOANS
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 950,809 $ 1,067,041 $ 535,250 $ 562,649 $ 282,253
------------ ------------ ----------- ----------- -----------
Charge-offs:
Commercial loans (555,230)) (32,519) (6,245) (13,151) (41,537)
Installment loans (305,333) (367,493) (188,419) (104,295) (163,669)
Real estate loans (10,058) (38,046) (21,185) (5,350)
Insurance premium finance (2,287,015) - (939) - (1,710)
------------ ------------ ----------- ----------- -----------
Total charge-offs (3,157,636) ( 438,058) ( 216,788) ( 117,446) ( 212,266)
------------ ------------ ----------- ----------- -----------
Recoveries:
Commercial loans 83,515 6,258 5,067 1,012 15,698
Installment loans 49,071 92,511 43,538 37,366 43,070
Real estate loans 15,191 40,455 10,240 13,288
Insurance premium finance 501,084 42,602 2,720 - 2,488
------------ ------------ ----------- ----------- -----------
Total recoveries 648,861 181,826 61,565 51,666 61,256
------------ ------------ ----------- ----------- -----------
Net charge-offs (2,508,775) (256,232) (155,223) (65,780) (151,010)
Bank acquisition 820,625 - 614,700 10,759 340,832
Provision for credit losses on 2,699,181 140,000 72,314 27,622 90,574
loans ------------ ------------ ----------- ----------- -----------
Ending balance $ 1,961,840 $ 950,809 $ 1,067,041 $ 535,250 $ 562,649
============ ============ =========== =========== ===========
Period end total loans, net of
Unearned interest $ 99,430,761 $ 98,633,919 $96,817,683 $63,768,409 $61,957,376
============ ============ =========== =========== ===========
Average loans $116,049,351 $103,321,220 $85,325,222 $64,644,273 $38,127,350
Ratio of net charge-offs to
average loans 2.2% 0.3% 0.2% 0.1% 0.4%
============ ============ =========== =========== ===========
Ratio of provision for credit
losses on Loans to average loans 2.3% 0.1% 0.1% 0.0% 0.2%
============ ============ =========== =========== ===========
Ratio of allowance for credit
losses on Loans to ending total loans 2.0% 1.0% 1.1% 0.8% 0.9%
============ ============ =========== =========== ===========
Ratio of allowance for credit
losses on Loans to total
nonperforming loans 108.2% 502.0% 417.4% 758.5% 463.4%
============ ============ =========== =========== ===========
Ratio of allowance for credit
losses on Loans to total
nonperforming assets 97.1% 21.0% 51.5% 44.1% 144.8%
============ ============ =========== =========== ===========
</TABLE>
The following table sets forth an allocation of the allowance for credit
losses among categories as of December 31, 1998 and 1997. 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.
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.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------------- ---------------------------------------
Percent of Percent of
Allowance Allowance
Amount by Category Amount by Category
------------------ -------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Insurance premium
Financing loans $ 644,456 32.9% $353,765 37.2%
Commercial loans 450,724 23.0% 152,117 16.0%
Installment loans 351,246 17.9% 234,798 24.7%
Real estate loans 515,414 26.2% 210,129 22.1%
------------------ -------------------- --------------- -------------------
Total $1,961,840 100% $950,809 100.0%
================== ==================== =============== ===================
</TABLE>
ALLOWANCE FOR MEDICAL CLAIMS RECEIVABLE LOSSES
The Company has substantially reduced its medical claims factoring
operations. The allowance for medical claims receivables losses was based on
estimates, and ultimate results could vary from estimates. These estimates were
reviewed monthly and as adjustments, either positive or negative, became
necessary they were reported in earnings in the periods in which they became
known. The following table presents a detailed analysis of the Company's
allowance for medical claims receivables losses for the five years ended
December 31, 1998:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 4,307,885 $ 217,734 $ 167,677 $ 135,299 $ 118,974
----------- ----------- ---------- ---------- ----------
Charge-offs (4,428,530) (2,156,355) (12,629)
Recoveries 956,023 1,510
----------- ----------- ---------- ---------- ----------
Net charge-offs (3,472,506) (2,154,845) (12,629)
(Credit) provision for medical
claims receivable losses (694,194) 6,244,996 62,686 32,378 16,325
----------- ----------- ---------- ---------- ----------
Ending balance $ 141,184 $ 4,307,885 $ 217,734 $ 167,677 $ 135,299
=========== =========== ========== ========== ==========
Period end medical claims
receivables, net of unearned
interest $ 646,378 $ 7,381,040 $6,334,005 $3,333,830 $2,705,974
=========== =========== ========== ========== ==========
Average medical claims receivables $ 3,582,939 $ 9,044,262 $3,660,432 $3,239,985 $2,009,576
=========== =========== ========== ========== ==========
</TABLE>
-40-
<PAGE>
The Company recorded a $694,194 credit for medical claims receivables
losses during the twelve months ended December 31, 1998. The credit can be
attributed to the recovery of unearned revenue as a result of charge-offs
accompanied by an overall reduction of the required allowance due to recoveries.
The medical claims receivables portfolio had a gross balance of $8,079,524 at
December 31, 1997. This balance had been reduced to a gross balance of $646,378
by December 31, 1998 through collections, recoveries and charge-offs.
Recoveries for the twelve months ended December 31, 1998 were $956,023 as
compared to $1,510 for the same period during 1997. Charge-offs were $4,428,530
and $2,156,355 for the twelve months ended December 31, 1998 and 1997,
respectively.
Investment Activities
As of December 31, 1998, $24,366,866 in investment securities were
classified as available-for-sale. The investment portfolio, which was 16.6% of
the Company's earning asset base as of December 31, 1998, 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, 1998 and December 31, 1997.
On April 1, 1998 the Bank's investment portfolio increased by $19.3 million
as a result of the acquisition of TexStar. In anticipation of the acquisition,
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 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. The securities added to the investment portfolio through the
acquisition increased the size of the investment portfolio by approximately
44.1%, and closely matched the restructured investment objectives of the Bank.
The efforts to restructure the investment portfolio were completed before the
acquisition. As of December 31, 1998 proceeds from the maturity of available-
for-sale securities were $44,130,203 and sales of available-for-sale securities
during 1998 were $5,807,634, with a gross realized gain on the sale of these
securities in the amount of $120,353. 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.
The securities within the available-for-sale classification had an
amortized cost of $24.3 million and an estimated market value of $24.4 million
on December 31, 1998. The unrealized gain in the available-for-sale securities
was $73,649 as of December 31, 1998. These unrealized gains are the result of
interest rate movements during 1998 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.
-41-
<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, 1998 the mortgage-backed securities held by the Bank
were classified as available-for-sale, and all were 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, 1998:
INVESTMENT PORTFOLIO
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Available-for-Sale Available-for-Sale
------------------ -------------------
<S> <C> <C>
U.S. Treasury notes $ 5,512,050 $ 4,993,751
U.S. government agencies 11,710,341 18,494,687
State and county municipal securities 2,514,782 3,806,271
Mortgage backed securities 3,179,716 442,699
Other investments 1,449,977 1,047,754
----------- -----------
Total $24,366,866 $28,785,162
=========== ===========
</TABLE>
INVESTMENT PORTFOLIO MATURITY/REPRICING SCHEDULE
<TABLE>
<CAPTION>
Maturing
or
Repricing
After After 5
Within 1 1 Year Years Other
Year but but Securities
Within Within
5 Years 10 Years
Amount Yield Amount Yield Amount Yield Amount Yield
----------- ----- ---------- ------ ---------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury notes $ 5,512,050 5.3%
U.S. government agencies 5,504,665 5.3% $1,480,975 6.2% $4,724,701 6.4%
Municipals 296,374 4.9% 1,363,383 4.9% 855,025 4.9%
Mortgage-backed 3,179,716 6.7%
securities
Other investments - - - 1,449,977 N/A
----------- ---------- ---------- ----------
Total $11,313,089 $2,844,358 $5,579,726 $4,629,693
=========== ========== ========== ==========
</TABLE>
-42-
<PAGE>
INVESTMENT PORTFOLIO MATURITY SCHEDULE
<TABLE>
<CAPTION>
U.S. Mortgage-
U.S. Treasury Government Backed
Notes Agencies Municipals Securities Other Total
------------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Within one year $5,512,050 $ 5,504,665 $ 296,374 $11,313,089
One year to two years 252,284 252,284
Two years to three 1,003,150 280,453 1,283,603
years
Three years to four 645,197 645,197
years
Four years to five 477,825 185,449 663,274
years
After five years 4,724,701 855,025 5,579,726
Other securities $3,179,716 $1,449,977 4,629,693
---------- ----------- ---------- ---------- ---------- -----------
Total $5,512,050 $11,710,341 $2,514,782 $3,179,716 $1,449,977 $24,366,866
========== =========== ========== ========== ========== ===========
</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 $188,242,954 for the year ended December
31, 1998, representing an increase of $33,711,025 or 21.8% compared with the
average balance of total deposits for the year ended December 31, 1997. 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
net increase in deposits during 1998 is primarily due to the acquisition of
TexStar and the increases in deposits during 1997 are due to internally
generated growth.
The following table sets forth certain information regarding the Bank's
average deposits as of December 31, 1998 and 1997:
AVERAGE DEPOSITS
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
---------------------------------- -----------------------------------
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 $ 31,450,099 16.7% - $ 22,420,160 14.5% -
Interest-bearing demand
deposits 44,741,576 23.8% 2.6% 38,109,284 24.7% 2.8%
Savings deposits 9,499,843 5.0% 2.4% 7,846,458 5.1% 2.4%
Time deposits 102,551,436 54.5% 5.3% 86,156,027 55.7% 5.2%
------------ ----- --- ------------ ----- ---
Total average deposits $188,242,954 100.0% 4.4% $154,531,929 100.0% 4.4%
============ ===== === ============ ===== ===
</TABLE>
As of December 31, 1998 non-brokered time deposits over $100,000
represented 15.6% of total deposits, compared with 15.2% of total deposits as of
December 31, 1997. As of December 31, 1998
-43-
<PAGE>
jumbo certificates of deposits in excess of $100,000 accounted for $24,224,817
of the Bank's deposits. Of this amount, $22,436,964 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, 1998 and 1997:
TIME DEPOSITS OF $100,000 OR MORE
<TABLE>
<CAPTION>
December 31, December 31,
Maturity Range 1998 1997
-------------- ----------- -----------
<S> <C> <C>
Three months or less $ 9,236,000 $ 9,924,000
Three through six months 4,400,000 3,932,000
Six through twelve months 8,801,000 7,863,000
Over one year and less than two
years 1,788,000 1,773,000
Over five years - -
----------- -----------
Total $24,225,000 $23,492,000
=========== ===========
</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, 1998, 15.2% of the Bank's interest-bearing
liabilities were in the form of time deposits of $100,000 and over.
Substantially all of such large deposits were obtained from the Bank's market
area, and none were obtained through brokers. Management believes these
deposits to be a stable source of funds. However, if a large number of these
time deposits matured at approximately the same time and were not renewed, the
Bank's liquidity could be adversely affected. Currently, the maturities of the
Bank's large time deposits are spread throughout the year, with approximately
38% maturing in the first quarter of 1998, 18% maturing in the second quarter of
1998, and the remaining 36% maturing in the second half of 1998 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.
The Company raised approximately $4,350,000 during 1998 in a private
subordinated debt offering and $116,000 during 1997, $7.4 million during 1996,
$1.2 million during 1995 and $2.3 million during 1994 through the sale of the
Company's common stock in registered stock offerings, private stock offerings or
incentive stock option exercises. 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
"Capital Adequacy Guidelines" under "Item 1. Business - Supervision and
Regulation: Regulation of the Bank."
On April 1, 1998 the Company completed the acquisition of TexStar through
the merger of TexStar into Surety Bank. As of April 1, 1998 TexStar had total
assets of $70,335,000, and Surety Bank's total
-44-
<PAGE>
assets as of the same date were $177,871,000. The assets and liabilities of
TexStar have been recorded at their fair values as of April 1, 1998.
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.
The payment of dividends by the Bank is subject to the provisions of 12
U.S.C. (S) 60 which provides that no dividend may be declared or paid without
the prior approval of 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
two years. The Bank incurred an accumulated loss for fiscal years 1998 and 1997
in the amount of $4,707,359. Under 12 U.S.C. (S) 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 $4,707,359. No assurance can be given if and when the Bank
will attain such level of profitability.
On November 19, 1998 the Board of Directors of the Bank entered into the
Formal Agreement with the OCC pursuant to which the Bank was required to achieve
certain capital levels and adopt and implement certain plans, policies and
strategies by March 31, 1999 and is required to achieve certain additional
capital levels by December 31, 1999. Under the Formal Agreement, the Bank was
required to achieve by March 31, 1999 total risk-based capital at least equal to
12% of risk-weighted assets and Tier I leverage capital at least equal to 7.5%
of adjusted total assets, and is required to achieve by December 31, 1999 total
risk-based capital at least equal to 14% of risk-weighted assets. At December
31, 1998 the Bank had total risk-based capital of 10.24% of risk weighted assets
and Tier I leverage capital of 5.64% of adjusted total assets. The Bank failed
to achieve the capital levels and the leverage ratio required by the Formal
Agreement to be met by March 31, 1999. The Bank submitted a request to the OCC
for an extension from March 31, 1999 to September 30, 1999 to meet the capital
requirements of the Formal Agreement. The OCC granted the extension, subject to
revocation based on the results of examinations by the OCC to be conducted in
April and June of 1999. See Management's plans to address this compliance issue
in "Item 1. Business - Recent Developments." See also "Formal Agreement with
the OCC" under "Item 1. Business - Supervision and Regulation: Regulation of the
Bank."
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, 1998 was $14.0 million,
compared with $15.9 million at December 31, 1997. The decrease in equity was
primarily the result the 1998 net loss.
The Company repurchased 45,547 and 18,671 shares as treasury stock during
1998 and 1997, respectively, at a total cost of $202,615 and $98,289 for 1998
and 1997, respectively. The shares repurchased as treasury stock were
repurchased in connection with an exercise of stock options.
Exclusive of the Formal Agreement, 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
-45-
<PAGE>
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 8.98%, 10.24%, and
5.64%, respectively, at December 31, 1998, and 9.92%, 11.28%, and 6.24%,
respectively, at December 31, 1997. The Bank is currently in compliance with
these standard guidelines; however, the Bank is not in compliance with the
guidelines of the Formal Agreement at March 31, 1999. The Bank submitted a
request to the OCC for an extension from March 31, 1999 to September 30, 1999 to
meet the capital requirements of the Formal Agreement. The OCC granted the
extension, subject to revocation based on the results of examinations by the OCC
to be conducted in April and June of 1999 or if the OCC finds the Bank to not
be in substantial compliance with the other articles of the Formal Agreement.
Management expects to achieve the Formal Agreement capital requirements of total
risk-based capital at least equal to 14% of risk-weighted assets and Tier I
leverage capital at least equal to 7.5% upon completion of the sale of the
branches located in Midlothian and Waxahachie, Texas. See "Capital Adequacy
Guidelines" under "Item 1. Business -Supervision and Regulation: Regulation of
the Bank."
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
stockholders.
The following table sets forth an analysis of the Bank's capital ratios as
required at December 31, 1998. The Bank will not be in compliance with these
guidelines at March 31, 1999:
RISK-BASED CAPITAL RATIOS
<TABLE>
<CAPTION>
Minimum Well- September 30, 1999 September 30, 1999
Capital Capitalized Formal Agreement Formal Agreement
December 31, Ratios Ratios Ratios(2) Ratios(2)
------------------------------ ---------- ----------- ------------------ ------------------
1998 1997
---- ----
<S> <C> <C> <C> <C> <C> <C>
Tier I risk-based $ 9,314,000 $ 10,277,000
capital
Tier II risk-based 1,304,000 1,402,000
capital
Total capital 10,618,000 11,679,000
Risk-weighted assets 103,722,000 103,559,000
Capital ratios:
Tier I risk-based 8.98% 9.92% 4.00% 6.00%
capital
Tier II risk-based 10.24 11.28 8.00 10.00 12.00% 14.00%
capital
Leverage ratio(1) 5.64 6.24 4.00 5.00 7.50 7.50
</TABLE>
(1) Calculated as adjusted assets divided by adjusted equity at December 31,
1998 and 1997.
(2) As extended from March 31, 1999.
-46-
<PAGE>
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 June 1998 FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. The accounting for gains and
losses on derivatives depends on the intended use of the derivative. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999,
with earlier application encouraged. Retroactive application is not permitted.
Management does not believe that the adoption of this pronouncement will
have a material impact on the financial condition or results of operations of
the Company since the Company currently does not enter into derivative
instruments or hedging activities.
Year 2000 Safety and Soundness
The Bank has developed an intensive Action Plan for addressing the concerns
and risks associated with the coming millennium. The Bank has reviewed the
Federal Reserve's and Federal Financial Institutions Examination Council's
("FFIEC") Interagency Statement entitled "Year 2000 Project Management
Awareness" and related materials. In addition, the Bank has done extensive
research and documentation to develop a strategy that will facilitate compliance
with federal banking agency policies which will be reviewed by regulatory
agencies in their monitoring process and examinations.
-47-
<PAGE>
This Action Plan includes the defined phases from the FFIEC: Awareness,
Assessment, Renovation, Validation and Implementation. As part of the Awareness
phase a Year 2000 Team was organized and developed an overall strategy to
encompass systems, vendors, customers and correspondents. This phase has been
completed. The Assessment phase identified the size and complexity of potential
problems, and in all hardware, software and related systems with
interdependencies affected by the Year 2000 date change. The Assessment phase is
substantially completed, but the Bank considers it an ongoing process due to the
need to evaluate any new relationships and information system hardware and
software obtained through the Year 2000. Under the Renovation phase, code
enhancements, hardware and software upgrades, and vendor certifications have
been pursued and are substantially complete. Testing under the Validation phase
is being tracked and results recorded. Testing of in-house mission critical
systems was substantially completed by December 31, 1998. Further testing with
mission critical vendors was substantially completed by March 31, 1999 and is
expected to be fully completed by June 30, 1999. The final phase of
Implementation includes the acceptance of certified systems and the completed
remediation and business resumption contingency plans for all mission critical
items. The Company has completed the remediation and business resumption
contingency plans. As additional agency policies and statements are made
available, the Bank will modify its Action Plan as necessary to maintain
compliance.
Current costs and estimated future expenditures are not significant and are
expected to have negligible effects on the Company's results of operations,
liquidity and capital resources. Costs incurred only to upgrade equipment to
Year 2000 compliance are expensed as incurred.
Pursuant to the Year 2000 Information and Readiness Disclosure Act of 1998,
Publication L. No. {05-27}, 112 Statute 2386 (the "Act"), the Bank hereby
designates this Year 2000 Statement as a Year 2000 Readiness Disclosure. This
Year 2000 Readiness Disclosure is made for the sole purpose of facilitating
responses or communicating or disclosing information aimed at correcting and/or
helping to correct and/or avoid Year 2000 failures. By designating the Year
2000 Statement as a Year 2000 Readiness Disclosure, the Bank intends to comply
fully with, and to be afforded the protections of, the Act. Therefore, all
statements made in this Year 2000 Readiness Disclosure shall be construed within
the confines of the Act.
This Year 2000 disclosure replaces and supercedes all prior communications
related to the Year 2000.
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
-48-
<PAGE>
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, 1998 and 1997, loans to director-related companies and other
related parties totaled approximately $329,000 and $479,000, respectively.
During 1998, 1997 and 1996, the Company paid legal fees to a director in the
amount of $182,335, $110,216 and $125,145, respectively.
Insurance Premium Finance Purchase Agreements
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 the 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. The loans which do not meet Surety Premium's
underwriting standards will be held by CAA.
On June 8, 1998 the Company announced that the Bank entered into an
agreement with Cardinal Premium Finance, L.L.C. ("Cardinal") for the purchase of
insurance premium finance ("IPF") loans. Pursuant to the five-year agreement,
Cardinal agreed to sell all of its IPF loans to Surety Premium on an exclusive
basis. The agreement provides for the sale by Cardinal to Surety Premium of a
minimum of $8,000,000 in IPF loans per year ($40,000,000 over the five-year term
of the agreement). Surety Premium has agreed to purchase Cardinal's IPF loans
which are in compliance with Surety Premium's underwriting standards. The loans
which do not meet Surety Premium's underwriting standards will be held by CAA.
Subsequent Events
On February 3, 1999 the Company announced that Bobby W. Hackler had
resigned as Chairman of the Board, Chief Executive Officer and director of the
Company and as Chairman of the Board, Chief Executive Officer, President and
director of the Bank effective February 3, 1999. The Board of Directors of the
Company and the Bank elected C. Jack Bean to fill the vacancies resulting from
the resignation of Mr. Hackler.
On April 13, 1999, the Company entered into a Purchase and Assumption
Agreement with The Citizens National Bank in Waxahachie, Waxahachie, Texas
("CNB"), to sell to CNB the Bank's two branches located in Waxahachie and
Midlothian, Texas (the "Branches"). The purchase price for the Branches will be
based upon the net value of the assets less the balance of liabilities assumed
plus 11% of the deposit base and 2.5% of the loan base and the value of certain
premises, equipment and other assets. The transaction will be structured as a
purchase of certain assets and assumption of certain liabilities of the
Branches, including deposits, by CNB. As of December 31, 1998, the Branches had
total deposits of approximately $58,000,000, total net loans of approximately
$15,000,000 and fixed assets of approximately $1,600,000. The Bank is currently
a $175,000,000 asset-based bank with nine full-service banking
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<PAGE>
facilities. After the sale is completed, the Bank will have approximately
$120,000,000 in assets and approximately $85,000,000 in loans. The Bank will
continue to operate its remaining seven banking branches, located in north-
central and south-central Texas, as full service community banking facilities
serving the local retail and small business markets. The Bank's operating
division, Surety Premium Finance ("Surety Premium"), will continue to market its
niche lending product, insurance premium financing. The Bank uses its Surety
Premium division to utilize investable funds that are not used by the Bank in
its traditional lending programs, rather than investing in lower yielding
investment securities. The completion of the sale is subject to a number of
contingencies, including regulatory approvals by applicable banking authorities.
There can be no assurance that the transaction will be completed. If
consummated, the transaction is expected to close no later than September 30,
1999, upon the expiration of all applicable waiting periods following receipt of
all necessary regulatory approvals.
Forward-Looking Statements
The Company may from time to time make forward-looking statements (within
the meaning of the Private Securities Litigation Reform Act of 1995) with
respect to earnings per share, credit quality, expected Year 2000 compliance
program, corporate objectives and other financial and business matters. The
Company cautions the reader that these forward-looking statements are subject to
numerous assumptions, risks and uncertainties, including economic conditions;
actions taken by the Federal Reserve Board; legislative and regulatory actions
and reforms; competition; as well as other reasons, all of which change over
time. Actual results may differ materially from forward-looking statements.
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 liability sensitive under one year with a
cumulative gap of $6,973,651 or 3.99%. 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, 1998 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.
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<PAGE>
<TABLE>
<CAPTION>
Change in Basis Points Fair Value % Change
<S> <C> <C>
-300 $14,213,508 1.6%
-200 $14,140,422 1.0%
-100 $14,067,336 0.5%
-50 $14,030,793 0.3%
0 $13,994,250 0.0%
+50 $13,957,707 (0.3)%
+100 $13,921,164 (0.5)%
+200 $13,848,078 (1.0)%
+300 $13,774,992 (1.6)%
</TABLE>
The preceding table indicates that at December 31, 1998, 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 management 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.
Emphasis will continue to be placed on granting loans with short maturities
and floating rates where possible. This strategy increases liquidity and is
necessitated by the continued shortening and more frequent repricing
opportunities 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.
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<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 1999 annual meeting for the fiscal year ended
December 31, 1998, to be filed no later than April 30, 1999.
ITEM 11. EXECUTIVE COMPENSATION.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1999 annual meeting for the fiscal year ended
December 31, 1998, to be filed no later than April 30, 1999.
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 1999 annual meeting for the fiscal year ended
December 31, 1998, to be filed no later than April 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information is incorporated by reference from the Company's definitive
Proxy Statement for the Company's 1999 annual meeting for the fiscal year ended
December 31, 1998, to be filed no later than April 30, 1999.
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<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of Report.
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, F-2
1998 and 1997
Consolidated Statements of Operations for F-3
the years ended December 31, 1998, 1997 and
1996
Statement of Comprehensive Income for the
years ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Shareholders' F-5
Equity for the years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Cash Flows for F-6
the years ended December 31, 1998, 1997 and
1996
Notes to Consolidated Financial Statements F-8
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
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)
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<PAGE>
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. (15)
2.12 Indenture between Surety Capital Corporation and Harris Trust and Savings
Bank, as Trustee, dated March 31, 1998. (16)
2.13 Branch Purchase and Assumption Agreement by and between Surety Bank,
National Association and Commercial Bank of Texas, National Association,
dated July 13, 1998. (19)
2.14 Purchase and Assumption Agreement by and between The Citizens National
Bank in Waxahachie and Surety Bank, N. A., dated April 13, 1999. *
3.01 Certificate of Incorporation. (1)
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<PAGE>
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)
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. (15)
4.02 Indenture dated as of March 31, 1998 between the Company and Harris Trust
and Savings Bank, Chicago, Illinois, as trustee. (16)
4.03 Form of Notes (included in Exhibit 4.02). (16)
4.04 Form of Note Purchase Agreements dated March 31, 1998. (17)
10.01 Surety Capital Corporation 1988 Incentive Stock Option Plan. (5)
10.02 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)
10.03 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)
10.04 Surety Capital Corporation 1995 Incentive Stock Option Plan. (8)
10.05 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. (15)
10.06 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. (15)
10.07 Change in Control Agreement entered into between Surety Capital
Corporation and B. J. Curley, dated February 9, 1996. (12)
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<PAGE>
10.08 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)
10.09 Surety Capital Corporation Amended and Restated Stock Option Plan for
Directors, and Form of Stock Option Agreement. (13)
10.10 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for
Officers and Key Employees, and Form of Stock Option Agreement. (15)
10.11 Surety Capital Corporation 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors, and Form of Stock Option Agreement. (15)
10.12 Amended and Restated Post Retirement Services Agreement Between Surety
Capital Corporation, Surety Bank, National Association and C. Jack Bean,
dated November 1, 1998. *
10.13 Surety Capital Corporation Amended and Restated 1998 Incentive Stock
Option Plan. (18)
21 Subsidiaries of the Registrant. *
23 Consent of PricewaterhouseCoopers LLP. *
24 Special Power of Attorney. *
27 Financial Data Schedule. *
(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.
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<PAGE>
(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.
(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.
(15) Filed with the Company's Form 10-K dated December 31, 1997 and
incorporated by reference herein.
(16) Filed with the Company's Form 10-Q for the quarter ended March 31, 1998
and incorporated by reference herein.
(17) Filed with the Company's Registration Statement No. 333-57601 on Form S-3
and incorporated by reference herein.
(18) Filed with the Company's Proxy Statement for the Annual Meeting of
Stockholders held on May 21, 1998 and incorporated by reference herein.
(19) Filed with the Company's Form 8-K dated July 13, 1998 and incorporated by
reference herein.
* Filed herewith.
(b) Reports on Form 8-K.
On October 6, 1998 the Company filed a Current Report on Form 8-K/A
(Amendment No. 3) to amend the Form 8-K filed on April 9, 1998 to include
unaudited financial statements of the acquired bank.
On November 2, 1998 the Company filed a Current Report on Form 8-K to
report that on October 16, 1998 the Company's subsidiary, Surety Bank,
National Association ("Surety Bank"), completed the sale of its four
Lufkin-area branches located in Chester, Kennard, Lufkin and Wells, Texas
to Commercial Bank of Texas, National Association, Nacogdoches, Texas. The
following financial statements were included: Pro Forma Balance Sheet as
of September 30, 1998 and Pro Forma Income Statement for the nine months
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<PAGE>
ended September 30, 1998 and for the twelve months ended December 31, 1997.
On November 18, 1998 the Company filed a Current Report on Form 8-K/A
(Amendment No. 1) to amend the Form 8-K to amend the pro forma financial
statements.
On November 30, 1998 the Company filed a Current Report on Form 8-K to
report that on November 19, 1998 each member of the Board of Directors of
Surety Bank signed a formal written agreement with the Office of the
Comptroller of the Currency pursuant to which Surety Bank is required to
achieve certain capital levels and adopt and implement certain plans,
policies and strategies.
(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.
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<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: April 14, 1999 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 14th day of April, 1999.
Signature Capacity
--------- --------
/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/ B. J. Curley Vice President, Chief Financial Officer,
- ---------------------------- Secretary and Director (Principal Financial
B. J. Curley Officer and Chief Accounting Officer)
* Director
- ----------------------------
William B. Byrd
* Director
- ----------------------------
Joseph S. Hardin
* Director
- ----------------------------
Margaret E. Holland
* Director
- ----------------------------
Michael L. Milam
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<PAGE>
* 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
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<PAGE>
INDEX TO EXHIBITS
Exhibit Exhibit
Number
- --------------------------------------------------------------------------------
2.14 Purchase and Assumption Agreement by and between The Citizens National
Bank in Waxahachie and Surety Bank, N. A., dated April 13, 1999.
10.12 Amended and Restated Post Retirement Services Agreement Between Surety
Capital Corporation, Surety Bank, National Association and C. Jack
Bean, dated November 1, 1998.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
24 Special Power of Attorney.
27 Financial Data Schedule.
<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, 1998 and 1997 and the related consolidated
statements of operations, comprehensive income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Surety Capital
Corporation as of December 31, 1998 and 1997 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
The accompanying 1998 consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered losses and
is now operating under a written formal agreement with the Office of the
Comptroller of the Currency, which requires it to meet, among other things,
prescribed capital requirements. The ability of the Company to comply with the
formal agreement and the resulting uncertainty as to regulatory actions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans concerning these matters are also described in Notes 1, 18,
and 22. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
February 18, 1999, except as to the information presented in Notes 8 and 18, for
which the date is March 31, 1999 and Note 22, for which the date is April 13,
1999
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
Assets:
<S> <C> <C>
Cash and due from banks $ 9,289,897 $ 6,204,177
Federal funds sold 24,761,752 22,257,266
Interest bearing deposits in financial institutions 94,939 94,939
Available-for-sale investment securities 24,366,866 28,785,162
Loans 100,346,913 100,846,310
Less: Unearned interest (916,152) (2,212,391)
Allowance for credit losses (1,961,840) (950,809)
------------ ------------
Loans, net 97,468,921 97,683,110
Medical claims receivables, net 505,194 3,073,155
Premises and equipment, net 6,762,223 3,760,550
Accrued interest receivable 759,833 908,487
Deferred tax asset, net of valuation allowance - 1,622,394
Other real estate and repossessed assets 205,877 158,271
Other assets 2,451,172 2,381,887
Excess of cost over fair value of net assets acquired, net
of accumulated amortization of $2,581,074 and $2,377,636
at December 31, 1998 and 1997, respectively 8,395,121 4,722,220
------------ ------------
Total assets $175,061,795 $171,651,618
============ ============
Liabilities and shareholders' equity:
Demand deposits $ 31,732,996 $ 22,185,320
Savings, NOW and money markets 43,282,766 44,477,424
Time deposits, $100,000 and over 24,224,817 23,492,179
Other time deposits 55,922,822 64,386,569
------------ ------------
Total deposits 155,163,401 154,541,492
Accrued interest payable and other liabilities 1,554,144 1,232,793
Convertible subordinated debt 4,350,000 --
------------ ------------
Total liabilities 161,067,545 155,774,285
------------ ------------
Commitments and contingent liabilities (Notes 12 & 17)
Shareholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, none issued at
December 31, 1998 and 1997 -- --
Common stock, $.01 par value, 20,000,000 shares authorized,
5,840,071 and 5,790,171 shares issued at December 31, 1998
and 1997, respectively, and 5,760,235 and 5,755,882
outstanding at December 31, 1998 and 1997, respectively 58,401 57,902
Additional paid-in capital 17,093,786 16,867,777
Accumulated deficit (2,887,548) (1,024,435)
Stock rights issuable 57,902 57,902
Treasury stock, 79,836 and 34,289 shares carried at cost at
December 31, 1998 and 1997, respectively (375,443) (172,828)
Unrealized gain on available-for-sale securities, net of tax 47,152 91,015
------------ ------------
Total shareholders' equity 13,994,250 15,877,333
------------ ------------
Total liabilities and shareholders' equity $175,061,795 $171,651,618
============ ============
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Commercial and real estate loans $ 6,460,480 $ 4,917,092 $ 4,539,602
Consumer loans 866,337 1,266,732 1,444,189
Insurance premium financing 3,745,792 4,935,716 3,563,467
SBA loans 686,888 -- --
Medical claims receivable factoring 1,044,069 1,477,510 1,232,463
Federal funds sold and interest bearing deposits 1,724,808 535,108 1,120,735
Investment securities:
Taxable 1,800,078 1,984,533 2,165,301
Tax-exempt 189,340 315,994 324,605
----------- ----------- -----------
Total interest income 16,517,792 15,432,685 14,390,362
----------- ----------- -----------
Interest expense:
Savings, NOW and money market 1,383,847 1,236,139 1,056,884
Time deposits, $100,000 and over 1,715,524 1,144,071 1,106,754
Other time deposits 3,683,240 3,369,588 3,191,439
Interest expense on notes payable 318,082 -- 6,612
----------- ----------- -----------
Total interest expense 7,100,693 5,749,798 5,361,689
----------- ----------- -----------
Net interest income before provision for credit
losses 9,417,099 9,682,887 9,028,673
Provision for credit losses on loans 2,699,181 140,000 72,314
(Credit) provision for medical claims receivables
losses (694,194) 6,244,996 62,686
----------- ----------- -----------
Total provision for credit losses 2,004,987 6,384,996 135,000
----------- ----------- -----------
Net interest income 7,412,112 3,297,891 8,893,673
----------- ----------- -----------
Noninterest income 3,425,302 2,538,918 1,877,454
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 5,620,710 4,748,097 4,244,874
Occupancy and equipment 2,004,070 1,517,662 1,244,551
General and administrative 4,507,990 3,649,136 2,645,587
Impairment of long lived assets -- 1,198,288 --
----------- ----------- -----------
Total noninterest expense 12,132,770 11,113,183 8,135,012
----------- ----------- -----------
(Loss) income before income taxes (1,295,356) (5,276,374) 2,636,115
Income tax expense (benefit): 567,757 (1,800,070) 938,128
----------- ----------- -----------
Net (loss) income $(1,863,113) $(3,476,304) $ 1,697,987
=========== =========== ===========
Basic (loss) earnings per share of common stock $(.32) $(.60) $.32
=========== =========== ===========
Weighted average shares outstanding 5,759,579 5,751,847 5,389,366
=========== =========== ===========
Diluted (loss) earnings per share of common stock $(.32) $(.60) $.31
=========== =========== ===========
Weighted average shares outstanding
and common stock equivalents 5,759,579 5,990,815 5,437,661
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
<PAGE>
SURETY CAPITAL CORPORATION
STATEMENT OF COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Net (loss) income $(1,863,113) $(3,476,304) $1,697,987
Other comprehensive (loss) income, net of income tax:
Unrealized holding (losses) gains on
available-for-sale Securities (43,863) 105,335 (156,203)
----------- ----------- ----------
Comprehensive (loss) income $(1,906,976) $(3,370,969) $1,541,784
=========== =========== ==========
Disclosure of reclassification amount, net of income tax:
Net unrealized holding gains (losses) arising during
the year $ (120,889) $ (5,616) $ (156,203)
Reclassification adjustment for net gains included in
net (loss) income 77,026 110,951 -
----------- ----------- ----------
Net unrealized (losses) gains on available-for-sale
Securities $ (43,863) $ 105,335 $ (156,203)
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Unrealized
Gain/
Common Stock (Accumulated Loss on
-------------------- Additional Deficit)/ Stock Available
Par Paid-in Retained 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,
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
--------- ------- ----------- ----------- ------- --------- -------- -----------
Purchase of Treasury
Stock (202,615) (202,615)
Net loss (1,863,113) (1,863,113)
Exercise of stock options 49,900 499 226,009 226,508
Change in unrealized
gain/(loss)
On available-for-sale
securities,
net of tax of $18,720 (43,863) (43,863)
--------- ------- ----------- ----------- ------- --------- -------- -----------
Balance at December 31,
1998 5,840,071 $58,401 $17,093,786 $(2,887,548) $57,902 $(375,443) $ 47,152 $13,994,250
========= ======= =========== =========== ======= ========= ======== ===========
</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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (1,863,113) $ (3,476,304) $ 1,697,987
Adjustments to reconcile net (loss) income to net
Cash provided by operating activities:
Provision for credit losses 2,004,987 6,384,996 135,000
Impairment of long lived assets 1,198,288
Depreciation 753,040 673,362 573,745
Amortization of intangible assets and debt acquisition
costs 634,821 506,172 359,717
Net gain on sale of available-for-sale securities (120,353) (173,361)
Net loss (gain) on sale or disposal of assets 61,895 4,758 (22,879)
Gain on sale of branches, net (1,103,483)
Deferred income taxes 1,622,394 (1,800,070)
Changes in assets and liabilities:
Unearned interest on loans (777,195) (289,356) 655,342
Accrued interest receivable 540,794 174,849 (302,305)
Other assets 360,175 (1,288,718) 317,230
Accrued interest payable and other liabilities (163,851) (167,199) (101,725)
------------ ------------ ------------
Net cash provided by operating activities 1,950,111 1,747,417 3,312,112
------------ ------------ ------------
Cash flows from investing activities:
Net decrease (increase) in loans 20,676,220 (2,002,404) (15,070,139)
Payments received on purchased medical claims receivables 13,739,893 18,633,244 14,229,677
Purchases of medical claims receivables (10,477,738) (21,835,125) (17,480,467)
Purchases of available-for-sale securities (26,197,558) (14,223,479) (7,239,958)
Proceeds from sales of available-for-sale securities 5,807,634 12,680,593
Proceeds from maturities of available-for-sale securities 44,130,203 6,167,712 909,492
Purchases of held-to-maturity securities (3,081,744)
Proceeds from maturities of held-to-maturity securities 5,190,666 15,515,641
Proceeds from maturities of interest bearing deposits in financial
institutions 190,903 1,034,697
Purchases of bank premises and equipment (619,628) (604,999) (518,010)
Proceeds from sales of bank premises and equipment 37,850 136,898 4,437
Proceeds from sale of other real estate and repossessed assets 893,937 644,659 428,217
Net cash paid in sale of branches (43,632,384)
Net cash acquired in acquisitions 2,704,674 3,731,462
------------ ------------ ------------
Net cash provided by (used in) investing activities 7,063,103 4,978,668 (7,536,695)
------------ ------------ ------------
Cash flows from financing activities:
Net decrease in deposits (7,380,994) (1,148,849) (3,145,274)
Principal payments on note payable (375,000)
Purchase of treasury stock (202,615) (98,289) (23,709)
Exercise of stock options 226,508 116,039 23,712
Proceeds from issuance of note payable, net of issuance costs 3,934,093
Proceeds from the sale of stock 7,394,293
------------ ------------ ------------
Net cash (used in) provided by financing activities (3,423,008) (1,131,099) 3,874,022
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 5,590,206 5,594,986 (350,561)
Beginning cash and cash equivalents 28,461,443 22,866,457 23,217,018
------------ ------------ ------------
Ending cash and cash equivalents $ 34,051,649 $ 28,461,443 $ 22,866,457
============ ============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
(continued)
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
Supplemental disclosure:
Cash paid during the year for interest $ 7,268,131 $ 5,821,868 $ 5,190,521
Cash paid during the year for federal income taxes $ 50,000 $ 995,000 $ 545,000
Supplemental schedule of noncash investing and
financing activities:
Transfers of repossessed collateral to other
real estate and repossessed assets $ 698,046 $ 576,329 $ 752,648
Additions to loans to facilitate the sale of
OREO and other assets $ 155,038 $ 357,037 $ 212,715
Transfer of held-to-maturity to
available-for-sale investment securities $17,370,604
Declaration of stock rights dividend $ 57,902
Supplemental schedule of investing activities:
Interest bearing deposits in financial institutions
Loans, net $(10,912,251)
Premises and equipment, net (610,068)
Other assets (201,095)
Gain on sale of branches (1,103,483)
Goodwill, net (476,099)
Deposits 56,758,737
Other liabilities 176,643
------------
Net cash paid in sale of branches $ 43,632,384
============
Interest bearing deposits in financial institutions $ 274,242
Investment securities $ 19,261,707 21,214,629
Loans, net 33,839,277 18,476,948
Premises and equipment, net 3,785,737 1,270,401
Other assets 1,099,582 959,648
Excess of cost over fair value of net assets
acquired 4,756,534 3,939,773
Deposits (64,761,640) (49,237,113)
Other liabilities (685,871) (629,990)
------------ ------------
Net cash acquired in acquisitions $ (2,704,674) $ (3,731,462)
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
------------------------------------------
Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts of
Surety Capital Corporation (the "Company") and its wholly-owned subsidiary,
Surety Bank, National Association (the "Bank"). All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Business
--------
The Bank is principally engaged in traditional community banking activities
provided through its nine branches located in north Texas and south-central
Texas. Community banking activities include the Bank's commercial and
retail lending, deposit gathering and investment and liquidity management
activities. In addition to its community banking services, the Bank offers
insurance premium financing and medical claims receivables factoring.
Insurance premium finance ("IPF") lending involves the lending of funds to
companies and individuals for the purpose of financing their purchase of
property and casualty insurance. From 1990 through 1998, the Company was
engaged in medical claims factoring, purchasing primarily insurance company
claims from a variety of health care providers. Management has determined
to substantially reduce the operations of the medical claims factoring
business.
Going Concern
-------------
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
incurred a net loss of $1.9 million during the year ended December 31, 1998
and a net loss of $3.5 million during the year ended December 31, 1997.
These losses primarily resulted from medical claims factoring operations,
insurance premium financing operations in the southeastern United States
and the Bank's used car floor planning and purchase financing each of which
has been substantially discontinued. The Bank is subject to compliance with
capital requirements as prescribed by the Office of the Comptroller of the
Currency (the "OCC") under a formal agreement signed by the Board of
Directors of the Bank on November 19, 1998 (the "Formal Agreement"). The
Bank was not in compliance with the Formal Agreement at March 31, 1999;
however, the Bank requested and received an extension from March 31, 1999
to September 30, 1999 for meeting the regulatory capital ratios, subject to
revocation based upon the results of examinations by the OCC to be
conducted in April and June of 1999, or if the OCC finds the Bank to not be
in substantial compliance with the other articles of the Formal Agreement.
If the Bank is unable to or does not meet the minimum capital requirements
or other articles of the Formal Agreement, one or more regulatory sanctions
may result. These sanctions may include, among others, such operating
restrictions as growth limitations, prohibitions on dividend payments,
increased supervisory monitoring, limitations on executive compensation,
restrictions on deposit interest rates and a merger or sale of the Bank.
Management's plans concerning these matters have been submitted to the OCC
and are described in Notes 18 and 22. Management believes that it will be
able to meet all of the requirements of the Formal Agreement. The
consolidated financial statements do not include adjustments, if any, that
might have been required had the outcome of the above-mentioned
uncertainties been known, or any adjustments relating to the recoverability
of recorded asset amounts or the amount of liabilities that may be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
comply with the terms of the Formal Agreement, maintain sufficient
liquidity and ultimately, return to profitable operations.
F-8
<PAGE>
1. Summary of Significant Accounting Policies continued:
------------------------------------------
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. Securities to be held for indefinite periods of time are
classified as available-for-sale and are 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. The cost of
securities sold is based on the specific identification method.
Loans, Medical Claims, and Allowance for Credit Losses
------------------------------------------------------
Loans and medical claims are stated at the amount of unpaid principal,
reduced by unearned interest and an 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. 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 Company has
adopted Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114"), as amended by Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure." Under SFAS 114,
the allowance for loan losses related to any loans that are identified for
evaluation in accordance with SFAS 114 (impaired loans) is based on
discounted cash flows using the loan's initial effective rate or the fair
value of the collateral for certain collateral dependent loans. Smaller
balance homogenous loans consisting of insurance premium finance loans 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 not probable.
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. The fees on medical claims are
recorded into income as the claims are collected.
F-9
<PAGE>
1. Summary of Significant Accounting Policies continued:
------------------------------------------
During 1998 Management revised the policy that is used for insurance
premium finance loans in determining what level of reserve is appropriate
and if charge-off of the loan is needed. All insurance premium finance
loans from 120 days to 149 days past the cancellation date are classified
as substandard and require a 25% allowance reserve. All insurance premium
finance loans 150 days to 179 days past cancellation date are classified as
doubtful and require a 50% allowance reserve. All loans which are greater
than 179 days are classified as a loss and are charged-off. Any insurance
premium finance loan which is past due more than 179 days and guaranteed
100% by a state or exchange guarantee fund requires a 50% allowance
reserve. Beginning in 1998, insurance premium finance loans which continue
to be outstanding are put on non-accrual status after 120 days past the
cancellation date. A similar set of guidelines have been established for
the medical claims factoring. All medical claims receivables are
considered current if their aging is between zero days and 60 days since
funding. Receivables 61 days to 90 days are classified as special mention
and require a 10% allowance reserve. Receivables 91 days to 120 days are
classified as substandard and require a 33% allowance reserve. Receivables
121 days to 180 days are classified as doubtful and require a 66% allowance
reserve. Any receivable which continues to be outstanding and aged beyond
180 days is classified as loss and is charged-off. Receivables are put on
non-accrual after 90 days from funding.
Interest income recognized on insurance premium financing loans and
installment loans 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 provision 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
----------------------------------------
Other real estate is foreclosed property held pending disposition and is
valued at the lower of its fair value or the recorded investment in the
related loan. At foreclosure, if the fair value, less estimated costs to
sell, of the real estate acquired is less than the Company's recorded
investment in the related loan, a writedown is recognized through a charge
to the allowance for credit losses. Any subsequent reduction in value is
recognized by a charge to income. Operating expenses of such properties,
net of related income, and gains and losses on disposition are included in
non-interest expense.
Goodwill and Identifiable Intangibles
-------------------------------------
Net assets acquired in purchase transactions are recorded at their fair
value at the date of acquisition. The excess of the purchase price over
the fair value of net assets acquired is amortized on a straight-line
basis, generally over a 15 year period. The Company continually re-
evaluates the propriety of the carrying amount of such intangible assets
and the remaining amortization period, to determine whether current events
and circumstances warrant adjustments to the carrying value and/or revised
estimates of the period of benefit.
F-10
<PAGE>
1. Summary of Significant Accounting Policies continued:
------------------------------------------
Earnings Per Share
------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" on December 31, 1997. 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 new method.
Reporting Comprehensive Income
------------------------------
The company adopted the provisions of the Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 130 ("Statement
130"), "Reporting Comprehensive Income", which 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. Statement 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately
from retained earnings and additional paid-in capital in the equity section
of the balance sheet. Statement 130 was adopted by the Company in January
of 1998, and has conformed to previously reported amounts accordingly.
Disclosures about Segments of an Enterprise and Related Information
-------------------------------------------------------------------
In June 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures
about Segments of an Enterprise and Related Information." Statement 131
establishes standards for the way that public business enterprises report
information about operation segments in annual financial statements and
requires that those enterprises report selected information about operation
segments in interim financial reports issued to shareholders. Statement 131
also establishes standards for related disclosures about products and
services, geographic areas, and major customers. Statement 131 is effective
for financial statements for periods beginning after December 15, 1997, and
was adopted by the Company in 1998.
Income Taxes
------------
The Company's method of accounting for income taxes utilizes an asset and
liability approach for financial statement purposes. The types of
differences between the tax basis 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. The necessity of a valuation allowance on
the deferred tax asset is periodically reviewed and is estimated based upon
the probability of realization, through the Company's ability to generate
sufficient taxable income from operations.
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-11
<PAGE>
2. Acquisitions and Dispositions:
-----------------------------
Acquisition of TexStar National Bank, Universal City, Texas
On April 1, 1998 the Company completed the acquisition of TexStar National
Bank, Universal City, Texas ("TexStar"), through the merger of TexStar into
Surety Bank. As of April 1, 1998, TexStar had total assets of $70,335,000.
The acquisition has been accounted for as a purchase with the assets and
liabilities of TexStar being recorded at their fair values as of April 1,
1998.
The consolidated results of operations include the operations of TexStar
subsequent to April 1, 1998. The unaudited pro forma information for the
twelve months ended December 31, 1998 and December 31, 1997, presented
below, reflect the acquisition of TexStar as if it had been acquired as of
January 1, 1997. Pro forma adjustments consisting of a provision for
income taxes and interest expense have been made to reflect the unaudited
pro forma information.
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
------------------- -------------------
Total interest income $17,718,774 $20,913,513
Net (loss) income (2,694,971) (3,350,957)
Basic (loss) income per share
of common stock ($0.47) $ (0.58)
Sale of Chester, Kennard, Lufkin and Wells Branches
In October 1998 the Company sold the Bank's four branches located in
Chester, Kennard, Lufkin and Wells, Texas (the "Lufkin Branches") to the
Commercial Bank of Texas, National Association ("Commercial Bank"),
Nacogdoches, Texas. The sale of the Lufkin Branches was consummated on
October 16, 1998, resulting in a pretax gain of $1.1 million. The Bank
sold loans totaling approximately $10,912,000, real property, furniture and
equipment totaling approximately $610,000, and cash and other assets
totaling approximately $1,067,000, relieved goodwill and other assets
associated with these branches by approximately $677,000, and Commercial
Bank assumed deposits and other liabilities totaling approximately
$56,936,000. After giving effect to a deposit premium of 3% on the
deposits assumed totaling approximately $1,703,000, in addition to the cash
at the Lufkin Branches, the Bank paid approximately $43,632,000 in cash to
Commercial Bank as consideration for the net deposit liabilities assumed by
Commercial Bank.
The consolidated results of operations exclude the operations of the Lufkin
Branches subsequent to October 16, 1998. The unaudited pro forma
information for the twelve months ended December 31, 1998 and 1997,
presented below, reflect the sale of the Lufkin Branches as if it the sale
had occurred as of January 1, 1997. These pro forma adjustments do not
reflect the acquisition of TexStar. Pro forma adjustments consisting of a
provision for income taxes and interest expense have been made to properly
reflect the unaudited pro forma information.
Twelve Months Ended Twelve Months Ended
December 31, 1998 December 31, 1997
-------------------- --------------------
Total interest income $13,811,988 $11,813,596
Net (loss) income (2,126,866) (3,818,037)
Basic (loss) income per share
of common stock ($0.37) $ (0.66)
F-12
<PAGE>
3. Investment Securities:
---------------------
Investment securities, all classified as available-for-sale, consisted of
the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury $ 5,498,506 $ 13,544 $ 5,512,050
Obligations of other U.S.
government agencies 11,727,000 13,164 $29,823 11,710,341
State and county municipals 2,457,968 57,718 904 2,514,782
Mortgage-backed securities 3,159,766 21,682 1,732 3,179,716
Other securities 1,449,977 1,449,977
----------- -------- ------- -----------
Total investment securities $24,293,217 $106,108 $32,459 $24,366,866
=========== ======== ======= ===========
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
December 31, 1997:
<S> <C> <C> <C> <C>
U.S. Treasury $ 4,994,786 $ 1,035 $ 4,993,751
Obligations of other U.S.
government agencies 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 investment securities $28,642,950 $154,578 $12,366 $28,785,162
=========== ======== ======= ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1998 by contractual maturity are shown below. Expected
maturities differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Fair
December 31, 1998: Cost Value
----------- -----------
<S> <C> <C>
Due within one year $11,297,594 $11,313,089
Due after one year through five years 2,812,258 2,844,359
Due after five years through ten 5,573,623 5,579,726
years
Mortgage-backed securities 3,159,766 3,179,716
Other securities 1,449,976 1,449,976
----------- -----------
Total investment securities $24,293,217 $24,366,866
=========== ===========
</TABLE>
In anticipation of the 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.
F-13
<PAGE>
3. Investment Securities, continued:
---------------------
Proceeds from sales of available-for-sale investment securities during the
year ended December 31, 1998 were $5,807,634 with gross recognized gains of
$120,430 and gross recognized losses of $77. 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.
At December 31, 1998 and 1997 the carrying value of Federal Reserve Bank
stock was $581,250 and $446,250, respectively. The Federal Reserve Bank
stock's market value was estimated to be the same as its carrying value at
both dates. At December 31, 1998 and 1997 the carrying value of Federal
Home Loan Bank stock was $791,923 and $524,700, respectively. The Federal
Home Loan Bank stock's market value was estimated to be the same as its
carrying value at both dates.
At December 31, 1998 and 1997 securities with a carrying amount of
$17,820,000 and $12,999,000, respectively, were pledged as collateral for
public deposits, as required or permitted by law.
At December 31, 1998 and 1997 the investment securities had accrued
interest receivable of $455,116 and $399,364, respectively.
4. Loans, net:
-----------
At December 31, 1998 and 1997 the loan portfolio was composed of the
following:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Real estate loans $ 41,939,108 $ 26,668,598
Insurance premium financing 24,887,202 40,373,695
Commercial loans 23,011,395 23,171,566
SBA loans 6,259,049
Installment loans 4,250,159 10,632,451
-------------- -------------
Total gross loans 100,346,913 100,846,310
Unearned interest (916,152) (2,212,391)
Allowance for credit losses on loans (1,961,840) (950,809)
-------------- -------------
Loans, net $ 97,468,921 $ 97,683,110
============== =============
</TABLE>
At December 31, 1998 and 1997 the loan portfolio had accrued interest
receivable of $301,863 and $509,123.
A summary of changes in allowance for credit losses on loans for the years
ended December 31, 1998 and 1997 were as follows:
F-14
<PAGE>
4. Loans, net continued:
----------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Balance at beginning of year $ 950,809 $1,067,041
Additions (deductions):
Provision for credit losses on loans 2,699,181 140,000
Bank acquisition 820,625 -
Loans charged off (3,157,636) (403,454)
Recoveries of loans previously charged-off 648,861 147,222
-------------- --------------
Balance at end of year $ 1,961,840 $ 950,809
============== ==============
</TABLE>
At December 31, 1998 and December 31, 1997 the Company's recorded
investment in loans for which impairment has been recognized in accordance
with SFAS 114 consists primarily of commercial loans and installment loans
as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Impaired loans with related allowance calculated under SFAS 114 $3,640,069 $2,306,501
Impaired loans with no allowance calculated under SFAS 114 1,614,945 505,443
------------ ------------
Impaired loans $5,255,014 $2,811,944
------------ ------------
Allowance on impaired loans calculated under SFAS 114 $ 971,456 $ 331,174
============ ============
<CAPTION>
For the year ended December 31,
------------------------------------------------------------
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Average impaired loans $5,494,830 $2,304,892 $1,723,362
Interest income recognized on impaired loans 554,978 253,538 189,570
</TABLE>
Loans on which the accrual of interest has been discontinued amounted to
approximately $1,398,000 and $92,000 at December 31, 1998 and 1997,
respectively.
As of December 31, 1998 and December 31, 1997, there were no commitments to
lend additional funds to borrowers of loans which were considered impaired.
5. Medical Claims Receivables:
--------------------------
At December 31, 1998 and 1997 the medical claims receivables portfolio was
composed of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Medical claims receivables $ 646,378 $ 8,079,524
Unearned interest - (698,484)
Allowance for medical claims
Receivables losses (141,184) (4,307,885)
------------- -------------
Medical claims receivables, net $ 505,194 $ 3,073,155
============= =============
</TABLE>
F-15
<PAGE>
5. Medical Claims Receivables continued:
--------------------------
During 1998 the Company substantially reduced its medical claims factoring
operations after incurring substantial losses. As a result of the
deteriorated condition of the portfolio during the fourth quarter of 1997,
in addition to a substantial provision for medical claims receivables
losses, management recognized an impairment to the unamortized goodwill of
$1,151,111, and undepreciated fixed assets of $47,177, relating to the
medical claims factoring division.
A summary of changes in the allowance for medical claims receivables credit
losses for the years ended December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Balance at beginning of year $ 4,307,885 $ 217,734
Additions (deductions):
(Credit) provision for credit losses (694,194) 6,244,996
Receivables charged off (4,428,530) (2,156,355)
Recoveries of receivables previously charged-off 956,023 1,510
------------- -------------
Balance at end of year $ 141,184 $ 4,307,885
============= =============
</TABLE>
6. Premises and Equipment:
-----------------------
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Estimated Useful
Lives 1998 1997
------------------------ ------------------- --------------------
<S> <C> <C> <C>
Buildings 5 - 30 years $ 3,470,359 $ 2,214,170
Furniture, fixtures and computers 3 - 10 years 4,443,964 3,295,948
Automobiles 3 - 5 years 98,518 196,611
Leasehold improvements 3 - 5 years 139,504 105,222
------------------- --------------------
8,152,345 5,811,951
Less accumulated depreciation (2,414,535) (2,467,430)
Land 1,024,413 416,029
------------------- --------------------
Premises and equipment, net $ 6,762,223 $ 3,760,550
=================== ====================
</TABLE>
F-16
<PAGE>
7. Deposits:
--------
At December 31, 1998 the scheduled maturities of time deposits are
approximately as follows:
Years Ending
December 31,
-------------
1999 $68,100,000
2000 6,197,000
2001 4,665,000
2002 585,000
2003 601,000
------------
$80,148,000
============
As of December 31, 1998 and 1997 certificates of deposits in excess of
$100,000 accounted for approximately $24,225,000 and $23,492,000 of the
Bank's deposits, respectively. As of December 31, 1998, $22,437,000 of
such certificates had a maturity of one year or less.
8. Convertible Subordinated Debt:
-----------------------------
Effective March 31, 1998, the Company issued $4,350,000 in 9% Convertible
Subordinated Notes Due 2008 (the "Notes"), pursuant to an indenture between
the Company and Harris Trust and Savings Bank, Chicago, Illinois, as
trustee (the "Trustee"). The Notes are general unsecured obligations of
the Company. The terms of the Notes are such that they qualify as Tier II
capital under the Federal Reserve Board's regulatory capital guidelines
applicable to bank holding companies. The Notes bear interest at a rate of
9% per annum until maturity. Interest on the Notes is payable semi-
annually on March 31 and September 30 of each year, commencing September
30, 1998. No principal payments are due until maturity on March 31, 2008.
The amount of the principal and any accrued and unpaid interest on the
Notes are subordinated in right of payment to the prior payment in full of
all senior indebtedness of the Company, including the Bank's deposits.
Upon the occurrence of certain events involving the bankruptcy, insolvency,
reorganization, receivership or similar proceedings of the Company, either
the Trustee or the holders of not less than 25% in aggregate principal
amount of the outstanding Notes may declare the principal of the Notes,
together with any accrued and unpaid interest, to be immediately due and
payable. The Notes do not otherwise provide for any right of acceleration
of the payment of principal thereof.
Each holder of Notes has the right at any time prior to maturity of the
Notes, unless previously redeemed, at the holder's option, to convert such
Notes, or any portion thereof which is an integral multiple of $10,000,
into shares of Common Stock of the Company, at the conversion price of
$6.00 per share, subject to certain antidilutive adjustments (the
"Conversion Price").
The Notes are not subject to mandatory redemption or sinking fund
provision. The Notes are redeemable for cash at the option of the Company
on at least 30 but not more than 60 days notice, in whole or in part, at
any time after the date of issuance and on or before March 31, 2002 at the
redemption prices set forth in the table below, plus accrued interest to
the date of redemption, if the closing sales price of the Company's common
stock shall be at least 130% of the Conversion Price then in effect for a
period of 20 consecutive trading days in the principal market in which the
common stock is then traded. At any time after March 31, 2002 and prior to
maturity, the Notes are redeemable for cash at the option of the Company,
on at least 30 but not more than 60 days notice, in whole or in part, at
the redemption prices set forth in the table below, plus accrued interest
to the date of redemption.
F-17
<PAGE>
8. Convertible Subordinated Debt continued:
-----------------------------
F-18
<PAGE>
<TABLE>
<CAPTION>
If Redeemed During Percentage of If Redeemed During Percentage of
12 Months Ended Principal 12 Months Ended Principal
March 31, Amount March 31, Amount
- ----------------------------------- -------------------------- -------------------------- ------------------------
<S> <C> <C> <C>
1999 109% 2004 104%
2000 108% 2005 103%
2001 107% 2006 102%
2002 106% 2007 101%
2003 105% 2008 100%
</TABLE>
The Company made the required March 31, 1999 interest payment on the Notes.
After this payment interest on the Notes the Company as a stand alone
entity had approximately $61,000 in cash remaining for future operating
expenses (see Note 18 regarding plans to meet future cash requirements).
9. (Loss) Earnings Per Share:
--------------------------
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 and 1996, 238,968 and 48,295
of common stock equivalent shares were added to the weighted average
shares outstanding for each year, respectively. None were added for 1998.
There was no effect to the 1998 and 1997 diluted EPS since the common stock
equivalents were considered anti dilutive.
10. Stock-Based Compensation Plans:
-------------------------------
The Company has four 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 have changed the method 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 are presented herein.
The Company has adopted the 1988, 1995 and 1998 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 1,200,000 shares
of Common Stock of the Company were set aside for issuance pursuant to the
exercise of options granted thereunder, of which 1,056,958 shares are
subject to outstanding options or remain available for grant at December
31, 1998. To exercise the options, grantees must pay the exercise price in
cash or Common Stock, or any combination of cash and Common Stock.
F-19
<PAGE>
10. Stock-Based Compensation Plans continued:
------------------------------
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") (collectively, the
"Directors Plans"). Under the 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 at December
31, 1998. 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 calendar business day of 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 1998 each of six non-
employee directors of the Company received an option to purchase 2,000
shares of Common Stock of the Company at an exercise price of $6.9375 per
share. In 1997 each of five non-employee directors 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. In 1997, pursuant to a one time
provision in the 1997 Directors Plan, 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,
1998, 1997, and 1996 and the changes during the year ended on that date is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
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 755,857 $4.18 87,292 $4.13 55,216 $4.36
Granted 102,000 $5.75 708,195 $4.24 40,000 $3.59
Exercised 49,900 $4.54 26,434 $4.39 7,924 $2.99
Expired or forfeited 65,000 $4.31 13,196 $6.42 -- --
Outstanding at
End of year 742,957 $4.33 755,857 $4.18 87,292 $4.13
Exercisable at
end of year 360,957 $4.39 75,856 $3.80 62,292 $4.28
Weighted-average
fair value at grant date of
options
granted during the
year $2.80 $1.98 $1.79
</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 1998, 1997 and 1996,
respectively: dividend yield of 0% for all three years; expected volatility
of 47.66% for 1998, 43.46% for 1997 and 48.85% for 1996; risk-free interest
rates of 5.63% for 1998 grants, 6.28% for 1997, and 5.68% for 1996, and the
expected lives of the options are 5.00 years for 1998 grants, 4.96 years
for 1997 grants, and 5.00 years for 1996 grants.
F-20
<PAGE>
10. Stock-Based Compensation Plans continued:
------------------------------
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Average Weighted
Remaining Weighted Average
Range of Number Contractual Average Number Exercise
Exercise Prices Outstanding Life Exercise Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.13 to $4.19 640,661 7.90 $4.12 290,661 $4.04
$4.44 to $6.94 102,296 8.61 $5.90 70,296 $5.87
- ------------------------------------------------------------------------------------------------------------
$3.13 to $6.94 742,957 8.00 $4.36 360,957 $4.39
</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 1998, 1997 and 1996 would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SFAS 123 charge -- $ (434,391) -- $ (368,194) -- $ 59,189
APB 25 charge -- -- -- -- -- --
Net (loss) income $(1,863,113) $(2,297,504) $(3,476,304) $(3,844,498) $1,697,987 $1,642,519
Net (loss) income per basic
common share $ (.32) $ (.40) $ (.60) $ (.67) $ 0.32 $ 0.30
Net (loss) income per
diluted common share $ (.32) $ (.40) $ (.60) $ (.67) $ 0.31 $ 0.29
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.
Under all of the plans, in the aggregate, 558,000 shares remain available
for option grants.
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.
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.
F-21
<PAGE>
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.
The total amounts of financial instruments with off-balance sheet risk at
December 31, 1998 were unfunded loan commitments of $6,653,000 and letters
of credit of $238,000.
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
$56,000 at December 31, 1998, as collateral supporting those letter of
credit commitments for which collateral is deemed necessary.
The Bank sold approximately $24,762,000 and $22,257,000 in federal funds at
December 31, 1998 and 1997, respectively. These funds represent
uncollateralized loans made by the Bank, in varying amounts, to other
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 Bexar, Comal, Ellis, Grayson, and Tarrant 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 $24,887,000 or 25% and
$40,374,000 or 40% of consolidated total loans as of December 31, 1998 and
1997, respectively.
13. Related Party Transactions:
--------------------------
In the ordinary course of business, loans have been granted to directors,
director related companies, executive officers and employees. Loans to
these related parties are approximately $329,000, and $479,000 as of
December 31, 1998 and 1997, respectively. During 1998, 1997 and 1996 the
Company paid legal fees to a director in the amount of $182,335, $110,216
and $125,145, respectively.
F-22
<PAGE>
14. Employee Benefit Plan:
---------------------
The Company adopted the Surety Bank 401(k) Plan (the "Plan"), in which 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, 1998,
1997 and 1996 was $86,148, $93,773, and $85,886, respectively.
15. Federal Income Tax:
------------------
The components of the net deferred tax (liability) asset recognized at
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------- -------------
Deferred tax liabilities:
<S> <C> <C>
Depreciation and amortization $ (749,587) $ (374,241)
Deferred loan costs (215,219) (172,705)
Other (105,963) (42,228)
Net unrealized gain on
available-for-sale investment securities (32,476) (2,686)
------------- -------------
Total gross deferred tax liabilities: (1,103,245) (591,860)
------------- -------------
Deferred tax assets:
Net operating loss carryforwards 1,098,444 208,415
Alternative minimum tax loss carryforward 81,599
Depreciation - 21,254
Allowance for credit losses 205,582 1,522,354
Non compete agreement impairment 374,644 404,980
Other real estate losses 39,719 9,675
Other 139,565 47,576
------------- -------------
Total gross deferred tax assets: 1,939,553 2,214,254
------------- -------------
Net deferred tax assets: $ 836,308 $1,622,394
Less valuation allowance for net
deferred tax assets (868,784) -
------------- -------------
Total net deferred tax (liability) asset: $ (32,476) $1,622,394
============= =============
</TABLE>
F-23
<PAGE>
15. Federal Income Tax continued:
------------------
The Company's effective tax rate on (loss) income before income taxes
differs from the U.S. statutory tax rate as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ---------------- ---------------
<S> <C> <C> <C>
U.S. statutory rate (34.0)% (34.0)% 34.0%
Valuation allowance 67.1%
Goodwill 10.3% (2.9)% 4.4%
Tax-exempt interest (5.2)% 2.1% (3.7)%
Other 5.6% 0.7% 0.9%
----------------- ---------------- ---------------
Effective tax rate 43.8% (34.1)% 35.6%
================= ================ ===============
</TABLE>
As of December 31, 1998 for income tax reporting purposes, the Company has
a current net pretax operating loss carryforward of approximately
$3,230,000, which expires, if not used, in 2013. As of December 31, 1998
the Company has an additional loss carryforward of approximately $104,000
for income tax reporting purposes which expires, if not used, in 2003. 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.
The Company also has an alternative minimum tax credit carryover of
approximately $82,000, which can be used to offset regular tax in future
periods.
The comprehensive provision (benefit) for federal income taxes for the
years ended December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996
---- ---- ----
Current:
<S> <C> <C> <C>
Federal $(1,164,482) - $916,674
State - - 33,826
--------------- -------------- -----------
(1,164,482) - 950,500
--------------- -------------- -----------
Deferred:
Federal 863,455 $(1,800,070) (12,372)
Valuation allowance 868,784 - -
--------------- -------------- -----------
1,732,239 (1,800,070) (12,372)
--------------- -------------- -----------
Provision (benefit) for tax expense charged
to results of operations 567,757 (1,800,070) 938,128
Tax on unrealized gain (loss) on
available-for-sale securities (18,720) 59,251 (81,147)
--------------- -------------- -----------
Comprehensive provision (benefit) for
federal income taxes $ 549,037 $(1,740,819) $856,981
=============== ============== ===========
</TABLE>
15. Federal Income Tax continued:
------------------
As of December 31, 1998 the Company had a net deferred tax asset in the
amount of $868,784. The Company provided a 100% valuation allowance for
its net deferred tax asset at the end of 1998 which could not be utilized
by a NOL carryback and due to uncertainty of the realization of the
deferred tax asset in future years. The realization of the net deferred
tax asset is contingent upon the Company generating sufficient future
taxable income.
16. Other Noninterest Income and Expense:
------------------------------------
Other noninterest income for the years ended December 31, 1998, 1997 and
1996 was composed of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------ ------------
Noninterest Income:
<S> <C> <C> <C>
Nonsufficient fund charges $ 672,276 $ 569,649 $ 460,156
Late fee charges 947,327 1,169,407 681,644
Service charges 383,356 305,494 372,756
Collection fees 110,168 162,297 135,533
Gain on sale of branches 1,103,483
Other 208,692 332,071 227,365
------------- ------------ ------------
Total $3,425,302 $2,538,918 $1,877,454
============= ============ ============
</TABLE>
General and administrative expense for the years ended December 31, 1998,
1997 and 1996 was composed of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
<S> <C> <C> <C>
General and administrative expense:
Professional fees 1,020,970 1,126,351 467,662
Settlements and accruals for
legal proceedings 336,698 - -
Office supplies 341,028 290,533 386,114
Travel and entertainment 128,961 132,476 96,577
Telephone 363,023 342,161 283,564
Advertising 164,163 189,510 174,335
Postage 447,312 374,233 299,388
Amortization of intangibles 634,821 506,172 359,717
Dues and subscriptions 120,130 72,847 70,559
Insurance 153,260 95,957 167,245
Bank service charge 183,086 116,631 110,881
FDIC assessment 69,976 15,626 3,553
Credit reports 32,796 46,314 22,850
Operational losses 229,761 13,987 23,075
Other 282,005 326,338 180,067
------------ ----------- ------------
Total general and
administrative $4,507,990 $3,649,136 $2,645,587
============ =========== ============
</TABLE>
F-24
<PAGE>
17. Commitments and Contingencies:
-----------------------------
As of December 31, 1998 the Company leased office space in Hurst, Texas
(which expires in 2001), and Schertz, Texas (which expires in 1999), under
noncancellable operating leases. The Company also leases the land for its
branch located in New Braunfels, Texas (which expires in 2001). Future
minimum lease payments for all noncancellable operating leases are as
follows:
For the years ending
--------------------
1999 $273,427
2000 89,793
2001 29,727
--------
Total $392,947
========
Rent expense was $218,000, $184,000, and $162,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
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 became a member of the Federal Home Loan Bank ("FHLB") on October
9, 1997 and subsequently purchased 5,247 shares of FHLB capital stock for
$524,700. As a member, the Bank has the option of borrowing up to
$10,700,000 from the FHLB, subject to a borrowing base that is determined
from the Bank's first mortgage loans and FHLB stock.
The Bank entered into an agreement with CAA Premium Finance ("CAA") on
March 16, 1998 to purchase premium finance loans for a term of five years
on an exclusive basis and at an annual minimum amount of $4,000,000. The
Bank has reserved the right to accept or reject each loan offered to it for
purchase. The purchased loans must meet the Bank's underwriting standards
prior to purchase. Loans which do not meet the Bank's underwriting
criteria are retained by CAA.+
The Bank also entered into an agreement with Cardinal Premium Finance
("Cardinal") on June 7, 1998 to purchase premium finance loans for a term
of five years on an exclusive basis and at an annual minimum amount of
$8,000,000. The Bank has reserved the right to accept or reject each loan
offered to the Bank for purchase. The purchased loans must meet the Bank's
underwriting standards prior to purchase. Loans which do not meet the
Bank's underwriting criteria are retained by Cardinal.
Legal Matters
-------------
("Surety 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-25
<PAGE>
17. Commitments and Contingencies continued:
-----------------------------
The plaintiff 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 sought 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 alleged
course of conduct.
Both the Anchorage case as well as the MacGregor case 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. The
Bank also contends that it had a right to exercise control over its
collateral to protect itself against the possibility of inconsistent orders
regarding the same funds. Tennessee seeks to recover funds allegedly
transferred in and out of Anchorage/MacGregor accounts at the Bank during
an approximate four month period in 1993. Tennessee also claims that the
Bank allegedly transferred funds in and out of Anchorage accounts after
receiving notice of a court order prohibiting such transfer. Tennessee is
claiming damages in excess of $2,000,000.
The Anchorage case was called to trial in July 1998, where, immediately
before trial was to begin, the court granted summary judgment in favor of
the Bank and entered a take nothing judgment against the Plaintiff.
Tennessee has since appealed the trial court's summary judgment To the
Fifth Circuit Court of Appeals where that appeal is pending.
The Plaintiff in the MacGregor case, United Shortline, Inc. Assurance
Services, N.A. ("Shortline"), purports to be 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. 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 those 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. Tennessee then appealed that
ruling to the Texas Supreme Court which affirmed the judgment of the Court
of Appeals. This case has recently been remanded to the trial court for
disposition of the remaining issues.
The Bank believes both of these cases lack merit and will continue to
defend them vigorously. The final outcome of both of these cases is
uncertain at this time.
F-26
<PAGE>
17. Commitments and Contingencies continued:
-----------------------------
The Bank is also a Defendant in Dr. Christian J. Renna, et al. vs. Barry
Carroll, et al., filed in April 1997 in the 348th Judicial District Court
of Tarrant County, Texas (the "Renna Case"). Christian J. Renna, D.O.
("Renna") claims that his contract billing and collection manager, James
Sharbrough, signed Renna's name to an agreement with the Bank and begin
submitting medical claims belonging to Renna and his medical practice to
the Bank for factoring. Renna claims that these alleged activities by his
billing/collection manager, who was also Renna's brother-in-law at the
time, were without his authority. The plaintiffs alleged that damages were
suffered as a result of failing to receive advances for collections on the
accounts allegedly factored by the Bank. The plaintiffs also contend that
they have been further damaged as a result of factoring fees paid to factor
the accounts. The plaintiffs assert that they have suffered actual damages
of approximately $1,500,000, consisting of the face amount of the
receivables, lost profits/income and other consequential damages. Exemplary
damages and attorneys fees in an unspecified amount are also sought. The
Bank has recently filed a motion for summary judgment. The case is
currently set for trial to begin on May 10, 1999. The Bank will continue to
defend this case vigorously.
The Company is a defendant in various other legal proceedings arising in
connection with its ordinary course of business. In the opinion of
management, the financial position, results of operations and liquidity of
the Company will not be materially affected by the final outcome of these
legal proceedings.
18. Regulatory Matters:
------------------
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. 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.
Formal Agreement with the OCC. On November 19, 1998 the Board of Directors
of the Bank entered into the Formal Agreement with the OCC pursuant to
which the Bank was required to achieve certain capital levels and adopt and
implement certain plans, policies and strategies by March 31, 1999 and is
required to achieve certain additional capital levels by December 31, 1999.
Under the Formal Agreement, the Bank was required to achieve by March 31,
1999 total risk-based capital at least equal to 12% of risk-weighted assets
and Tier I leverage capital at least equal to 7.5% of adjusted total
assets, and is required to achieve by December 31, 1999 total risk-based
capital at least equal to 14% of risk-weighted assets. At December 31,
1998 the Bank had total risk-based capital of 10.24% of risk weighted
assets and Tier I leverage capital of 5.64% of adjusted total assets. The
Bank failed to achieve the capital levels and the leverage ratio required
by the FA to be met by March 31, 1999. The Bank submitted a request to the
OCC for an extension from March 31, 1999 to September 30, 1999 to meet the
capital requirements of the Formal Agreement. The OCC granted the extension
subject to revocation based on the results of examinations by the OCC to be
conducted in April and June of 1999 or if the OCC finds the Bank to not be
in substantial compliance with the articles of the Formal Agreement.
Management expects to achieve both the FA capital requirements for March
31, 1999 and December 31, 1999 upon completion of the branch sales of
Midlothian and Waxahachie (see Note 22).
The FA establishes higher capital requirements than those applicable under
OCC regulations for an "adequately" and "well capitalized" bank. The table
below sets forth the capital requirements for the Bank under OCC
regulations, under the Formal Agreement, in addition to the Bank's actual
capital ratios at December 31, 1998 and 1997.
F-27
<PAGE>
18. Regulatory Matters continued:
------------------
<TABLE>
<CAPTION>
Actual Formal Agreement OCC Regulations
--------------------------------------- --------------------------------- -------------------------------
Capital Ratios Capital Ratios
December 31, December 31, September 30, December 31, Adequately Well
1998 1997 1999(1) 1999 Capitalized Capitalized
------------------- ------------------ --------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Leverage 5.64% 6.24% 7.50% 7.50% 4.00% 5.00%
Risk-Based Capital:
Tier I 8.98% 9.92% 6.00% 6.00% 4.00% 6.00%
Tier I & II 10.24% 11.28% 12.00% 14.00% 8.00% 10.00%
</TABLE>
(1) As extended from March 31, 1999.
The Bank's actual capital amounts and ratios are presented in the table for
the years ended December 31, 1998 and 1997.
December 31,
----------------------------------
1998 1997
-------------- --------------
Tier I risk-based capital $ 9,314,000 $ 10,277,000
Tier II risk-based capital 1,304,000 1,402,000
-------------- --------------
Total capital $ 10,618,000 $ 11,679,000
============== ==============
Risk-weighted assets $103,722,000 $103,559,000
Additionally, pursuant to the Formal Agreement, the Board of Directors was
required to develop a three year capital plan program, a plan to enhance
its management information systems, a three year strategic plan
establishing objectives for the Bank's earnings performance, growth,
balance sheet mix, off-balance sheet activities, liability structure,
capital adequacy, reduction in the volume of non-performing assets, product
line development and market segments which the Bank intends to promote or
develop, together with strategies to achieve those objectives, a revised
loan policy, and a loan classification policy, each for submission to, and
approval by, the OCC. All of these recommended enhancements have been
implemented and the three year capital plan program, the plan to enhance
the Bank's management information systems and the three year strategic plan
have been submitted to the OCC for approval.
The OCC has extensive enforcement authority over the operations of all
national banks, including the Bank. The OCC may under certain circumstances
assess civil monetary damages against the Bank and the Directors of the
Bank, issue cease-and-desist or removal orders and initiate injunctive
actions. Additionally, the OCC may impose a number of corrective measures
on the Bank, including (1) the imposition of restrictions on certain
activities involving asset growth, acquisitions, branch establishment,
expansion into new lines of business, declaration and payment of dividends,
and transactions with affiliates, (2) the imposition of certain additional
mandated capital raising activities, and (3) a merger or sale of the Bank.
The Formal Agreement also prohibits the Board of Directors from declaring
or paying any dividends unless the Bank (1) is in compliance with 12 U.S.C.
(S)(S) 56 and 60, its approved capital program provided for in the Formal
Agreement, and the capital levels set forth in the Formal Agreement, as
more fully described above, and (2) has obtained the prior written approval
of the OCC.
F-28
<PAGE>
18. Regulatory Matters continued:
------------------
The Company, as the holding company for the Bank, does not have material
working capital needs separate from those of the Bank, other than the
payment of interest on its convertible subordinated debt (see Note 8). The
Bank is currently precluded from declaring and paying any dividends to the
Company under the Formal Agreement. The Company will attempt to secure a
loan to meet its cash flow needs for the twelve months ended March 31,
2000, which includes servicing the interest payment on the Notes. The
provisions of the subordinated debt do not allow holders to force an
interest payment. After March 31, 2000, the Bank expects to be permitted
to make dividends to the Company in an amount necessary to service the
interest payments on the Notes and for general corporate purposes. There
can be no assurance that the Company's present capital and financing will
be sufficient to finance future operations thereafter. If the Company
sells additional shares of common and/or preferred stock to raise funds,
the terms and conditions of the issuances and any dilutive effect may have
an adverse impact on the existing stockholders. If additional financing
becomes necessary, there can be no assurance that the financing can be
obtained on satisfactory terms. In this event, the Company could be
required to restrict its operations.
The Board of Governors of the Federal Reserve System (the "Federal
Reserve") has announced a policy sometimes known as the "source of strength
doctrine" that requires a bank holding company to serve as a source of
financial and managerial strength to its subsidiary banks. The Federal
Reserve 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 Federal Reserve 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, 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 stockholders.
19. Fair Value of Financial Instruments:
-----------------------------------
The following assumptions 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,
and medical claims receivables approximate the fair values of such
assets and liabilities. The subordinated notes payable do not have
readily determinable fair market values. The Company has valued the
subordinated notes payable at the par value plus the premium the
Company would be required to pay if it had retired the subordinated
notes payable at December 31, 1998.
F-29
<PAGE>
19. Fair Value of Financial Instruments continued:
-----------------------------------
Fair values for the Company's off-balance sheet instruments, which
consist of lending commitments and standby letters of credit, are
based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. Management believes the value of
these off-balance sheet instruments are not materially different from
the commitment amount.
<TABLE>
<CAPTION>
At December 31, 1998 At December 31, 1997
--------------------------- ----------------------------
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 $ 9,290 $ 9,290 $ 6,204 $ 6,204
Federal funds sold 24,762 24,762 22,257 22,257
Interest bearing deposits in
financial institutions 95 95 95 95
Available-for-sale securities 24,367 24,367 28,785 28,785
Loans receivable 97,469 95,999 97,683 98,044
Medical claims receivable 505 505 3,073 3,073
Financial Liabilities:
Noninterest bearing deposits 31,733 31,733 22,186 22,186
Interest bearing deposits 123,430 123,570 132,356 132,380
Notes payable 4,350 4,742 - -
Off-balance sheet instruments - 69 - 50
</TABLE>
F-30
<PAGE>
20. Business Segments:
-----------------
The accounting policies of the segments are the same as those described
above in Note 1. The Company evaluates segment performance based on net
interest income, or profit or loss from operations, before income taxes not
including nonrecurring gains and losses.
<TABLE>
<CAPTION>
Insurance Medical Claims
Community Premium Receivables
Banking Financing Factoring Total
------------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
1998:
Net interest income before provision
for credit losses $ 7,222,819 $ 1,587,486 $ 606,794 $ 9,417,099
Provision for credit losses 435,209 2,263,972 (694,194) 2,004,987
Noninterest income 2,529,060 896,242 - 3,425,302
Noninterest expense 9,075,421 2,107,115 950,234 12,132,770
Net (loss) income (47,773) (2,205,919) 390,579 (1,863,113)
Loans, gross 75,459,711 24,887,202 100,346,913
Medical claims receivables, gross 646,378 646,378
Total assets 149,739,286 24,602,796 719,713 175,061,795
1997:
Net interest income before provision
for credit losses 5,754,941 1,764,036 2,163,910 $ 9,682,887
Provision for credit losses 195,000 (55,000) 6,244,996 6,384,996
Noninterest income 1,492,582 1,046,336 - 2,538,918
Noninterest expense 7,434,769 1,678,874 1,999,540 11,113,183
Net (loss) income 510,957 $ 782,488 (4,769,749) (3,476,304)
Loans, gross 60,472,615 40,373,695 100,846,310
Medical claims receivables, gross 8,079,524 8,079,524
Total assets 124,850,117 42,450,596 4,350,905 171,651,618
1996:
Net interest income before provision
for credit losses 6,502,936 1,311,676 1,214,061 9,028,673
Provision for credit losses 40,000 50,000 45,000 135,000
Noninterest income 1,242,723 634,731 - 1,877,454
Noninterest expense 6,498,397 1,251,756 384,859 8,135,012
Net income 910,092 417,172 370,723 1,697,987
Loans, gross 60,150,826 39,168,604 99,319,430
Medical claims receivables, gross 6,377,067 6,377,067
Total assets $131,947,288 $38,343,966 $ 6,148,056 $176,439,310
</TABLE>
F-31
<PAGE>
21. Parent Company Financial Information:
------------------------------------
Condensed Parent Company Only
Balance Sheets
as of December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
--------------- ----------------
<S> <C> <C>
Assets:
Cash $ 274,233 $ 730,094
Investment in subsidiary, at equity 17,756,212 15,090,094
Other assets 411,680 57,145
--------------- ----------------
Total assets $18,442,125 $15,877,333
=============== ================
Liabilities:
Convertible subordinated debt $ 4,350,000 $ -
Accrued interest payable 97,875 -
--------------- ----------------
Total liabilities 4,447,875 -
Shareholders' equity:
Common stock 58,401 57,902
Additional paid-in capital 17,093,786 16,867,777
Accumulated deficit (2,887,548) (1,024,435)
Stock rights issuable 57,902 57,902
Treasury stock (375,443) (172,828)
Unrealized gain on available-for-sale securities 47,152 91,015
--------------- ----------------
Total shareholders' equity 13,994,250 15,877,333
--------------- ----------------
Total liabilities and shareholders' equity $18,442,125 $15,877,333
=============== ================
</TABLE>
F-32
<PAGE>
21. Parent Company Financial Information, continued:
------------------------------------
Condensed Parent Company Only
Statements of Operations
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Interest income $ 19,806 $ 20,533 $ 40,045
Interest expense 324,818 - 6,612
-------------- -------------- -------------
Net interest (expense) income (305,012) 20,533 33,433
Noninterest expense (160,897) (244,120) (169,610)
Equity in net (loss) income of subsidiary (1,374,112) (3,333,245) 1,788,489
-------------- -------------- -------------
Net (loss) income before income taxes (1,840,021) (3,556,832) 1,652,312
Income tax expense (benefit): 23,092 (80,528) (45,675)
-------------- -------------- -------------
Net (loss) income $(1,863,113) $(3,476,304) $1,697,987
============== ============== =============
</TABLE>
F-33
<PAGE>
21. Parent Company Financial Information, continued:
------------------------------------
Condensed Parent Company Only
Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(1,863,113) $(3,476,304) $ 1,697,987
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Amortization of debt issuance costs 31,193 - -
Equity in net loss (income) of subsidiary 1,374,112 3,333,245 (1,810,509)
Net decrease (increase) in receivable from
Subsidiary - 103,760 (35,762)
Net (increase) decrease in other assets 30,179 (5,170) 55,082
Net increase (decrease) in accrued liabilities 97,875 - (58,806)
------------- -------------- -------------
Net cash used in operating activities (329,754) (44,469) (152,008)
------------- -------------- -------------
Cash flows from investing activities:
Investment in subsidiary (4,084,093) - (6,170,000)
------------- -------------- -------------
Net cash used in investing activities (4,084,093) - (6,170,000)
------------- -------------- -------------
Cash flows from financing activities:
Sale of common stock - - 7,394,293
Exercise of stock options 226,508 116,039 23,712
Proceeds from borrowings, net of issuance
Costs 3,934,093 - -
Payments on borrowings - - (375,000)
Purchase of treasury stock (202,615) (98,289) (23,709)
------------- -------------- -------------
Net cash provided by financing activities 3,957,986 17,750 7,019,296
------------- -------------- -------------
Net (decrease) increase in cash and cash equivalents (455,861) (26,719) 697,288
Beginning cash and cash equivalents 730,094 756,813 59,525
------------- -------------- -------------
Ending cash and cash equivalents $ 274,233 $ 730,094 $ 756,813
============= ============== =============
</TABLE>
F-34
<PAGE>
22. Subsequent Events:
-----------------
On April 13, 1999, the Bank entered into Purchase and Assumption Agreement
a with The Citizens National Bank in Waxahachie, Waxahachie, Texas
("Citizens"), to sell to Citizens the Bank's two branches located in
Waxahachie and Midlothian, Texas (the "Branches"). The purchase price for
the Branches will be based upon the net value of the assets less the
balance of liabilities assumed plus 11% of the deposit base and 2.5% of the
loan base and the value of certain premises, equipment and other assets.
The transaction will be structured as a purchase of certain assets and
assumption of certain liabilities of the Branches, including deposits, by
Citizens. As of December 31, 1998, the Branches had total deposits of
approximately $58,000,000, total net loans of approximately $15,000,000 and
fixed assets of approximately $1,600,000. The completion of the sale is
subject to a number of contingencies, including regulatory approvals by
applicable banking authorities and a due diligence review of the Branches
by Citizens. There can be no assurance that the transaction will be
completed. If consummated, the transaction is expected to close no later
than September 30, 1999, upon the expiration of all applicable waiting
periods following receipt of all necessary regulatory approvals.
F-35
<PAGE>
EXHIBIT 2.14
PURCHASE AND ASSUMPTION AGREEMENT
---------------------------------
by and between
THE CITIZENS NATIONAL BANK IN WAXAHACHIE
Waxahachie, Texas
and
SURETY BANK, N.A.
Hurst, Texas
Dated as of
April 13, 1999
<PAGE>
TABLE OF CONTENTS
SECTION 1. SALE AND PURCHASE OF CERTAIN ASSETS AND ASSUMPTION AND TRANSFER OF
CERTAIN LIABILITIES.......................................................1
1.1 Sale of Assets..................................................1
1.2 Assets to be Retained by Seller.................................2
1.3 Assumption of Liabilities of Seller.............................3
1.4 Liabilities to be Retained by Seller............................3
1.5 Purchase Premium................................................4
1.6 Valuation of Assets and Liabilities.............................4
1.7 Delivery of Schedules...........................................4
1.8 The Closing, the Closing Date and the Effective Time............4
1.9 Preliminary Balance Sheet and Final Balance Sheet...............4
1.10 Adjustments.....................................................5
1.11 Deliveries by Seller at the Closing.............................5
1.12 Deliveries by Buyer at the Closing..............................7
1.13 Closing Costs and Recording.....................................7
1.14 Further Assurances..............................................7
1.15 Personnel.......................................................7
SECTION 2. REAL ESTATE PROVISIONS..............................................9
2.1 Commitment for Title Insurance and Survey.......................9
2.2 Objections and Remedies.........................................9
2.3 Title Insurance Policy.........................................10
2.4 Environmental Investigation....................................10
2.5 Destruction or Damage Prior to Closing.........................11
SECTION 3. REPRESENTATIONS AND WARRANTIES OF SELLER...........................12
3.1 Organization and Standing......................................12
3.2 Execution and Delivery.........................................12
3.3 Compliance with Laws, Permits and Instruments..................12
3.4 Litigation.....................................................13
3.5 Consents.......................................................13
3.6 Title to Assets................................................13
3.7 Real Property..................................................13
3.8 Financial Statements...........................................13
3.9 Absence of Certain Changes or Events...........................13
3.10 Contracts......................................................14
3.11 No Adverse Change..............................................14
3.12 Evidences of Indebtedness......................................14
3.13 Books and Records..............................................14
3.14 Regulatory Compliance..........................................14
3.15 Brokerage Fees.................................................15
3.16 Employee Matters...............................................15
3.17 Representations Not Misleading.................................15
SECTION 4. REPRESENTATIONS AND WARRANTIES OF BUYER............................15
4.1 Organization and Standing......................................15
4.2 Execution and Delivery.........................................15
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4.3 Compliance with Laws, Permits and Instruments..................15
4.4 Litigation.....................................................16
4.5 Consents.......................................................16
4.6 Brokerage Fees.................................................16
4.7 Disclosure.....................................................16
SECTION 5. COVENANTS OF SELLER................................................16
5.1 Best Efforts...................................................16
5.2 Information for Governmental Applications......................16
5.3 Required Acts of Seller........................................16
5.5 Prohibited Acts of Seller......................................17
5.6 Access; Pre-Closing Investigation..............................18
5.7 Additional Financial Statements................................18
5.8 Untrue Representations.........................................18
5.9 Notice of Adverse Changes, Litigation and Claims...............18
5.10 No Disclosure or Negotiation with Others.......................19
5.11 Notices to Customers...........................................19
SECTION 6. COVENANTS OF BUYER.................................................19
6.1 Best Efforts...................................................19
6.2 Regulatory Approvals...........................................19
6.3 Notice of Adverse Changes, Litigation and Claims...............19
6.4 Change of Name, Notice to Customers............................19
6.5 Use of Name....................................................20
SECTION 7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER...................20
7.1 Compliance with Representations, Warranties and Agreements.....20
7.2 Necessary Corporate Actions....................................20
7.3 Governmental Approvals.........................................20
7.4 No Litigation..................................................21
7.5 No Material Adverse Change.....................................21
SECTION 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER..................21
8.1 Compliance with Representations, Warranties and Agreements.....21
8.2 Governmental and Other Approvals...............................21
8.3 No Litigation..................................................21
SECTION 9.
SURVIVAL OF REPRESENTATIONS, WARRANTIES,
AGREEMENT AND OBLIGATIONS; INDEMNIFICATION...............................22
9.1 Survival 22
9.2 Indemnification by Seller..... 22
9.3 Indemnification by Buyer...... 23
9.4 Limit on Indemnities.......... 23
SECTION 10. OPERATIONAL AGREEMENTS............................................23
10.1 Replacement of Customer Check Stock............................23
10.2 Payment of Checks, Drafts, and Orders..........................23
10.3 Uncollected Items..............................................24
10.4 Data Processing and Utilities..................................24
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10.5 Compliance with Garnishments and Similar Orders................25
10.6 Direct Deposit Arrangements....................................25
10.7 Direct Debit Arrangements......................................26
10.8 IRA Deposits...................................................26
10.9 Keogh Accounts.................................................26
10.10 Final Statements...............................................26
10.11 IRA Deposits and Keogh Accounts................................26
10.12 Interest Reporting and Withholding.............................27
10.13 Loans..........................................................27
10.14 Other Items....................................................28
10.15 Safe Deposit Box and Safekeeping Business......................28
10.16 Noncompetition Agreement.......................................28
10.17 Books and Records..............................................29
10.18 Taxes..........................................................29
10.19 Clearing Items.................................................29
SECTION 11. TERMINATION AND ABANDONMENT.......................................29
11.1 Right of Termination...........................................29
11.2 Notice of Termination..........................................30
11.3 Effect of Termination..........................................30
SECTION 12. MISCELLANEOUS.....................................................30
12.1 Entire Agreement...............................................30
12.2 Multiple Counterparts..........................................30
12.3 Amendment......................................................31
12.4 Notices........................................................31
12.5 Binding Effect.................................................31
12.6 Governing Law..................................................32
12.7 Attorneys' Fees and Costs......................................32
12.8 Severability...................................................32
12.9 Assignability..................................................32
12.10 Rules of Construction..........................................32
12.11 Expenses.......................................................32
12.12 Waiver.........................................................32
12.13 Specific Performance...........................................33
12.14 Public Disclosure..............................................33
12.15 Confidential Information.......................................33
12.16 Arbitration....................................................33
12.17 Seller's Knowledge.............................................33
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PURCHASE AND ASSUMPTION AGREEMENT
---------------------------------
THIS PURCHASE AND ASSUMPTION AGREEMENT (this "Agreement") is made and
entered into as of the 13th day of April, 1999, by and between The Citizens
National Bank in Waxahachie, a national banking association having its principal
place of business in Waxahachie, Texas ("Buyer"), and Surety Bank, N.A., a
national banking association having its principal place of business in Hurst,
Texas ("Seller").
RECITALS:
--------
WHEREAS, Seller desires to sell and transfer to Buyer, and Buyer desires to
purchase assets from Seller associated with the branches of Seller located at
310 N. Ninth Street, Midlothian, Texas (the "Midlothian Branch"), and 104 N.
Elm, Waxahachie, Texas (the "Waxahachie Branch") (collectively, the "Branches"),
and to assume certain liabilities of Seller associated with the Branches as
hereinafter described on the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, for and in consideration of the foregoing and of the mutual
representations, warranties, covenants and agreements contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and subject to the conditions herein set forth, the parties
hereto, intending to be legally bound hereby, do undertake, promise, covenant
and agree with each other as follows:
SECTION 1.
SALE AND PURCHASE OF CERTAIN ASSETS
------------------------------------
AND ASSUMPTION AND TRANSFER OF CERTAIN LIABILITIES
--------------------------------------------------
1.1 Sale of Assets. On the terms and subject to the conditions contained
in this Agreement, at the Closing (as defined in Section 1.8) Buyer shall
purchase from Seller and Seller shall sell, convey, assign, transfer and deliver
to Buyer all of the rights, title, and interests of Seller in and to the
following assets of the Branches as a going concern, free and clear of all
liens, security interests, pledges, encumbrances, adverse claims and demands of
every kind, character and description whatsoever, except as otherwise provided
in this Agreement (all of which are collectively referred to herein as the
"Assets"):
A. All cash and other amounts due from banks, including cash items
in the process of collection (the "Cash on Hand");
B. All Loans (as defined in Section 1.1H) (except for any such loans
or any portions thereof that are repaid on or prior to the Effective Time),
plus accrued but unpaid interest on such loans through the Effective Time;
C. All rights, title and interest in the real property on which the
Branches are located, as described on Schedule 1.1(C), and all improvements
to such property, purchased, installed or constructed by or on behalf of
Seller and used in connection with the operation or maintenance of the
Branches, including, without limitation, buildings, structures, parking
facilities and drive-in teller facilities (the "Real Property");
D. All furniture, fixtures, leasehold improvements, equipment and
other tangible personal property located on or affixed to the Real Property
or used in connection with the operations of the Branches;
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E. All Prepaid Expenses (as defined in Section 1.9);
F. All safe deposit contracts and leases for the safe deposit boxes
located at the Branches as of the Effective Time (the "Safe Deposit
Contracts"); and
G. All books, records (including computer records), files and
documentation relating to the Assets and the Liabilities (the "Records"),
including, but not limited to:
(i) Signature cards, orders and contracts between Seller and
its depositors, including records related to IRA Deposits, and records
of similar character;
(ii) Records of deposit balances carried with other financial
institutions;
(iii) Loan and collateral records and credit files on all Loans;
(iv) Available tax records pertaining to the Real Property;
(v) Deeds, mortgages, abstracts, surveys, appraisals and other
instruments or records of title pertaining to real estate or real
estate mortgages; and
(vi) Card forms and printed copy of master applications, file
layouts, documentation of the files transferred, and a description of
the data in such files, as well as any other documentation to
facilitate the orderly operation and conversion to Buyer's system of
Seller's data processing operations.
It is understood that certain of Seller's records may be available only in
the form of photocopies, film copies or other non-original and non-paper
media.
H. "Loans" shall refer to the outstanding obligations, as of the
Closing Date, associated with loans, and loan participations on the books
of the Branches as of the date of this Agreement (including unfunded or
partially funded loan commitments, lines of credit, and letters of credit
for which Buyer shall be responsible for providing the credit thereunder
from and after the Closing Date (the "Commitments"), and overdrafts less
than 30 days old as of the Closing Date. "Loans" shall also include loans,
Commitments, and loan participations associated with the Branches approved
by Seller (with Buyer's input pursuant to Section 5.4K) after the date of
this Agreement. Buyer shall succeed to all rights, title, benefits and
interests in and to the Assets as of the Effective Time, and shall be
entitled to receive all benefits therefrom.
1.2 Assets to be Retained by Seller. Seller shall retain all assets not
expressly purchased by Buyer pursuant to Section 1.1, including, but not limited
to all investment securities owned by Seller; all securities purchased by Seller
subject to repurchase agreements; all other real estate owned by Seller and
properties carried as in substance foreclosures that are associated with the
Branches (if any); all assets and records associated with the investment or
brokerage business of Seller or its affiliates, whether conducted at the
Branches or any other location of Seller; all intangible assets, including
goodwill and mortgage servicing rights, of Seller; all rights to the name
"Surety Bank, N.A." and any of Seller's corporate logos, trademarks, trade
names, signs, paper stock, monetary instruments (including, but not limited to,
traveler's checks and cashier's checks), forms and other supplies containing any
such logos, trademarks or tradenames; and all trust assets and trust accounts
(collectively, the "Excluded Assets"). Seller shall coordinate with Buyer to
remove the Excluded Assets from the Branches on or prior to the Effective Time.
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Seller shall remove the Excluded Assets at its own cost and will be responsible
for making any repairs necessitated by Seller's removal of the Excluded Assets.
1.3 Assumption of Liabilities of Seller. At the Closing, subject to the
conditions contained herein, Seller shall transfer and assign to Buyer, and
Buyer shall assume, pay for, perform and discharge from and after the Effective
Time, as and when due and payable, the following liabilities of Seller
attributable to the Branches and reflected on the general ledger of Seller (all
of which are collectively referred to herein as the "Liabilities"):
A. All deposits as of the Effective Time (the "Deposits"), including
accrued and unpaid interest on any interest-bearing deposits through the
Effective Time ( "Accrued Interest"), together with all duties and
obligations of Seller associated therewith, including, but not limited to,
the agreements with customers associated with such deposits (the "Deposit
Agreements"; the holders of record of the Deposits are hereinafter referred
to as the "Depositors"), but the Deposits shall not include the deposits of
the Branches listed on Schedule 1.3A nor shall the Deposits include deposit
overdrafts present on the books of the Branches 30 days or more as of the
Closing Date unless Buyer agrees otherwise; furthermore, the Deposits shall
not exceed $58,000,000;
B. All accrued real estate taxes on the Real Property attributable
to the portion of the year during which Buyer owns such banking facility;
C. All liabilities, duties and obligations under the Safe Deposit
Contracts;
D. All duties and obligations of Seller under the loan documents
related to the Loans;
E. All contracts listed on Schedule 1.3E; and
F. All accrued expenses associated with the Branches as contemplated
by Section 1.9.
Buyer shall succeed to all obligations and liabilities of Seller to the extent
included in the Liabilities as of the Effective Time, and shall be liable from
then and thereafter to pay, discharge and perform all of the Liabilities as if
Buyer had itself incurred such obligations and liabilities, and Buyer shall
succeed to all rights, offsets and defenses of Seller in connection therewith.
For purposes of this Agreement, the term "deposit" shall include, but not be
limited to, all uncollected items included in the depositors' balances and
credited on the books of Seller, and shall have the meaning identical to that
defined in section 3(1) of the Federal Deposit Insurance Act, 12 U.S.C. (S)
1813(1).
1.4 Liabilities to be Retained by Seller. Seller shall retain all
liabilities or obligations not expressly assumed by Buyer pursuant to Section
1.3, including, but not limited to:
A. All real estate taxes on other real estate and properties carried
as in substance foreclosures of Seller, all sales and use, social security
and unemployment taxes withheld or collected from employees or customers
and all accounts payable and operating expenses, whether or not accrued,
for products or services incurred prior to the Effective Time including,
but not limited to, salaries, attorneys' fees and telephone, utility,
advertising and public relations expenses;
B. All liabilities for overdrafts in accounts maintained by Seller
with other financial institutions, including accrued but unpaid interest
thereon through the Effective Time; and
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C. All real estate taxes on the Real Property attributable to the
portion of the year Seller owns such facility.
D. Liabilities or obligations with respect to any litigation, suits,
claims, demands or governmental proceedings arising, commenced or resulting
from the operations of the Branches prior to the Effective Time.
E. Seller's cashier checks, letters of credit, money orders,
interest checks and expense checks issued prior to closing, consignments of
U.S. Government "E" and "EE" bonds and any and all traveler's checks.
1.5 Purchase Premium. Buyer agrees to pay to Seller a premium (the
"Purchase Premium") equal to $6,000,000. Such amount shall be adjusted by mutual
agreement as of the close of business as of the end of the month immediately
prior to the Closing Date based upon the amount of Assets and Liabilities on the
books of the Branches as of such date. At the Closing, Seller shall transfer to
Buyer cash in an amount equal to the value of the Liabilities as determined
pursuant to Section 1.6, and at the Closing, Buyer shall transfer to Seller cash
in an amount equal to the sum of (a) the value of the Assets determined pursuant
to Section 1.6, plus (b) the Purchase Premium. In lieu of a direct payment of
funds from Buyer to Seller in accordance with the preceding sentence, the
parties agree that such amount shall be treated as an offset to the amounts to
be paid from Seller to Buyer pursuant to the preceding sentence.
1.6 Valuation of Assets and Liabilities. For purposes of calculating the
value of the Assets to be purchased and the Liabilities to be assumed by Buyer
from Seller, all such assets and liabilities shall be valued at their net book
value as shown on the books and records of Seller as of the Closing Date (as
defined in Section 1.8) (the "Net Book Value"); provided, however, that (i) book
value of any asset or liability not recorded in accordance with generally
accepted accounting principles shall be adjusted to conform with generally
accepted accounting principles and (ii) all Loans shall be valued at principal,
excluding accrued but unpaid interest.
1.7 Delivery of Schedules. Schedules provided for in this Agreement shall
be delivered to Buyer and Seller respectively no later than April 21, 1999. Each
party shall have two (2) business days to notify the other party whether the
information contained in the Schedules is acceptable to such party or constitute
a "material adverse change" as contemplated herein.
1.8 The Closing, the Closing Date and the Effective Time. The sale and
purchase of the Assets and the assumption of the Liabilities pursuant to this
Agreement (the "Closing") shall occur on a date mutually determined by Buyer and
Seller no later than 7 days after receipt of all required regulatory approvals
and expiration of all required waiting periods. The Closing shall be held at the
offices of Seller at 310 N. 9th St., Midlothian, Texas, at 10:00 a.m., unless
another place and time is mutually agreed upon by Buyer and Seller. The date of
the Closing is referred to herein as the "Closing Date." Buyer and Seller shall
use their best efforts to cause the Closing Date to occur on or before June 30,
1999. The effective time (the "Effective Time") shall be 2:00 p.m. (or such
later or earlier time as which deposits are posted by Buyer as of the next
business day), local time, on the Closing Date. Buyer and Seller specifically
agree that time is of the essence for all purposes with respect to this
Agreement and the transactions contemplated hereby.
1.9 Preliminary Balance Sheet and Final Balance Sheet. On the Closing
Date, Seller shall present Buyer with a list of the balances of the Assets and
the Liabilities as of a date 3 business days prior to the Closing Date,
certified by the Chief Executive Officer or Chief Financial Officer of Seller to
be true
4
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and correct as of the date reflected thereon (the "Preliminary Balance Sheet"),
and the parties will calculate all amounts pursuant to Sections 1.5 and 1.6 in
accordance with the amounts reflected on the Preliminary Balance Sheet. Within 3
days following the Closing Date, and when all the data with respect to the
Branches up to and including the Effective Time is available, Seller shall
present Buyer with a list of the balances of the Assets and the Liabilities as
of the Effective Time, certified by the Chief Executive Officer or Chief
Financial Officer of Seller to be true and correct as of the date reflected
thereon (the "Final Balance Sheet"). Additionally, Seller shall deliver to Buyer
a list of loans purchased, individually identified by account number, which list
shall be appended to the Bill of Sale. Subject to Buyer's rights of
indemnification pursuant to Section 11, the Final Balance Sheet shall become
final and binding on Buyer and Seller 10 business days after its delivery to
Buyer, unless Buyer gives written notice to Seller of its disagreement with
respect to any item included in such statement, including, without limitation,
any differences in application of method for calculating accrued interest
receivable. Seller and Buyer shall use reasonable efforts to resolve the
disagreement during the 10 day period following receipt by Seller of the notice.
If the disagreement is not resolved during such 10-day period, the parties agree
to follow the procedures set forth in Section 12.16 to resolve such dispute, and
such Final Balance Sheet shall be modified by any such resolution, whereupon the
Final Balance Sheet shall become final and binding. When the Final Balance Sheet
becomes final and binding, an appropriate adjusting settlement payment from
Seller to Buyer or from Buyer to Seller, as the case may be, will be made
together with accrued interest calculated at the federal funds rate in effect on
the Closing Date for the number of days elapsed between the Closing Date and the
date of such adjusting settlement payment.
1.10 Adjustments. All operating expenses and fees accrued or prepaid on or
prior to the Effective Time, including, without limitation, wages, salaries,
deposit insurance premiums, utility payments, telephone charges, prepaid rents,
property taxes, other ordinary operating expenses of the Branches and other
expenses related to the Assets or Liabilities, shall be prorated between the
parties as of the Effective Time. All real property taxes with respect to the
Real Property shall be prorated based upon the tax rate in effect as of the
Closing Date of the appropriate taxing authority. All amounts prepaid on Safe
Deposit Contracts shall be prorated through the Effective Time, and all deposits
paid thereon shall be paid to Buyer. Notwithstanding Seller's normal practices
and procedures, to the extent that Seller has paid expenses that are expenses
allocable to Buyer pursuant to this Section 1.9, such expenses shall appear as
"Prepaid Expenses" on the Preliminary Balance Sheet, or, if not allocable as of
the date the Preliminary Balance Sheet is calculated (the "Preliminary Balance
Sheet Date"), on the Final Balance Sheet. Notwithstanding Seller's normal
practices and procedures, to the extent that expenses have been incurred but not
paid by Seller on or prior to the Effective Time, they shall appear as an
"Accrued Expense" on the Preliminary Balance Sheet or, if not incurred by the
Preliminary Balance Sheet Date, on the Final Balance Sheet.
1.11 Deliveries by Seller at the Closing. At the Closing, Seller shall
execute, acknowledge and deliver to Buyer in recordable form as appropriate, and
with third party consents and releases of liens and security interests when
required, certificates and other instruments of sale, conveyance, transfer and
assignment relating to all of the Assets, and containing warranties consistent
with the representations and warranties contained in this Agreement, including
without limitation, the following (all of such actions constituting conditions
precedent to Buyer's obligations to close hereunder):
A. A general warranty bill of sale covering the Personal Property;
B. A special warranty deed conveying good and indefeasible fee
simple title to the Real Property, subject only to ad valorem taxes for the
year in which the Closing occurs and the Permitted Exceptions;
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C. Documents properly endorsed for transfer reflecting the
assignment of all notes, guaranties, security agreements and any other
agreements to inure to the benefit of Buyer with respect to the Loans, and
possession of any escrow deposits relating to the Loans;
D. All collateral security of any nature whatsoever held by Seller
as collateral for any of the Assets;
E. All of the Records;
F. The Preliminary Balance Sheet.
G. The Cash on Hand and such of the other Assets that are capable of
physical delivery;
H. A certificate duly executed by an authorized officer of Seller,
dated as of the Closing Date, pursuant to which such officer shall certify
that all of the representations and warranties of Seller as set forth in
this Agreement are true and correct as of the Closing Date and that there
have been no material adverse changes in the condition of the Assets as of
the Closing Date;
I. A certificate duly executed by the Cashier or Secretary of Seller
pursuant to which such officer shall certify (i) the due adoption by the
Board of Directors of Seller of corporate resolutions attached to such
certificate authorizing the transaction and the execution and delivery of
this Agreement and the other agreements and documents contemplated hereby
and the taking of all actions contemplated hereby and thereby; and (ii) the
incumbency and true signatures of those officers of Seller duly authorized
to act on its behalf in connection with the transaction contemplated by
this Agreement and to execute and deliver this Agreement and other
agreements and documents contemplated hereby and the taking of all actions
contemplated hereby and thereby on behalf of Seller;
J. All documents, contracts, certificates, instruments, keys and
records necessary or appropriate to transfer the safe deposit and
safekeeping businesses, if any, of the Branches to Buyer;
K. Possession of the Assets and access to and keys to the Branches
and all security devices located at the Branches, together with security
codes for access to the Branches and combinations to all locking devices of
Seller located at the Branches;
L. A list, certified by an authorized officer of Seller, setting
forth all garnishments, similar court orders, tax liens and orders of any
governmental entity in effect with respect to the Deposits;
M. Payment to Buyer as may be required pursuant to Section 1.5 in
immediately available funds (such payment to be made at a time no later
than 12:00 Noon, Waxahachie, Texas time, on the Closing Date);
N. A Power of Attorney in a form to be mutually agreed upon by Buyer
and Seller;
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O. Such other documents as may be reasonably required by the Title
Company in connection with the issuance of the Title Policy; and
P. All other documents, certificates and instruments of conveyance,
transfer and assignment as are reasonably requested by Buyer or Buyer's
counsel. All instruments, agreements and certificates described in this
Section 1.10 shall be in form and substance reasonably satisfactory to
Buyer's legal counsel.
1.12 Deliveries by Buyer at the Closing. At the Closing, Buyer shall
execute, acknowledge and deliver to Seller, in recordable form as appropriate,
such documents and certificates necessary to carry out the terms and provisions
of this Agreement, including without limitation the following (all of such
actions constituting conditions precedent to Seller's obligations to close
hereunder):
A. An assignment and assumption agreement by which Buyer assumes the
Liabilities;
B. A certificate duly executed by an authorized officer of Buyer,
dated as of the Closing Date, pursuant to which such officer shall certify
that all of the representations and warranties of Buyer as set forth in
this Agreement are true and correct as of the Closing Date;
C. A certificate duly executed by the Cashier or Assistant Cashier
of Buyer pursuant to which such officer shall certify (i) the due adoption
by the Board of Directors of Buyer of corporate resolutions attached to
such certificate authorizing the execution and delivery of this Agreement
and the other agreements and documents contemplated hereby and the taking
of all actions contemplated hereby and thereby on behalf of Buyer, and (ii)
the incumbency and true signatures of those officers of Buyer duly
authorized to act on its behalf, in connection with the transaction and
this Agreement and to execute and deliver the Agreement on behalf of Buyer;
and
D. Such other documents, certificates and instruments as are
reasonably requested by Seller and Seller's counsel. All instruments,
agreements and certificates described in this Section 1.11 shall be in form
and substance reasonably satisfactory to Seller's legal counsel.
1.13 Closing Costs and Recording. Seller and Buyer shall each pay one-half
of any documentary, stamp or other transfer taxes, recording fees and escrow
fees relating to the sale of the Real Property. Except as otherwise specified in
this Agreement, Buyer shall be responsible for filing or recording any
instruments or documents evidencing, or otherwise notifying persons who are not
parties to this Agreement regarding, the consummation of the transactions
contemplated by this Agreement.
1.14 Further Assurances. From time to time following the Closing, at the
request of any party hereto and without further consideration, the other party
hereto shall execute and deliver to such requesting party such instruments and
documents and take such other action (but without incurring any material
financial obligation) as such requesting party may reasonably request in order
to consummate more fully and effectively the transactions contemplated hereby.
1.15 Personnel. The parties shall follow the following procedure in
dealing with employees of the Branches regarding employment after the Closing:
A. With respect to all employees of Seller affiliated with the
Branches ("Employees"), as soon as reasonably practicable, but no later
than 10 days after the date hereof, Seller shall notify each Employee that
Seller and Buyer have entered into an agreement with
7
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respect to the Buyer's acquisition of the Branches. Seller shall also
furnish to Buyer within such time period a schedule containing the name of
each Employee, such Employee's salary and benefits, and a synopsis of each
Employee's tenure with Seller and any other information reasonably
requested by Buyer with respect to such Employee, upon receipt by Seller of
each such Employee's consent to such delivery.
B. Within 20 days of receipt of information referred to in Section
A. above, Buyer shall (i) interview each of the Employees, (ii) deliver to
Seller a confidential list (the "Employment List") setting forth the
Employees to whom Buyer intends to offer employment beginning at the
Closing, the position to be offered to each such Employee and such
Employee's anticipated compensation and employee benefits (which Employment
List may not be changed prior to the Closing except upon mutual agreement
of Buyer and Seller, except that the terms of the Employment List shall not
be applicable with respect to the employment of any Employee who does not
accept employment with Buyer in accordance with the terms of this Section
1.14), and (iii) at a date to be mutually agreed upon by Seller and Buyer,
offer to each such Employee a position with Buyer on the terms reflected in
the Employment List with respect to such Employee. Each Employee will have
5 business days to accept or reject the offer made by Buyer to such
Employee. Each Employee who accepts the offer of employment made by Buyer
is hereinafter referred to as a "Designated Employee." If an Employee (i)
is not offered employment by Buyer or (ii) rejects Buyer's offer of
Employment with such five-day period, Seller may, at its option, approach
such Employee to discuss opportunities for such Employee to transfer to
other positions with Seller or its affiliates after the Closing. Seller
shall pay any and all costs (including without limitation, severance pay
and accrued vacation pay) associated with any transfer or termination of
any Employee of Seller other than the Designated Employees.
C. Buyer and Seller shall coordinate all communications of
employment offers to, or plans to terminate, any Employee; provided,
however, this paragraph shall not be construed to require Buyer and Seller
to act jointly at any time.
D. On the Closing Date, Buyer shall employ each of the Designated
Employees at the positions and with the compensation and benefits set forth
in the Employment List. Buyer shall not employ any Employees of Seller
prior to the Closing Date. Buyer shall not be obligated to make any
contribution to any plan or program on behalf of any of such employees, or
to otherwise provide any compensation or benefits to any of such employees,
with respect to any period prior to the Closing. It is further provided
that in no way shall Buyer be liable for any claims of any Designated
Employees or other employees of the Branches that any of them may have
against Seller.
E. Seller shall retain all liabilities and obligations (including,
without limitation, the liability and obligation for all wages, salary,
vacation pay and unemployment, medical, dental, vision, health, disability
and retirement benefits), for any claims incurred by any Employee prior to
the Effective Time. Buyer shall not at any time assume any liability for
the benefits of any Employee under any of Seller's plans. Seller shall be
responsible for providing any Employee whose "qualifying event," within the
meaning of section 4980B(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), occurs on or prior to the Effective Time (and such
Employee's "qualified beneficiaries" within the meaning of section 4980B(f)
of the Code) with the continuation of group health coverage required by
section 4980B(f) of the Code under the terms of the health plan maintained
by Seller.
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F. Nothing in this Section is intended, nor shall it be construed,
to confer any rights or benefits upon any person other than Buyer and
Seller.
G. Prior to the Closing Date, Seller shall reasonably cooperate with
Buyer, at Buyer's expense and at no expense to Seller, in making Employees
available to Buyer, its employees and representatives at reasonable times
for such training as Buyer deems advisable such times to be other than
during lobby hours; provided, however, Buyer shall conduct such training
program (some of which training may be conducted off-site from the
Branches) in a manner that does not materially interfere with or prevent
the performance of the normal duties and activities of such Employees or
the operation of the Branch at which such Employees are employed. Buyer
shall not be liable for the acts or omissions of Seller's agents or
employees.
H. Nothing in this Section is intended, nor shall it be construed,
to obligate Buyer to hire any current Employees of Seller.
I. Seller shall use its reasonable best efforts to maintain its
Employees as employees of the Seller at the Branches until the Closing
Date.
SECTION 2.
REAL ESTATE PROVISIONS
----------------------
2.1 Commitment for Title Insurance and Survey. Within 30 business days
from the date of this Agreement, Seller shall, at its expense, deliver to Buyer
and Buyer's counsel (a) a title commitment (including all documents, instruments
or agreements evidencing or creating the exceptions referenced in such
commitment) (the "Commitment") issued by Ellis County Abstract & Title,
Waxahachie, Texas (the "Title Company") covering the Real Property and (b) a
land title survey of the Real Property, prepared and certified as to all matters
shown thereon by a surveyor licensed by the State of Texas (the "Survey"), which
Survey shall include a notation stating whether or not any portion of the Real
Property is located in a 100-year flood plain, flood-prone area of special flood
hazard and shall show the specific location of any portions of the Real Property
that may be located in any such flood areas. The Commitment shall reflect that
Buyer has good and indefeasible title to the Real Estate, subject only to (1)
any shortages in area, (2) taxes for 1999 and subsequent years and subsequent
assessments for prior years due to a change in land usage or ownership, (3)
existing building and zoning ordinances, (4) utility easements, reservations or
other exceptions accepted or deemed waived by Buyer.
2.2 Objections and Remedies. If the Commitment contains any exceptions
other than those described in Section 2.1, Buyer may object to such exceptions
by providing written notice of such objection on or before the close of business
on the fifth business day after delivery of the Commitment and the Survey to
Buyer. All objections raised by Buyer are referred to herein as the
"Objections". Within 30 days after receipt of the Objections, Seller shall
either (i) remedy or remove all Objections, or (ii) notify Buyer that Seller has
elected not to remedy or remove some or all of the Objections. In the event
Seller gives the notice set forth in the preceding clause (ii) of this Section
2.3, or in the event Seller fails to remedy or remove all Objections within said
30-day period, Buyer may (as its sole remedy) on or before close of business on
the fifth business day after such 30-day period (or, if applicable, on or before
close of business on the fifth business day after receipt of Seller's notice),
terminate this Agreement in its entirety by giving Seller written notice,
whereon this Agreement shall terminate and have no further force and effect
except as set forth in Section 11.3 hereof. If Buyer fails to terminate within
such 5-business day period, Buyer shall be deemed to have waived its Objections.
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2.3 Title Insurance Policy. At the Closing, Seller shall, at its expense,
cause the Title Company to issue a Texas Owner's Policy of Title Insurance,
covering the Real Estate in the amount equal to its Net Book Value as of the
Closing Date. Such policy shall guarantee Buyer's title to the Real Property to
be good and indefeasible subject only to the exceptions set forth in Section 2.1
(the "Permitted Exceptions").
2.4 Environmental Investigation
A. Buyer and its consultants, agents and representatives, shall have
the right to the same extent that Seller has such right, but not the
obligation or responsibility, to inspect the Properties, including, without
limitation, conducting asbestos surveys and sampling, environmental
assessments and investigation, and other environmental surveys and analyses
including soil and ground sampling ("Environmental Inspections") at any
time on or prior to 20 days after the date hereof. Any Environmental
Inspection conducted by Buyer shall be at the expense of Buyer. Buyer
shall notify Seller prior to any physical inspections of the Properties,
and Seller may place reasonable restrictions on the time of such
inspections. If, as a result of any such Environmental Inspection, further
investigation ("Secondary Investigation") including, without limitation,
test borings, soil, water and other sampling is deemed desirable by Buyer,
Buyer shall (i) notify Seller of any Property for which it intends to
conduct such a Secondary Investigation and the reasons for such Secondary
Investigation, and (ii) commence such Secondary Investigation, on or prior
to 40 days after the date hereof. Any Secondary Investigation conducted by
Buyer shall be at the expense of Buyer. Buyer shall give reasonable notice
to Seller of such Secondary Investigations, and Seller may place reasonable
time and place restrictions on such Secondary Investigations.
B. Seller agrees to indemnify and hold harmless Buyer for any claims
for damage to property, or injury or death to persons, made as a result of
any Environmental Inspection or Secondary Investigation conducted by Buyer
or its agents, which damage or injury is attributable to the negligent
actions or negligent omissions of Seller or its agents. Buyer agrees to
indemnify and hold harmless Seller for any claims for damage to property,
or injury or death to persons, attributable to the negligent actions or
omissions of Buyer or its agents in performing any Environmental Inspection
or Secondary Investigation. Buyer shall not have any liability or
responsibility of any nature whatsoever for the results, conclusions or
other findings related to any Environmental Inspection, Secondary
Investigation or other environmental survey. If this Agreement is
terminated, then except as otherwise required by law, reports to any
governmental authority of the results of any Environmental Inspection,
Secondary Investigation or other environmental survey shall be made by
Seller and not by Buyer. Buyer shall make no such report prior to the
Closing unless required to do so by law, and in such case will give Seller
reasonable notice of Buyer's intentions.
C. Buyer shall have the right to terminate this Agreement if (i) the
results of such Environmental Inspection, Secondary Investigation or other
environmental survey are disapproved by Buyer because the environmental
inspection, Secondary Investigation or other environmental survey
identifies violations or potential violations of Environmental Laws; (ii)
Seller has refused to allow Buyer to conduct an Environmental Inspection or
Secondary Investigation in a manner that Buyer reasonably considers
necessary; (iii) the Environmental Inspection, Secondary Investigation or
other environmental survey identifies any past or present event, condition
or circumstance that would or potentially would require remedial or cleanup
action or result in a material adverse change in the Assets or the business
of such Branch; (iv) the presence of any underground or above ground
storage tank in, on or under any Property that is not shown to be in
compliance with all Environmental Laws applicable to the tank either now or
at a future time certain, or that has had
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a release of petroleum or some other Hazardous Material that has not been
cleaned up to the satisfaction of the relevant governmental authority or
any other party with a legal right to compel cleanup. Promptly upon receipt
of all reports associated with the Environmental Inspections and any
Secondary Investigation, Buyer shall notify Seller in writing if Buyer
intends to terminate this Agreement pursuant to this Section 2.5. Seller
shall have the opportunity to correct any objected to violations or
conditions to Buyer's reasonable satisfaction for a period of 10 days after
such notice. If Seller fails to demonstrate its satisfactory correction of
the violations or conditions to Buyer, Buyer may terminate this Agreement
at any time after such 10-day period.
D. Seller agrees to make available to Buyer and its consultants,
agents and representatives all documents and other material relating to
environmental conditions of the Property including, without limitation, the
results of other environmental inspections and surveys. Seller also agrees
that all engineers and consultants who prepared or furnished such reports
may discuss such reports and information with Buyer and shall be entitled
to certify the same in favor of Buyer and its consultants, agents and
representatives and make all other data available to Buyer and its
consultants, agents and representatives.
E. The term "Environmental Laws" means the common law and all
federal, state, local and foreign laws or regulations, codes, orders,
decrees, judgments or injunctions issued, promulgated, approved or entered
thereunder, now or hereafter in effect, relating to pollution or protection
of public or employee health or safety or the environment, including,
without limitation, laws relating to (i) emissions, discharges, releases or
threatened releases of Hazardous Materials, into the environment
(including, without limitation, ambient air, indoor air, surface water,
ground water, land surface or subsurface strata), (ii) the manufacture,
processing, distribution, use, generation, treatment, storage, disposal,
transport or handling of Hazardous Materials, and (iii) underground and
above ground storage tanks, and related piping, and emissions, discharges,
releases or threatened releases therefrom.
F. The term "Property" or "Properties" consists of: (i) all real
property owned or leased by Seller relating to the Branches, including but
not limited to the Real Property.
G. The term "Hazardous Material" means any pollutant, contaminant,
chemical, or toxic or hazardous substance, constituent, material or waste,
or any other chemical, substances, constituent or waste including, without
limitation, petroleum, including crude oil or any fraction thereof, or any
petroleum product.
2.5 Destruction or Damage Prior to Closing. In the event of damage to or
destruction of all or any portion of the Real Property by fire or other casualty
prior to the Effective Time, Seller will promptly notify Buyer of the nature and
extent of such damage or destruction, the amount estimated to be necessary to
repair or restore the Real Property, the amount, if any, of Seller's insurance
proceeds that are available to make such repairs or restoration and the
estimated period of time it will take to make such repairs and restoration. The
rights and obligations of the parties by reason of such damage or destruction
shall be as follows:
A. If the estimated time for completion of the repairs to the Real
Property is three months or less, then Buyer, at Buyer's option, may (i)
take title to the Real Property subject to such damage or destruction with
Seller assigning to Buyer all Seller's rights to proceeds of insurance
carried by Seller and payable as a result of such damage or destruction, or
(ii) request that Seller cause the repairs to be made, in which case Seller
shall cause the repairs to be made and the Closing Date shall be extended
until the repairs are completed.
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B. If the estimated time for completion of the repairs to the Real
Property is more than three months, then Buyer, at Buyer's option, may (i)
take title to the Real Property subject to such damage or destruction with
Seller assigning to Buyer all Seller's rights to proceeds of insurance
carried by Seller and payable as a result of such damage or destruction,
(ii) subject to (c) below, request in writing (the "Buyer's Repair
Request") that Seller cause the repairs to be made, in which case Seller
shall cause the repairs to be made and the Closing Date shall be extended
until the repairs are completed, or (iii) terminate this Agreement by
giving written notice to such effect to Seller not later than 10 days after
receipt of written notice from Seller notifying Buyer of the estimated time
needed for repair, whereupon this Agreement shall terminate and have no
further force or effect except as set forth in Section 11.3.
C. In the event Buyer requests that Seller repair the Real Property
pursuant to (b)(ii) above, Seller, shall have the option to terminate this
Agreement by giving notice to such effect to Buyer not later than 10 days
after receipt of Buyer's Repair Request, whereupon this Agreement shall
terminate and have no further force or effect except as set forth in
Section 11.3.
SECTION 3.
REPRESENTATIONS AND WARRANTIES OF SELLER
----------------------------------------
Seller represents and warrants to Buyer as follows:
3.1 Organization and Standing. Seller is a national banking association
duly organized, validly existing and in good standing under the laws of the
United States, and has full power and authority (including all licenses,
franchises, permits and other governmental authorizations as are legally
required) to own, operate and/or lease its properties and to carry on the
business and activities now conducted by it. Seller is an insured financial
institution as defined in the Federal Deposit Insurance Act, and all of the
Deposits are insured by the Bank Insurance Fund. Seller has all requisite
corporate power to enter into this Agreement with Buyer, to carry out its
obligations under this Agreement and to consummate the transactions contemplated
hereby.
3.2 Execution and Delivery. Seller has taken all corporate and
shareholder action, if any, necessary to authorize the execution, delivery and
(provided the required regulatory approvals are obtained) performance of this
Agreement and the other agreements and documents contemplated hereby to which it
is a party. This Agreement has been, and the other agreements and documents
contemplated hereby have been or at Closing will be, duly executed by Seller
constituting the valid and binding obligation of Seller, enforceable in
accordance with their respective terms and conditions, except as enforceability
may be limited by bankruptcy, insolvency, reorganization or similar laws and
judicial decisions affecting the rights of creditors generally and by general
principles of equity (whether applied in a proceeding at law or in equity).
3.3 Compliance with Laws, Permits and Instruments. To the knowledge of
Seller, the Branches have been operated in all material respects in accordance
with applicable laws, rules and regulations. The execution, delivery and
(provided the required regulatory and shareholder approvals are obtained)
performance of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with, or result, by itself or with the
giving of notice or the passage of time, in any violation of or default under,
any provision of the Articles of Association or Bylaws of Seller or any material
mortgage, indenture, lease, agreement or other instrument or any permit,
concession, grant, franchise, license, contract, authorization, judgment, order,
decree, writ, injunction, statute, law, ordinance, rule or regulation applicable
to Seller or its properties.
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3.4 Litigation. There are no actions, claims, suits, investigations or
proceedings pending or, to Seller's knowledge, threatened (or any basis therefor
known by Seller) affecting the Assets or Liabilities at law or in equity, or by
or before any governmental department, commission, board, bureau, agency or
instrumentality, that involve any claim not fully covered by insurance. No
legal action, suit or proceeding or judicial, administrative or governmental
investigation is pending or, to the knowledge of Seller, threatened against
Seller that questions or might question the validity of this Agreement or any
actions taken or to be taken by Seller pursuant hereto or seeks to enjoin or
otherwise restrain the transactions contemplated hereby.
3.5 Consents. Other than governmental approvals contemplated by Section
7.3, no approval, consent, authorization or action of, filing with, any
governmental body or other third party is required on the part of Seller in
connection with (a) the execution, delivery or performance by Seller of this
Agreement and the other agreements and documents contemplated hereby or (b) the
consummation by Seller of the transactions contemplated hereby.
3.6 Title to Assets. Except for Permitted Exceptions, Seller has good
and marketable title, free and clear of all security interests, mortgages,
encumbrances, pledges, trust agreements, liens or other adverse claims to any of
the Assets. No person or entity other than Seller has any right, title or
interest in and to any of the Assets. Upon payment by Buyer of the amounts
contemplated by this Agreement, Buyer will acquire good and indefeasible title
to the Assets, free and clear of any lien, charge, encumbrance, option or
adverse claim, other than Permitted Exceptions.
3.7 Real Property. Schedule 1.1(C) contains an accurate and complete
description of the Real Property. Seller has received no notice of, or is not
otherwise aware of, any proposed condemnation or eminent domain proceeding with
respect to the Real Property or any portion thereof. Except as specifically set
forth herein or disclosed to Buyer in writing within 30 business days after the
execution of this Agreement, Seller has not entered into any agreement regarding
the Real Property, and the Real Property is not subject to any claim, demand,
suit, proceeding or litigation of any kind, pending or outstanding, or to the
knowledge of Seller, threatened or likely to be made or instituted, that would
in any way be binding upon Buyer or its successors or assigns or materially
affect or limit Buyer's or its successors' or assigns' use and enjoyment of the
Real Property or that would materially limit or restrict Buyer's right or
ability to enter into this Agreement and consummate the sale and purchase
contemplated hereby. To Seller's best knowledge and belief, the Real Property
and collateral underlying the Loans are free from contamination with Hazardous
Materials.
3.8 Financial Statements. Seller has provided Buyer with daily statements
and trial balances that fairly present, in all material aspects, the financial
condition of the Branches in accordance with generally accepted accounting
principles, including a list of overdrafts, past due Loans, new and renewed
Loans and new and closed accounts, with respect to the Assets and Liabilities of
the Branches as of March 31, 1999 (the "Financial Statements");
3.9 Absence of Certain Changes or Events. Since March 31, 1999, with
respect to its Branches, Seller has conducted its business only in the ordinary
course and has not, other than in the ordinary course of business and consistent
with past practices and safe and sound banking practices:
A. Incurred any obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due;
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B. Mortgaged, pledged or subjected to lien, charge, security
interest or any other encumbrance or restriction any of the Assets;
C. Sold, transferred, leased to others or otherwise disposed of any
of the Assets;
D. Terminated, canceled or surrendered, or received any notice of or
threat of termination or cancellation of any contract, lease or other
agreement or suffered any damage, destruction or loss (whether or not
covered by insurance) which, in any case or in the aggregate, has had a
materially adverse affect on the Assets;
E. Suffered any change, event or condition that, in any case or in
the aggregate, has had or may have a materially adverse effect on the
Assets or the Liabilities; or
F. Entered into any agreement or made any commitment to take any of
the types of action described in subsections A. through E. above.
3.10 Contracts. There are no agreements, contracts or commitments
affecting the Assets to which Seller is a party and that require consent by any
other person or entity in connection with the consummation of the transactions
contemplated hereby either to prevent a breach or to continue the effectiveness
thereof.
3.11 No Adverse Change. To the knowledge of Seller, and except as
disclosed in the representations and warranties made hereunder, there has been
no material adverse change nor any event or condition that has had, nor has a
reasonable possibility of having in the future, a material adverse change,
financial or otherwise, in the Assets or Liabilities since March 31, 1999. No
material liabilities affecting the Branches have been incurred since March 31,
1999, other than those arising from normal transactions in the ordinary course
of business that have been or will be disclosed to Buyer in writing prior to the
Closing Date.
3.12 Evidences of Indebtedness. To the knowledge of Seller, all evidences
of indebtedness and leases reflected as Assets of Seller associated with the
Branches are legal, valid and binding obligations of the respective obligors
thereof enforceable in accordance with their respective terms (except as limited
by applicable bankruptcy, insolvency, reorganization and similar laws affecting
creditors generally and the availability of injunctive relief, specific
performance, and other equitable remedies) and are not subject to any defenses,
offsets or counterclaims that may be asserted against Seller or the present
holder thereof. Anything herein to the contrary notwithstanding, Seller does not
guarantee collectibility of any of the Loans.
3.13 Books and Records. To the knowledge of Seller, the books and records
of the Branches of Seller have been kept accurately in the ordinary course of
business, the transactions entered therein represent bona fide transactions and
the revenues, expenses, assets and liabilities of Seller have been properly
recorded in such books and records.
3.14 Regulatory Compliance. To the knowledge of Seller, and except as
disclosed in writing to Buyer, all reports, records and other documents or
information involving any of the Assets or the Liabilities or the operation of
the Branches that are required to be filed by Seller with any regulatory
authority including, without limitation, the OCC, the Federal Deposit Insurance
Corporation and the Internal Revenue Service have been duly and timely filed and
all information and data contained in such reports, records or other documents
is true, accurate and correct.
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3.15 Brokerage Fees. Seller has not paid or agreed to pay any fee or
commission to any agent, broker, finder or other person for or as a result of
services rendered as a broker or finder in connection with this Agreement or the
transactions covered and contemplated hereby. All negotiations relating to this
Agreement have been conducted by Seller directly and without the intervention of
any person in such manner as to give rise to any valid claim against Seller for
any brokerage commission or like payment.
3.16 Employee Matters. Schedule 3.16 lists the names of all Employees as
of the date specified thereon and states for each such individual his or her
position, dates of employment with Seller, years of service and present
compensation.
3.17 Representations Not Misleading. No representation or warranty by
Seller contained in this Agreement, and no statement made by Seller contained in
any other agreement or document contemplated hereby, contains or will contain
any untrue statement of material fact or omits or will omit to state any
material fact necessary to make the statements herein or therein, in light of
the circumstances under which it was or will be made, not misleading.
SECTION 4.
REPRESENTATIONS AND WARRANTIES OF BUYER
---------------------------------------
Buyer represents and warrants to Seller as follows:
4.1 Organization and Standing. Buyer is a national banking association
duly organized, validly existing and in good standing under the laws of the
United States and has full power and authority (including all licenses,
franchises, permits and other governmental authorizations that are legally
required) to own, operate and lease its properties and to carry on the business
and activities now conducted by it. Buyer has all requisite corporate power to
enter into this Agreement and carry out its obligations under this Agreement and
to consummate the transactions contemplated hereby.
4.2 Execution and Delivery. Buyer has taken all corporate action
necessary to authorize the execution, delivery and (provided the required
regulatory approvals are obtained) performance of this Agreement and the other
agreements and documents contemplated hereby to which it is a party. This
Agreement has been, and the other agreements and documents contemplated hereby
have been or at Closing will be, duly executed by Buyer, and each constitutes
the legal, valid and binding obligation of Buyer, enforceable in accordance with
their respective terms and conditions, except as enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws and judicial decisions
affecting the rights of creditors generally and by general principles of equity
(whether applied in a proceeding at law or in equity).
4.3 Compliance with Laws, Permits and Instruments. The execution,
delivery and (provided the required regulatory and shareholder approvals are
obtained) performance of this Agreement and the consummation of the transactions
contemplated hereby will not conflict with, or result, by itself or with the
giving of notice or the passage of time, in any violation of or default under,
any provision of the Articles of Association or Bylaws of Buyer or any material
mortgage, indenture, lease, agreement or other instrument or any permit,
concession, grant, franchise, license, contract, authorization, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Buyer or its
properties. No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority or other third party is
required in connection with the execution and delivery of this Agreement by
Buyer or the consummation by Buyer of the transactions contemplated hereby,
except for filings required in order to obtain the required regulatory
approvals, as described in Section 7.3.
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4.4 Litigation. No legal action, suit or proceeding or judicial,
administrative or governmental investigation is pending or, to the knowledge of
Buyer, threatened against Buyer that questions or might question the validity of
this Agreement or any actions taken or to be taken by Buyer pursuant hereto or
seeks to enjoin or otherwise restrain the transactions contemplated hereby.
4.5 Consents. Other than the approvals described in Section 7.3, no
approval, consent, authorization or action of, filing with, any governmental
body or other third party is required on the part of Buyer in connection with
(a) the execution, delivery or performance by Buyer of this Agreement and the
other agreements and documents contemplated hereby or (b) the consummation by
Buyer of the transactions contemplated hereby.
4.6 Brokerage Fees. Buyer has not paid or agreed to pay any fee or
commission to any agent, broker, finder or other person for or as a result of
services rendered as a broker or finder in connection with this Agreement or the
transactions covered and contemplated hereby. All negotiations relating to this
Agreement have been conducted by Buyer directly and without the intervention of
any person in such manner as to give rise to any valid claim against Buyer for
any brokerage commission or like payment.
4.7 Disclosure. No representation or warranty by Buyer contained in this
Agreement, and no statement made by Buyer contained in any other agreement or
document contemplated hereby, contains or will contain any untrue statement of
material fact or omits or will omit to state any material fact necessary to make
the statements herein or therein, in light of the circumstances under which it
was or will be made, not misleading.
SECTION 5.
COVENANTS OF SELLER
-------------------
5.1 Best Efforts. Seller agrees to use its best efforts to cause the
consummation of the transactions contemplated hereby in accordance with the
terms and conditions of this Agreement.
5.2 Information for Governmental Applications. Seller shall promptly, but
in no event later than 10 business days after receipt of a request by Buyer,
furnish Buyer with all information concerning Seller required for inclusion in
any application or statement to be made by Buyer to or filed by Buyer with any
governmental body in connection with the transactions contemplated by this
Agreement, or in connection with any unrelated transactions during the pendency
of this Agreement, and Seller represents and warrants that all information so
furnished for such statements and applications shall be true and correct in all
material respects and shall not omit any material fact required to be stated
therein or necessary to make the statements made, in light of the circumstances
under which they were made, not misleading. Seller shall otherwise cooperate
with Buyer in obtaining all governmental and regulatory consents, approvals,
licenses, waivers and the like required to be fulfilled or obtained for the
completion of the transactions contemplated by this Agreement.
5.3 Required Acts of Seller. Prior to the Closing, Seller shall, unless
otherwise permitted in writing by Buyer, and as such acts relate to the
Branches:
A. Operate the Branches in the ordinary course of business;
B. Use all reasonable efforts to preserve its business organization
intact and to retain its present customers, depositors, suppliers, officers
and employees;
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C. Act in a manner that will preserve or attempt to preserve its
goodwill;
D. Perform all of its obligations under contracts, leases and
documents relating to or affecting its assets, properties and business
associated with the Branches, except such obligations as Seller may in good
faith reasonably dispute;
E. Maintain all Real Property and Personal Property in its current
operating condition and repair, ordinary wear and tear excepted;
F. Maintain in full force and effect all insurance policies now in
effect or renewals thereof and give all notices and present all claims
under all insurance policies in due and timely fashion;
G. Timely file all reports required to be filed with governmental
authorities and observe and conform to all applicable laws, rules,
regulations, ordinances, codes, orders, licenses and permits;
H. Timely file all tax returns required to be filed by it and
promptly pay all taxes, assessments, governmental charges, duties,
penalties, interest and fines that become due and payable;
I. Withhold from each payment made to each of its employees the
amount of all taxes (including, but not limited to, Federal income taxes,
FICA taxes and state and local income and wage taxes) required to be
withheld therefrom and pay the same to the proper tax receiving officers;
J. Continue to follow and implement policies, procedures and
practices regarding the identification, monitoring, classification and
treatment of all assets in substantially the same manner as it has in the
past; and
K. Cooperate with and assist Buyer in assuring the orderly
transition of the business of the Branches to Buyer from Seller, including
permission by Seller to meet regularly with Seller's Chief Lending Officer,
Mr. Lloyd Butts, and to receive reports from Mr. Butts regarding any
matters related to the assets or liabilities of the Branches to be acquired
by Buyer. If the Acquisition is finally disapproved by any appropriate
regulatory authority, the Buyer's representatives will no longer be
entitled to receive such reports.
5.5 Prohibited Acts of Seller. Prior to the Closing, Seller shall
not, without the prior written consent of Buyer:
A. Introduce any new material method of management or operation of
the Branches:
B. Take any action that may result in a material adverse change in
the business of the Branches or the Assets;
C. Take or fail to take any action that would cause or permit the
representations made in Section 3 to be inaccurate at the time of the
Closing or preclude Seller from making such representations and warranties
at the time of the Closing;
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D. Default with respect to any provision of any insurance policy now
or hereafter in effect relating to the Branches;
E. Enter into any transaction affecting any Asset or Liability other
than in the ordinary course of business;
F. Make, or incur any obligation to make, any capital expenditures
or enter into any contracts to make such expenditures with respect to the
Branches, in either case in an aggregate amount not to exceed $10,000,
provided that Seller can make any emergency repairs required to restore the
Branches to a safe operating condition;
G. Make any material modifications, including, but not limited to,
any changes in collateral, repayment terms or interest rates, to the Assets
or Liabilities as a whole;
H. Sell, transfer, mortgage, encumber or otherwise dispose of any of
the Assets except for the disposition of Assets (other than the Real
Property) in the ordinary course of business; or
I. Cause the transfer from the Branches to Seller's other operations
of any deposits of the type included in the Liabilities, provided, however,
that Seller may transfer deposits to Seller's other branches or offices
upon the unsolicited request of the depositors; or
L. Pay more than prevailing market rates on deposits.
5.6 Access; Pre-Closing Investigation. Seller shall afford the officers
and authorized representatives of Buyer full access to the properties, books and
records of Seller pertaining to the Assets and Liabilities and employees of the
Branches in order that Buyer may have full opportunity to make such reasonable
investigation as it shall desire to make of the Assets and Liabilities,
including, without limitation, access sufficient to verify the value of the
Assets and the Liabilities and the satisfaction of the conditions precedent to
Buyer's obligations described in Section 7. Seller agrees at any time, and from
time to time, to furnish to Buyer as soon as practicable, any additional
information pertaining to the Assets and Liabilities that Buyer may reasonably
request.
5.7 Additional Financial Statements. Seller shall furnish Buyer with
Financial Statements as of each month end until the Closing Date for the
Branches.
5.8 Untrue Representations. Seller shall promptly notify Buyer in writing
if Seller becomes aware of any fact or condition that makes untrue, or shows to
have been untrue, in any material respect, any schedule or any other information
furnished to Buyer or any representation or warranty made in or pursuant to this
Agreement or that results in Seller's failure to comply with any covenant,
condition or agreement contained in this Agreement.
5.9 Notice of Adverse Changes, Litigation and Claims. Seller shall
promptly notify Buyer in writing if Seller becomes aware of (i) any fact or
condition that makes untrue, or shows to have been untrue, in any material
respect, any schedule or any other information furnished to Buyer or any
representation or warranty made in or pursuant to this Agreement or that results
in Seller's failure to comply with any covenant, condition or agreement
contained in this Agreement, (ii) any litigation, or any claim, controversy or
contingent liability that might become the subject of litigation, against Seller
or affecting the Branches, if such litigation or potential litigation might, in
the event of an unfavorable
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outcome, have a material adverse effect on the business, results of operations
or condition, financial or otherwise, of the Branches, (iii) any change that has
occurred or has been threatened (or any development has occurred or been
threatened involving a prospective change) in the business, financial condition,
operations or prospects of Seller that is or may reasonably be expected to have
a material adverse effect on the Assets or the Liabilities.
5.10 No Disclosure or Negotiation with Others. Seller shall prevent the
disclosure of any of the terms or conditions hereof to any other person except
for disclosure required by appropriate regulatory authorities, and as long as
this Agreement shall remain effective, Seller shall not, directly or indirectly,
nor shall it authorize any of its officers, directors, employees,
representatives or agents to, directly or indirectly, encourage, solicit or
initiate discussions or negotiations with, or discuss or negotiate with, or
provide any non-public information to, any corporation, partnership, person or
other entity or group (other than Buyer or an affiliate or an associate of Buyer
or an officer, partner, employee or other authorized representative of Buyer or
such affiliate or associate) concerning any merger, tender offer or other
takeover offer, sale of substantial assets, sale of shares of capital stock or
similar transaction involving the Assets or the Liabilities.
5.11 Notices to Customers. Prior to the Closing Date, Seller agrees to
mail or cause to be mailed, to each of the Depositors, each holder of a safe
deposit box domiciled at the Branches and to such other customers as may be
required by applicable law, such notice of contemplated transfer of the Assets,
the Liabilities or the operations of the Branches as may be required of Seller
as a condition of approval by any regulatory authority, or as otherwise may be
required by applicable law. Each such notice shall be in a form acceptable to
each party hereto, such approval not to be unreasonably withheld. Seller will
cooperate with Buyer in preparation and mailing of such notices.
SECTION 6.
COVENANTS OF BUYER
------------------
6.1 Best Efforts. Buyer agrees to use its best efforts to cause the
consummation of the transactions contemplated hereby in accordance with the
terms and conditions of this Agreement.
6.2 Regulatory Approvals. Buyer shall promptly, but in no event later
than 10 days after the date of this Agreement, unless delayed by Seller, file or
cause to be filed applications for all regulatory approvals required to be
obtained by Buyer in connection with the transactions contemplated hereby.
Buyer shall promptly respond to comments and requests for information received
from regulatory authorities. Buyer shall use its best efforts to obtain such
regulatory approvals at the earliest practicable time.
6.3 Notice of Adverse Changes, Litigation and Claims. Buyer shall
promptly notify Seller in writing if Buyer becomes aware of (i) any fact or
condition that makes untrue, or shows to have been untrue, in any material
respect, any schedule or any other information furnished to Buyer or any
representation or warranty made in or pursuant to this Agreement or that results
in Buyer's failure to comply with any covenant, condition or agreement contained
in this Agreement, or (ii) any litigation against Buyer if such litigation might
prevent consummation of the transactions contemplated by this Agreement.
6.4 Change of Name, Notice to Customers.
A. Prior to the Closing Date, Buyer agrees to mail or cause to be
mailed, to each of the Depositors, each holder of a safe deposit box
domiciled at the Branches and to such other
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customers as may be required by applicable law, such notice of contemplated
transfer of the Assets, the Liabilities or the operations of the Branches
as may be required as a condition of approval by any regulatory authority,
or as otherwise may be required by applicable law. Each such notice shall
be in a form acceptable to each party hereto, such approval not to be
unreasonably withheld.
B. After the Closing Date, Buyer shall, (i) as soon as practicable,
change the name on all documents and facilities relating to the Branches
from Seller's name to Buyer's name, and all signs and other trademarks or
logos identifying Seller as the owner and operator of the Branches shall be
returned to Seller; (ii) starting promptly after the Closing Date, mail
written notice by first class mail to all customers of the Branches as of
the Closing Date, all Depositors and all borrowers with respect to the
Loans, of the consummation of the transactions contemplated by this
Agreement, the form and substance of such notice being mutually
satisfactory to Buyer and Seller; and (iii) to the extent required by law,
give the notices required to be given by it pursuant to section 6 of the
Federal Real Estate Settlement Procedures Act, as amended.
6.5 Use of Name. It is understood that Seller is not transferring to
Buyer any right, title or interest in or to, or any right of license to use,
Seller's name in connection with the Branches or otherwise. No agency
relationship exists between the parties hereto. At no time, whether before or
after Closing Date, shall Buyer transact any business in the name of Seller or
use any forms, checks or receipts with Seller's name or any trademark or service
mark utilized by Seller thereon or in any way hold itself out as the actual or
apparent agent of Seller.
SECTION 7.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER
------------------------------------------------
All obligations of Buyer under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
any or all of which may be waived in whole or in part in writing by Buyer:
7.1 Compliance with Representations, Warranties and Agreements. The
representations and warranties made by Seller in this Agreement or in any
schedule delivered to Buyer pursuant hereto shall have been true and correct
when made and shall be true and correct as of the Closing with the same force
and effect as if such representations and warranties were made at and as of the
Closing, except with respect to those representations and warranties
specifically made as of an earlier date (in which case such representations and
warranties shall be true as of such earlier date). Seller shall have performed
or complied with all agreements, terms, covenants and conditions required by
this Agreement to be performed or complied with by Seller prior to or at the
Closing except as specifically provided to the contrary in this Agreement.
7.2 Necessary Corporate Actions. Seller shall have taken any and all
requisite corporate actions and other steps and secured any other corporate
approvals, including any requisite shareholders approval, necessary to authorize
and consummate this Agreement and the transactions contemplated hereby.
7.3 Governmental Approvals. Buyer shall have received approvals,
acquiescences or consents, all on terms and conditions acceptable to Buyer in
its sole discretion, from all necessary governmental agencies and authorities to
the transactions contemplated by this Agreement, including, but not limited to
the approval of the OCC and expiration of applicable waiting periods, for Buyer
to acquire the Assets and assume the Liabilities and to establish branches of
Buyer at each location of the Branches.
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Such approvals and the transactions contemplated hereby shall not have been
contested or threatened to be contested by any Federal or state governmental
authority or by any other third party by formal proceedings.
7.4 No Litigation. No action shall have been taken, and no statute,
rule, regulation or order shall have been promulgated, enacted, entered,
enforced or deemed applicable to the acquisition by any Federal, state or
foreign government or governmental authority or by any court, domestic or
foreign, including the entry of a preliminary or permanent injunction, that
would (a) make this Agreement or the transactions contemplated hereby illegal,
invalid or unenforceable (b) require the divestiture of a material portion of
the Assets or the Liabilities once acquired by Buyer, (c) impose material limits
in the ability of Buyer to consummate the Agreement or the transactions
contemplated hereby, (d) otherwise materially and adversely affect the Assets,
the Liabilities or the Branches or (e) if the Agreement or the transactions
contemplated hereby are consummated, subject Buyer or any officer, director or
employee of Buyer to criminal penalties or to civil liabilities. No action or
proceeding before any court or governmental authority, domestic or foreign, by
any government or governmental authority or by any other person, domestic or
foreign, shall be threatened, instituted or pending that would reasonably be
expected to result in any of the consequences referred to in clauses (a) through
(e) above.
7.5 No Material Adverse Change. Buyer shall have determined in good faith
that there has been no material adverse change in the business, properties,
operations or financial condition of any of the Branches or any of the Assets or
Liabilities in the aggregate since the date of this Agreement.
SECTION 8.
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER
-------------------------------------------------
All obligations of Seller under this Agreement are subject to the
fulfillment, prior to or at the Closing, of each of the following conditions,
any or all of which may be waived in whole or in part by Seller.
8.1 Compliance with Representations, Warranties and Agreements. The
representations and warranties made by Buyer in this Agreement shall have been
true and correct when made and shall be true and correct as of the Closing with
the same force and effect as if such representations and warranties were made at
and as of the Closing, except with respect to those representations and
warranties specifically made as of an earlier date (in which case such
representations and warranties shall be true as of such earlier date). Buyer
shall have performed or complied in all material respects with all agreements,
terms, covenants and conditions required by this Agreement to be performed or
complied with by Buyer prior to or at the Closing.
8.2 Governmental and Other Approvals. Buyer shall have received
approvals, acquiescences or consents to the transactions contemplated by this
Agreement from all necessary governmental agencies and authorities for the
transactions contemplated hereby, and Seller and Buyer shall have received
satisfactory evidence that such approvals have been obtained and that any
necessary waiting periods have passed or Buyer shall have notified Seller in
writing that such approvals, acquiescences or consents are reasonably expected
to be obtained in due course.
8.3 No Litigation. No action shall have been taken, and no statute,
rule, regulation or order shall have been promulgated, enacted, entered,
enforced or deemed applicable to the acquisition by any Federal, state or
foreign government or governmental authority or by any court, domestic or
foreign, including the entry of a preliminary or permanent injunction, that
would (a) make the Agreement or the transactions contemplated hereby illegal,
invalid or unenforceable or (b) if the Agreement or the
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transactions contemplated hereby is consummated, subject any officer, director
or employee of Seller to criminal or civil liability. No action or proceeding
before any court or governmental authority, domestic or foreign, by any
government or governmental authority or by any other person, domestic or
foreign, shall be threatened, instituted or pending that would reasonably be
expected to result in any of the consequences referred to in clauses (a) or (b)
above.
SECTION 9.
SURVIVAL OF REPRESENTATIONS, WARRANTIES, AGREEMENT AND OBLIGATIONS;
-------------------------------------------------------------------
INDEMNIFICATION.
---------------
9.1 Survival. The representations, warranties, obligations, covenants,
indemnities and agreements of Seller and Buyer contained in this Agreement shall
survive the Closing for nine months and shall continue thereafter. Such
representations, warranties, obligations, covenants, indemnities and agreements
shall not be affected by, and shall remain in full force and effect
notwithstanding, any investigation at any time made by or on behalf of any party
hereto or any information any party may have with respect thereto.
9.2 Indemnification by Seller. Seller agrees, effective as of the
Closing, to pay, and to indemnify, save, defend and hold harmless Buyer and each
of its officers, directors, shareholders and representatives (collectively,
"Insiders"), from and against, and shall reimburse Buyer and its Insiders with
respect to, any and all damages, liabilities, losses, obligations, actions,
suits, disbursements, claims, deficiencies, penalties, interest, expenses,
fines, assessments, charges and costs (including, without limitation, reasonable
attorneys' and expert witness' fees, costs of investigation and court costs) of
every kind (collectively, "Losses"), imposed on, incurred by or asserted against
Buyer or its Insiders (or any of them) in any way relating to or arising from or
out of:
A. A breach, deficiency, inaccuracy or inadequacy of or in any
statement, representation or warranty of Seller contained in this
Agreement, or any schedule, certificate or other document delivered
pursuant hereto or as part of the transactions contemplated hereby;
B. Ownership or operation of each of the Branches or their
respective businesses and properties prior to the Effective Time;
C. Liabilities of Seller that are not expressly assumed by Buyer;
D. A breach of any covenant of Seller or the failure of Seller to
perform any agreement, covenant or obligation of Seller contained in this
Agreement or in any other agreement or document executed pursuant to this
Agreement,
E. Any taxes, including interest and penalties, required to be paid
by Seller or its successor, which relate to Seller's business or assets at
or prior to the Effective Time;
F. The termination of employment by Seller prior to the Effective
Time of any individual who is an officer or employee of Seller; and
G. All refunds or repayments made by Seller following the Effective
Time of credit life or single interest insurance premiums on policies that
were issued in connection with loans made by Seller prior to the Effective
Time and purchased by Buyer.
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Any claim for indemnification shall be applicable to each representation
independently, irrespective of whether such claim is consistent with any other
representation contained in this Agreement.
9.3 Indemnification by Buyer. Buyer hereby agrees, effective as of the
Closing, to pay, and to indemnify, save and hold harmless Seller from and
against, and shall reimburse Seller with respect to, any and all Losses imposed
on, incurred by or asserted against Seller in any way relating to or arising
from or out of:
A. A breach, deficiency, inaccuracy or inadequacy of or in any
statement, representation or warranty of Buyer contained in this Agreement,
or any schedule, certificate or other document delivered pursuant hereto or
as part of the transactions contemplated hereby;
B. Ownership or operation of each of the Branches or their
respective businesses and properties after the Effective Time;
C. Liabilities of Seller that are expressly assumed by Buyer;
D. A breach of any covenant of Buyer or the failure of Buyer to
perform any agreement, covenant or obligation of Buyer contained in this
Agreement or in any other agreement or document executed pursuant to this
Agreement,
Any claim for indemnification shall be applicable to each representation
independently, irrespective of whether such claim is consistent with any other
representation contained in this Agreement.
9.4 Limit on Indemnities. Notwithstanding any other provision hereof, the
rights of any party to be indemnified shall be subject to the following
limitations:
A. The indemnifying party shall pay claims hereunder when a claim
against the indemnified party has been established by a final judgment in
litigation or by settlement consented to in writing by Seller and Buyer;
and
B. The indemnifying party shall not be liable for any claim covered
by the indemnities under Sections 9.2 or 9.3 unless the indemnifying party
has been notified of such claim prior to the third anniversary of the
Closing Date.
SECTION 10.
OPERATIONAL AGREEMENTS
----------------------
10.1 Replacement of Customer Check Stock. Upon customer request, Buyer
shall forward to each Depositor new checks on Buyer's check stock, which checks
the Depositor may draw upon Buyer for the purpose of effecting transactions with
respect to such Deposits. The parties will use reasonable efforts to develop
procedures (i) that will cause checks drawn on Seller's form of check stock
against Deposits that are received after the Effective Time to be cleared
through Buyer's then current clearing procedures and (ii) to provide for the
orderly conversion of ATM and debit cards.
10.2 Payment of Checks, Drafts, and Orders. After the Effective Time,
Buyer agrees (i) to pay in accordance with applicable law, the Deposit
Agreements and customary banking practice all checks, drafts and withdrawal
orders properly drawn by Depositors and properly presented to Buyer by mail,
over its counters or through the check clearing system of the banking industry,
whether drawn on the checks, withdrawal or draft forms provided by Seller or by
Buyer, and (ii) in all other respects to discharge, in
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accordance with applicable law, the Depository Agreements and customary banking
practice in the usual course of its banking business, all duties and obligations
of Seller with respect to the balances due and owing to the Depositors. If any
of the Depositors shall demand payment from Seller for all or any part of any
Deposit, Seller shall not be liable or responsible for making such payment.
10.3 Uncollected Items. If an item included in the Deposits at the
Effective Time is returned to Seller after the Effective Time as uncollected (an
"Uncollected Item") within the first six months after the Closing Date, then:
A. Within one business day after receipt, Seller will fax to Buyer a
list reflecting the amount of such Uncollected Item, the date of deposit
and depositor's account number (if available) and Seller will forward a
consolidated collection request with the original Uncollected Item (a
"Collection Advice"), to Buyer.
B. Upon receipt of a Collection Advice, Buyer may place holds on the
respective customers' Deposits in an amount not less than the amount of the
Uncollected Item and may take any actions appropriate to ensure that such
Deposits are not withdrawn in accordance with normal procedures of Buyer.
C. Within 2 business days after receipt of such Collection Advice
and original Uncollected Item, Buyer will debit the available Deposits
and/or overdraw the depositor's account (except in such cases when Seller's
negligence is the basis of a defense by the customer to Buyer's right to
debit such accounts or overdraw such account) and return the paid
collection request to Seller. Uncollected Items that overdraw an account
balance shall be held by Buyer unless requested by Seller during the
collection process. Buyer will release Uncollected Items to depositors
only upon receipt of sufficient good funds to cover any deficient balances.
D. A list reflecting name, address, phone number and number of
accounts overdrawn $1,500 or more, resulting from Uncollected Items
forwarded by Seller being charged to the customer's account, shall be sent
to Seller on the date such item is charged back.
E. Unless Buyer consents otherwise, Seller will be responsible for
collecting overdrawn balances of Uncollected Items for thirty days and
older as of the Closing Date. Buyer will cooperate with Seller with
respect to providing information or records that may be needed to pursue
resolution of amounts due to Seller. Buyer will be responsible for
reasonable collection efforts on overdrawn balances of Uncollected Items
for less than 30 days as of the Closing Date.
F. After a period of 60 days from the date an account is charged for
an Uncollected Item and becomes overdrawn, Buyer will submit a collection
request to Seller for any remaining balances that could not be collected.
The original Uncollected Items received shall be returned with the
collection letter.
10.4 Data Processing and Utilities.
A. Following the receipt of all required regulatory approvals,
Seller shall assist Buyer in the transfer of all utilities relating to the
Branches, including the existing phone number for the Branches, into the
name of Buyer.
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B. From the date hereof through the Closing Date, Seller shall
cooperate and work with Buyer to complete the tasks required to facilitate
the conversion of the data processing operations of the Branches.
C. Within 15 days of the date of this Agreement, and as reasonably
requested by Buyer, Seller shall provide Buyer with initial computer data
on media acceptable to Buyer ("test tapes") to be used by Buyer solely to
assist in the conversion of the data processing operations of the Branches
to the data processing system of Buyer. Seller shall use best efforts to
provide any computer programming or changes in existing file layouts
related to any of the Assets or Liabilities that Buyer may reasonably
request. In addition, Seller shall deliver to Buyer final computer data on
media acceptable to Buyer ("final tapes") and deconversion reports as of
the Closing Date by not later than 10:00 a.m. local time on the day
immediately following the Closing Date. Such test tapes and final tapes
shall be in a format currently used by Seller, and Seller will reasonably
cooperate with Buyer in Buyer's conversion of such format to one which is
reasonably acceptable to Buyer. Such test tapes and final tapes shall
include master applications, specifications, file layouts, documentation of
the files transferred, and a description of the data in such files. Such
test tapes and final tapes shall contain such data that Buyer may
reasonably request, including, but not limited to, customer name, address,
account number, taxpayer identification number, deposit type, account
opening date, average collected balance, current balance, branch code,
interest method and frequency, maturity date, last rollover date, term, and
next interest payment due date. Seller warrants and represents that the
information based upon which such test tapes are created, and final tapes
shall be true and correct in all material respects as of the time given.
D. Seller agrees to reasonably cooperate in resolving any
conversion-related issues arising from the conversion of the accounts for a
period of 90 days following the date that the conversion is completed. If
Buyer requests, Seller shall reformat or data scrub the conversion tapes
and Buyer shall reimburse Seller for any costs and expenses incurred
by Seller in such reformatting or data scrubbing.
E. During the period following receipt of all necessary regulatory
approvals for the transaction until Closing Date, on a date and time
mutually agreeable to Buyer and Seller, Seller shall cooperate with and
permit Buyer, at Buyer's option and expense and at no expense to Seller, to
make provision for the installation of teller equipment in the Branches;
provided, however, that Buyer shall arrange for the installation of such
equipment at such times and in a manner that does not significantly
interfere with the normal business activities and operation of Seller or
the Branches.
10.5 Compliance with Garnishments and Similar Orders. After the Effective
Time, Buyer will comply in all material respects with any and all garnishments,
similar court orders, tax liens and order of any governmental entity in effect
with respect to the Deposits, and Buyer will not pay any Deposits in violation
of such garnishments, orders or tax liens or otherwise take any actions not
permitted pursuant thereto or pursuant to applicable law.
10.6 Direct Deposit Arrangements . Seller will use reasonable efforts to
transfer to Buyer on the Closing Date all of those automated clearing house and
Fed wire direct deposit arrangements that are tied by agreement or other
standing arrangement to the Deposits. For a period of 120 days, (the "Direct
Deposit Cut-off Date"), Seller will, no later than the next business day
following the date of receipt thereof, remit and transfer by electronic
transmission to Buyer all direct deposits intended for the Deposits. After the
Direct Deposit Cut-off Date, Seller may discontinue accepting and forwarding
automated-clearing-
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house and Fed-wire entries and funds and return such direct deposits to the
originators marked "Account Closed".
10.7 Direct Debit Arrangements. With respect to all Deposits that have
arrangements providing for direct debit of such accounts by third parties
("Direct Debit Accounts"), for a period of 120 days after the Closing Date,
Seller will forward to Buyer all direct debits on Direct Debit Accounts on the
business day following the date of receipt thereof, and will give Buyer a daily
accounting of such debits to Buyer's clearing account. Thereafter, Seller may
discontinue forwarding such entries and return them to the originators marked
"Account Closed".
10.8 IRA Deposits. With respect to Deposits that are individual retirement
accounts created by a trust for the exclusive benefit of an individual or his or
her beneficiaries in accordance with the provisions of section 408 of the Code
("IRA Deposits"), effective as of the Closing Date, Seller will resign as
custodian and Seller will appoint Buyer as successor custodian of all such IRA
Deposits, including but not limited to, sending to the depositors thereof
appropriate notices, and filing any appropriate applications with applicable
regulatory authorities. At the Effective Time, Buyer will accept appointment as
custodian with respect to such IRA Deposits and will perform all of the duties
so transferred and comply with the terms of Seller's agreement with the
depositor of the IRA Deposits affected thereby.
10.9 Keogh Accounts. With respect to Deposits that are Keogh Accounts
created by a trust for the benefit of employees and that comply with the
provisions of section 401 of the Code ("Keogh Accounts"), Seller will use
reasonable efforts and cooperate with Buyer to invite depositors thereof to
direct a transfer of each such depositor's Keogh Account and the related Deposit
to Buyer, as custodian thereof, and to adopt Buyer's form of Keogh master plan
as a successor to Seller's Keogh master plan. Buyer will assume no Deposits
that are Keogh Accounts unless Buyer has received the documents necessary for
such assumption or transfer at or before the Closing. With respect to any
depositors who do not transfer such Keogh Accounts to Buyer's form of Keogh
master plan, Seller will use reasonable efforts in order to enable Buyer to
retain such Keogh Accounts at the Branches.
10.10 Final Statements. Seller will render a final statement to each
Depositor of an account assumed under this Agreement as to transactions
occurring through the Effective Time and will comply with all laws, rules and
regulations regarding tax reporting of transactions of such accounts through the
Effective Time; provided, however, that Seller shall not be obligated to render
a final statement on any account not ordinarily receiving periodic statements in
the ordinary course of Seller's business. Seller will be entitled to impose
normal fees and service charges on a per-item basis, but Seller will not impose
periodic fees or blanket charges in connection with such final statements.
Seller shall provide magnetic records of final customer statements to Buyer.
10.11 IRA Deposits and Keogh Accounts. Seller will deliver to Buyer on
the Closing Date all of the documents in Seller's possession governing each IRA
Deposit and Keogh Account that is included in the Deposits. Seller will prepare
and file all reports to government authorities required to be filed for the
period ending on the Closing Date and all prior periods (except for filing IRS
Form 1099's for the calendar year in which the Closing occurs, for which filings
Buyer will be responsible pursuant to Section 10.12 A. and B.). Buyer will be
responsible for all such reporting for periods commencing on the day after the
Closing.
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10.12 Interest Reporting and Withholding.
A. For the period from January 1 of the year in which the Closing
occurs through the Closing Date, Seller will provide all information
necessary for Buyer to report to applicable taxing authorities and owners
of Deposits, all interest credited to, withheld from and any early
withdrawal penalties imposed upon the Deposits during such period
(collectively, the "Reported Amounts"). With respect to all periods
beginning on or after January 1 of the year in which the Closing occurs,
Buyer will report all Reported Amounts to applicable taxing authorities and
owners of Deposits.
B. With respect to any Accounts for which amounts are required by
any governmental agency to be withheld (the "Withholding Accounts"), Seller
will: (i) for the period from January 1, of the year in which the Closing
occurs through the Closing Date, report all Reported Amounts incurred
during such period on the Withholding Accounts to applicable taxing
authorities and to the owners of the Withholding Accounts; and (ii)
withhold any amounts required by any governmental agencies to be withheld
from the Withholding Accounts on or before the Closing Date in accordance
with applicable law or appropriate notice from any governmental agency and
remit such amounts to the appropriate agency on or prior to the applicable
due date; and Buyer will: (i) for the period from the day after the Closing
Date to the end of the calendar year (and all periods thereafter), report
all Reported Amounts incurred during such period on the Withholding
Accounts to applicable taxing authorities and to the owners of the
Withholding Accounts; and (ii) withhold any amounts required by any
governmental agencies to be withheld from the Withholding Accounts after
the Closing Date in accordance with applicable law or appropriate notice
from any governmental agency and remit such amounts to the appropriate
agency on or prior to the applicable due date.
C. Buyer shall report to applicable authorities and the borrowers of
the Loans all interest paid on such loans for the year in which such loans
are acquired by Buyer.
10.13 Loans. In connection with the transfer of the Loans, Seller and
Buyer agree as follows:
A. The parties will cooperate and use their best efforts to cause
Buyer to become the beneficiary of credit life, accident and health,
vendor's single interest premium or similar insurance purchased by or on
behalf of such customer on the Loans. For the duration of such insurance,
Seller and Buyer agree to cooperate in good faith to develop a mutually
satisfactory method by which the issuer of such insurance will make rebate
payments to and satisfy claims of the holders of such certificates of
insurance after the Effective Time.
B. Each of Buyer and Seller will use their best efforts to comply
with all notice and reporting requirements of the loan documents or of any
law or regulation with respect to the transfer of such loans.
C. Within 30 days after the Closing Date, Buyer may, at its expense,
issue new coupon books, if applicable, or similar payment notices for
payment of the Loans with instructions to use Buyer's coupons or statements
and to destroy unused coupons furnished by Seller.
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D. For a period of 60 days after the Closing Date, within 3 business
days after receipt by Seller of any check or money order made payable to
Seller representing payment on a Loan, Seller shall issue and forward a
cashier's check made payable to Buyer or wire transfer to the benefit of
Buyer in the amount of such item, and forward the item for collection. If
the item is returned unpaid, however, Seller shall promptly notify Buyer of
such item's return and shall forward the original of such item to Buyer.
Within 3 business days after receipt of such returned item, Buyer shall
issue and forward a cashier's check or wire transfer to Seller in the
amount of such item, and Buyer shall be responsible for any further efforts
to collect such item.
E. If the balance due on any Loan has been reduced by Seller as a
result of a payment by check received prior to the Closing Date, which item
is returned after the Closing Date, the asset value representing the Loan
transferred shall be correspondingly increased and an amount in cash equal
to such increase shall be paid by Buyer to Seller promptly upon demand.
F. The parties hereby agree that Seller makes no representations or
warranties as to whether the Loans are collectible.
10.14 Other Items. Following the Effective Time, Seller agrees to
deliver immediately, but in no event later than three (3) business days after
receipt by Seller, to Buyer any collected funds accepted by Seller for credit to
any account included in the Deposits, (iii) any refunds or reimbursements of
prepaid expenses included in the acquired Assets which are accepted by Seller
and (iv) any written notices or correspondence received by Seller relating to
the Deposits or the Loans.
10.15 Safe Deposit Box and Safekeeping Business. From and after the
Closing, Buyer agrees to assume and discharge, in the usual course of the
banking business, the duties and obligations of Seller with respect to all safe
deposit boxes located in the Branches, and to maintain all necessary facilities
for the use of such boxes by the renters thereof during the period for which
such persons have paid rent therefor in advance to Seller, subject to the
provisions of the rental agreements between Seller and the respective renters of
such boxes. From and after the Closing, Buyer shall assume, honor, and
discharge the duties and obligations of Seller with respect to all safekeeping
items obtained from Seller and shall be entitled to any right or benefit
heretofore accrued or hereafter accruing therefrom. At the Closing, Seller
shall provide Buyer with a true and correct list of all safe deposit rental
agreements and contracts with respect to the Branches in effect as of the
Closing Date, together with the rentals or other amounts paid on such agreements
and contracts and the expiration dates of such contracts.
10.16 Noncompetition Agreement. For and in consideration of the purchase
by Buyer of the Assets and the assumption of the Liabilities, the payment of the
Purchase Premium and the other agreements and covenants contained in this
Agreement, Seller agrees as follows:
A. From the date hereof and for a period of three years following
the Closing Date, Seller and the officers, directors and employees of
Seller (for so long as they are employed by Seller) will not (i) establish,
own or operate a branch or other office within Ellis County, Texas, (ii)
other than banking services offered to the public generally via the
Internet, and insurance premium finance marketing efforts in place with
insurance agencies, solicit the banking business of any current customers
of the Branches whose banking business or any part thereof is transferred
to Buyer pursuant to the terms of this Agreement, or (iii) recruit, hire,
assist others in recruiting or hiring, discuss employment with, or refer to
others concerning employment, any person who is, or within the preceding 12
months was, a Designated Employee or an employee of Buyer.
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B. If any court of competent jurisdiction should determine that any
term or terms of this covenant are too broad in terms of time, geographic
area, lines of commerce or otherwise, such court shall modify and revise
any such term or terms so that they comply with applicable law. Seller
hereby acknowledges and agrees that Buyer will be irreparably damaged if
the provisions of this Section 10.16 are not specifically enforced.
Accordingly, Buyer shall be entitled to an injunction restraining any
violation of this Section 10.16 by Seller (without any bond or other
security being required), or any other appropriate decree of specific
performance. Such remedies shall not be exclusive and shall be in addition
to any other remedy that Buyer may have at law or in equity.
10.17 Books and Records. Buyer shall allow Seller and its authorized
agents and representatives to inspect any of the Records for any proper purpose
during regular business hours after the Closing Date upon reasonable notice to
Buyer (which notice shall specify the purpose of such inspection), and Seller
may, at its own expense, make such copies of and excerpts from such books and
records as it may deem desirable; provided, however, that all information,
including copies of books and records, obtained by Seller from Buyer pursuant to
this Section 10.17 shall be and remain confidential information known to Seller
or otherwise contained in Seller's books and records. Buyer shall maintain all
material books and records relating to the Assets, the Liabilities and the
business of the Branches for a period that is not less than the greater of (i)
the period required by applicable law, rule or regulation or (ii) three (3)
years from the Closing Date.
10.18 Taxes. Buyer shall be responsible for the payment of all taxes
arising as a result of the purchase of the Assets; except that Buyer shall not
be responsible for, or have any liability with respect to, taxes on any income
to Seller arising out of this transaction. Seller shall cooperate with Buyer in
Buyer's efforts to minimize all taxes payable by Buyer, if any, as a result of
the transactions contemplated by this Agreement.
10.19 Clearing Items. During the 120-day period following the Closing
Date, if it is not possible to clear checks and other items drawn on a Deposit
account through Buyer's then current clearing procedures, Seller will make
provisional settlement to the presenting institution and will forward such
checks and other items on such Deposit to Buyer, no later than the next business
day after receipt thereof, and Buyer will reimburse Seller for such provisional
settlement. Upon the expiration of such 120-day period, Seller shall cease
forwarding checks and other debits against the Deposit accounts and return them
to the originators marked "Account Closed". Upon timely presentation to Buyer,
Buyer will assume all responsibility for such items (except for such items that
have not been handled by Seller in accordance with applicable law or regulation,
or with ordinary care), including but not limited to determining whether to
honor or dishonor such items and giving any required notification for the return
of items.
SECTION 11.
TERMINATION AND ABANDONMENT
---------------------------
11.1 Right of Termination. This Agreement and the transactions
contemplated hereby may be terminated and abandoned at any time prior to or at
the Closing as follows, and in no other manner:
A. By the mutual consent of Seller and Buyer;
B. By either Buyer or Seller, if the Closing has not occurred by
September 30, 1999, or such other date as Seller and Buyer shall agree in
writing, unless the failure to so consummate by such time is due to a
breach of this Agreement by the party seeking to terminate;
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C. By Buyer if Buyer reasonably determines that regulatory approval
as set forth in Section 7.3 cannot be reasonably and economically obtained
on terms and conditions satisfactory to Buyer in its sole discretion.
D. By Seller or Buyer in the event regulatory approval is denied.
E. By Buyer if there shall be any actual or threatened litigation to
restrain or invalidate the sale of the Assets to, or the assumption of the
Liabilities by, Buyer that, in the good faith judgment of Buyer makes it
inadvisable to proceed with such transaction;
F. By Buyer if there shall have been any material adverse change in
the condition, business, operations, affairs, prospects, properties or
assets of Seller that are the subject of this Agreement;
G. By Buyer if any material representation or warranty made herein
by Seller is untrue in any material respect, or Seller shall have defaulted
in any material respect in the performance of any material obligation under
this Agreement;
H. By Buyer pursuant to the termination provisions provided in
Section 2.3, Section 2.5 or Section 2.6.
I. By Seller if any material representation or warranty made herein
by Buyer is untrue in any material respect, or Buyer shall have defaulted
in any material respect in the performance of any material obligation under
this Agreement, including any default under Section 6.2.
11.2 Notice of Termination. The power of termination provided for by
Section 11.1 may be exercised only by a notice given in writing, as provided in
Section 12.4.
11.3 Effect of Termination. Without limiting any other relief to which
either party hereto may be entitled, in the event of the termination and
abandonment of this Agreement pursuant to the provisions of Section 11.1, no
party to this Agreement shall have any further liability or obligation in
respect of this Agreement, except for (a) liability of a party for expenses
pursuant to Section 12.11, and (b) the provisions of Section 12.15 shall remain
applicable.
SECTION 12.
MISCELLANEOUS
-------------
12.1 Entire Agreement. This Agreement and the other agreements, documents
and instruments executed and delivered by the parties to each other at the
Closing constitute the full understanding of the parties, a complete allocation
of risks between them and a complete and exclusive statement of the terms and
conditions of their agreement relating to the subject matter hereof and
supersede any and all prior agreements, whether written or oral, that may exist
between the parties with respect thereto.
12.2 Multiple Counterparts. For the convenience of the parties hereto,
this Agreement may be executed in multiple counterparts, each of which shall be
deemed an original, and all counterparts hereof so executed by the parties
hereto, whether or not such counterpart shall bear the execution of each of the
parties hereto, shall be deemed to be, and shall be construed as, one and the
same Agreement. a telecopy or facsimile transmission of a signed counterpart of
this Agreement shall be sufficient to bind the party or parties whose
signature(s) appear thereon.
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12.3 Amendment. This Agreement may be amended, modified or supplemented
only by a written instrument signed by each party hereto.
12.4 Notices. Any and all notices and other communications required or
permitted to be given under this Agreement by any party hereto to the other
party may be delivered personally or by overnight courier service or sent by
mail, telex or facsimile transmission, at the respective addresses or
transmission numbers set forth below and shall be effective upon the earlier of
actual receipt or (a) in the case of mail, upon the earlier of actual receipt or
3 business days after deposit in the United States Postal Service, first class
certified or registered mail, postage prepaid, return receipt requested; and (b)
in the case of overnight courier service, one business day after delivery to
such courier service. The parties may change their respective addresses and
transmission numbers by written notice to all other parties, sent as provided in
this Section 12.4. All communications must be in writing and addressed as
follows:
If to Seller: Surety Bank, N.A.
1845 Precinct Line Rd., Suite 100
Hurst, Texas 76054
Attn: C. Jack Bean
Chairman
Telecopy: (817) 498-0647
With a Copy to: Ms. Margaret Holland
Tracy & Holland, L.L.P.
306 West Seventh Street, #500
Fort Worth, Texas 76102-4982
Telecopy: (817) 332-3140
If to Buyer: The Citizens National Bank in Waxahachie
200 N. Elm St., P.O. Box 717
Waxahachie, Texas
Attn: Mark Singleton
President
Telecopy: (972) 938-4364
With a Copy to: Carolyn V. Kelly, Esq.
Jenkens & Gilchrist,
a Professional Corporation
1445 Ross Avenue, Suite 3200
Dallas, Texas 75202
Telecopy: (214) 855-4300
12.5 Binding Effect. All of the terms, covenants, representations,
warranties and conditions of this Agreement shall be binding upon, and inure to
the benefit of and be enforceable by, the parties hereto and their respective
successors, representatives and permitted assigns. Nothing expressed or referred
to herein is intended or shall be construed to give any person other than the
parties hereto any legal or equitable right, remedy or claim under or in respect
of this Agreement, or any provision herein contained, it being the intention of
the parties hereto that this Agreement, the assumption of obligations and
statements of responsibilities hereunder, and all other conditions and
provisions hereof are for the sole benefit of the parties to this Agreement and
for the benefit of no other person. Nothing in this Agreement shall act to
relieve or discharge the obligation or liability of any third party to any party
to this Agreement,
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nor shall any provision give any third party any right of subrogation or action
over or against any party to this Agreement.
12.6 Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS. VENUE FOR ANY CAUSE OF ACTION
ARISING FROM THIS AGREEMENT SHALL LIE IN ELLIS COUNTY, TEXAS.
12.7 Attorneys' Fees and Costs. In the event attorneys' fees or other
costs are incurred to secure performance of any of the obligations herein
provided for, or to establish damages for the breach thereof, or to obtain any
other appropriate relief, whether by way of prosecution or defense, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred therein.
12.8 Severability. In the event that any provision of this Agreement is
held to be illegal, invalid or unenforceable under present or future laws, then
(a) such provision shall be fully severable and this Agreement shall be
construed and enforced as if such illegal, invalid or unenforceable provision
were not a part hereof; (b) the remaining provisions of this Agreement shall
remain in full force and effect and shall not be affected by such illegal,
invalid or unenforceable provision or by its severance from this Agreement; and
(c) there shall be added automatically as a part of this Agreement a provision
as similar in terms to such illegal, invalid or unenforceable provision as may
be possible and still be legal, valid and enforceable.
12.9 Assignability. No party to this Agreement shall assign this
Agreement, by operation of law or otherwise, in whole or in part, without the
prior written consent of the other parties. Any assignment made or attempted in
violation of this Section 12.9 shall be void and of no effect.
12.10 Rules of Construction. All sections referred to herein are sections
of this Agreement and all exhibits and schedules referred to herein are exhibits
and schedules, respectively, attached to this Agreement. Descriptive headings as
to the contents of particular sections are for convenience only and shall not
control or affect the meaning, construction or interpretation of any provision
of this Agreement. The exhibits and schedules to this Agreement (and any
appendices thereto) referred to in this Agreement and attached hereto are and
shall be incorporated herein and made a part hereof for all purposes as though
set forth herein verbatim. Each use herein of the masculine, neuter or feminine
gender shall be deemed to include the other genders. Each use herein of the
plural shall include the singular and vice versa, in each case as the context
requires or as it is otherwise appropriate. The word "or" is used in the
inclusive sense.
12.11 Expenses. Seller shall pay all of its expenses and costs (including,
without limitation, all attorneys' fees and expenses and application fees), and
Buyer shall pay all of its expenses and costs (including, without limitation,
all attorneys' fees and expenses and application fees), in connection with this
Agreement and the consummation of the transactions contemplated hereby.
12.12 Waiver. Any of the terms or conditions of this Agreement may be
waived at any time by the party that is entitled to the benefit thereof. Such
action shall be evidenced by a signed written notice given in the manner
provided in Section 12.4. No party to this Agreement shall by any act (except by
a written instrument given pursuant to Section 12.4) be deemed to have waived
any right or remedy hereunder or to have acquiesced in any breach of any of the
terms and conditions hereof. No failure to exercise, nor any delay in exercising
any right, power or privilege hereunder by any party hereto shall operate as a
waiver thereof. No single or partial exercise of any right, power or privilege
hereunder shall preclude any other or further exercise thereof or the exercise
of any other right, power or privilege. A waiver of any party of any right or
remedy on any one occasion shall not be construed as a bar to any right
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or remedy that such party would otherwise have on any future occasion or to any
right or remedy that any other party may have hereunder.
12.13 Specific Performance. Each of the parties hereto acknowledges that
the other parties would be irreparably damaged and would not have an adequate
remedy at law for money damages in the event that any of the covenants contained
in this Agreement were not performed in accordance with its terms or otherwise
were materially breached. Each of the parties hereto therefore agrees that,
without the necessity of proving actual damages or posting bond or other
security, the other party shall be entitled to temporary and/or permanent
injunction or injunctions to prevent breaches of such performance and to
specific enforcement of such covenants in addition to any other remedy to which
they may be entitled, at law or in equity.
12.14 Public Disclosure. Seller and Buyer will consult with each other
regarding the content of any press release or other public disclosure concerning
this transaction and obtain the prior written approval of the other party
hereto; provided, however, that notwithstanding anything else contained in this
Section 12.14, Seller and Buyer shall be permitted to make any public disclosure
or governmental filings as its counsel may deem necessary to maintain compliance
with or to prevent violations of applicable Federal or state laws or
regulations.
12.15 Confidential Information. Except as may be required by applicable
securities laws or as may be necessary to obtain the regulatory approvals as
described in Section 7.3, Seller and Buyer will treat as confidential any
information related to the transactions described herein obtained from any other
party. Seller and Buyer will use such information, and not disclose it to
others, except their employees, advisors, directors and agents, expressly for
the purposes of evaluating the potential of consummating the transactions
proposed herein. The term "information" does not include any information that
(a) at the time of disclosure or thereafter is generally available to and known
by the public, (b) was available on a nonconfidential basis from a source other
than Seller or Buyer or (c) was independently acquired or developed without
violating any laws or obligations under this Agreement.
12.16 Arbitration. Buyer and Seller shall agree, by amendment to this
Agreement, on provisions whereby any controversy or claim between Buyer and
Seller arising out of or relating to this Agreement or any agreements or
instruments relating hereto or delivered in connection herewith, including, but
not limited to, a claim based on or arising from an alleged tort, will, at the
request of any party, shall be determined by arbitration.
12.17 Seller's Knowledge. '"Seller's Knowledge" or other similar phrases
means information that is known to any Executive Officer or Loan Review Officer
of the Seller, or to the Branch Manager or Branch President of the applicable
Branch, without (except for Section 3.12) independent investigation.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers and their corporate seals to be
hereunto affixed as of the date first above written.
Buyer:
THE CITIZENS NATIONAL BANK IN WAXAHACHIE
[S E A L]
By: /s/ Mark Singleton
------------------------------------------------
Mark Singleton, President
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ATTEST:
/s/ Shirley K. Singleton
- ------------------------------
Name: Shirley K. Singleton
Title: Vice President
Seller:
SURETY BANK, N.A.
[S E A L]
By: /s/ C/ Jack Bean
------------------------------------------------
C. Jack Bean, Chairman
ATTEST:
/s/ B. J. Curley
- ------------------------------
Name: B. J. Curley
Title: Secretary
34
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EXHIBIT 10.12
AMENDED AND RESTATED
POST RETIREMENT SERVICES AGREEMENT BETWEEN
SURETY CAPITAL CORPORATION, SURETY BANK,
NATIONAL ASSOCIATION AND C. JACK BEAN
This Amended and Restated Post Retirement Services Agreement ("Agreement")
is entered into by and among Surety Capital Corporation, a Delaware corporation
(the "Corporation"), Surety Bank, National Association, a national banking
association (the "Bank"), and C. Jack Bean, an individual of Fort Worth, Texas
("Bean"). The Corporation, the Bank and Bean are collectively referred to as
the "Parties." The Corporation's business operations that are conducted by the
Bank are referred to as its "Banking Business."
In consideration of the mutual covenants set forth below, it is agreed as
follows:
1. Purposes. The purposes of this Agreement are to provide:
(a) Bean with compensation and benefits for certain consulting
services to be rendered by Bean for the Corporation and the Bank on a part-time
basis after his retirement as a full-time employee of the Corporation; and
(b) the Corporation and the Bank 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 Corporation's and the Bank's ongoing
operations with businesses and business professionals in the service areas
covered by the Corpora tion's Banking Business, (2) representing the
Corporation and the Bank 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 the Bank, (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").
2. Definitions. For purposes of this Agreement, certain terms are
defined as follows:
(a) "Accelerated Payment" means either the payment by the Corporation
and the Bank pursuant to Section 6 or pursuant to Section 7.
(b) "Cause" means any act that is materially adverse to the best
interests of the Corporation or the Bank 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;
(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
by directors representing
<PAGE>
at least two-thirds (2/3rds) of the directors then in office who were directors
at the beginning of the period;
(C) the Corporation sells or otherwise transfers more than fifty
percent (50%) voting control of the Bank; or
(D) there is a sale of substantially all of the assets of the
Bank.
(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 exis tence 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.
3. 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 3.
The nature and extent of the actual activities to be conducted by Bean will be
mutually agreed to by Bean and the Corporation and the Bank 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 or the Bank
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 or the Bank of
its obligations under this Agreement, immediately after providing the
Corporation or the Bank, as the case may be, 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
or the Bank pursuant to Section 3(a), neither the Corporation nor the Bank will
have any further obligations under this Agreement, except to the extent payments
and benefits are owed pursuant to Section 5 for periods prior to the termination
of this Agreement. In the event of a termination of this Agreement by Bean
pursuant to Section 3(b)(2), neither the Corporation nor the Bank will have any
further obligations under this Agreement, except to the extent payments and
benefits are owed pursuant to Section 5 for periods prior to the termination of
this Agreement. If the termination of this Agreement is pursuant to Section
3(b)(1) as a result of a default by the Corporation or the Bank in the
performance of their respective obligations hereunder or pursuant to Section
3(c) as a result of a Change in Control of the Corporation, the Corporation and
the Bank will be obligated to pay any amounts owed under Section 5 and to also
pay the Accelerated Payment due pursuant to either Section 6 or Section 7, as
the case may be, which obligation shall survive the termination of this
Agreement.
-2-
<PAGE>
The Corporation (to the extent of 25% thereof) and the Bank (to the extent of
75% thereof) 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.
4. Compensation for Services. During the period that Bean performs the
Services for the Corporation and the Bank after he retires from providing his
active, full-time services to the Corporation in its day-to-day operations, the
Corporation (to the extent of 25% thereof) and the Bank (to the extent of 75%
thereof) 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 and the Bank's normal substantiation and
reimbursement policies in connection with such expenses.
5. 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 and the Bank agree to provide to Bean the
compensation and benefits listed below.
(a) Annual Payment. Upon Bean's retirement from full-time employment,
the Corporation and the Bank 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 and the Bank 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) Twenty-five percent of all payments pursuant to this Section 5
will be paid by the Corporation and seventy-five percent of all payments
pursuant to this Section 5 will be paid by the Bank.
6. Default. If the Corporation or the Bank defaults in the performance
of any provision under Section 5 of this Agreement, the payments, insurance
coverage and reimbursements under Section 5(a) and (b) shall be accelerated and
immediately due and payable to Bean. In such event, the Parties agree that it
may be diffi cult, 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
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. Twenty-five percent of all payments pursuant to this Section
6 will be paid by the Corporation and seventy-five percent of all payments
pursuant to this Section 6 will be paid by the Bank.
(a) Annual Payment. The amount owed under Section 5(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 5(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 5(b) for the immediately preceding twelve (12) calendar
month period.
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<PAGE>
7. Change in Control of the Corporation. In the event of a Change in
Control of the Corporation, the Corporation (to the extent of twenty-five
percent (25%) thereof) and the Bank (to the extent of seventy-five (75%)
thereof) shall pay to Bean the Accelerated Payment, calculated in accordance
with Section 6 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.
8. 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 7 by seeking other employment or otherwise, nor shall
the amount of any payment or benefit provided for in Section 7 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.
9. 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.
10. 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 and the Bank to Bean under this Agreement,
including payments pursuant to Sections 5, 6 and 7. Bean hereby agrees to
indemnify and hold harmless the Corporation and the Bank from and for any
liability or claim respecting the foregoing taxes which are the sole obligation
and liability of Bean. Bean's obligation to indemnify the Corporation and the
Bank as provided by this Section 10 shall survive the termination of this
Agreement.
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 Corporation: Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Telephone: 817-788-7558
Telecopy: 817-428-0054
If to Bank: Surety Bank, National Association
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Telephone: 817-788-7558
Telecopy: 817-428-0054
-4-
<PAGE>
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
11 may be changed at any time by notice given in accordance with this Section
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. 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.
13. 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.
14. 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.
15. 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.
16. Inurement. This Agreement shall extend to and be binding upon Bean
and his heirs, legatees, legal representatives and successors, and on the
Corporation and the Bank and their respective successors or assigns. The rights
of the Corporation and the Bank under this Agreement may not be assigned without
Bean's consent.
17. Amendment. All amendments or changes to this Agreement shall be in
writing.
18. 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.
19. 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.
-5-
<PAGE>
20. 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. The Parties agree that the
Post Retirement Services Agreement dated January 20, 1998 between the
Corporation and Bean is hereby terminated and of no further force and effect,
such agreement being superseded in its entirety by this Agreement.
21. Authorization. The Corporation and the Bank are authorized to enter
into this Agreement by virtue of resolutions duly adopted by the respective
Board of Directors of the Corporation and the Bank.
22. Effective Date. The effective date of this Agreement is November 1,
1998.
SURETY: SURETY CAPITAL CORPORATION
By: /s/ B. J. Curley
------------------------------
Title: Vice President
BANK: SURETY BANK, NATIONAL ASSOCIATION
By: /s/ Bobby W. Hackler
------------------------------
Title: President
BEAN: /s/ C. Jack Bean
---------------------------------
C. Jack Bean
-6-
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF SURETY CAPITAL CORPORATION
Jurisdiction
Subsidiary of Organization
Surety Bank, National National Banking
Association Association
<PAGE>
Exhibit 23
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-8 (File No. 333-57253), Form
S-3 (File No. 33-44893); Form S-3 (File No. 33-89264) and Form S-3 (File No.
333-57601) of our report, which includes a going concern explanatory paragraph
due to the ability of the Company to comply with the Formal Agreement mandated
by the Office of the Comptroller of the Currency, and the resulting uncertainty
as to regulatory actions, dated February 18, 1999, except as to the information
presented in Notes 8 and 18, for which the date is March 31, 1999, and Note 22,
for which the date is April 13, 1999, on our audits of the consolidated
financial statements of Surety Capital Corporation as of December 31, 1998 and
1997, and for the years ended December 31, 1998, 1997 and 1996, which report is
included in this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Fort Worth, Texas
April 15, 1999
<PAGE>
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoint C. Jack Bean and B. J. Curley, 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, 1998, 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 1st day of April, 1999.
/s/ C. Jack Bean
------------------------------
C. Jack Bean
/s/ William B. Byrd
------------------------------
William B. Byrd
/s/ B. J. Curley
------------------------------
B. J. Curley
/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
<TABLE> <S> <C>
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,289,897
<INT-BEARING-DEPOSITS> 94,939
<FED-FUNDS-SOLD> 24,761,752
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