SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-K
Mark One
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended
December 31, 1999 - 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.)
1501 Summit Avenue, Fort Worth, Texas 76102
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(Address of Principal Executive Offices)
817-335-5955
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
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 [ ] No [ X ]
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 on May 1, 2000, based on the quoted
price of the Common Stock as last reported on the American Stock
Exchange before trading was halted on November 8, 1999, was
$3,008,485. 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 May 1, 2000, 5,895,235 shares
of Common Stock were outstanding.
Documents Incorporated by Reference: None.
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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 (the "Bank"), Fort Worth, Texas,
formerly Texas Bank, National Association and formerly Texas
National Bank with full service offices in Converse, Fort Worth,
New Braunfels, San Antonio, Schertz, Universal City, and
Whitesboro, Texas.
The Company's and the Bank's principal executive offices
are located at 1501 Summit Avenue, Fort Worth, Texas 76102, and
its telephone number is 817-335-5955.
Recent Developments
Formal Agreement. On November 19, 1998 the Board of
Directors of 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. The
Bank was also required to achieve certain additional capital
levels by December 31, 1999. Under the Formal Agreement, by
March 31, 1999 the Bank was required to achieve total risk-based
capital of at least 12% of risk-weighted assets and Tier I
leverage capital of at least 7.5% of adjusted total assets. By
December 31, 1999 the Bank was required to achieve total risk-
based capital of at least 14% of risk-weighted assets. The Bank
failed to achieve the capital requirements set forth in the
Formal Agreement by March 31, 1999 and submitted a request for
an extension to September 30, 1999. The OCC granted the
extension and the Bank achieved the required levels of capital
upon completion of the sale of the Midlothian and Waxahachie
branches on June 30, 1999. At December 31, 1999 the Bank met
the capital levels required by the Formal Agreement, with total
risk-based capital of 14.73% of risk-weighted assets and Tier I
leverage capital of 9.78% of adjusted total assets.
Memorandum of Understanding. On October 28, 1999 the Board
of Directors of the Company entered into a Memorandum of
Understanding (the "MOU") with the Board of Governors of the
Federal Reserve System (the "FRB"). Under the MOU, the Company
is not permitted to declare or pay any corporate dividends or
incur any additional debt without the prior approval of the FRB.
Also, the Company was required to develop and submit to the FRB
a written three-year capital plan, a plan to service the
Company's existing debt without incurring any additional debt,
and written procedures designed to strengthen and maintain the
Company's internal records and controls to ensure that future
regulatory reports are filed in a timely and accurate manner.
The Company has submitted each of the requested plans and
procedures to the FRB. Finally, the Company is mandated under
the MOU to comply fully with all formal and informal supervisory
actions which have been or may be imposed on the Bank by the
OCC.
IPF Division. As a result of various accounting
irregularities found during the course of an internal audit of
the insurance premium finance ("IPF") division of the Bank
conducted in 1999, the Company recognized additional losses,
including interest, of $2,611,000 ($1,723,000 on a tax-effected
basis) over prior years beginning in the first quarter of 1996
and extending through the fourth quarter of 1999. These losses
were primarily the result of the diversion of refunds due
certain insurance premium
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finance customers to the accounts of
other customers. Errors resulting from the absence of
appropriate accounting controls, to a much lesser extent, also
contributed to such losses. See "Restatement of Prior Year
Financial Statements" under "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The irregular transactions were discovered through the
Company's internal audit and reported to the Board of Directors
and the OCC. On September 21, 1999 the Board of Directors and
the OCC entered into an Amendment to the Formal Agreement (the
"Amendment") pursuant to which the Bank was required to retain
the services of a qualified and independent auditor of the Bank
to review all IPF accounting transactions (from 1997 forward)
relating to any overpayment of loan balances and/or refunds due
to IPF customers and report to the Board of Directors and the
OCC regarding the review. The Company engaged an independent
forensic accountant to conduct an independent review of the IPF
division covering the period from January 1, 1996 to December
31, 1999. Based on the findings of the review, the Company made
refunds to affected borrowers totaling $2,523,000, of which
$567,000 was interest. An accrual for the refunds was included
in other liabilities as of December 31, 1999. As of April 30,
2000 the Company had reported the results of the review to the
OCC. There can be no assurance that additional regulatory
actions involving the Company or the Bank will not be taken, or
if taken, will not have a material adverse impact on the Company
or the Bank. The Company is cooperating with regulatory
agencies in their review of these matters.
Management intends to aggressively pursue collection of the
loans to which funds were inappropriately directed. At this
time, however, the Company cannot predict the likely amount of
any such recoveries.
The persons directly responsible for managing the IPF
division during the period when the diversions occurred are no
longer employed by the Company or the Bank.
AMEX Delisting. On November 8, 1999 the Company filed a
Current Report on Form 8-K with the Securities and Exchange
Commission (the "SEC") pursuant to which the Company announced
that the operating results of the Company for the third quarter
ended September 30, 1999 had not been finalized and were pending
the results of a review of the IPF division. On the same date,
the American Stock Exchange ("AMEX") halted trading in the
Company's Common Stock, pending the filing of the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 and further review of the Company's compliance with the
continued listing requirements of AMEX. Effective November 23,
1999 the Company filed a Current Report on Form 8-K with the SEC
pursuant to which the Company announced that the Company and its
previous independent auditors, PricewaterhouseCoopers LLP, had
determined, as a result of the ongoing review of the IPF
division, the financial statements as of December 31, 1998 and
1997 and for the years ended December 31, 1998, 1997 and 1996,
included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, filed with the SEC on April
15, 1999, (a) may contain errors and should not be relied upon
by investors for any purpose and (b) were withdrawn. Included
in this Annual Report on Form 10-K are audited financial
statements as of December 31, 1999 and for the year then ended
and unaudited financial statements as of and for the years ended
December 31, 1998 and 1997. Although the Company has made every
effort to have prior periods re-audited, it has been
unsuccessful in such efforts as the Company has been unable to
secure a qualified, independent audit firm willing to provide an
audit opinion on such periods. As a result of the
unavailability of current audited financial statements of the
Company, on March 22, 2000 AMEX determined that the Company was
not in compliance with its continued listing requirements. The
Company's Common Stock was formally delisted by AMEX effective
as of April 3, 2000. The Company intends to have its listing
privileges on
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AMEX reinstated, or to be traded on another
market, such as NASDAQ or the OTC Bulletin Board, as soon as it
qualifies, but there are no assurances that such efforts will be
successful. The Company's stock may be eligible for trading on
the OTC Bulletin Board at such time as it is current in its
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934, which should occur after the
filing of the Company's Annual Report on Form 10-K of the fiscal
year ending December 31, 2000. At that time, depending on the
Company's performance, it may also be eligible for trading on
NASDAQ or on an exchange. The Company's Common Stock may be
traded through the National Quotation Bureau (commonly known as
"pink sheets") at any time that a broker agrees to make a market
in the stock.
Dependence on Bank. The Company, as a holding company
without significant assets other than its ownership of all the
common stock of the Bank, is entirely 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"). Under the Formal
Agreement the Bank is currently precluded from declaring and
paying any dividends without prior OCC approval.
On November 9, 1999 the OCC approved a $262,000 reduction
of the Bank's surplus, the proceeds of which were upstreamed to
the Company, which, together with a $60,000 capital contribution
by certain officers and directors of the Company and a $139,000
federal income tax payment by the Bank to the Company, was
sufficient to enable the Company to meet its September 30, 1999
interest obligations under the Notes and to pay certain other
operating expenses. Additionally, on March 28, 2000 the OCC
approved another reduction in the Bank's surplus in the amount
of $500,000 that enabled the Company to meet debt service
obligations under the Notes and pay for other operating expenses
through March 31, 2000. No assurance can be given, however,
that the OCC will continue to approve such reductions in the
Bank's surplus, particularly if the Bank is unable to commence
operating profitably in the near future. On April 26, 2000
certain members of the Company's Board of Directors guaranteed
to personally loan the Company up to $200,000, if necessary, to
enable the Company to meet its cash obligations in 2000. See
"Restrictions on Distribution of Subsidiary Bank Dividends and
Assets" under "Item 1. Business - Supervision and Regulation:
Regulation of the Bank" and "Item 13. Certain Relationships and
Related Transactions."
The Company
Surety Finance Company, the predecessor to the Company,
commenced business in 1985 as a sole proprietorship. In
December 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 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.
The Bank
The Bank was chartered as a national banking association in
1963. The Bank operates full service offices in Converse, Fort
Worth, New Braunfels, San Antonio, Schertz, Universal City, and
Whitesboro, Texas.
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The Bank provides customary retail and commercial banking
services to its customers, including checking and savings
accounts, time deposits, IRAs, money transfers, safe deposit
facilities, commercial loans, real estate mortgage loans,
consumer loans and night depository facilities. The Bank also
specializes in the niche-lending product of IPF lending. At
December 31, 1999 commercial loans, real estate loans, consumer
loans and IPF loans represented 14.6%, 46.5%, 8.4% and 30.5% of
the Company's total loan portfolio. No material industry or
group concentrations exist in the loan portfolio.
Seasonal activity or large deposits of any individual
depositor do not significantly affect the Bank. Deposits of
public funds (funds of governmental agencies and municipalities)
at December 31, 1999 were 10.8% of total deposits. This amount
can fluctuate, but generally not by a material amount.
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. 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: $9.8 million),
which was paid to the shareholders of TexStar in connection with
the merger. The Company financed the acquisition, in part,
through a private placement of subordinated convertible debt.
In February 1996 the Company acquired First National Bank,
Midlothian, Texas, with $53.8 million in assets, for $6.6
million. The Company financed the Midlothian acquisition
through a $7.4 million public offering of its Common Stock.
Dispositions of Assets
In June 1999 the Company sold two branches located in
Waxahachie and Midlothian, Texas (the "Branches"), resulting in
a pretax gain of $3.1 million. The Company sold loans totaling
$13.1 million, real property, furniture and equipment totaling
$1.5 million, and cash and other assets totaling $105,000,
relieved goodwill associated with these branches by $2.4
million, and the acquirer assumed deposits and other liabilities
totaling $45.4 million. After giving effect to a premium of
2.5% on loans and 11.0% on deposits totaling $5.3 million, in
addition to the cash at the Branches, the Company paid
$25.2 million in cash as consideration for the net deposit
liabilities assumed by the acquirer.
In October 1998 the Company sold four branches located in
Chester, Kennard, Lufkin and Wells, Texas (the "Lufkin
Branches"), resulting in a pretax gain of $1.1 million. The
Company sold loans totaling $10.9 million, real property,
furniture and equipment totaling $610,000, and cash and other
assets totaling $1.3 million, relieved goodwill associated with
these branches by $476,000, and the acquirer assumed deposits
and other liabilities totaling $56.9 million. After giving
effect to a deposit premium of 3% on the deposits assumed
totaling $1.7 million, in addition to the cash at the Lufkin
Branches, the Company paid $43.6 million in cash as
consideration for the net deposit liabilities assumed by the
acquirer.
Commercial and Consumer Lending
The Company provides general commercial lending services
for corporate and other business clients as a part of the
Company's efforts to serve the local communities in which it
operates. Certain risks are involved in granting loans,
primarily related to the borrowers' ability and willingness to
repay the debt. Before the Company extends a new loan to a
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customer, these risks are assessed through a review of the
borrower's past and current credit history, the collateral being
used to secure the transaction in case the customer does not
repay the debt, the borrower's character and other factors.
Once the decision has been made to extend credit, the Company's
independent loan review function, which is currently performed
by an independent accounting and consulting firm, and
responsible credit officer monitor these factors throughout the
life of the loan. Any loan identified as a problem credit by
management or during the loan review is assigned to the
Company's "watch loan list," and is subject to ongoing
monitoring to ensure appropriate action is taken when
deterioration has occurred.
Commercial, industrial and agricultural loans are primarily
variable-rate and include operating lines of credit and term
loans made to small businesses primarily based on their ability
to repay the loan from the business's cash flow. Business
assets such as equipment and inventory typically secure these
loans. When the borrower is not an individual, the Company
generally obtains the personal guarantee of the business owner.
As compared to consumer lending, which includes loans secured by
a single-family residence, personal installment loans and
automobile loans, commercial lending entails significant
additional risks. These loans typically involve larger loan
balances and are generally dependent on the business's cash flow
and, thus, may be subject to adverse conditions in the general
economy or in a specific industry. Management reviews the
borrower's cash flows when deciding whether to grant the credit
to evaluate whether estimated future cash flows will be adequate
to service principal and interest of the new obligation in
addition to existing obligations.
Commercial real estate and farmland loans are primarily
secured by borrower-occupied business real estate and are
dependent on the ability of the related business to generate
adequate cash flow to service the debt. Such loans primarily
carry variable-interest rates. Commercial real estate loans are
generally originated with a loan-to-value ratio of 80% or less.
Management performs much the same analysis when deciding whether
to grant a commercial real estate loan as a commercial loan.
Residential real estate loans and home equity lines of
credit carry primarily variable rates, although fixed-rate loans
are originated, and are secured by the borrower's residence.
Such loans are made based on the borrower's ability to make
repayment from employment and other income. Management assesses
the borrower's ability to repay the debt through review of
credit history and ratings, verification of employment and other
income, review of debt-to-income ratios and other measures of
repayment ability. The Company generally makes these loans in
amounts of 80% or less of the value of collateral. An appraisal
is obtained from a qualified real estate appraiser for
substantially all loans secured by real estate.
Construction loans are secured by residential and business
real estate, generally occupied by the borrower on completion.
The Company's construction lending program is established in a
manner to minimize risk of this type of lending by not making a
significant amount of loans on speculative projects. While not
contractually required to do so, the Company usually makes the
permanent loan at the end of the construction phase.
Construction loans also are generally made in amounts of 80% or
less of the value of collateral.
Consumer installment loans to individuals include loans
secured by automobiles and other consumer assets. Consumer
loans for the purchase of new automobiles generally do not
exceed 80% of the sticker price of the car. Loans for used cars
generally do not exceed average loan value as stipulated in a
recent auto industry used car price guide. Overdraft protection
loans are unsecured personal lines of credit to individuals of
demonstrated good credit character with reasonably assured
sources of income and satisfactory credit histories. Consumer
loans generally involve more risk than residential mortgage
loans because of the type and nature of collateral and, in
certain types of consumer loans, the absence of collateral.
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Since these loans are generally repaid from ordinary income of
an individual or family unit, repayment may be adversely
affected by job loss, divorce, ill health or by general decline
in economic conditions. The Company assesses the borrower's
ability to make repayment through a review of credit history,
credit ratings, debt-to-income ratios and other measures of
repayment ability.
Insurance Premium Financing
The Company supplements 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. This gives the
Company a pricing advantage over non-bank competitors.
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 660 independent insurance agents and maintains a
loan portfolio supported by insurance policies underwritten by
815 insurance companies. At December 31, 1999 IPF loans totaled
$20.6 million, or 30.5% of gross loans, compared to
$24.6 million, or 24.6% of gross loans, at December 31, 1998.
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.
As a result of various accounting irregularities found
during the course of an internal audit of the IPF division of
the Bank conducted in 1999, the Company recorded previously
unrecognized net charge-offs of IPF loans totaling $1,927,000.
The charge-offs were reflected over the current and prior
periods, with $137,000 of this amount was recognized in 1999.
The prior period financial statements were restated to reflect
additional net charge-offs of $834,000 in 1998, $784,000 in 1997
and $172,000 in 1996. See "Item 1. Business - Recent
Developments" and "Restatement of Prior Year Financial
Statements" under "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Additionally, the Company charged off $1.8 million in IPF
loans, net of recoveries, in 1998 primarily related to IPF loans
generated by the Bank's southeastern United States IPF 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.
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. In 1998 the Company
realized net charge-offs of $3.5 million for medical claims
receivables. Accordingly, the operations of the medical claims
factoring division was discontinued; however, due to the
existence of contractual commitments to nine customers and in
order to enhance the collectibility of previously charged-off
medical claims, the Company continued to factor new medical
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claims receivables on behalf of these customers in 1999. As of
December 31, 1999 the contractual commitments had expired and
there were no medical claims receivable balances outstanding at
such date. Gross medical claims receivables totaled $646,000 at
December 31, 1998. Management will continue to actively pursue
the collection of the charged-off receivables. In 1999,
recoveries totaled $540,000. At this time, the Company cannot
predict the likely amount of any additional recoveries.
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.
On November 12, 1999 the Gramm-Leach-Bliley Act (the "GLB
Act") was enacted into law. The GLB Act makes sweeping changes
in the financial services in which various types of financial
institutions may engage. The Glass-Steagall Act, which had
generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding
company," which owns only well capitalized and well managed
depository institutions, will be permitted to engage in a
variety of financial activities, including insurance and
securities underwriting and agency activities. The GLB Act is
not expected to have a material effect on the activities in
which the Company and the Bank currently engage, except to the
extent that competition with other types of financial
institutions may increase as they engage in activities not
permitted prior to enactment of the GLB Act. See "Gramm-Leach-
Bliley Act of 1999" under "Item 1. Business - Supervision and
Regulation: Regulation of the Company."
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Employees
As of December 31, 1999 the Bank had 99 full-time employees
and 20 part-time employees. The Bank provides a number of
benefits such as health, dental and life insurance for all, as
well as education assistance for qualified employees. A 401(k)
retirement plan and stock option plans are in place for eligible
employees. None of the Bank's employees are subject to a
collective bargaining agreement, and the Bank believes that its
employee relations are good. The Company has no employees not
also employed by the Bank.
SUPERVISION AND REGULATION
General
The Company and the Bank are subject to the generally
applicable state and federal laws governing businesses and
employers. The Company and the Bank are further regulated by
special state and federal laws and regulations applicable only
to financial institutions and their parent companies. Virtually
all aspects of the Company's and the Bank's operations are
subject to specific requirements or restrictions and general
regulatory oversight, including laws regulating consumer finance
transactions, such as the Truth in Lending Act, the Home
Mortgage Disclosure Act and the Equal Credit Opportunity Act and
laws regulating collections and confidentiality, such as the
Fair Debt Collection Practices Act, the Fair Credit Reporting
Act and the Right to Financial Privacy Act. The supervision and
regulation of bank holding companies and their subsidiaries is
intended primarily for the protection of depositors, the deposit
insurance funds of the Federal Deposit Insurance Corporation
("FDIC") and the banking system as a whole, and not for the
protection of bank holding company stockholders or creditors.
To the extent that the following discussion describes
statutory or regulatory provisions, it is qualified in its
entirety by reference to the particular statute or regulation.
Any change in applicable laws, regulations or policies of
various regulatory authorities may have a material effect on the
business, operations and prospects of the Company and the Bank.
The Company is unable to predict the nature or the extent of the
effects on its business or earnings that fiscal or monetary
policies, economic control or new federal or state legislation
may have in the future.
Regulation of the Company
The Company is a bank holding company registered under the
BHC Act, and therefore is subject to regulation and supervision
by the 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 (except those that have become "financial
holding companies," as described below) 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.
Memorandum of Understanding: On October 28, 1999 the Board
of Directors of the Company entered into a Memorandum of
Understanding (the "MOU") with the FRB. Under the MOU, the
Company is not permitted to declare or pay any corporate
dividends or incur any additional debt without the prior
approval of the FRB. Also, the Company was required to develop
and submit to the FRB a written three-year capital plan, a plan
to service the Company's existing debt without incurring any
additional debt, and written procedures designed to strengthen
and maintain the Company's internal records and controls to
ensure that future regulatory reports are filed in a timely and
accurate manner. The Company has submitted each of the
requested plans and procedures to the FRB. Finally, the Company
is mandated under the MOU to comply fully with all formal and
informal supervisory actions that have been or may be imposed on
the Company by the OCC.
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Regulatory Restrictions on Dividends and 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 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.
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Bank holding companies (other than those that have become
"financial holding companies," as described below) are 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 bank holding company would
directly or indirectly own or control 5% or more of the voting
shares of such bank or bank holding company. In approving such
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 (other than those that have
become "financial holding companies," as described below) 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.
Gramm-Leach-Bliley Act of 1999: The Gramm-Leach-Bliley Act
of 1999 (the "GLB Act") eliminates many legal barriers between
banks and bank holding companies, on the one hand, and
securities firms, insurance companies and other financial
services providers, on the other. Among other things, the GLB
Act repealed certain Glass-Steagall Act restrictions on
affiliations between banks and securities firms, and amended the
BHC Act to permit bank holding companies that qualify as
"financial holding companies" ("FHCs") to engage in activities,
and acquire companies engaged in activities, that are (a)
financial in nature; (b) incidental to financial activities; or
(c) complementary to financial activities if the FRB determines
that they pose no substantial risk to the safety or soundness of
depository institutions or the financial system in general. The
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GLB Act treats various lending, insurance underwriting,
insurance company portfolio investment, financial advisory,
securities underwriting, dealing and market-making, and merchant
banking activities as financial in nature for this purpose. The
FRB, in consultation with the Secretary of the Treasury, may add
to this list. The GLB Act not only permits bank holding
companies to acquire securities and insurance firms, but also
allows such firms to acquire banks and bank holding companies.
A bank holding company may become an FHC only if (a) all of
its depository institution subsidiaries are well capitalized,
(b) all of its depository institution subsidiaries are well
managed, and (c) the bank holding company has filed with the FRB
a declaration that the company elects to be an FHC. In
addition, a bank holding company generally may not commence any
new activity or acquire any additional company as an FHC if any
of its depository institution subsidiaries has received a rating
of less than "satisfactory" in its most recent examination under
the Community Reinvestment Act of 1977 ("CRA").
The GLB Act generally permits national banks to engage
through special financial subsidiaries in the financial and
other incidental activities authorized for FHCs by the GLB Act.
However, such financial subsidiaries may not engage in insurance
or annuity underwriting, insurance company portfolio
investments, real estate investment and development or, at least
for the first five years after the GLB Act's enactment, merchant
banking. Also, the national bank in question and all its
depository institution affiliates must be well capitalized, well
managed and have satisfactory CRA ratings, and there are limits
on such a bank's investments in such subsidiaries. With certain
limited exceptions, a national bank's dealings with its
financial subsidiaries are subject to Sections 23A and 23B of
the Federal Reserve Act.
The GLB Act also imposes new restrictions on financial
institutions' transfer and use of nonpublic personal information
about their customers. Among other things, it directs the
federal banking agencies to develop new regulations for this
purpose; gives customers the right to "opt out" of having their
nonpublic personal information shared with nonaffiliated third
parties; bars financial institutions from disclosing customer
account numbers or other such access codes to nonaffiliated
third parties for direct marketing purposes; and requires annual
disclosure by financial institutions of their policies and
procedures for protecting customers' nonpublic personal
information.
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.
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Regulation of the Bank
The Bank is a national banking association and therefore is
subject to regulation, supervision and examination by the OCC.
The Bank is also a member of the FRB and the FDIC. Requirements
and restrictions under the laws of the United States include a
reserves requirement, restrictions on the nature and the amount
of loans which can be made, restrictions on the business
activities in which a bank may engage, restrictions on the
payment of dividends to shareholders, and minimum capital
requirements. See "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 that
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 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. The Bank was also
required to achieve certain additional capital levels by
December 31, 1999. Under the Formal Agreement, by March 31,
1999 the Bank was required to achieve total risk-based capital
of at least 12% of risk-weighted assets and Tier I leverage
capital of at least 7.5% of adjusted total assets. By December
31, 1999 the Bank was required to achieve total risk-based
capital of at least 14% of risk-weighted assets. The Bank
failed to achieve the capital requirements set forth in the
Formal Agreement by March 31, 1999 and submitted a request for
an extension to September 30, 1999. The OCC granted the
extension and the Bank achieved the required level of capital
upon completion of the sale of the Midlothian and Waxahachie
branches on June 30, 1999. At December 31, 1999 the Bank met
the capital levels required by the Formal Agreement with total
risk-based capital of 14.73% of risk-weighted assets and Tier I
leverage capital of 9.78% of adjusted total assets.
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.
On September 21, 1999 the Board of Directors of the Bank
entered into an amendment to the Formal Agreement (the
"Amendment") with the OCC which required the Bank to retain the
services of a qualified and independent auditor to review all
IPF accounting transactions (from 1997 forward) relating to any
overpayment of loan balances and/or refunds due to IPF customers
and report to the Board of Directors and the OCC regarding the
findings of the review. Under the Amendment the Bank was
further required, within sixty days of receipt of the report, to
submit an action plan to the OCC setting out the Bank's program
for (1) making full reimbursement of any and all unpaid IPF
refunds; (2) establishing internal controls and procedures to
ensure that IPF accounts are handled in a way which is
consistent with safe and sound banking practices; and (3)
providing appropriate training to all bank employees who are, or
will be, involved in IPF activities at the Bank. The Bank is in
compliance with the requirements of the Amendment.
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) as a last resort,
the appointment of a receiver or conservator of the Bank.
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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. ss. 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. ss. 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, 1999 the Bank has undivided profits of
$(2,592,000). Payment of dividends out of undivided profits is
further limited by 12 U.S.C. ss. 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. ss. 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 1999 and 1998 in the amount of $(2,302,000). 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. ss.ss. 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."
On November 9, 1999 the OCC approved a $262,000 reduction
of the Bank's surplus, the proceeds of which were upstreamed to
the Company, which together with a $60,000 capital contribution
by certain officers and directors of the Company and a $139,000
federal income tax payment by the Bank to the Company, was
sufficient to enable the Company to meet its September 30, 1999
interest obligations under the Notes and to pay certain other
operating expenses. By December 31, 1999 the Company, as a
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stand-alone entity, did not have sufficient cash on hand to pay
its operating expenses. On March 28, 2000 the OCC approved
another reduction in the Bank's surplus in the amount of
$500,000 that enabled the Bank to meet its debt service
obligations under the Notes and to pay for other operating
expenses through March 31, 2000. The Company had cash on hand
of $46,000 as of March 31, 2000 following such payments.
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, without
prior OCC approval. Under these circumstances it is highly
unlikely that the Company would be able to rely on alternative
sources of capital, such as borrowings from financial
institutions or issuances of equity securities and subordinated
debt instruments. Therefore, the Company for the foreseeable
future is dependent on the OCC's approval of future dividends by
the Bank to the Company. No assurance can be given that the OCC
will continue to approve dividends by the Bank to the Company,
particularly if the Bank is unable to commence operating
profitably in the near future. On April 26, 2000 certain members
of the Company's Board of Directors guaranteed to personally
loan the Company up to $200,000, if necessary, to enable the
Company to meet its cash obligations in 2000.
In the event the Company is unable to make the required
interest payments, the Company will be in default under the
Notes for failure to pay accrued interest thereon. 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 to timely pay
principal of and interest on the Notes, or to comply with the
covenants contained in the Indenture; the holder of the Notes
(or the Trustee on behalf of the holders of all the Notes
affected) may, however, 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. Furthermore, the Notes may be accelerated in the
event of the bankruptcy, insolvency or reorganization of the
Company. The initiation of any such a courses of action by the
holders of the Notes in the event of the failure of the Company
to meet its debt servicing 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.
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Limitations on Interest Charges: Federal and Texas state
laws generally limit the amount of interest and fees which
lenders, including the Bank, may charge regarding loans. The
applicable law, and the applicable limits, may vary depending
upon, among other things, the identity, nature and location of
the lender, and the type of loan or collateral. In Texas, the
maximum interest rate applicable to most loans changes with
changes in the average auction rate for United States Treasury
Bills, but does not decline below 18% or rise above 24% (except
for certain loans in excess of $250,000 for which the maximum
annual rate may not rise above 28%). However, the interest
which may be charged on an IPF loan is regulated by the Texas
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 domiciled in Texas 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. Under the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), subject to certain concentration limits and
other requirements, (a) bank holding companies such as the
Company are permitted to acquire banks and bank holding
companies located in any state; (b) any bank that is a
subsidiary of a bank holding company is permitted to receive
deposits, renew time deposits, close loans, service loans and
receive loan payments as an agent for any other bank subsidiary
of the holding company, and (c) banks are permitted to acquire
branch offices outside their home states by merging with out-of-
state banks, purchasing branches in other states, and
establishing de novo branch offices in other states - provided
that, in the case of any such purchase or de novo branch, the
host state has adopted legislation "opting in" to those
provisions of Riegle-Neal; and, provided that, in the case of a
merger with a bank located in another state, neither of the two
states involved has adopted legislation "opting out" of that
provision of Riegle-Neal. On August 28, 1995 Texas enacted
legislation opting out of interstate banking which was effective
until September 1999. However, in the second quarter of 1998
the OCC approved a series of merger transactions requested by a
non-Texas-based institution that ultimately resulted in the
merger of its Texas-based bank into the non-Texas based
institution. Although challenged in the courts, the final legal
ruling allowed the merger to proceed. In addition, on May 13,
1998 the Texas Banking Commission began accepting applications
filed by state banks to engage in interstate mergers and
branching.
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 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 that has a
ratio of tangible equity to total assets that is equal to or
less than 2%.
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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 may also, 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, 1999, and
exclusive of the Formal Agreement, the Bank meets the
requirements to be categorized as "well 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.
Capital Adequacy Guidelines: Capital management consists
of providing equity to support both current and future
operations. The Company is subject to capital adequacy
requirements issued by the FRB and the Bank is subject to
similar requirements imposed by the OCC.
The various federal bank regulatory agencies, including the
FRB and the OCC, have adopted risk-based capital requirements
for assessing bank holding company and bank capital adequacy.
These standards define capital and establish minimum capital
requirements in relation to assets and off-balance sheet
exposure, adjusted for credit risk. The risk-based capital
standards are designed to make regulatory capital requirements
more sensitive to differences in risk profile among bank holding
companies and banks, to account for off-balance sheet exposure
and to minimize disincentives for holding liquid assets. Assets
and off-balance sheet items are assigned to broad risk
categories, each with appropriate relative risk weights. The
resulting capital ratios represent capital as a percentage of
total risk-weighted assets and off-balance sheet items.
The minimum standard for the ratio of Tier I capital to
total risk-weighted assets is 4% and the ratio of total capital
to risk-weighted assets (including certain off-balance sheet
obligations, such as standby letters of credit) is 8%. At least
half of the risk-based capital must consist of common equity,
retained earnings, and qualifying perpetual preferred stock,
less deductions for goodwill and various other intangibles
("Tier I capital"). The remainder may consist of a limited
amount of subordinated debt, certain hybrid capital instruments
and other debt securities, preferred stock, and a limited amount
of the general valuation allowance for loan losses ("Tier II
capital"). The sum of Tier I capital and Tier II capital is
"total risk-based capital." See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
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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.
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 such affiliated parties. It also limits
the amount of advances to third parties that 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.
-18-
<PAGE>
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.
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.
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.
Depositor Preference Statute: Federal legislation has been
enacted providing that deposits and certain claims for
administrative expenses and employee compensation against an
insured depository institution would be afforded a priority over
other general unsecured claims against such institution,
including federal funds and letters of credit, in the
liquidation or other resolution of the institution by any
receiver.
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. The FDIC can make changes in the rate
schedule outside the five-cent range above or below the current
schedule only after a full rulemaking with opportunity for
public comment.
The FDIC also applies 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.
-19-
<PAGE>
Community Reinvestment Act of 1977 ("CRA"): Under the CRA,
a bank's applicable regulatory authority (which is the OCC for
the Bank) is required to assess the record of each financial
institution which it regulates to determine if the institution
meets the credit needs of its entire community, including low-
and moderate-income neighborhoods served by the institution, and
to take that record into account in its evaluation of any
application made by such institution for, among other things,
approval of the acquisition or establishment of a branch or
other deposit facility, an office relocation, a merger, or the
acquisition of shares of capital stock of another financial
institution. The regulatory authority prepares a written
evaluation of an institution's record of meeting the credit
needs of its entire community and assigns a rating. The Bank
has undertaken significant actions to comply with the CRA, and
received a "satisfactory" rating in its most recent review by
federal regulators with respect to its compliance with the CRA.
Both the United States Congress and the banking regulatory
authorities have proposed substantial changes to the CRA and
fair lending laws, rules and regulations, and there can be no
certainty as to the effect, if any, that any such changes would
have on the Bank.
Instability of Regulatory Structure: Various legislation,
including proposals to overhaul the bank regulatory system,
expand the powers of banking institutions and bank holding
companies and limit investments that a depository institution
may make with insured funds, is from time to time introduced in
Congress. Such legislation may change banking statutes and the
operating environment of the Company and the Bank in substantial
and unpredictable ways. The Company cannot determine the
ultimate effect that potential legislation, if enacted, or
implementing regulations with respect thereto, would have upon
the financial condition or results of operations of the Company
or the Bank.
Expanding Enforcement Authority: One of the major
additional burdens imposed on the banking industry by FDICIA is
the increased ability of banking regulators to monitor the
activities of banks and their holding companies. In addition,
the FRB, OCC and FDIC 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 that 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.
-20-
<PAGE>
FRB monetary policies have materially affected the
operating results of commercial banks in the past and are
expected to continue to do so in the future. The nature of
future monetary policies and the effect of such policies on the
business and earnings of the Company and the Bank cannot be
predicted.
Statistical Disclosures
The following schedules present, for the periods indicated,
certain financial and statistical information of the Company as
required under the Securities and Exchange Commission's Industry
Guide 3, or a specific reference as to the location of required
disclosures included as a part of this Form 10-K as of and for
the year ended December 31, 1999.
I. Distribution of Assets, Liabilities and Stockholders'
Equity; Interest Rates and Interest Differential
A & B. Average Balance Sheet and Related Analysis of Net Interest Earnings
This information is included under the heading "Yields
Earned and Rates Paid" included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
C. Interest Differential
This information is included under the heading "Yields
Earned and Rates Paid" included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results
of Operations."
II. Securities Portfolio
A. The following is a schedule of the December 31 carrying
values of securities available for sale:
1999 1998 1997
------------ ------------ ------------
U.S. Treasury notes $ -- $ 5,512,050 $ 4,993,751
U.S. government agencies 10,509,965 11,710,341 18,494,687
State and county municipals -- 2,514,782 3,806,271
Mortgage-backed securities 476,173 3,179,716 442,699
Other securities 1,494,354 1,969,815 1,567,592
------------ ------------ ------------
Total securities $ 12,480,492 $ 24,886,704 $ 29,305,000
============ ============ ============
B. The following is a schedule of maturities for each category
of securities available for sale and the related weighted-
average yield of such securities as of December 31, 1999:
-21-
<PAGE>
<TABLE>
<CAPTION>
After 1 Year but After 5 Years but
Within 1 Year Within 5 Years Within 10 Years Other Securities
----------------- ---------------- ------------------- ------------------
Amount Yield Amount Yield Amount Yield Amount Yield
--------- ----- ------ ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government agencies $ -- -- $ -- -- $10,509,965 5.18% $ -- --
Mortgage-backed securities 356,046 6.23% -- -- 120,127 5.85% -- --
Other securities -- -- -- -- -- -- 1,494,354 N/A
--------- ------ ----------- ----------
Total $ 356,046 6.23% $ -- --% $10,630,092 5.19% $1,494,354 N/A
========= ====== =========== ==========
</TABLE>
The weighted-average yields are calculated using amortized
cost of securities and are based on coupon rates for
securities purchased at par value and on effective interest
rates considering amortization or accretion if the
securities were purchased at a premium or discount. Other
securities include stock holdings in the Independent
Bankers Financial Corporation, the Federal Reserve Bank and
the Federal Home Loan Bank that bear no stated maturity or
yield.
C. Excluding holdings of obligations of U.S. government
agencies, there were no investments in securities of any
one issuer exceeding 10% of the Company's consolidated
shareholders' equity at December 31, 1999.
III. Loan Portfolio
A. Types of Loans - Total year-end loans and medical claims
receivables are comprised of the following classifications:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Loans:
Insurance premium financing $ 20,639,094 $ 24,570,762 $ 40,361,185 $ 39,168,604 $ 22,409,356
Commercial loans 9,870,652 29,424,509 23,171,566 22,745,139 16,301,840
Installment loans 5,678,584 3,867,119 10,632,451 12,631,520 10,645,406
Real estate loans 31,529,099 42,047,938 26,668,598 24,774,167 16,281,558
------------- ------------- ------------- ------------ ------------
Total loans 67,717,429 99,910,328 100,833,800 99,319,430 65,638,160
Less: Unearned interest (510,834) (916,152) (2,212,391) (2,501,747) (1,869,751)
Allowance for credit losses (1,434,041) (1,961,840) (950,809) (1,067,041) (535,250)
------------- ------------- ------------- ------------ ------------
Total loans, net $ 65,772,554 $ 97,032,336 $ 97,670,600 $ 95,750,642 $ 63,233,159
============= ============= ============= ============ ============
Medical claims receivables:
Medical claims receivables,
net of unearned interest $ -- $ 646,378 $ 7,381,040 $ 6,334,005 $ 3,333,830
Less: Allowance for credit
losses -- (141,184) (4,307,885) (217,733) (167,677)
------------- ------------- ------------- ------------ ------------
Total medical claims
receivables, net $ -- $ 505,194 $ 3,073,155 $ 6,116,272 $ 3,166,153
============= ============= ============= ============ ============
</TABLE>
-22-
<PAGE>
The following table details the percentage of loans in each
category to total loans as of December 31:
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
Loans:
Insurance premium financing 30.48% 24.59% 40.03% 39.44% 34.14%
Commercial loans 14.58% 29.45% 22.98% 22.90% 24.84%
Installment loans 8.38% 3.87% 10.54% 12.72% 16.22%
Real estate loans 46.56% 42.09% 26.45% 24.94% 24.80%
------- ------- ------- ------- -------
Total loans 100.00% 100.00% 100.00% 100.00% 100.00%
======= ======= ======= ======= =======
B. Maturities and Sensitivities of Loans to Changes in
Interest Rates - The following is a schedule of maturities
of loans based on contractual terms and assuming no
amortization or prepayments, excluding residential real
estate and home equity loans, insurance premium finance
loans and consumer installment loans, as of December 31,
1999:
<TABLE>
<CAPTION>
Within One Year to After Five
One Year Five Years Years Total
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Fixed Rate:
Commercial and commercial
real estate 623,277 $ 3,384,934 $ 2,362,983 $ 6,371,194
Real estate construction 1,338,047 -- -- 1,338,047
----------- ----------- ------------ ------------
Total $ 1,961,324 $ 3,384,934 $ 2,362,983 $ 7,709,241
=========== =========== ============ ============
Variable Rate:
Commercial and commercial
real estate $ 4,036,913 $ 2,274,703 $ 12,424,374 $ 18,735,990
Real estate construction 850,050 23,075 -- 873,125
----------- ----------- ------------ ------------
Total $ 4,886,963 $ 2,297,778 $ 12,424,374 $ 19,609,115
=========== =========== ============ ============
</TABLE>
C. Risk Elements
1. Nonaccrual, Past Due and Restructured Loans - The
following schedule summarizes nonaccrual, past due and
restructured loans.
<TABLE>
<CAPTION>
(a), (b) & (c) 1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 705,969 $ 1,398,800 $ 91,868 $ 143,856 $ 31,000
Loans 90 days or more past
due and still accruing 13,557 414,969 97,537 111,797 39,568
-------------------------------------------------------------------
Total nonperforming loans 719,526 1,813,769 189,405 255,653 70,568
Medical claims receivables
aged beyond 120 days -- -- 4,183,064 1,079,889 --
Other repossessed assets 825,245 205,877 158,271 738,198 85,528
-------------------------------------------------------------------
Total nonperforming assets $ 1,544,771 $ 2,019,646 $ 4,530,740 $ 2,073,740 $ 156,096
===================================================================
</TABLE>
There were no loans which are "troubled debt restructurings" as defined
in Statement of Financial Accounting Standards No. 15 (exclusive of loans
included in total nonperforming loans in the above table).
The policy for placing loans on nonaccrual status is to cease accruing
interest on loans when management believes that collection of interest is
doubtful, when loans are past due as to principal and interest 90 days or more
(120 days for IPF), except that in certain circumstances interest accruals are
continued on loans deemed by management to be fully collectible. In such
cases, loans are individually evaluated in order to determine whether to
continue income recognition after 90 days beyond the due dates. When loans are
placed on nonaccrual status, any accrued interest is charged against interest
income.
-23-
<PAGE>
During 1999, $34,000 would have been recorded on the above nonaccruing
loans had such loans been accruing pursuant to contractual terms. During such
period, no interest income was actually recorded on such loans.
(d) Impaired Loans - Information regarding impaired loans at
December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year-end loans with allowance
allocated $ 3,958,654 $ 3,640,069 $ 2,306,501 $ 3,209,403 $ 950,196
Year-end loans with no
allowance allocated 414,419 1,614,945 505,443 1,627,868 332,505
-------------------------------------------------------------------
Total impaired loans $ 4,373,073 $ 5,255,014 $ 2,811,944 $ 4,837,271 $ 1,282,701
===================================================================
Amount of the allowance
allocated $ 645,899 $ 971,456 $ 331,174 $ 387,386 $ 76,692
===================================================================
</TABLE>
Impaired loans are primarily comprised of commercial loans
and installment loans, and are carried at present value of
expected cash flows, discounted at the loan's effective interest
rate or at fair value of collateral, if the loan is collateral
dependent. A portion of the allowance for loan losses is
allocated to impaired loans.
Smaller-balance homogeneous loans are evaluated for
impairment in total. Such loans include residential first
mortgage and construction loans secured by one- to four-family
residences, IPF, consumer and home equity loans. Commercial
loans and mortgage loans secured by other properties are
evaluated individually for impairment. When analysis of a
borrower's operating results and financial condition indicates
that the borrower's underlying cash flows are not adequate to
meet its debt service requirements, the loan is evaluated for
impairment. Impaired loans, or portions thereof, are charged
off when deemed uncollectible.
2. Potential Problem Loans - At December 31, 1999 no
loans were identified which management has serious
doubts about the borrower's ability to comply with
present loan repayment terms and which are not
included in item III.C.1., above.
3. Foreign Outstandings - There were no foreign
outstandings during any period presented.
4. Loan Concentrations - At December 31, 1999 there were
no concentrations of loans greater than 10% of total
loans which are not otherwise disclosed as a category
of loans in Item III.A., above.
D. Other Interest-Bearing Assets - At December 31, 1999 there
were no other interest-bearing assets required to be
disclosed under Item III.C.1. or 2. above, if such assets
were loans.
-24-
<PAGE>
E. IV. Summary of Loan Loss Experience
A. The following schedule presents an analysis of the activity
in the allowance for loan losses, average loan data and
related ratios:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 1,961,840 $ 950,809 $ 1,067,041 $ 535,250 $ 562,649
Charge-offs:
Commercial loans (602,922) (555,230) (32,519) (6,245) (13,151)
Installment loans (254,334) (305,333) (332,889) (188,419) (104,295)
Real estate loans (249,848) (10,058) (38,046) (21,185)
Insurance premium finance (1,265,999) (3,146,848) (784,493) (172,504) --
-------------- -------------- -------------- -------------- --------------
Total charge-offs (2,373,103) (4,017,469) (1,187,947) (388,353) (117,446)
-------------- -------------- -------------- -------------- --------------
Recoveries:
Commercial loans 24,202 83,515 6,258 5,067 1,012
Installment loans 57,343 49,071 92,511 43,538 37,366
Real estate loans 27,992 15,191 40,455 10,240 13,288
Insurance premium finance 930,195 526,996 7,998 2,720 --
-------------- -------------- -------------- -------------- --------------
Total recoveries 1,039,732 674,773 147,222 61,565 51,666
-------------- -------------- -------------- -------------- --------------
Net charge-offs (1,333,371) (3,342,696) (1,040,725) (326,788) (65,780)
Bank acquisition -- 820,625 -- 614,700 10,759
Transfer from allowance for
medical claims receivable losses 668,636 -- -- -- --
Provision for credit losses on loans 136,936 3,533,102 924,493 243,879 27,622
-------------- -------------- -------------- -------------- --------------
Ending balance $ 1,434,041 $ 1,961,840 $ 950,809 $ 1,067,041 $ 535,250
============== ============== ============== ============== ==============
Average loans $ 82,725,870 $ 116,049,351 $ 103,321,220 $ 85,325,222 $ 64,768,409
============== ============== ============== ============== ==============
Ratio of net charge-offs to average
loans 1.61% 2.88% 1.01% 0.38% 0.10%
============== ============== ============== ============== ==============
</TABLE>
-25-
<PAGE>
The following schedule presents an analysis of the activity in the allowance
for medical claims receivable losses, average receivable data and related
ratios:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Beginning balance $ 141,184 $ 4,307,885 $ 217,734 $ 167,677 $ 135,299
Charge-offs (12,707) (4,428,530) (2,156,355) (12,629) --
Recoveries 540,159 956,023 1,510 -- --
-------------- -------------- -------------- -------------- --------------
Net (charge-offs) recoveries 527,452 (3,472,507) (2,154,845) (12,629) --
Provision for medical claims
receivable losses -- (694,194) 6,244,996 62,686 32,378
Transfer to allowance for credit
losses on loans (668,636) -- -- -- --
-------------- -------------- -------------- -------------- --------------
Ending balance $ -- $ 141,184 $ 4,307,885 $ 217,734 $ 167,677
============== ============== ============== ============== ==============
Period end medical claims
receivables, net of unearned
interest $ -- $ 646,378 $ 7,381,040 $ 6,334,005 $ 3,333,830
============== ============== ============== ============== ==============
Average medical claims receivables $ 206,432 $ 3,582,939 $ 9,044,262 $ 3,660,432 $ 3,239,985
============== ============== ============== ============== ==============
Ratio of net charge-offs
(recoveries) to average medical
claims receivables (255.50)% 96.92% 23.83% 0.35% --%
============== ============== ============== ============== ==============
</TABLE>
The allowance for loan and medical claims receivable losses
balances and provisions charged to expense are determined by
management based on periodic reviews of the loan and medical
claims receivable portfolios, past loss experience, economic
conditions and various other circumstances which are subject to
change over time. In making this judgment, management reviews
selected large credits as well as impaired loans, other
delinquent, nonaccrual and problem loans and loans to industries
experiencing economic difficulties. The collectibility of these
loans is evaluated after considering current operating results
and financial position of the borrower, estimated market value
of collateral, guarantees and the Company's collateral position
versus other creditors. Judgments, which are necessarily
subjective, as to probability of loss and amount of such loss
are formed on these loans and medical claims receivables, as
well as other loans, taken together.
B. The following schedule is a breakdown of the year-end
allowance for credit losses allocated by type of credit. A
breakdown of the percentage of loans in each category to
total loans is included in Item III A., above.
-26-
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans:
Insurance premium financing $ 346,359 $ 644,456 $ 353,765 $ 217,734 $ 117,755
Commercial loans 352,833 450,724 152,117 178,298 136,489
Installment loans 187,370 351,246 234,798 397,353 169,674
Real estate loans 444,459 515,414 210,129 273,656 111,332
Unallocated 103,020 -- -- -- --
----------- ----------- ----------- ----------- -----------
Total for allowance loan
losses 1,434,041 1,961,840 950,809 1,067,041 535,250
Medical claims receivables -- 141,184 4,307,885 217,734 167,677
----------- ----------- ----------- ----------- -----------
Total allowance for credit
losses $ 1,434,041 $ 2,103,024 $ 5,258,694 $ 1,284,775 $ 702,927
=========== =========== =========== =========== ===========
</TABLE>
Management believes any allocation of the allowance for
credit losses into categories lends an appearance of precision
that does not exist. The allowance is utilized as a single
unallocated allowance available for all loans. The above
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 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 for any charge-
offs that occur.
V. Deposits
A. The following is a schedule of average deposit amounts and
average rates paid on each category for the periods
indicated:
<TABLE>
<CAPTION>
Average Amount Outstanding Average Rate Paid
During the Year During the Year
--------------------------------------------- --------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing
demand deposits $ 24,750,304 $ 31,450,099 $ 22,420,160 --% --% --%
Interest-bearing demand
deposits 29,419,592 44,741,576 38,109,284 2.38% 2.57% 2.75%
Savings deposits 6,019,141 9,499,843 7,846,458 2.27% 2.45% 2.41%
Time deposits 57,460,935 102,551,436 86,156,027 5.00% 5.26% 5.24%
------------- ------------- -------------
Total average deposits $ 117,649,972 $ 188,242,954 $ 154,531,929 3.15% 3.60% 3.72%
============= ============= =============
</TABLE>
B. Other categories - not applicable.
C. Foreign deposits - not applicable.
-27-
<PAGE>
D. The following is a schedule of maturities of time deposits
in amounts of $100,000 or more as of December 31, 1999:
Three months or less $ 5,003,692
Over three through six months 2,929,001
Six through twelve months 4,052,129
Over twelve months 1,241,173
---------------
Total $ 13,225,995
===============
E. Time deposits greater than $100,000 issued by foreign
offices - not applicable.
VI. Return on Equity and Assets
This information is included "Item 6. Selected Financial Data."
VII. Short-Term Borrowings
This item is not required for the Company because average
outstanding balances of short-term borrowings during the years
ended December 31, 1999, 1998 and 1997 were less than 30% of
shareholders' equity at such dates.
ITEM 2. PROPERTIES.
The following chart provides information about the Company's existing
facilities.
<TABLE>
<CAPTION>
Deposits at
Branch/Office Sq. Ft. Location/Ownership December 31, 1999
------------- ------- ----------------------- -----------------
<S> <C> <C> <C>
Converse 3,750 9154 FM 78 $ 7,160,695
Converse, Texas 78109
Owned
Fort Worth 18,208 1501 Summit Avenue 11,211,985
Fort Worth, Texas 76102
Owned
New Braunfels 1,250 1012 IH 35 South 2,103,027
New Braunfels, Texas 78130
Leased
San Antonio 2,800 426 Wolfe 1,939,060
San Antonio, Texas 78216
Owned
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deposits at
Branch/Office Sq. Ft. Location/Ownership December 31, 1999
------------- ------- ----------------------- -----------------
Schertz 1,000 420 Schertz Parkway 9,538,329
Schertz, Texas 78154
Leased
Universal City 12,000 600 Pat Booker Road 23,085,721
Universal City, Texas 78148
Owned
Whitesboro 6,365 2500 Highway 82 East 29,839,301
Whitesboro, Texas 76263 -------------
Owned
Total $ 84,878,118
=============
</TABLE>
The Company considers its physical properties to be in good
operating condition and suitable for the purposes for which they
are being used. All the properties owned by the Company are
unencumbered by any mortgage or security interest and are, in
management's opinion, adequately insured. The Company operates
its community banking business segment out of each facility,
while the IPF business segment is operated out of the Fort Worth
facility.
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
-29-
<PAGE>
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, which affirmed the judgment of the trial court.
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 now 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 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.
-30-
<PAGE>
No matter was submitted to a vote of the stockholders of
the Company during the fourth quarter of 1999.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK-
HOLDER MATTERS.
Market Information
The Company's Common Stock was traded on the American Stock
Exchange, Inc.'s ("AMEX") primary list under the symbol "SRY"
from January 10, 1995 until trading was halted on November 8,
1999. The Company's Common Stock was formally delisted by AMEX
effective as of April 3, 2000. See "AMEX Delisting" under "Item
1. Business - Recent Developments."
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 1998 and for
January 1 through November 8, 1999.
----------------------------------------
High Low
----------------------------------------
1999 Fiscal Year
----------------
First Quarter $3.38 $1.50
Second Quarter $1.88 $1.13
Third Quarter $2.00 $0.94
Fourth Quarter $0.94 $0.44
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
Stockholders
As of March 31, 2000 there were 390 record holders of the
Company's Common Stock.
Dividend Policy
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. ss.ss. 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.
-31-
<PAGE>
Transfer Agent
Securities Transfer Corporation
16910 Dallas Parkway, Suite 100
Dallas, Texas 75248
(972) 447-9890
Annual and Other Reports, Stockholder and General Inquiries
Surety Capital Corporation is required to file an annual
report on Form 10-K for its fiscal year ended December 31, 1999
with the Securities and Exchange Commission. Copies of the Form
10-K annual report and the Company's quarterly reports may be
obtained without charge by contacting:
Mr. John D. Blackmon
Surety Capital Corporation
1501 Summit Avenue
Fort Worth, Texas 76102
(817) 335-5955
-32-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following summary of 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, 1999. All prior
financial information has been restated to reflect previously
unrecognized losses resulting from accounting irregularities in
the Company's IPF division and certain other error corrections.
See Note 2 to the accompanying consolidated financial statements
for details of the restatement.
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------
(Dollars in thousands, except per share amounts) 1999(1) 1998(2) 1997 1996(3) 1995(4)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets $ 104,194 $ 174,605 $ 171,985 $ 176,439 $ 121,339
Cash and cash equivalents 9,751 34,052 28,461 22,866 23,217
Securities available for sale 12,480 24,887 29,305 16,221 10,128
Securities held to maturity -- -- -- 22,561 13,781
Loans, net of unearned interest 67,207 98,994 98,621 96,818 63,768
Allowance for credit losses on loans 1,434 1,962 951 1,067 535
Medical claims factoring, net -- 505 3,073 6,116 3,166
Total deposits 84,878 154,847 154,541 155,690 109,599
Long term debt 4,350 4,350 -- -- --
Shareholders' equity 11,323 11,716 15,206 19,112 10,294
Year Ended December 31,
-----------------------------------------------------------------
1999(1) 1998(2) 1997 1996(3) 1995(4)
-----------------------------------------------------------------
Income Statement Data:
Interest income $ 9,912 $ 16,451 $ 15,420 $ 14,390 $ 9,535
Interest expense 4,104 7,101 5,750 5,361 3,678
-----------------------------------------------------------------
Net interest income 5,808 9,350 9,670 9,029 5,857
Provision for credit losses 137 2,839 7,169 307 60
-----------------------------------------------------------------
Net interest income after provision for credit
losses 5,671 6,511 2,501 8,722 5,797
Noninterest income 4,552 3,425 2,539 1,877 1,419
Noninterest expense 10,809 12,493 11,154 8,143 5,878
-----------------------------------------------------------------
Income (loss) before income taxes (586) (2,557) (6,114) 2,456 1,338
Income tax expense (benefit) (840) 913 (2,085) 877 451
-----------------------------------------------------------------
Net income (loss) $ 254 (3,470) (4,029) 1,579 887
=================================================================
Common Share Data:
Net income (loss) - basic $ 0.04 $ (0.60) $ (0.70) $ 0.29 $ 0.27
Net income (loss) - diluted 0.04 (0.60) (0.70) 0.29 0.25
Book value 1.92 2.03 2.64 3.32 2.94
Dividend pay-out ratio(5) -- -- -- -- --
</TABLE>
-33-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
1999(1) 1998(2) 1997 1996(3) 1995(4)
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Performance Data
Return (loss) on average total assets 0.19% (1.66)% (2.30)% 0.96% 0.83%
Return (loss) on average shareholders' equity 2.28% (27.09)% (21.94)% 9.15% 9.52%
Net interest spread(6) 4.28% 4.55% 5.39% 5.52% 5.47%
Net interest margin(7) 4.98% 5.11% 6.11% 6.14% 6.04%
Average shareholders' equity to average assets 8.11% 6.13% 10.50% 10.49% 8.68%
Total loans to total deposits at year-end 79.18% 63.93% 63.82% 62.19% 58.18%
Asset Quality Ratios
Nonperforming assets to total assets 1.48% 1.16% 2.63% 1.18% 0.07%
Nonperforming loans to total loans(8) 1.06% 1.82% 0.19% 0.26% 0.11%
Net loan charge-offs to average loans(8) 1.61% 2.88% 1.01% 0.38% 0.10%
Allowance for credit losses on loans to total loans(8) 2.12% 2.02% 0.94% 1.07% 0.82%
Allowance for credit losses on loans to nonperforming 199.30% 108.16% 502.00% 417.38% 758.49%
Loans(8)
</TABLE>
(1) On June 30, 1999 the Company sold two branches located in
Waxahachie and Midlothian, Texas.
(2) On April 1, 1998 the Company acquired 100% of the
outstanding common stock of TexStar National Bank,
Universal City, Texas. On October 16, 1998 the Company
sold four branches located in Chester, Kennard, Lufkin and
Wells, Texas.
(3) 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 acquired
certain assets and assumed certain liabilities relating to
Providers Funding Corporation located in Dallas, Texas.
(4) On September 28, 1995 the Company acquired certain assets
and assumed certain liabilities relating to the branch of
Bank One, Texas, National Association located in
Waxahachie, Texas.
(5) Calculated as dividends declared per share divided by net
income per share.
(6) Calculated as the difference between the average yield on
interest-earning assets and the average cost of interest-
bearing liabilities.
(7) Calculated as net interest income divided by average
interest-earning assets.
(8) Exclusive of medical claims factoring.
-34-
<PAGE>
The following tables set forth the consolidated financial
condition and results of operations as of the dates and for the
quarters indicated.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 7,772,075 $ 7,849,265 $ 5,054,824 $ 5,416,633
Federal funds sold 22,509,673 27,374,339 4,584,339 4,334,595
----------------------------------------------------------------
Total cash and cash
equivalents 30,281,748 35,223,604 9,639,163 9,751,228
Interest-bearing deposits -- -- 25,000 25,000
Securities available for sale,
at fair value 26,419,007 18,688,649 13,205,414 12,480,492
Loans, net 90,298,396 74,481,074 71,638,943 65,772,554
Medical claims receivables, net 140,177 -- -- --
Premises and equipment, net 6,562,402 4,890,126 5,949,932 6,295,302
Accrued interest receivable 927,509 614,052 568,344 514,453
Deferred tax asset, net of
valuation allowance -- -- 284,221 1,179,590
Other real estate and repossessed
assets 329,004 157,088 836,245 825,245
Goodwill, net 8,329,635 5,683,005 5,557,675 5,432,346
Other assets 1,846,052 1,743,821 1,102,874 1,917,723
----------------------------------------------------------------
Total assets $165,133,930 $141,481,419 $108,807,811 $104,193,933
================================================================
Liabilities:
Deposits $146,449,427 $ 96,235,695 $ 89,531,841 $ 84,878,118
Notes payable 4,350,000 4,350,000 4,350,000 4,350,000
Due to purchaser for branch sale -- 24,993,724 -- --
Accrued interest payable and
other liabilities 3,562,231 4,090,705 3,603,044 3,642,845
----------------------------------------------------------------
Total Liabilities 154,361,658 129,670,124 97,484,885 92,870,963
Shareholders' equity:
Common Stock 58,401 58,401 58,401 59,751
Additional Paid-in-Capital 17,093,786 17,093,787 17,093,790 17,152,587
Accumulated deficit (5,967,172) (4,659,561) (5,011,487) (4,911,864)
Stock rights issuable 57,902 57,902 57,902 57,902
Treasury Stock (375,443) (375,443) (375,443) (375,443)
Accumulated other comprehensive
income (loss) (95,202) (363,791) (500,237) (659,963)
----------------------------------------------------------------
Total shareholders' equity 10,772,272 11,811,295 11,322,926 11,322,970
----------------------------------------------------------------
Total liabilities and
shareholders' equity $165,133,930 $141,481,419 $108,807,811 $104,193,933
================================================================
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
--------------------------------------------------------------------
<S>
Assets: <C> <C> <C> <C>
Cash and due from banks $ 6,959,708 $ 11,801,147 $ 9,054,812 $ 9,289,897
Federal funds sold 32,319,522 34,912,591 50,497,554 24,761,752
----------------------------------------------------------------
Total cash and cash
equivalents 39,279,230 46,713,738 59,552,366 34,051,649
Interest-bearing deposits 94,939 94,939 94,939 94,939
Securities available for sale,
at fair value 25,079,197 42,897,060 32,690,700 24,886,704
Loans, net 98,591,741 127,715,966 118,920,182 97,032,336
Medical claims receivables, net 2,531,874 1,074,166 680,505 505,194
Premises and equipment, net 3,650,054 7,376,268 7,534,164 6,762,223
Accrued interest receivable 798,392 1,320,315 1,176,553 759,833
Deferred tax asset, net of valuation
allowance 1,968,213 2,223,374 2,221,608 --
Other real estate and repossessed
assets 174,639 628,894 739,343 205,877
Goodwill, net 4,627,719 9,054,447 9,697,493 8,374,997
Other assets 1,408,910 1,994,367 1,330,114 1,930,824
----------------------------------------------------------------
Total assets $178,204,908 $241,093,534 $234,637,967 $174,604,576
================================================================
Liabilities:
Deposits $156,128,931 $219,509,307 $213,372,337 $154,847,135
Notes payable 4,350,000 4,350,000 4,350,000 4,350,000
Accrued interest payable and
other liabilities 2,363,967 2,808,414 2,445,063 3,691,590
----------------------------------------------------------------
Total Liabilities 162,842,898 226,667,721 220,167,400 162,888,725
Shareholders' equity:
Common Stock 57,922 58,401 58,401 58,401
Additional Paid-in-Capital 16,876,119 17,031,136 17,093,786 17,093,786
Accumulated deficit (1,486,609) (2,488,013) (2,494,820) (5,165,947)
Stock rights issuable 57,922 57,902 57,902 57,902
Treasury Stock (172,828) (255,073) (375,443) (375,443)
Accumulated other comprehensive
income (loss) 29,484 21,460 130,741 47,152
----------------------------------------------------------------
Total shareholders' equity 15,362,010 14,425,813 14,470,567 11,715,851
----------------------------------------------------------------
Total liabilities and
shareholders' equity $178,204,908 $241,093,534 $234,637,967 $174,604,576
================================================================
</TABLE>
-36-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-----------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 2,305,071 $ 2,034,235 $ 1,838,398 $ 1,843,421 $ 8,021,125
Securities:
Taxable 306,047 333,716 223,818 224,748 1,088,329
Tax-exempt 33,472 32,544 -- 1 66,017
Medical claims receivables
Factoring 60,714 3,214 -- -- 63,928
Federal funds sold and interest-
bearing deposits 257,574 300,275 59,258 55,446 672,553
-----------------------------------------------------------------------------
Total interest income 2,962,878 2,703,984 2,121,474 2,123,616 9,911,952
Interest expense:
Deposits 1,192,439 1,078,339 730,964 709,276 3,711,018
Notes Payable 108,273 108,272 108,273 67,900 392,718
-----------------------------------------------------------------------------
Total interest expense 1,300,712 1,186,611 839,237 777,176 4,103,736
-----------------------------------------------------------------------------
Net interest income 1,662,166 1,517,373 1,282,237 1,346,440 5,808,216
Provision for credit losses on loans 95,355 36,590 3,837 1,154 136,936
-----------------------------------------------------------------------------
Net interest income after provision
for credit losses on loans 1,566,811 1,480,783 1,278,400 1,345,286 5,671,280
Noninterest income 460,162 3,204,802 561,977 325,327 4,552,268
Noninterest expense:
Salaries and employee benefits 1,220,228 1,114,114 981,847 1,113,889 4,430,078
Occupancy and equipment 509,110 626,910 385,228 272,417 1,793,665
Other expenses 1,102,322 1,322,770 989,607 1,170,632 4,585,331
-----------------------------------------------------------------------------
Total non-interest expense 2,831,660 3,063,794 2,356,682 2,556,938 10,809,074
-----------------------------------------------------------------------------
Income (loss) before income taxes (804,687) 1,621,791 (516,305) (886,325) (585,526)
Income tax expense (benefit) (3,462) 314,179 (164,382) (985,944) (839,609)
-----------------------------------------------------------------------------
Net income (loss) $ (801,225) $ 1,307,612 $ (351,923) $ 99,619 $ 254,083
=============================================================================
Net income (loss) per share - Basic $ (0.14) $ 0.22 $ (0.06) $ 0.02 $ 0.04
=============================================================================
Net income (loss) per share -
Diluted $ (0.14) $ 0.22 $ (0.06) $ 0.02 $ 0.04
=============================================================================
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-----------------------------------------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income:
Loans, including fees $ 2,435,016 $ 3,365,999 $ 2,774,567 $ 3,117,015 $ 11,692,597
Securities:
Taxable 352,538 593,986 525,414 328,140 1,800,078
Tax-exempt 36,070 92,257 24,355 36,658 189,340
Medical claims receivables
factoring 636,366 285,154 633,799 (511,250) 1,044,069
Federal funds sold and interest-
bearing deposits 351,634 450,624 609,125 313,425 1,724,808
-----------------------------------------------------------------------------
Total interest income 3,811,624 4,788,020 4,567,260 3,283,988 16,450,892
Interest expense:
Deposits 1,427,548 2,004,562 1,903,989 1,446,512 6,782,611
Notes Payable -- 100,253 91,695 126,134 318,082
-----------------------------------------------------------------------------
Total interest expense 1,427,548 2,104,815 1,995,684 1,572,646 7,100,693
-----------------------------------------------------------------------------
Net interest income 2,384,076 2,683,205 2,571,576 1,711,342 9,350,199
Provision for credit losses on loans 514,506 1,529,437 137,092 1,352,067 3,533,102
Provision for medical claims
receivables losses (335,000) 459,043 13,904 (832,141) (694,194)
-----------------------------------------------------------------------------
Total provision for credit losses 179,506 1,988,480 150,996 519,926 2,838,908
-----------------------------------------------------------------------------
Net interest income after provision
for credit losses 2,204,570 694,725 2,420,580 1,191,416 6,511,291
Noninterest income 570,970 648,269 734,185 1,471,878 3,425,302
Noninterest expense:
Salaries and employee benefits 1,196,262 1,494,994 1,515,663 1,413,791 5,620,710
Occupancy and equipment 402,308 543,412 521,999 654,276 2,121,995
Other expenses 838,346 865,781 1,160,376 1,886,025 4,750,528
-----------------------------------------------------------------------------
Total non-interest expense 2,436,916 2,904,187 3,198,038 3,954,092 12,493,233
-----------------------------------------------------------------------------
Income (loss) before income taxes 338,624 (1,561,193) (43,273) (1,290,798) (2,556,640)
Income tax expense (benefit) 129,502 (559,789) (36,466) 1,380,329 913,576
-----------------------------------------------------------------------------
Net income (loss) $ 209,122 $ (1,001,404) $ (6,807) $ (2,671,127) $ (3,470,216)
=============================================================================
Net income (loss) per share - Basic $ 0.03 $ (0.17) $ -- $ (0.46) $ (0.60)
=============================================================================
Net income (loss) per share - Diluted$ 0.03 $ (0.17) $ -- $ (0.46) $ (0.60)
=============================================================================
</TABLE>
-38-
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Business of Surety Capital Corporation
Surety Capital Corporation (the "Holding Company"), a
corporation incorporated under the laws of the state of Delaware
in 1985, is a bank holding company registered under BHC Act.
The Company owns all of the issued and outstanding shares of
capital stock of Surety Bank, National Association (the "Bank"),
Fort Worth, Texas. The Bank is a commercial bank chartered as a
national banking association in 1963, and is the Holding
Company's only significant asset. The Holding Company and the
Bank are collectively referred to in this Item 7 as the
"Company."
The Company conducts business from its main office located
at 1501 Summit Avenue in Fort Worth, and from its six full
service branches located in Converse, New Braunfels, San
Antonio, Schertz, Universal City and Whitesboro, Texas. The
Company provides customary retail and commercial banking
services to its customers, including checking and savings
accounts, time deposits, IRAs, money transfers, safe deposit
facilities, commercial loans, real estate mortgage loans,
consumer loans and night depository facilities. The Company
also specializes in the niche-lending product of IPF lending.
No material industry or group concentrations exist in the loan
portfolio.
The Company also invests in U.S. government and agency
obligations, obligations of states and political subdivisions,
mortgage-backed securities and other investments permitted by
applicable law. Funds for lending and other investment
activities come primarily from customer deposits, borrowed
funds, and loan and security sales and principal repayments.
As a bank holding company, the Holding Company is subject
to regulation, supervision and examination by the Federal
Reserve Board. As a federally chartered commercial bank, the
Bank is subject to regulation, supervision and examination by
the Office of the Comptroller of the Currency (the "OCC") and
the FDIC. The FDIC insures deposits in the Bank up to
applicable limits. The Bank is also a member of the Federal
Reserve System and the Federal Home Loan Bank (the "FHLB") of
Dallas.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
In the following pages, management presents an analysis of
the Company's financial condition and results of operations as
of and for the year ended December 31, 1999, compared to prior
years. This discussion is designed to provide stockholders with
a more comprehensive review of the operating results and
financial position than could be obtained from an examination of
the financial statements alone. This analysis should be read in
conjunction with the financial statements and related footnotes
and the selected financial data included elsewhere in this
report. All prior year financial information has been restated
to reflect the recognition of losses in the Company's IPF
division as a result of irregular accounting transactions
discovered in 1999. See further discussion of the prior year
restatement below under the heading "Restatement of Prior Year
Financial Statements."
Forward-Looking Statements
When used in this document, the words or phrases "will
likely result," "are expected to," "will continue," "is
-39-
<PAGE>
anticipated," "estimated," "projected," or similar expressions
are intended to identify "forward looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market
area, changes in policies by regulatory agencies, fluctuations
in interest rates, demand for loans in the Company's market area
and competition, that could cause actual results to differ
materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect the
Company's financial performance and could cause the Company's
results for future periods to differ materially from any
statements expressed with respect to future periods.
The Company does not undertake, and specifically disclaims
any obligation, to publicly revise any forward-looking
statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or
unanticipated events.
Restatement of Prior Year Financial Statements
In 1999 various accounting irregularities were found during
the course of an internal audit of the Company's IPF division.
Through further investigation, internal audit identified a
significant number of transactions whereby refund amounts due to
some borrowers were inappropriately diverted. Most of the
refunds were applied against the balance of various unrelated
loan accounts including past due loan principal, past due
interest, assessed late charges, etc.
The refunds due to borrowers were primarily the result of
cancellations of the underlying insurance contracts to which the
loans related. Insurers require the entire premium to be paid
at the inception of the policy. The Company generally finances
75% of the premium, requiring the loan customer to pay the
remainder. The insurer earns the premium ratably over the term
of the policy coverage. When a policy is canceled prior to the
end of the coverage term, the insurer must refund the unearned
premium less any cancellation fees. The Company holds a
security interest in the unearned premium for all IPF loans.
Accordingly, when a policy is canceled, the insurer remits the
entire unearned premium to the Company. Upon receipt, the
Company uses the funds to pay-off the loan balance. After the
loan is paid in full, any remaining funds should be remitted to
the borrower. As indicated above, some refunds due to borrowers
were used to pay-down or pay-off various unrelated, delinquent
loan accounts. The irregular transactions were reported to the
OCC, and in accordance with an amendment to a prior Formal
Agreement with the OCC, the Company retained the services of a
forensic accountant to conduct an independent review of the IPF
division covering the period from January 1, 1996 to December
31, 1999.
As a result of the independent review of the IPF division,
the Company recognized additional losses, including interest, of
$2,611,000 ($1,723,000 on a tax-effected basis). These losses
primarily related to the recognition of previously unrecognized
loan charge-offs. Errors resulting from the absence of
appropriate accounting controls within the IPF division, to a
much lesser extent, also contributed to such losses. The
additional losses were recognized as adjustments to the current
and prior years beginning in the first quarter of 1996 and
extending through the fourth quarter of 1999. The losses
totaled $502,000 in 1999, $1,092,000 in 1998, $837,000 in 1997
and $180,000 in 1996. All prior year financial information
included in the accompanying consolidated financial statements
and in the Company's annual report on Form 10-K for the year
ended December 31, 1999 has been restated to reflect these
losses.
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The Company made refunds to approximately 2,398 borrowers,
whose original refunds were never paid, totaling $2,523,000, of
which $567,000 represented interest. Accruals for these
payments, totaling $2.5 million at December 31, 1999 and
$2.0 million at December 31, 1998, are included in other
liabilities on the accompanying balance sheets.
The Company no longer employs the persons directly
responsible for managing the IPF division during the period when
the diversions occurred.
The comparative consolidated financial statements as of and
for the years ended December 31, 1998 and 1997, as restated,
have not been audited. Although the Company has made every
effort to have the prior financial statements re-audited, it has
been unsuccessful in such effort, as the Company has been unable
to secure a qualified, independent audit firm willing to provide
an audit opinion on such periods. The Company's original
auditors for 1998 and 1997, as well as the Company's current
auditors, declined the Company's request to audit the restated
financial statements. Management believes that no other
accounting firm would be willing to audit the restated financial
statements for the previous years in light of the irregularities
discovered and the absence of adequate internal controls during
that time. Additionally, required management representations
would not be available as all members of the former senior
management group are no longer employed by the Company.
Formal Agreement with the OCC
On November 19, 1998 the Board of Directors of the Bank
entered into a formal written agreement (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. The Bank was also
required to achieve certain additional capital levels by Decem-
ber 31, 1999. Under the Formal Agreement, by March 31, 1999 the
Bank was required to achieve total risk-based capital of at
least 12% of risk-weighted assets and Tier I leverage capital of
at least 7.5% of adjusted total assets. By December 31, 1999
the Bank was required to achieve total risk-based capital of at
least 14% of risk-weighted assets. The Bank failed to achieve
the capital requirements set forth in the Formal Agreement by
March 31, 1999 and submitted a request for an extension to
September 30, 1999. The OCC granted the extension and the Bank
achieved the required levels of capital upon completion of the
sale of the Midlothian and Waxahachie branches on June 30, 1999.
At December 31, 1999 the Bank met the capital levels required by
the Formal Agreement, with total risk-based capital of 14.73% of
risk-weighted assets and Tier I leverage capital of 9.78% of
adjusted total assets.
Memorandum of Understanding with the Federal Reserve Board
On October 28, 1999 the Board of Directors of the Holding
Company entered into a memorandum of understanding ("MOU") with
the Federal Reserve Board ("FRB"). Under the MOU, the Holding
Company is not permitted to declare or pay any corporate
dividends or incur any additional debt without the prior
approval of the FRB. Also, the Holding Company was required to
develop and submit to the FRB a written three-year capital plan,
a plan to service the Holding Company's existing debt without
incurring any additional debt, and written procedures designed
to strengthen and maintain the Holding Company's internal
records and controls to ensure that future regulatory reports
are filed in a timely and accurate manner. The Holding Company
has submitted each of the requested plans and procedures to the
FRB. Finally, the Holding Company is mandated under the MOU to
comply fully with all formal and informal supervisory actions
that have been or may be imposed on the Bank by the OCC.
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Analysis of Financial Condition
The Company's assets totaled $104.2 million at December 31,
1999 compared to $174.6 million at December 31, 1998, a decrease
of $70.4 million, or 40.3%. The decrease in assets was
primarily the result of the sale of the Waxahachie and
Midlothian branches in June 1999, which resulted in a pretax gain
of $3.1 million. The Company sold loans totaling $13.1 million,
real property, premises and equipment totaling $1.5 million, and
cash and other assets totaling $105,000, relieved goodwill
associated with these branches by $2.4 million, and the acquirer
assumed deposits and other liabilities totaling $45.4 million.
After giving effect to a premium of 2.5% on loans and 11.0% on
deposits totaling $5.3 million, in addition to the cash at the
branches, the Company paid $25.2 million in cash as consideration
for the net deposit liabilities assumed by the acquirer.
Federal funds sold decreased $20.5 million, or 82.7%, from
$24.8 million at December 31, 1998 to $4.3 million at December
31, 1999, primarily as a result of the use of such funds to
finance the sale of the branches.
Total securities available for sale decreased
$12.4 million, or 49.8%, from $24.9 million at December 31, 1998
to $12.5 million at December 31, 1999. The decrease was due to
$18.3 million in maturities and principal repayments combined
with $4.6 million in sales of securities available for sale.
The sales were primarily made to provide funds to finance the
sale of the branches. The decline was partly offset by
$11.5 million in purchases as most of the proceeds from the
aforementioned maturities and principal repayments were
reinvested in U.S. government agency securities.
The Company invests primarily in U.S. Treasury notes,
obligations of U.S. government agencies and corporations,
municipal bonds, and mortgage-backed securities. Mortgage-
backed securities include Federal Home Loan Mortgage Corporation
and Government National Mortgage Association participation
certificates. Other securities include stock holdings in the
Independent Bankers Financial Corporation, the Federal Reserve
Bank of Dallas and the Federal Home Loan Bank of Dallas. All of
the Company's securities are classified as available for sale.
Management classifies securities as available for sale to
provide the Company with the flexibility to provide for
liquidity needs or to move such funds into loans as demand
warrants. The Company held no derivative securities or
structured notes during any period presented.
At December 31, 1999 the unrealized loss on securities
available for sale totaled $1.0 million compared to an
unrealized gain of $74,000 at December 31, 1998. No impairment
loss related to these securities has been recognized, as
management believes the decline in the fair value is temporary.
Net loans decreased $31.2 million, or 32.2%, from
$97.0 million at December 31, 1998 to $65.8 million at December
31, 1999. After adjusting for the $13.1 million in loans sold
($3.6 million in commercial loans, $8.5 million in real estate
loans and $1.0 million in installment loans) in connection with
the sale of the branches, the decrease in loans totaled
$18.1 million. Decreases were experienced in commercial, real
estate and IPF loans. Excluding the loans sold in connection
with the sale of the branches, commercial, real estate and IPF
loans decreased $15.9 million, $2.0 million and $3.9 million
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from December 31, 1998. The decrease in commercial loans was
primarily in the San Antonio market area as a result of the loss
of numerous commercial relationships to a competitor financial
institution. Several officers and directors of the competitor
financial institution were former officers and directors of
TexStar, which was acquired by the Company in 1998. As a non-
compete agreement was not part of the purchase transaction, the
former officers and directors of TexStar were able to solicit
the business of their former customers. The decrease in real
estate loans was primarily in the one-to-four family residential
real estate portfolio. The Company experienced a decrease in
production volume due to a general rise in interest rates.
Additionally, due to the rising interest rate environment, many
of the Company's customers refinanced existing variable-rate
loans with fixed-rate products offered by other financial
institutions. IPF loans decreased as a result of the Company's
decision to close the southeast office in Atlanta, Georgia in
1998. Although the IPF loan production office closed in 1998,
many of the IPF loans originated in the Atlanta market area
remained outstanding as of December 31, 1998. Such loans were
paid-off in 1999. Installment loans increased $1.8 million from
$3.9 million at December 31, 1998 to $5.7 million at December
31, 1999 despite the sale of $1.0 million of such loans in
connection with the sale of the branches. The increase in
installment loans was due to increased volume from normal
operations as the Company did not change its philosophy
regarding pricing or underwriting standards for such loans
during the year.
Despite the decrease in loans, total loans, net of unearned
interest, as a percentage of total deposits increased to 79.2%
at December 31, 1999 compared to 63.9% at December 31, 1998.
Net premises and equipment totaled $6.8 million at December
31, 1998 compared to $6.3 million at December 31, 1999,
decreasing only $467,000, despite the inclusion of $1.5 million
of such assets with the sale of the branches. In 1999 the
Company purchased and remodeled an existing facility in downtown
Fort Worth, Texas and relocated the main office operations from
the former leased facility in Hurst, Texas. Additions to
premises and equipment in connection with the new facility
totaled $1.8 million. Other additions totaled $174,000 while
the net book value of assets sold or disposed, exclusive of the
sale of the branches, totaled $31,000. Depreciation totaling
$835,000 during 1999 accounted for the remainder of the
decrease.
Other real estate owned and repossessed assets totaled
$825,000 at December 31, 1999 compared to $206,000 at December
31, 1998. The increase resulted as the Company acquired
$827,000 of real estate in settlement of loans during 1999,
while real estate with a carrying value of $159,000 was sold.
Gains totaling $9,000 were realized on those sales. Other
repossessed assets, which primarily consist of automobiles,
decreased $49,000 during 1999.
Goodwill decreased from $8.4 million at December 31, 1998
to $5.4 million at December 31, 1999 as the Company wrote-off
$2.4 million in goodwill in connection with the sale of the
branches. Amortization of goodwill totaling $579,000 during
1999 accounted for the remainder of the decrease.
Deposits are attracted principally from within the
Company's primary market area through the offering of a broad
selection of deposit instruments, including checking accounts,
money market accounts, regular savings accounts, term
certificate accounts and individual retirement accounts.
Interest rates paid, maturity terms, service fees and withdrawal
penalties for the various types of accounts are established
periodically by management based on the Company's liquidity
requirements, growth goals and interest rates paid by
competitors. The Company does not use brokers to attract
deposits.
Total deposits decreased $69.9 million, or 45.2%, from
$154.8 million at December 31, 1998 to $84.9 million at December
31, 1999. After adjusting for the $45.2 million in deposits
sold ($9.7 million in noninterest-bearing checking,
$17.8 million in savings, NOW and money market accounts and
$17.7 million in time deposits) in connection with the sale of
the branches, the decrease in deposits totaled $24.7 million.
Excluding deposits sold in connection with the sale of the
branches, noninterest-bearing deposits decreased $5.2 million,
or 24.0%, while savings, NOW and money market accounts decreased
$2.5 million, or 9.8%, and time deposits decreased $17.0
million, or 27.2%. The overall decrease in these categories of
deposits is the result of the loss of numerous customer
relationships in the San Antonio market area to a competitor
financial institution for reasons discussed in the analysis of
the changes in loans above, the loss of certain public fund
deposit relationships in the Whitesboro market area, and the
loss of certain deposits retained in connection with the sale of
the Midlothian and Waxahachie branches. In order to obtain
regulatory approval for the sale of the branches, the Company
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retained $8.5 million in time certificates of deposit and IRAs.
Customers have elected not to renew these deposits as they have
matured because the Company no longer has branch facilities in
their market areas.
At December 31, 1999 the Company's time deposits totaled
$45.4 million, or 53.5% of total deposits compared to
$80.1 million, or 51.7% of total deposits, at December 31, 1998.
All of the Company's time deposits mature in less than five
years. As of December 31, 1999, $37.3 million in time deposit
were due to mature within one year. Based on past experience
and the Company's prevailing pricing strategies, management
believes a substantial percentage of such certificates will
renew with the Company at maturity. If there is a significant
deviation from historical experience, the Company can utilize
borrowings from the FHLB as an alternative to this source of
funds, subject to regulatory approval under the Formal
Agreement.
Borrowed funds totaled $4.4 million at December 31, 1999
and 1998. Borrowed funds consist of convertible subordinated
notes issued on March 31, 1998 to provide funds to finance the
acquisition of TexStar. The notes bear interest at a rate of 9%
per annum until maturity. No principal payments are due until
maturity on March 31, 2008, while interest on the notes is
payable semi-annually. Details of the notes are discussed
further in the notes to the consolidated financial statements.
Comparison of Results of Operations
Net Income. General economic conditions, the monetary and
fiscal policies of federal agencies and the regulatory policies
of agencies that regulate financial institutions affect the
operating results of the Company. Interest rates on competing
investments and general market rates of interest influence the
Company's cost of funds. Lending activities are influenced by
the demand for various types of loans, which in turn is affected
by the interest rates at which such loans are made, general
economic conditions and the availability of funds for lending
activities.
The Company's net income is primarily dependent upon its
net interest income, which is the difference between interest
income generated on interest-earning assets and interest expense
incurred on interest-bearing liabilities. Provisions for credit
losses, service charges, gains on the sale of assets and other
income, noninterest expense and income taxes also affect net
income.
Net income totaled $254,000 for 1999 compared to net losses
of $3,470,000 for 1998 and $4,029,000 for 1997. Net income
(loss) per share was $0.04 for 1999, $(0.60) for 1998, and
$(0.70) for 1997. Net income (loss) as a percentage of average
assets was 0.19%, (1.66)% and (2.30)% for 1999, 1998 and 1997,
while net income (loss) as a percentage of average shareholders'
equity was 2.26%, (27.09)% and (21.94)% over the same three
years.
Net Interest Income. Net interest income is the largest
component of the Company's income and is affected by the
interest rate environment and the volume and composition of
interest-earning assets and interest-bearing liabilities.
The general market rates of interest, including the deposit
and loan rates offered by many financial institutions, are
influenced by the FRB through adjustments to the discount rate.
The discount rate is the interest rate at which member
institutions can borrow funds from the Federal Reserve if
necessary. The discount rate began 1997 at 5.00% and remained
stable until the fourth quarter of 1998 when the rate was
decreased in two separate adjustments of 25 basis points each.
In 1999 the discount rate was increased by 25 basis points in
the third quarter and again in the fourth quarter to end the
year at 5.00%. Over the same period, the Company's prime
interest rate, the rate offered on loans to borrowers with
strong credit, adjusted in a similar pattern. The prime rate
began 1997 at 8.50% and remained stable until the end of the
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third quarter of 1998 when the rate was decreased 25 basis
points. The rate later decreased an additional 50 basis points
during the fourth quarter of 1998 and remained stable until the
third quarter of 1999. In 1999, the prime rate increased 50
basis points in the third quarter and 25 basis points in the
fourth quarter to end the year at 8.50%.
As of December 31, 1999 and 1998 the Company was in a
negative gap position, or liability sensitive, on a one-year
time horizon. The "gap" is the difference between the repricing
of interest-earning assets and interest-bearing liabilities
within certain time periods. Accordingly, the Company's
interest-bearing liabilities will generally reprice more quickly
than its interest-earning assets. Therefore, the Company's net
interest margin is likely to increase in periods of falling
interest rates in the market and decrease in periods of
increasing interest rates. The Company's net interest margin
decreased to 4.98% in 1999 from 5.11% in 1998 and 6.11% in 1997
as a result of a decrease in the average yield earned on
interest-earning assets from 9.74% in 1997 to 8.99% in 1998 and
8.50% in 1999, partly offset by a slight overall decrease in the
average rate paid on interest-bearing liabilities from 4.35% in
1997 to 4.44% in 1998 and 4.22% in 1999.
Net interest income decreased $3,542,000 from $9,350,000 in
1998 to $5,808,000 in 1999. The decrease was due to a decrease
in the average volume of interest-earning assets combined with a
49 basis point decrease in the average yield on such
investments. Despite a shift in the average proportions of the
various categories of interest-earning assets toward higher-
yielding loans, the average yield earned on interest-earning
assets in 1999 decreased as a result of decline in market rates
available on such investments during the latter part of 1998.
As evidenced by the Company's negative gap position discussed
above, this is due to a lag in the repricing of certain
interest-earning assets despite an increase in market rates
beginning in the third quarter of 1999. Partially offsetting
the impact of the decline in interest income on net interest
income for 1999 was a decrease in interest expense paid on
deposits. The decrease in deposit interest expense was a result
of lower average deposit balances combined with a 34 basis point
decrease in the average rate paid on deposits. The decline in
the average rate paid on deposits was the result of a decrease
in the average rates offered while the mix of the deposit
portfolio remained fairly stable. While the average interest
rate spread decreased from 4.55% in 1998 to 4.28% in 1999, the
ratio of average interest-earning assets to average interest-
bearing liabilities increased, totaling 119.92% in 1999 compared
to 114.31% in 1998. As discussed in the analysis of financial
condition above, the decrease in the average volume of interest-
earning assets and interest bearing-liabilities was primarily
the result of the sale of the branches in the second quarter.
Net interest income totaled $9,350,000 in 1998 compared to
$9,670,000 in 1997, a decrease of $320,000, or 3.3%. An
increase in the average volume of interest-earning assets
resulted in a $1,031,000 overall increase in interest income
despite a 75 basis point decrease in the average yield earned on
such investments. The Company's average yield on interest-
earning assets declined from 9.74% in 1997 to 8.99% in 1998.
The decline in the average yield resulted from a general decline
in market rates and a shift in the relative proportions of
average interest-earning assets from higher-yielding loans and
medical claims receivables to federal funds sold. The average
rate paid on interest-bearing liabilities remained fairly stable
over the comparable periods, increasing only 9 basis points to
4.44% in 1998 from 4.35% in 1997. The increase was the result
of the issuance of $4.4 million in 9% convertible subordinated
notes to fund the acquisition of TexStar at the beginning of the
second quarter of 1998. Interest paid on interest-bearing
liabilities increased $1,351,000 over the comparable periods
primarily due to a 21.2% increase in average interest bearing
liabilities. The increase in the average volume of interest-
earning assets and interest-bearing liabilities arose primarily
from the acquisition of TexStar. The impact of the acquisition
was partly offset by the subsequent sale of four branches in the
fourth quarter.
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Allowance and Provision for Credit Losses. The Company
maintains an allowance for credit losses in an amount that, in
management's judgment, is adequate to absorb reasonably
foreseeable losses inherent in the loan portfolio. While
management utilizes its best judgment and information available,
the ultimate adequacy of the allowance is dependent upon a
variety of factors, including the performance of the Company's
loan portfolio, the economy, changes in real estate values and
interest rates and the view of the regulatory authorities toward
loan classifications. The provision for loan losses is
determined by management as the amount to be added to the
allowance for loan losses after net charge-offs have been
deducted to bring the allowance to a level which is considered
adequate to absorb losses inherent in the loan portfolio. The
amount of the provision is based on management's review of the
loan portfolio and consideration of such factors as historical
loss experience, general prevailing economic conditions, changes
in the size and composition of the loan portfolio and specific
borrower considerations, including the ability of the borrower
to repay the loan and the estimated value of the underlying
collateral.
All lending activity contains risks of loan losses and the
Company recognizes these credit risks as a necessary element of
its business activity. To assist in identifying and managing
potential loan losses, the Company contracts with an independent
loan review service provider to evaluate individual credit
relationships as well as overall loan portfolio conditions. One
of the primary objectives of the loan review function is to make
recommendations to management as to both specific loss reserves
and overall portfolio loss reserves.
Net loan charge-offs totaled $1,333,000, or 1.61% of
average loans, in 1999 compared to $3,343,000, or 2.88% of
average loans, in 1998 and $1,041,000, or 1.01% of average
loans, in 1997. Commercial and IPF loans accounted for the
largest portions of charge-offs. As discussed above, the
current and prior financial statements reflect previously
unrecognized losses in the IPF loan portfolio. As the losses
were not reported due to an inappropriate diversion of funds, no
efforts had been made to collect these loans. Management
intends to aggressively pursue collection of these loans. At
this time, however, the Company cannot predict the likely amount
of any such recoveries. A substantial portion of the previously
recorded loan charge-offs for 1998 were related to IPF loans
generated by the Company's southeastern United States insurance
premium financing operation, headquartered in Atlanta, Georgia.
The Atlanta office has been closed and loan production from that
market has been terminated. Also in 1998 a significant portion
of the commercial loan charge-offs related to the Bank's used car
floor plan lending program. The Bank has since discontinued its
used car floor plan lending program.
The Company recognized a provision for loan losses of
$137,000 in 1999. After a $669,000 transfer from the allowance
for medical claims receivables losses, the year-end balance in
the allowance for loan losses totaled $1.4 million, or 2.12% of
total loans. In 1998 the Company recognized a provision for
loan losses of $3,533,000, after an $821,000 increase in the
allowance resulting from the acquisition of TexStar, to bring
the year-end balance of the allowance for loan losses to $2.0
million, or 2.02% of total loans. The provision for loan losses
totaled $924,000 in 1997, while the year-end balance of the
allowance for loan losses totaled $1.0 million, or 0.94% of
total loans. The amount of the provision for loan losses over
the comparable periods has fluctuated based on the level of
charge-offs experienced due to management's desire to maintain
an adequate level of allowance.
Nonperforming loans, defined as loans past due 90 days or
more and loans for which the accrual of interest has been
discontinued, totaled $720,000, $1.8 million and $189,000 at
December 31, 1999, 1998 and 1997. Nonperforming loans as a
percentage of total loans totaled 1.06%, 1.82% and 0.19%.
Despite the improvement in the level of charge-offs and
nonperforming loans, the allowance for loan losses as a
percentage of total loans increased from 2.02% in 1998 to 2.12%
in 1999. Management believes the relative increase is prudent
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as the percentage of higher risk IPF loans to total loans has
increased from 24.6% at December 31, 1998 to 30.5% at December
31, 1999. Management does not anticipate significant changes in
loan portfolio risk in the near future, and will continue to
monitor the appropriate factors when considering future levels
of provisions and the allowance for loan losses. While
management believes that it uses the best information available
to determine the allowance for estimated loan losses, unforeseen
market conditions could result in adjustments to the allowance
for estimated loan losses and net earnings could be
significantly affected if circumstances differ substantially
from the assumptions used in determining the allowance.
The Company substantially discontinued its medical claims
factoring operations in 1998 and by December 31, 1999 no longer
had an investment in medical claims receivables. The operations
were discontinued as a result of significant losses experienced
in 1997 and 1998. Net charge-offs of medical claims receivables
totaled $3,473,000 in 1998 and $2,155,000 in 1997. In 1999 the
Company recorded $13,000 in charge-offs and $540,000 in
recoveries related to medical claims receivables. As the final
medical claims receivables paid-off in 1999, the Company
transferred the remaining $669,000 balance of the allowance for
medical claims losses to the allowance for loan losses.
The Company recorded a $(694,000) provision for medical
claims receivables losses during 1998 compared to $6,245,000 in
1997. The negative provision in 1998 was possible due to the
recovery of $956,000 in prior charge-offs combined with an
overall reduction in the level of allowance necessary due to the
decrease in gross medical claims receivables outstanding.
Medical claims receivables decreased from $7.4 million at
December 31, 1997 to $646,000 at December 31, 1998. The
allowance for medical claims receivables losses totaled
$4.3 million at December 31, 1997 and $141,000 at December 31,
1998.
Noninterest Income. Noninterest income totaled $4,552,000
in 1999, increasing 32.9%, from $3,425,000 in 1998. The
increase was due to the realization of a $3,050,000 gain on the
sale of the Midlothian and Waxahachie branches. The increase in
noninterest income resulting from the gain on the sale of the
branches was partly offset by decreases in service charges on
deposit accounts and loan collection fees and late charges.
Decreases in these categories of noninterest income were due to
decreases in the average balances of loans and deposits
outstanding due to the sale of the branches. Additionally, the
decrease in loan collection fees and late charges in 1999 was
partly the result of the full-year impact of the closure of the
Atlanta IPF office in June 1998.
Noninterest income for 1998 increased $886,000, or 34.9%,
from $2,539,000 in 1997. The increase in noninterest income was
primarily attributed to the $1,103,000 gain realized on the sale
of the Chester, Kennard, Lufkin and Wells branches. Exclusive
of the gain on the sale of these branches, the Company
experienced a $217,000, or 8.6%, decrease in noninterest income.
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 loan
collection fees and late charges for the latter part of 1998.
Noninterest Expense. Noninterest expense totaled
$10,809,000 in 1999, decreasing $1,684,000, or 13.5%, from
$12,493,000 in 1998. The decrease was primarily due to
decreases in salaries and employee benefits expense and
occupancy and equipment expense. The decreases in these
categories of noninterest expense were due to the closure of the
Atlanta IPF office in June 1998 and the branch sales in October
1998 and June 1999 and the related reduction in full-time
equivalent employees from these actions. While total other
noninterest expense decreased only slightly in 1999, the various
components of other noninterest expense experienced
fluctuations. Expenses related to professional services, federal
deposit insurance premiums and interest accrued on IPF refunds
increased in 1999, while expenses related to settlements and
accruals for legal proceedings, postage, telephone, office
supplies, advertising and operational losses decreased.
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Professional services increased due to the costs associated with
the investigation of the irregular transactions and diversions
of customer refunds in the IPF division, as discussed above.
Professional services expense totaled $1,325,000 in 1999
compared to $1,021,000 in 1998 and $1,126,000 in 1997.
Professional services expense has been a significant portion of
total noninterest expense over the comparable periods as a
result of on-going litigation; acquisition and divestiture
transactions; problems associated with the Atlanta IPF division
and the medical claims factoring operations; and the current
situation in the IPF division, discussed above. Federal deposit
insurance premiums increased $294,000, or 420.0%, due to the
higher risk rating placed on the Bank as a result of the last
regulatory examination and the Formal Agreement with the OCC.
As part of the restatement of the accompanying prior year
financial statements resulting from irregular transactions and
diversion of refunds discovered in the IPF division in 1999
(discussed above), the Company recognized an accrual for
interest on the cumulative refund payable as of the end of each
reporting period. As no refunds had been paid by December 31,
1999, the balance of refunds payable continued to increase, thus
causing an increase in the related interest expense.
Settlements and accruals for legal proceedings totaled $337,000
in 1998 as the result of the recognition of an accrual for
pending litigation. The litigation was subsequently settled in
1999 without recognition of additional expense. Expenses
related to postage, telephone, office supplies and advertising
decreased $180,000, $71,000, $163,000 and $82,000, respectively.
The reductions in these categories of expenses are primarily the
result of the sale of the six branches and the closure of the
Atlanta IPF division since June 1998. Operational losses
decreased $181,000 in 1999 as certain nonrecurring expenses
incurred in the acquisition of TexStar were included in the
total for operational losses in 1998.
Noninterest expense increased $1,340,000, or 12.0%, in 1998
from $11,153,000 in 1997. The Company experienced increases in
salaries and benefits expense, occupancy and equipment expense
and other noninterest expense. The increase in salaries and
benefits expense and occupancy and equipment expense is
attributable to the acquisition of TexStar, which included a
network of five branches, at the beginning of the second quarter
of 1998. Significant increases in other noninterest expense for
1998 included $337,000 for settlements and legal accruals for
legal proceedings, a $129,000 increase in amortization of
intangibles and debt issuance costs, a $151,000 increase in
interest accrued on IPF refunds, and a $216,000 increase in
operational losses. The increases in settlements and accruals
for legal proceedings, interest on IPF refunds and operational
losses are discussed above. The increase in amortization of
intangibles and debt issuance costs is due to the additional
intangible assets recorded with the issuance of debt and
recognition of goodwill in connection with acquisition of
TexStar. In 1997 the Company recognized impairment of certain
fixed assets and goodwill related to the medical claims
factoring division totaling $1,198,000 as a result significant
losses associated with the division and a decrease in the
likelihood of a return to profitability.
The Company's efficiency ratio was 94.0%, 66.6% and 62.4%
in 1999, 1998 and 1997. Excluding the impairment of certain
fixed assets and goodwill recognized in 1997, the efficiency
ratio for 1997 was 55.5%. The efficiency ratio measures the
percentage of total revenues, on a taxable equivalent basis
excluding securities gains and other nonrecurring gains,
absorbed by non-interest expense. Expressed differently, for
example, for every dollar of revenue the Company generated in
1999, the Company incurred $0.94 in overhead expenses. The
Company's efficiency ratios for the comparable periods compare
unfavorably to other financial institutions in the Company's
peer group.
Income Taxes. The change in income tax expense/(benefit)
is primarily attributable to the change in income/(loss) before
income taxes. The provision for income taxes totaled $(840,000)
in 1999, $914,000 in 1998 and $(2,085,000) in 1997 resulting in
effective tax rates of (143.4)%, 35.7% and (34.1)%. Despite a
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<PAGE>
loss before income taxes in 1998, tax expense was recognized as
a result of management's decision to provide a 100% valuation
allowance for the deferred tax asset in the amount of
$1,637,000. During 1999, the valuation allowance was reversed
resulting in a tax benefit of $840,000. As of December 31,
1999, management concluded a valuation allowance for the net
deferred tax asset was not necessary as management believes it
is more likely than not the Company will realize the net
deferred tax assets during the carry-forward period.
Yields Earned and Rates Paid
The following table sets forth information relating to the
Company's average balance sheet and reflects the average yield
on interest-earning assets and the average cost of interest-
bearing liabilities for the periods indicated. Such yields and
costs are derived by dividing income or expense by the average
monthly balance of interest-earning assets or interest-bearing
liabilities, for the periods presented. Average balances are
derived from daily balances, which include nonaccruing loans in
the loan portfolio.
-49-
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31, 1999 Year ended December 31, 1998
-------------------------------------------- -------------------------------------
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 and federal
funds sold $ 13,886,972 $ 672,553 4.84% $ 31,121,974 $ 1,724,808 5.54%
Securities(2) 19,799,970 1,154,346 5.72 32,200,324 1,989,418 6.18
Loans(3) 82,725,870 8,021,125 9.70 116,049,351 11,692,597 10.08
Medical claims receivables(3) 206,432 63,928 30.97 3,582,939 1,044,069 29.14
------------- ------------ ------------ ------------
Total interest-earning assets 116,619,244 9,911,952 8.50 182,954,588 16,450,892 8.99
Noninterest-earning assets:
Cash and due from banks 6,299,984 9,098,676
Premises and equipment 6,200,881 6,191,020
Accrued interest receivable 668,380 991,940
Other real estate owned 424,878 505,629
Other assets 8,908,169 12,775,599
Allowance for credit losses (1,936,754) (3,501,675)
------------- -------------
Total assets $137,184,782 $209,015,777
============= =============
LIABILITIES(1)
Interest-bearing liabilities:
Interest-bearing demand deposits $ 29,419,592 $ 701,495 2.38 $ 44,741,576 $ 1,151,356 2.57
Savings deposits 6,019,141 136,809 2.27 9,499,843 232,491 2.45
Time deposits 57,460,935 2,872,714 5.00 102,551,436 5,398,764 5.26
------------- ------------ ------------ ------------
Total interest-bearing deposits 92,899,668 3,711,018 3.99 156,792,855 6,782,611 4.33
Other borrowed funds 4,350,000 392,718 9.03 3,262,500 318,082 9.75
------------- ------------ ------------ ------------
Total interest-bearing liabilities 97,249,668 4,103,736 4.22 160,055,355 7,100,693 4.44
------------ ------------
Noninterest-bearing liabilities
Noninterest-bearing deposits 24,750,304 31,450,099
Other liabilities 4,062,345 4,698,128
------------- -------------
Total liabilities 126,062,317 196,203,582
Shareholders' equity 11,122,465 12,812,195
------------- -------------
Total liabilities and equity $137,184,782 $209,015,777
============= =============
Net interest income $ 5,808,216 $ 9,350,199
============ ============
Net interest spread 4.28% 4.55%
===== =====
Net interest margin 4.98% 5.11%
===== =====
</TABLE>
-50-
<PAGE>
Year ended December 31, 1997
-------------------------------------
Interest
Average Income/ Average
Balance Expense Rate
------- -------- -------
ASSETS(1)
Interest-earning assets:
Interest-bearing deposits and federal
funds sold $ 10,186,144 $ 535,108 5.25%
Securities(2) 35,693,396 2,300,527 6.45
Loans(3) 103,321,220 11,107,030 10.75
Medical claims receivables(3) 9,044,262 1,477,510 16.34
------------ ------------
Total interest-earning assets 158,245,022 15,420,175 9.74
Noninterest-earning assets:
Cash and due from banks 5,943,102
Premises and equipment 3,865,966
Accrued interest receivable 951,155
Other real estate owned 259,828
Other assets 7,296,715
Allowance for credit losses (1,655,993)
------------
Total assets $174,905,795
============
LIABILITIES(1)
Interest-bearing liabilities:
Interest-bearing demand deposits $ 38,109,284 1,046,696 2.75
Savings deposits 7,846,458 189,443 2.41
Time deposits 86,156,027 4,513,659 5.24
------------ ------------
Total interest-bearing deposits 132,111,769 5,749,798 4.35
Other borrowed funds -- -- --
------------ ------------
Total interest-bearing liabilities 132,111,769 5,749,798 4.35
------------
Noninterest-bearing liabilities
Noninterest-bearing deposits 22,420,160
Other liabilities 2,009,672
------------
Total liabilities 156,541,601
Shareholders' equity 18,364,194
------------
Total liabilities and equity $174,905,795
============
Net interest income $ 9,670,377
============
Net interest spread 5.39%
=====
Net interest margin 6.11%
=====
-51-
<PAGE>
(1) Average balances and interest income/expense items include
the accounts of TexStar from the date of its acquisition on
April 1, 1998 and exclude the Chester, Kennard, Lufkin and
Wells branches and the Waxahachie and Midlothian branches
from the dates of their respective disposition on October
16, 1998 and June 30, 1999.
(2) Average balance includes unrealized gains and losses while
yield is based on amortized cost. Interest on tax-exempt
securities is reported on historical basis without tax-
equivalent adjustment. Interest on tax-exempt securities
on a tax equivalent basis was $100,000 in 1999, $287,000 in
1998 and $479,000 in 1997.
(3) Calculated net of deferred loan fees and costs and unearned
interest.
The table below describes the extent to which changes in
interest rates and changes in volume of interest-earning assets
and interest-bearing liabilities have affected the Company's
interest income and expense during the years indicated. For
each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to
(1) changes in volume (multiplied by prior year rate); (2)
changes in rate (multiplied by prior year volume); and (3) total
changes in rate and volume. The combined effects of changes in
both volume and rate, that are not separately identified, have
been allocated proportionately to the change due to volume and
change due to rate:
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
Increase/(Decrease) Increase/(Decrease)
----------------------------------- ---------------------------
Change Change Change Change
Due to Due to Total Due to Due to Total
Volume Rate Change Volume Rate Change
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Interest Income:
Interest-bearing deposits and
federal funds sold $ (857,050) $ (195,205) $(1,052,255) $ 1,158,708 $ 30,992 $ 1,189,700
Securities (718,477) (116,595) (835,072) (218,585) (92,524) (311,109)
Loans (3,245,720) (425,752) (3,671,472) 1,311,396 (725,829) 585,567
Medical claims receivables (1,041,786) 61,645 (980,141) (1,196,480) 763,039 (433,441)
----------- ----------- ----------- ----------- ----------- -----------
Total interest income (5,863,033) (675,907) (6,538,940) 1,055,039 (24,322) 1,030,717
Interest Expense:
Interest-bearing demand
deposits (370,454) (79,407) (449,861) 173,728 (69,068) 104,660
Savings deposits (80,101) (15,581) (95,682) 40,430 2,618 43,048
Time deposits (2,266,541) (259,509) (2,526,050) 863,023 22,082 885,105
----------- ----------- ----------- ----------- ----------- -----------
Total deposits (2,717,096) (354,497) (3,071,593) 1,077,181 (44,368) 1,032,813
Other borrowed funds 99,605 (24,969) 74,636 318,082 -- 318,082
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense (2,617,491) (379,466) (2,996,957) 1,395,263 (44,368) 1,350,895
----------- ----------- ----------- ----------- ----------- -----------
Net interest margin $(3,245,542) $ (296,441) $(3,541,983) $ (340,224) $ 20,046 $ (320,178)
=========== =========== =========== =========== =========== ==========
</TABLE>
Asset and Liability Management and Market Risk
The Company's primary market risk exposure is interest rate
risk and, to a lesser extent, liquidity risk. Interest rate
risk is the risk that the Company's financial condition will be
adversely affected due to movements in interest rates. The
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<PAGE>
income of financial institutions is primarily derived from the
excess of interest earned on interest-earning assets over the
interest paid on interest-bearing liabilities. Accordingly, the
Company places great importance on monitoring and controlling
interest rate risk.
There are several methods employed by the Company to
monitor and control interest rate risk. One such method is
using a gap analysis. As discussed above in management's
analysis of net interest income, the gap is defined as the
repricing variance between rate sensitive assets and rate
sensitive liabilities within certain periods. The repricing can
occur due to changes in rates on variable rate products as well
as maturities of interest-earning assets and interest-bearing
liabilities. A high ratio of interest sensitive liabilities,
generally referred to as a negative gap, tends to benefit net
interest income during periods of falling interest rates as the
average rate paid on interest-bearing liabilities declines
faster than the average rate earned on interest-earning assets.
The opposite holds true during periods of rising interest rates.
The Company attempts to minimize the interest rate risk through
management of the gap in order to achieve consistent return.
The Company's asset and liability management policy is to
maintain a gap position whereby the ratio of rate sensitive
assets to rate sensitive liabilities is between 60.0% and 140.0%
on a one-year time horizon. As of December 31, 1999 the
Company's ratio of rate sensitive assets to rate sensitive
liabilities was 79.4% on a one-year time horizon. One strategy
used by the Company is to originate variable rate loans tied to
market indices. Such loans reprice on an annual, quarterly,
monthly or daily basis as the underlying market indices change.
Currently, $22.0 million, or 46.7%, of the Company's non-IPF
loan portfolio reprices on a regular basis, while almost all of
the Company's $20.6 million in fixed-rate IPF loans were
originated with original maturities of nine months or less. The
Company also invests excess funds in liquid federal funds that
mature and reprice on a daily basis. The Company also maintains
all of its securities in the available for sale portfolio to
take advantage of interest rate swings and to maintain liquidity
for loan funding and deposit withdrawals.
In addition to the gap analysis, management measures the
Company's interest rate risk by computing estimated changes in
net interest income and the "net portfolio value" ("NPV") of its
cash flows from assets, liabilities and off-balance sheet items
in the event of a range of assumed changes in market interest
rates. The Company's senior management and the Board of
Directors review the exposure to interest rates at least
quarterly. Exposure to interest rate risk is measured with the
use of an interest rate sensitivity analysis to determine the
change in NPV in the event of hypothetical changes in interest
rates, while the gap analysis is used to determine the repricing
characteristics of assets and liabilities.
NPV represents the market value of portfolio equity and is
equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items.
The application of the methodology attempts to quantify interest
rate risk as the change in the NPV that would result from
theoretical 100, 200 and 300 basis point (1 basis point equals
0.01%) changes in market interest rates. Both increases and
decreases in market interest rates are considered.
The following table presents, as of December 31, 1999 and
1998, an analysis of the Company's interest rate risk as
measured by changes in NPV for instantaneous and sustained
parallel shifts of 100, 200 and 300 basis points in market
interest rates.
-53-
<PAGE>
<TABLE>
<CAPTION>
1999 1999
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Change in $ Amount % Change $ Amount % Change
Interest Rate of NPV in NPV of NPV in NPV
- ------------- -------- -------- -------- ---------
+ 300 bp $ 9,438,000 (16.65)% $11,497,000 (1.87)%
+ 200 bp 10,068,000 (11.08)% 11,570,000 (1.25)%
+ 100 bp 10,709,000 (5.42)% 11,606,000 (0.93)%
Base 11,323,000 -- 11,716,000 --
- - 100 bp 12,006,000 6.03% 11,789,000 0.62%
- - 200 bp 12,256,000 8.24% 11,862,000 1.25%
- - 300 bp 12,308,000 8.70% 11,936,000 1.88%
</TABLE>
As illustrated in the table, NPV is more sensitive to
rising rates than declining rates. Such difference in
sensitivity occurs principally because, as interest rates rise,
borrowers do not prepay variable-rate loans which reprice less
frequently than on an annual basis, variable-rate loans with
interest rate adjustment caps and fixed-rate loans as quickly as
they do when interest rates are declining. Thus, in a rising
interest rate environment, the amount of interest the Company
would receive on its loans would increase relatively slowly as
loans are slowly prepaid and new loans at higher rates are made.
Moreover, the interest the Company would pay on its deposits
would increase rapidly because the Company's deposits generally
have shorter periods to repricing.
Computations of prospective effects of hypothetical
interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, loan
prepayments and deposit decay rates, and should not be relied
upon as indicative of actual results. Further, the computations
do not contemplate any actions the Company may undertake in
response to changes in interest rates.
As with any method of measuring interest rate risk, certain
shortcomings are inherent in the NPV approach. For example,
although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different
degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate
in advance of changes in market interest rates, while interest
rates on other types may lag behind changes in market rates.
Further, in the event of a change in interest rates, expected
rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would
likely deviate significantly from those assumed in making risk
calculations.
Liquidity
Liquidity is the ability of the Company to fund customers'
needs for borrowing and deposit withdrawals. The purpose of
liquidity management is to assure sufficient cash flow to meet
all of the financial commitments and to capitalize on
opportunities for business expansion. This ability depends on
the institution's financial strength, asset quality and types of
deposit and investment instruments offered by the Company to its
customers. The Company's principal sources of funds are
deposits, loan and securities repayments, maturities of
securities, sales of securities available for sale and other
funds provided by operations. The Company also has the ability
to borrow from the FHLB, subject to regulatory approval under
the Formal Agreement. While scheduled loan repayments and
maturing investments are relatively predictable, deposit flows
and early loan and mortgage-backed security prepayments are more
influenced by interest rates, general economic conditions and
competition. The Company maintains investments in liquid assets
based upon management's assessment of (1) need for funds, (2)
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<PAGE>
expected deposit flows, (3) yields available on short-term
liquid assets and (4) objectives of the asset/liability
management program.
Cash and cash equivalents decreased $24.3 million, or
71.3%, from $34.1 million at December 31, 1998 to $9.8 million
at December 31, 1999. The decrease is primarily the result of
the use of such funds to finance the sale of the branches in
June 1999. Cash and cash equivalents represented 9.4% of total
assets at December 31, 1999 compared to 19.5% of total assets at
December 31, 1998. Subject to regulatory approval under the
Formal Agreement with the OCC, the Company has the ability to
borrow funds from the FHLB and has various federal fund sources
from correspondent banks, should the Company need to supplement
its future liquidity needs in order to meet deposit flows, loan
demand or to fund investment opportunities. Management believes
the Company's liquidity position is strong based on its high
level of cash, cash equivalents, core deposits, the stability of
its other funding sources and the support provided by its
capital base.
As summarized in the Consolidated Statements of Cash Flows,
the most significant transactions which affected the Company's
level of cash and cash equivalents, cash flows and liquidity
during 1999 were the net cash paid in the sale of the branches
of $25.2 million, the net decrease in loans of $16.6 million;
the receipt of proceeds from sales, maturities and repayments of
securities of $22.8 million; securities purchases of
$11.5 million and the net decrease in deposits of $24.8 million.
On a stand-alone basis, the Holding Company had $5,000 in
cash on hand as of December 31, 1999. The liquidity of the
Holding Company and its ability to meet its cash obligations
depends substantially on its receipt of dividends from the Bank,
which are limited by banking statutes and regulations and the
Formal Agreement, discussed below.
Capital Resources
Total shareholders' equity decreased $393,000 primarily due
to the after-tax impact of unrealized losses on securities
available for sale in excess of current earnings retained and
proceeds from common stock issued.
The Holding Company and the Bank are subject to regulatory
capital requirements administered by federal banking agencies.
Bank regulators monitor capital adequacy very closely and
consider it an important factor in ensuring the safety of
depositors' accounts. As a result, bank regulators have
established standard risk based capital ratios that measure the
amount of an institutions capital in relation to the degree of
risk contained in the balance sheet, as well as off-balance
sheet exposure. Federal law requires each federal banking
regulatory agency to take prompt corrective action to resolve
problems of insured depository institutions including, but not
limited to, those that fall below one or more prescribed capital
ratios. According to the regulations, institutions whose Tier 1
and total capital ratios meet or exceed 6.0% and 10.0% of risk-
weighted assets, respectively, are considered "well
capitalized." Institutions whose Tier 1 and total capital
ratios meet or exceed 4.0% and 8.0% of risk-weighted assets,
respectively, are considered "adequately capitalized." Tier 1
capital is shareholders' equity excluding the unrealized gain or
loss securities classified as available for sale and intangible
assets. Tier 2 capital, or total capital, includes Tier 1
capital plus the allowance for loan losses not to exceed 1.25%
of risk weighted assets. Risk weighted assets are the Company's
total assets after such assets are assessed for risk and
assigned a weighting factor based on their inherent risk. In
addition to the risk-weighted ratios, all institutions are
required to maintain Tier 1 leverage ratios of at least 5.0% to
be considered "well capitalized" and 4.0% to be considered
"adequately capitalized." The leverage ratio is defined as Tier
1 capital divided by adjusted total assets for the most recent
quarter.
-55-
<PAGE>
As discussed above, the Bank is subject to more stringent
capital requirements under the Formal Agreement. Under the
Formal Agreement, the Bank was required to achieve, by March 31,
1999, a total risk-based capital ratio of at least 12% and a
leverage ratio of at least 7.5%. As of December 31, 1999 the
Bank was required to achieve a total risk-based capital ratio of
at least 14%. 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 ratios required by
the Formal Agreement 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 and the Bank
achieved the required levels of capital upon completion of the
sale of the Midlothian and Waxahachie branches on June 30, 1999.
The table below sets forth consolidated and Bank-only
actual capital levels in addition to the capital requirements
under the Formal Agreement and prompt corrective action
regulations.
<TABLE>
<CAPTION>
Minimum Requirements
Formal Under Prompt Corrective
Actual Year-end Capital Ratios Agreement at Action Regulations
------------------------------ December 31, ------------------------
Unaudited 1999 Adequately Well
1999 1998 Capitalized Capitalized
------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Leverage Ratio:
Tier I capital to average
assets
Consolidated 5.38% 1.88% 4.00% 5.00%
Bank 9.78% 4.14% 7.50% 4.00% 5.00%
Risk-Based Capital Ratios:
Tier I capital to risk-
weighted assets
Consolidated 7.38% 3.12% 4.00% 6.00%
Bank 13.49% 6.88% 6.00% 4.00% 6.00%
Total capital to risk-
weighted assets
Consolidated 12.31% 5.92% 8.00% 10.00%
Bank 14.73% 8.12% 14.00% 8.00% 10.00%
</TABLE>
As of December 31, 1999 the Holding Company and the Bank
met the level of capital required to be categorized as well
capitalized under prompt corrective action regulations.
Management is not aware of any conditions subsequent to December
31, 1999 that would change the Holding Company's or the Bank's
capital category.
The Holding Company is without significant assets other
than its ownership of all the common stock of the Bank and is
entirely dependent upon dividends received from the Bank in
order to meet its cash obligations, including debt service on
the Notes. Under the Formal Agreement the Bank is currently
precluded from declaring and paying any dividends without prior
OCC approval.
On November 9, 1999 the OCC approved a $262,000 reduction
of the Bank's surplus, the proceeds of which were upstreamed to
the Holding Company, which, together with a $60,000 capital
contribution by certain officers and directors of the Holding
Company and a $139,000 federal income tax payment by the Bank to
the Holding Company, was sufficient to enable the Holding
Company to meet its September 30, 1999 interest obligations
under the Notes and to pay certain other operating expenses.
-56-
<PAGE>
Additionally, on March 28, 2000 the OCC approved another
reduction in the Bank's surplus in the amount of $500,000 that
enabled the Holding Company to meet debt service obligations
under the Notes and pay for other operating expenses through
March 31, 2000. No assurance can be given, however, that the
OCC will continue to approve such reductions in the Bank's
surplus, particularly if the Bank is unable to commence
operating profitably in the near future. On April 26, 2000
certain members of the Holding Company's Board of Directors
guaranteed to personally loan the Company up to $200,000, if
necessary, to enable the Holding Company to meet its cash
obligations in 2000.
Stockholders' Rights Agreement
Pursuant to the Rights Agreement dated June 17, 1997
between the Holding Company and Securities Transfer Corporation,
as rights agent, the Holding 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 Holding 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
Holding 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 Holding 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 Holding 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 Holding Company, or any subsidiary of the Holding
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 Holding 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.
Year 2000 Preparedness
The Company successfully completed its Year 2000 changeover
without any problems in its core business processes. The
Company has confirmed normal business operations across all
products and markets on a sustained basis.
While management believes it is unlikely, problems
associated with non-compliant third parties could still occur.
Management will continue to monitor all business processes and
relationships with third parties during 2000 to ensure that all
processes continue to function properly.
Actual costs of the Company's Year 2000 conversion project,
including equipment replacement or upgrade, vendor payments,
customer communications and education, totaled $24,000, of which
$13,000 was expended in 1999.
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<PAGE>
Recent Accounting Pronouncements
Beginning January 1, 2001 a new accounting standard,
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities,"
will require all derivatives to be recorded at fair value.
Unless designated as hedges, changes in these fair values will
be recorded in the income statement. Fair value changes
involving hedges will generally be recorded by offsetting gains
and losses on the hedge and on the hedged item, even if the fair
value of the hedged item is not otherwise recorded. This
standard is not expected to have a material effect, but the
effect will depend on derivative holdings when this standard
applies.
Impact of Inflation and Changing Prices
The consolidated financial statements and notes included
herein have been prepared in accordance with generally accepted
accounting principles ("GAAP"). Presently GAAP requires the
Company to measure financial position and operating results
primarily in terms of historic dollars. Changes in the relative
value of money due to inflation or recession are generally not
considered. 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 that are beyond the control of the Company, including
the influence of domestic and foreign economic conditions and
the monetary and fiscal policies of the United States government
and federal agencies, particularly the FRB. The FRB implements
national monetary policy such as seeking to curb inflation and
combat recession by its open market operations in United States
government securities, control of the discount rate applicable
to borrowing by banks, and establishment of reserve requirements
against bank deposits. The actions of the FRB in these areas
influence the growth of bank loans, investments and deposits,
and affect the interest rates charged on loans and paid on
deposits. The nature, timing and impact of any future changes
in federal monetary and fiscal policies on the Company and its
results of operations are not predictable.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
This information is included under the heading "Asset and
Liability Management and Market Risk" included in "Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and supplementary data required to
be included pursuant to Item 8 are set forth in Item 14 of this
Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNT-
ING AND FINANCIAL DISCLOSURE.
The information required by this Item 9 has been previously
reported in the Company's Current Report on Form 8-K/A
(Amendment No. 1) dated June 3, 1999, and is expressly
incorporated herein by reference.
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<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The bylaws of the Company provide that the Board shall
consist of such number of directors as shall be determined by
resolution of the Board. By a resolution adopted by the Board
on May 1, 2000, the number of directors comprising the Board was
set at eight (8). Each member of the Board of Directors is
elected for a one-year term to serve until his or her successor
is elected and qualified. Each executive officer is appointed
by the Board of Directors to serve until the first meeting of
directors after the next annual meeting of stockholders.
The following table sets forth certain information relating
to the directors and executive officers of the Company as of May
1, 2000:
Name Age Position
Charles M. Ireland 52 Chairman of the Board, Chief Executive
Officer and Director
Lloyd W. Butts 59 President and Director
John D. Blackmon 55 Senior Vice President, Chief Financial
Officer and Secretary
Richard N. Abrams 58 Director
William B. Byrd 68 Director
Margaret E. Holland 47 Director
Michael L. Milam 47 Director
Garrett Morris 84 Director
Cullen W. Turner 59 Director
The business experience of each of these directors and
executive officers during the past five (5) years is set forth
below:
Charles M. Ireland has served as Chairman of the Board and
Chief Executive Officer of the Company since September 1999, and
has served as a director of the Company since August 1999. Mr.
Ireland has also served as President of the Bank since July
1999, and has served as a director of the Bank since August
1999. He was previously employed by Landmark Bank from August
1997 to July 1999, most recently as Senior Vice President/Senior
Lender in its Denison, Texas banking facility. From December
1985 to July 1997 Mr. Ireland served as a Senior Vice President
of NationsBank, Texas N.A.
Lloyd W. Butts has served as President and as a director of
the Company since September 1999. Mr. Butts has also served as
Vice Chairman and as a director of the Bank since September
1999. He previously served as Senior Vice President of the Bank
from December 1994 to September 1999. Mr. Butts was previously
President, Chief Executive Officer and a director of First
National Bank, Whitesboro, Texas from its formation in 1984
until its merger with and into the Bank in December 1994.
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<PAGE>
John D. Blackmon has served as Senior Vice President, Chief
Financial Officer and Secretary of the Company since June 1999.
He previously served as Controller of Jimco Sales &
Manufacturing, Inc. from April 1997 to May 1999; as Vice
President and Chief Financial Officer of International Marketing
Specialists, Inc. from April 1995 to April 1997; and as Vice
President and Controller of Summit Bancshares, Inc., a publicly-
traded bank holding company, from June 1984 to October 1994.
Richard N. Abrams has served as a director of the Company
since May 2000. He has served as Chairman of the Board and
Chief Executive Officer of Funeral Financial Systems, Ltd. (a
factor to the funeral industry) since August 1985 and of
Executive Offices, Ltd. (a shared office building) since October
1986, and as Chairman of the Board of Funeraleasing, Ltd. (a
leasing company for the funeral industry) since December 1998
and of EZFunerals.net (a business to business internet company)
since February 2000. Mr. Abrams is a certified public
accountant. Mr. Abrams has served as a director of the Bank
since March 2000.
William B. Byrd has served as a director of the Company
since April 1993. He has been involved in personal investment
activities, real estate brokerage and management, and ranching
for the past five years. Mr. Byrd has served as a director of
the Bank since January 1994.
Margaret E. Holland has served as a director of the Company
since September 1997. She has been a partner in the law firm of
Holland, Johns & Schwartz, L.L.P. (formerly Tracy & Holland,
L.L.P.) since October 1992. Ms. Holland has served as a
director of the Bank since September 1997.
Michael L. Milam has served as a director of the Company
since May 1994. He has been president of Dallas Fire Insurance
Company, a licensed Texas stock insurance company, since
December 1988. Mr. Milam has served as a director of the Bank
since May 1994.
Garrett Morris has served as a director of the Company
since May 1994. He has been a member of the law firm of Morris
and Schieffer since 1989. Mr. Morris has served as a director
of the Bank since May 1994.
Cullen W. Turner has served as a director of the Company
since March 1987. He has been involved in personal investment
activities for the past five years. Mr. Turner has served as a
director of the Bank since December 1993.
No family relationships exist among the executive officers
and directors of the Company.
No director presently holds any other directorships in
companies with a class of securities registered pursuant to
Section 12 of the Securities Exchange Act of 1934 or subject to
the requirements of Section 15 of that act.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company's directors, executive officers
and holders of more than ten percent (10%) of the Common Stock
to file with the Securities and Exchange Commission (the "SEC")
and the American Stock Exchange ("AMEX") (until April 3, 2000,
on which date the Company's Common Stock was delisted from
trading on AMEX) initial reports of ownership and reports of
changes in ownership of the Common Stock. Such persons are
required by SEC regulations to furnish the Company with copies
of all Section 16(a) reports they file with the SEC.
Based solely on the Company's review of the copies of such
forms it has received during the year, the Company believes that
during the year ended December 31, 1999, all the Company's
directors, executive officers and holders of more than ten
percent (10%) of the Common Stock complied with all Section
16(a) filing requirements except for the late filing by Lloyd W.
Butts and Charles M. Ireland of their initial reports on Form 3.
To the best knowledge of management of the Company, during
fiscal year 1999 no director, officer or ten percent (10%)
beneficial owner of Common Stock of the Company failed to file
with the SEC and AMEX any required reports on Form 3, 4 or 5
regarding transactions in securities of the Company.
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<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid or accrued by the Company and the
Bank to or on behalf of each individual who served as the
Company's Chairman of the Board and Chief Executive Officer
during the Company's last fiscal year and the one other most
highly compensated executive officer of the Company (determined
as of the end of the last fiscal year) (hereinafter referred to
as the "named executive officers") for the fiscal years ended
December 31, 1999, 1998 and 1997:
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<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation
Name and All Other
Principal Position Year Salary($)(1) Bonus($) Compensation
($)(2)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bobby W. Hackler 1999 $ 14,073 $0 $ 130,038(4)
Chairman of the Board and 1998 $ 137,800 $0 $ 2,500
Chief Executive Officer of the 1997 $ 123,301 $0 $ 2,318
Company; Chairman of the Board,
Chief Executive Officer and
President of the Bank (3)
C. Jack Bean 1999 $ 85,300 $0 $ 22,693(6)
Chairman of the Board and Chief 1998 $ 121,667 $0 $ 30,700(7)
Executive Officer of the 1997 $ 157,200 $0 $ 2,318
Company; Chairman of the Board
of the Bank (5)
Robert L. Bintliff 1999 $ 37,000 $0 $ 1,988(9)
Vice Chairman, Chief Executive
Officer and Chief Financial
Officer of the Company; Chief
Executive Officer and Chief
Financial Officer of the Bank (8)
Charles M. Ireland 1999 $ 44,250 $ 20,000 $ 3,000(11)
Chairman of the Board and Chief
Executive Officer of the
Company; President and Chief
Executive Officer of the
Bank (10)
Lloyd W. Butts 1999 $ 109,150 $ 5,000 $ 13,075(13)
President the Company;
Vice Chairman of the Bank (12)
</TABLE>
(1) Includes salary and directors' fees paid by the Bank,
before any salary reduction for contributions to the Bank's
Savings Plan under Section 401(k) of the Internal Revenue Code
of 1986, as amended (the "Code").
(2) The amounts shown in this column consist of matching
contributions under the Bank's Savings Plan under Section 401(k)
of the Code, which was adopted by the Bank in 1993, unless
otherwise indicated.
(3) Mr. Hackler served as Vice Chairman and Chief
Operating Officer of the Company and as Vice Chairman, President
and Chief Executive Officer of the Bank until August 1998, when
he was elected to the positions indicated in the table upon Mr.
Bean's retirement. Mr. Hackler resigned these positions in
February 1999.
(4) Includes $129,750 representing payment in full under
the Executive Deferred Compensation Agreement between the
Company and Mr. Hackler.
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<PAGE>
(5) Mr. Bean served in these positions from 1988 to August
1998 and from February 1999 to September 1999.
(6) Includes $19,287 paid as compensation and $3,406 paid
as reimbursement of medical expenses to Mr. Bean under the Post
Retirement Services Agreement.
(7) Includes $1,200 for a matching contribution under the
Bank's Savings Plan under Section 401(k) of the Code and $29,500
representing the fair market value of an automobile gifted to
Mr. Bean by the Bank upon his retirement.
(8) Mr. Bintliff became an employee of the Company in
February 1999 and served in these positions from May 1999 to
June 1999.
(9) Represents $1,500 for an automobile allowance and $488
for club membership.
(10) Mr. Ireland became an employee of the Company in July
1999 and was elected to these positions in September 1999.
(11) Represents $3,000 for an automobile allowance.
(12) Mr. Butts became an employee of the Company in
December 1994 and was elected to these positions in September
1999.
(13) Includes $10,650 for an automobile allowance.
Stock Option Plans
Option Grants. The following table provides information on
stock options granted in fiscal year 1999 to the named executive
officers:
-63-
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1999(1)
Potential
Realizable Value
Individual Grants at Assumed Annual
Rates of Stock
Price Appreciation
for Option Term
- ------------------------------------------------------------------------------------------------
Number of Percent
Securities of Total
Underlying Options Exercise
Options Granted to or Base
Granted Employees in Price Expiration
Name (#) Fiscal Year ($/Sh)(2) Date 5%($)(3) 10%($)(3)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bobby W. Hackler 0 0 $0 n/a n/a n/a
C. Jack Bean 2,000(4) 0.30% $2.125 01-04-09 $ 2,673 $ 6,773
100,000 14.77% $1.3125 04-21-09 $ 82,542 $209,179
Robert L. Bintliff 100,000 14.77% $1.3125 n/a n/a n/a
Charles M. Ireland 100,000 14.77% $1.1875 08-24-09 $ 74,681 $189,257
Lloyd W. Butts 20,000 2.95% $1.3125 04-21-09 $ 16,508 $ 41,836
</TABLE>
(1) This table reflects incentive stock options covering
200,000 shares of Common Stock granted on April 21, 1999 under
the 1998 Incentive Stock Option Plan of Surety Capital
Corporation (the "1998 Plan"), incentive stock options covering
100,000 shares of Common Stock granted on August 24, 1999 under
the 1998 Plan, and options covering 2,000 shares of Common Stock
granted on January 4, 1999 under the 1996 Stock Option Plan for
Directors (the "1996 Plan") to the named executive officers.
The 100,000 options granted to Mr. Bintliff terminated on June
24, 1999, the date of termination of Mr. Bintliff's employment
with the Company and the Bank. Of the remaining options granted
under the 1998 Plan, 100,000 vested on the date of grant and
100,000 will vest one-third one year from the date of grant,
two-thirds two years from the date of grant, and one hundred
percent (100%) three years from the date of grant. The options
granted under the 1996 Plan vested in full one year from the
date of grant. The options have been granted for a term of ten
years, subject to earlier termination upon the occurrence of
certain events related to termination of employment.
(2) Based on 100% of the fair market value of the shares
underlying options on the date of grant.
(3) The dollar amounts under these columns are the result
of calculations of the potential realizable value under the 5%
and 10% rates set by the Securities and Exchange Commission.
The assumed appreciation rates of 5% and 10% (compounded
annually on the $2.125, $1.3125 and $1.1875 market value at the
date of grant) from the date of grant are not intended to
forecast possible future appreciation, if any, of the Company's
stock price. These amounts show potential realizable value of
the options at the end of the ten year term.
(4) These options were granted on January 4, 1999 under
the 1996 Plan for Directors when Mr. Bean was not employed by
the Company or the Bank.
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<PAGE>
Option Exercises and Holdings. The following table
provides information with respect to the named executive
officers concerning the exercise of incentive stock options
during the last fiscal year and unexercised incentive stock
options held as of the end of the last fiscal year under the
Stock Option Plans:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES
IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
Value of
Number of Unexercised
Unexercised In-The-Money
Options at Options at
FY-End (#) FY-End ($)
___________________________________
Shares Value
Acquired Realized Exercisable/ Exercisable/
Name on Exercise (#) ($)(1) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Bobby W. Hackler 0 $0 75,000 / 50,000 $0 / $0
C. Jack Bean 0 $0 0 / 2,000 $0 / $0
100,000 / 0 $0 / $0
50,000 / 50,000 $0 / $0
Robert L. Bintliff 0 $0 0 / 0 $0 / $0
Charles M. Ireland 0 $0 0 / 100,000 $0 / $0
Lloyd W. Butts 0 $0 0 / 20,000 $0 / $0
</TABLE>
(1) No incentive stock options were exercised in 1999 by
the named executive officers.
(2) Market value of underlying securities as of the fiscal
year end ($0.75), minus the exercise or base price. This price
was in effect on November 8, 1999 when AMEX halted trading in
the Company's Common Stock.
Compensation of Directors
In February 1997 the Company began to hold combined
meetings of the Board and the Bank Board. In January and
February 1999 the Bank paid each director $1,000, and effective
March 1, 1999 the Bank pays each director $500 for attendance at
each combined meeting. The total amount paid as directors' fees
in the fiscal year ended December 31, 1999 was $72,000.
The Company has adopted the 1996 Stock Option Plan for
Directors (the "1996 Directors Plan") and the 1997 Non-Qualified
Stock Option Plan for Non-Employee Directors (the "1997
Directors Plan"). Under the 1996 and 1997 Directors Plans an
aggregate of 250,000 shares of Common Stock of the Company were
set aside for issuance pursuant to the exercise of options
granted thereunder, of which 200,000 shares are subject to
outstanding options and 44,000 shares remain available for
grant. The 1996 Directors Plan is a formula plan pursuant to
which annual options are automatically granted to directors of
the Company who are not employees of the Company or the Bank at
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<PAGE>
fair market value. All options under the 1996 Directors Plan
are non-qualified stock options, and vest one year following the
date of grant. On the first business day of calendar each year,
each non-employee director is automatically granted an option to
purchase 2,000 shares of Common Stock of the Company at 100% of
fair market value on the grant date. In 1999 each non-employee
director of the Company received an option to purchase 2,000
shares of Common Stock of the Company at an exercise price of
$2.125 per share. The 1997 Directors Plan provides for the one
time grant of 25,000 non-qualified stock options to directors of
the Company who were not employees of the Company or the Bank at
fair market value. In 1997 each non-employee director of the
Company received an option to purchase 25,000 shares of Common
Stock of the Company at exercise prices ranging from $4.18 to
$5.375 per share. These options vest over five years.
Termination of Employment and Change in Control Agreements
The Company has entered into termination of employment and
change in control agreements with certain of its executive
officers, as more fully described below. While these agreements
were not adopted to deter takeovers, they may have an incidental
anti-takeover effect by making it more expensive for a bidder to
acquire control of the Company.
Change in Control Agreements. The Company and the Bank
have entered into change in control agreements with the
following executive officers of the Company and of the Bank:
Charles M. Ireland, Lloyd W. Butts and John D. Blackmon. The
change in control agreements provide for the payment under
certain circumstances of benefits to these officers in the event
of a change in control of the Company followed by the
termination of employment of the officers. A "change in
control" is deemed to have occurred if (i) any person becomes
the beneficial owner, directly or indirectly, of fifteen percent
(15%) or more of the Common Stock of the Company; or (ii) during
any period of two (2) consecutive years during the term of the
change in control agreements, individuals who at the beginning
of such period constitute the Board of Directors cease for any
reason to constitute at least a majority thereof, unless the
election of each director who was not a director at the
beginning of such period has been approved in advance by
directors representing at least a majority of the directors then
in office who were directors at the beginning of the period; or
(iii) a merger or consolidation occurs in which the Company is a
party, whether or not the Company is the surviving corporation,
in which outstanding shares of Common Stock are converted into
shares of the successor corporation or a holding company thereof
representing fifty percent (50%) or less of the voting power of
all capital stock thereof outstanding immediately after the
merger or consolidation) or other securities (of either the
Company or another company) or cash or other property; or (iv)
the sale of all, or substantially all, of the Company's or
Bank's assets occurs; or (v) the stockholders of the Company
approve a plan of complete liquidation of the Company or the
Bank.
Under the change in control agreements, officers who,
during the period commencing on the effective date of a change
of control and ending two (2) years thereafter, are terminated
by the Company for any reason other than for cause or who
terminate their employment with the Company with good reason are
entitled to receive a change in control payment at the time of
such termination. The change in control payment payable under
the change in control agreements may, at the election of the
officers, be either in the form of a lump sum cash payment or in
the form of Common Stock of the Company. The amount of the lump
sum cash payment is equal to each officer's annual base salary
rate as an employee of the Company and the Bank (but excluding
all other compensation, such as bonuses and fringe benefits) in
effect immediately before the effective date of the change in
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<PAGE>
control. The stock payment consists of shares of Common Stock
of the Company in an amount equal to the result obtained by
dividing the cash payment the officer would otherwise be
entitled to receive by the market value of the Common Stock on
the effective date of the change in control.
The change in control agreements continue in effect through
December 1, 2000. On each successive December 1, the terms of
the change in control agreements will be automatically extended
for one (1) additional year, unless not later than by April 30
of such year the Company shall have given notice to the officers
(on behalf of the Company and on behalf of the Bank) that it
does not wish to extend such change in control agreements.
Stock Option Plans. The Board 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. The 1988, 1995 and 1998 Stock Option Plans have been
approved by the stockholders of the Company. The 1997 Stock
Option Plan was adopted by the Board on January 2, 1997 and is
not subject to stockholder approval. The purpose of the Stock
Option Plans is to attract and retain capable employees and
provide an incentive to such employees to remain in the employ
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. 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 975,000
shares are subject to outstanding options and 67,158 shares
remain available for grant. To exercise the options, grantees
must pay the exercise price in cash or Common Stock, or any
combination of cash and Common Stock. Options granted under the
1988, 1995 and 1998 Stock Option Plans are incentive stock
options and options granted under the 1997 Stock Option Plan are
non-qualified stock options.
The Stock Option Plans contain certain "change in control"
provisions designed to attract and retain valued employees of
the Company and to ensure that such employees' performance is
not undermined by the possibility, threat or occurrence of a
change in control. The 1988 and 1995 Plans provide that in the
event of a change in control of the Company (in the form of a
dissolution or liquidation of the Company or a merger or
consolidation in which the Company is not the surviving
corporation) any options granted under the plans become fully
exercisable, notwithstanding any vesting schedule relating to
such options to the contrary. The 1997 and 1998 Plans provide
for the acceleration of any applicable vesting schedule upon a
"change in control," which definition not only includes the
dissolution or liquidation of the Company or a merger or
consolidation in which the Company is not the surviving
corporation, but also the acquisition by a person or group of
20% or more of the combined voting power of the Company's
capital stock or under certain circumstances a change in the
constitution of the Board.
Post Retirement Services Agreement. The Company and the
Bank have entered into a post retirement services agreement with
C. Jack Bean in recognition of his activities as a founder of
the Company and of his long tenure as the principal executive
officer of the Company and the Bank. The purposes of the
agreement are to provide Mr. Bean with compensation and benefits
for certain consulting services Mr. Bean is providing to the
Company and the Bank on a part-time basis after his retirement
as a full-time employee of the Company on August 31, 1998. Upon
Mr. Bean's retirement the Company (to the extent of 25% thereof)
and the Bank (to the extent of 75% thereof) began making
payments to Mr. Bean in the amount of $53,825 per year, in
addition to providing certain other benefits, including health
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<PAGE>
insurance coverage and reimbursement for certain expenses
incurred in connection with his post retirement consulting
services to the Company and the Bank.
If the Company or the Bank defaults in the performance of
any provisions of the agreement or the occurrence of a change in
control of the Company, the Company (to the extent of 25%
thereof) and the Bank (to the extent of 75% thereof) will pay
Mr. Bean an accelerated payment calculated as follows: (1) the
annual payment will be equal to the discounted present value of
$53,825 per year for the number of years equal to eighty-five
(85) minus Mr. Bean's age at the time of the default or change
in control, and (2) the insurance coverage payment will be equal
to the insurance cost times the number of years equal to eighty-
five (85) minus Mr. Bean's age at the time of the default or
change in control. The discount interest rate for purposes of
clause (a) in the preceding sentence will be five percent (5%)
per year; the insurance cost for purposes of clause (b) in the
preceding sentence will be the cost of the coverage and
reimbursement provided in the immediately preceding twelve (12)
calendar month period.
A "change in control" for purposes of the agreement is
deemed to occur if (1) any person becomes the beneficial owner,
directly or indirectly, of securities of the Company
representing twenty percent (20%) or more of the combined voting
power of the Company's then outstanding voting securities; (2)
during any period of two consecutive years during the term of
the agreement, individuals who at the beginning of such period
constitute the Company's Board of Directors cease for any reason
to constitute at least a majority thereof, unless the election
of each director who was not a director at the beginning of such
period has been approved in advance by directors representing at
least two-thirds (2/3rds) of the directors then in office who
were directors at the beginning of the period; (3) the Company
sells or otherwise transfers more than fifty percent (50%) of
the voting control of the Bank; or (4) there is a sale of
substantially all of the assets of the Bank.
Compensation Committee Interlocks and Insider Participation
The Company and the Bank currently have a joint
Compensation Committee. The members of the Compensation
Committee are William B. Byrd, Cullen W. Turner, and Margaret E.
Holland, who serves as chairman, none of whom are or have been
employees of the Company or the Bank. Margaret E. Holland is a
partner in the law firm of Holland, Johns & Schwartz, L.L.P.
(formerly Tracy & Holland, L.L.P.). During 1999 the Company
paid $119,046.50 for legal services to such firm.
Compensation Committee Report on Executive Compensation
The named executive officers of the Company receive no
salary or fees from the Company. All compensation paid to the
named executive officers is paid by the Bank, and the
Compensation Committee is responsible for determining these
salaries. The Compensation Committee is also responsible for
reviewing performance and awarding stock options to the
executive officers and key employees of the Company.
The Compensation Committee regularly monitors the
performance of the executive officers through its review of the
Bank's performance. The Compensation Committee establishes and
approves executive compensation as part of its annual budgeting
process. Base salaries for 1999 for the named executive
officers were based upon a review of comparable positions in the
banking industry. The Federal Reserve Bank's Eleventh District
survey of salaries was the primary source used for such
comparison. Also, individual performance of each named
executive officer was considered in determining compensation.
The Compensation Committee may also, in its discretion, award
bonuses to executive officers based upon individual and
corporate performance. Based on the loss recorded for 1999, the
Compensation Committee voted to not award bonuses to the named
executive officers for 1999. In connection with the employment
of Messrs. Bintliff, Bean (who had previously retired) and
Ireland, the Compensation Committee recommended stock option
grants to each of such individuals (100,000 shares of Common
Stock per grant). (See "Item 11. Executive Compensation - Stock
Option Plans: Option Grants.")
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<PAGE>
A significant portion of the Company's and the Bank's
executive compensation is linked directly to individual and
corporate performance. The Compensation Committee will continue
to review all elements of executive compensation to ensure that
the total compensation program, and each element thereof, meets
the Company's objectives and philosophy.
Compensation Committee of
Surety Capital Corporation and
Surety Bank, National Association
Margaret E. Holland, Chairman
William B. Byrd
Cullen W. Turner
Performance Graph
The following graph compares the cumulative total
stockholder return on the Common Stock of the Company with that
of the MG Industry Group 415 - Regional-Southwest Banks Index, a
bank stock index published by Media General Financial Services,
Inc., and the American Stock Exchange Index, a broad market
index published by the American Stock Exchange. The comparison
for each of the periods assumes that $100 was invested on
December 31, 1994 in each of the Common Stock of the Company,
the stocks included in the MG Industry Group 415 - Regional-
Southwest Banks Index, and the stocks included in the American
Stock Exchange Index. These indexes, which reflect formulas for
dividend reinvestment and weighting of individual stocks, do not
necessarily reflect returns that could be achieved by individual
investors.
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<PAGE>
<TABLE>
<CAPTION>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE MG INDUSTRY GROUP 415 -
REGIONAL-SOUTHWEST BANKS INDEX,
AND THE AMERICAN STOCK EXCHANGE INDEX
1994 1995 1996 1997 1998 1999
<S> <C> <C> <C> <C> <C> <C>
Company $100.00 $112.00 $130.00 $224.00 $ 64.00 $ 24.00
MG Industry Group 41 $100.00 $139.63 $175.54 $278.51 $245.03 $220.65
American Stock Exchange $100.00 $128.90 $136.01 $163.66 $161.44 $201.27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
By Management
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<PAGE>
The following table shows beneficial ownership of shares of
Common Stock of the Company by all current directors and
executive officers of the Company named in "Item 11. Executive
Compensation" individually, and together with all current
executive officers of the Company as a group, as of May 1, 2000:
- ------------------------------------------------------------
Amount and
Name of Individual Nature of
or Number of Beneficial Percent
Persons In Group Ownership (1) of Class (2)
- ------------------------------------------------------------
Charles M. Ireland 11,250 shares (3) *
Lloyd W. Butts 15,750 shares (4) *
John D. Blackmon 2,000 shares (5) *
Richard N. Abrams 516,800 shares (6) 8.77%
William B. Byrd 43,050 shares (7) *
Margaret E. Holland 30,500 shares (8) *
Michael L. Milam 76,250 shares (9) 1.29%
Garrett Morris 50,750 shares (10) *
Cullen W. Turner 186,600 shares (11) 3.15%
All directors and
executive officers as
a group (8 persons) 932,950 shares (12) 15.55%
* Less than 1% of all the issued and outstanding shares of
Common Stock.
(1) Based on information furnished by persons named and,
except as otherwise indicated below, each person has sole voting
and dispositive power with respect to all shares of Common Stock
owned by such person.
(2) Based on 5,895,235 shares of Common Stock issued and
outstanding at May 1, 2000, as adjusted for shares convertible
or exercisable within sixty (60) days which are deemed
outstanding for a specific stockholder pursuant to Rule 13d-
3(d)(1) under the Securities Exchange Act of 1934.
(3) Includes 11,250 shares of Common Stock owned of
record.
(4) Includes 15,750 shares of Common Stock owned of
record.
(5) Includes 2,000 shares of Common Stock owned of record.
(6) Includes 440,000 shares of Common Stock owned of
record and 76,800 shares of Common Stock owned by Mr. Abram's
son.
(7) Includes 22,050 shares of Common Stock owned of
record; 6,000 shares of Common Stock which Mr. Byrd has the
right to acquire within sixty (60) days from the date hereof
pursuant to options granted to him under the 1996 Stock Option
Plan for Directors of the Company; and 15,000 shares of Common
Stock which Mr. Byrd has the right to acquire within sixty (60)
days from the date hereof pursuant to options granted to him
under the 1997 Non-Qualified Stock Option Plan for Non-Employee
Directors of the Company. (See "Item 11. Executive Compensation
- Compensation of Directors.")
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<PAGE>
(8) Includes 11,500 shares of Common Stock owned of
record; 4,000 shares of Common Stock which Ms. Holland has the
right to acquire within sixty (60) days from the date hereof
pursuant to options granted to her under the 1996 Stock Option
Plan for Directors of the Company; and 15,000 shares of Common
Stock which Ms. Holland has the right to acquire within sixty
(60) days from the date hereof pursuant to options granted to
her under the 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors of the Company. (See "Item 11. Executive
Compensation - Compensation of Directors.")
(9) Includes 18,250 shares of Common Stock owned of
record; 35,000 shares of Common Stock held by Dallas Fire
Insurance Company, which is a wholly-owned subsidiary of a
corporation in which Mr. Milam has a 50% ownership interest;
8,000 shares of Common Stock which Mr. Milam has the right to
acquire within sixty (60) days from the date hereof pursuant to
options granted to him under the 1996 Stock Option Plan for
Directors of the Company; and 15,000 shares of Common Stock
which Mr. Milam has the right to acquire within sixty (60) days
from the date hereof pursuant to options granted to him under
the 1997 Non-Qualified Stock Option Plan for Non-Employee
Directors of the Company. (See "Item 11. Executive Compensation
- Compensation of Directors.")
(10) Includes 31,750 shares of Common Stock owned of
record; 4,000 shares of Common Stock which Mr. Morris has the
right to acquire within sixty (60) days from the date hereof
pursuant to options granted to him under the 1996 Stock Option
Plan for Directors of the Company; and 15,000 shares of Common
Stock which Mr. Morris has the right to acquire within sixty
(60) days from the date hereof pursuant to options granted to
him under the 1997 Non-Qualified Stock Option Plan for Non-
Employee Directors of the Company. (See "Item 11. Executive
Compensation - Compensation of Directors.")
(11) Includes 108,600 shares of Common Stock owned of
record; 55,000 shares of Common Stock held by a trust for which
Mr. Turner serves as trustee; 8,000 shares of Common Stock which
Mr. Turner has the right to acquire within sixty (60) days from
the date hereof pursuant to options granted to him under the
1996 Stock Option Plan for Directors of the Company; and 15,000
shares of Common Stock which Mr. Turner has the right to acquire
within sixty (60) days from the date hereof pursuant to options
granted to him under the 1997 Non-Qualified Stock Option Plan
for Non-Employee Directors of the Company. (See "Item 11.
Executive Compensation - Compensation of Directors.")
(12) Includes 30,000 shares of Common Stock of the Company
currently exercisable pursuant to the Company's 1996 Stock
Option Plan for Directors and 75,000 shares of Common Stock of
the Company currently exercisable pursuant to the Company's 1997
Non-Qualified Stock Option Plan for Non-Employee Directors.
By Others
The following table sets forth certain information with
respect to stockholders of the Company who were known to be
beneficial owners of more than five percent (5%) of the issued
and outstanding shares of the Common Stock of the Company as of
May 1, 2000:
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<PAGE>
Name and Address Amount and Nature Percent
of Beneficial Owner of Beneficial Ownership(1) of Class(2)
- ------------------- -------------------------- -----------
Carlson Capital, L.P.
301 Commerce Street, Suite 3300
Fort Worth, Texas 76102 519,300 shares 8.81%
Pine Capital Management, Incorporated
353 Sacramento Street, 10th Floor
San Francisco, California 94111 536,672 shares(3) 9.10%
(1) Based on information furnished by the entities named
and, except as otherwise indicated below, each entity has sole
voting and dispositive power with respect to all shares of
Common Stock owned by such entity.
(2) Based on 5,895,235 shares of Common Stock issued and
outstanding at May 1, 2000, as adjusted for shares convertible
or exercisable within sixty (60) days which are deemed
outstanding for a specific stockholder pursuant to Rule 13d-
3(d)(1) under the Securities Exchange Act of 1934.
(3) Pine Capital Management, Incorporated has shared
dispositive power with its clients, none of which own over five
percent (5%) of the issued and outstanding shares of the
Company, and no voting power with respect to these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Certificate of Incorporation of the Company limits the
liability of directors to the full extent permitted by Delaware
law. The Certificate of Incorporation also provides that the
Company will indemnify directors and officers to the full extent
provided by Delaware law.
On January 18, 2000 the Company and the Bank entered into
indemnification agreements with all members of the Board of
Directors and one executive officer. The agreements provide
that in consideration of each indemnitee's service as an officer
or director after the date of the agreement, the Company or the
Bank will hold harmless and indemnify the indemnitee to the full
extent authorized or permitted by law if he or she is made a
party to or a participant in certain proceedings by reason of
his or her service as director, officer, employee or agent or
fiduciary of the Company or the Bank or of any other
corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise which such person is or was serving at
the express written request of the Company or the Bank, as
further specified in the agreements.
From time to time, the Bank makes loans to officers,
directors and principal stockholders (and their affiliates) of
the Company or the Bank. All loans to such persons are made in
the ordinary course of business; are made on substantially the
same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other
persons; and do not involve more than the normal risk of
collectibility or present other unfavorable features.
Additionally, the Company extends loans to various IPF customers
to finance premiums related to insurance policies underwritten
by Dallas Fire Insurance Company. Michael L. Milam, a director
of the Company, is president of Dallas Fire Insurance Company
and, as such, derives indirect benefit from these financing
transactions.
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<PAGE>
During 1999 the Company paid $119,046.50 for legal services
to Holland, Johns & Schwartz, L.L.P. (formerly Tracy & Holland,
L.L.P.), a law firm in which Margaret E. Holland is a partner.
Ms. Holland is a director of the Company.
On October 29, 1999 the Company sold $60,000 in aggregate
principal amount of redeemable convertible promissory notes (the
"Notes") to certain officers and directors of the Company. The
Notes were issued subject to redemption by the Company and
convertible into shares of Common Stock of the Company at an
initial conversion price of $0.50 per share. The proceeds from
the sale of the Notes were used by the Company to pay in part
the September 30, 1999 interest payment on the 9% Convertible
Subordinated Notes Due 2008. In addition, for each $1,000 of
principal amount of Notes the holder received a warrant
entitling the holder to purchase 250 shares of Common Stock at
$0.01 per share (the "Warrants"). All Notes were converted and
all Warrants were exercised on November 1, 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, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 F-3
Consolidated Statements of Comprehensive Income for the years
ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 F-6
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. (9)
2.06 Amendment Number One to Reorganization Agreement, dated
January 16, 1996. (10)
2.07 Amendment Number Two to Reorganization Agreement, dated
February 29, 1996. (10)
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. (9)
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. (10)
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. (9)
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. (13)
2.12 Indenture between Surety Capital Corporation and Harris Trust
and Savings Bank, as Trustee, dated March 31, 1998. (14)
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. (17)
2.14 Purchase and Assumption Agreement by and between The Citizens
National Bank in Waxahachie and Surety Bank, N. A., dated April 13,
1999. (18)
3.01 Certificate of Incorporation. (1)
3.02 Certificate of Amendment of Certificate of Incorporation, as
filed with the Delaware Secretary of State on April 8, 1987. (2)
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<PAGE>
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 (12); as amended by Amendment No. 1 to Rights Agreement of
Surety Capital Corporation, dated as of March 10, 1998. (13)
4.02 Indenture dated as of March 31, 1998 between the Company and
Harris Trust and Savings Bank, Chicago, Illinois, as trustee. (14)
4.03 Form of Notes (included in Exhibit 4.02). (14)
4.04 Form of Note Purchase Agreements dated March 31, 1998. (15)
10.01 Surety Capital Corporation 1988 Incentive Stock Option Plan. (5)
10.02 Surety Capital Corporation 1995 Incentive Stock Option Plan. (8)
10.03 Surety Capital Corporation Amended and Restated Stock Option
Plan for Directors, and Form of Stock Option Agreement. (11)
10.04 Surety Capital Corporation 1997 Non-Qualified Stock Option
Plan for Officers and Key Employees, and Form of Stock Option
Agreement. (13)
10.05 Surety Capital Corporation 1997 Non-Qualified Stock Option
Plan for Non-Employee Directors, and Form of Stock Option Agreement.
(13)
10.06 Amended and Restated Post Retirement Services Agreement
Between Surety Capital Corporation, Surety Bank, National
Association and C. Jack Bean, dated November 1, 1998. (18)
10.07 Surety Capital Corporation Amended and Restated 1998 Incentive
Stock Option Plan. (16)
10.08 Earnest Money Contract between Curtis F. Nooner, Norman S.
Moize, and Waldron Property Company No. Two, L.P., as seller, and
Surety Bank, National Association, as purchaser, dated April 29,
1999, and First Amendment to Earnest Money Contract, dated June 25,
1999. *
10.09 Form of Change in Control Agreement between Surety Capital
Corporation, Surety Bank, National Association and Charles M.
Ireland, John D. Blackmon and Lloyd W. Butts, dated October 18,
1999. *
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<PAGE>
10.10 Form of Redeemable Convertible Promissory Note between Surety
Capital Corporation and C. Jack Bean, Charles M. Ireland, Margaret
E. Holland, Aaron M. Siegel, Garrett Morris, Cullen W. Turner,
William B. Byrd, Michael L. Milam and Lloyd W. Butts, and related
Warrant, dated October 29, 1999. *
10.11 Form of Indemnification Agreement between Surety Capital
Corporation and William B. Byrd, Lloyd W. Butts, Charles M. Ireland,
Margaret E. Holland, Michael L. Milam, Garrett Morris, Cullen W.
Turner and John D. Blackmon, dated January 18, 2000. *
10.12 Form of Indemnification Agreement between Surety Bank,
National Association and William B. Byrd, Lloyd W. Butts, Charles M.
Ireland, Margaret E. Holland, Michael L. Milam, Garrett Morris,
Cullen W. Turner and John D. Blackmon, dated January 18, 2000. *
11 Statement Regarding Computation of Earnings Per Share. (19)
16 Letter from PricewaterhouseCoopers LLP to the Securities and
Exchange Commission dated June 11, 1999. (20)
21 Subsidiaries of the Registrant. *
23 Consent of Fisk & Robinson, P.C. *
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.
(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.
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<PAGE>
(9) Filed with Registration Statement No. 33-64789 on Form S-1
and incorporated by reference herein.
(10) Filed with the Company's Form 8-K dated February 29, 1996 and
incorporated by reference herein.
(11) Filed with the Company's Form 10-K dated December 31, 1996
and incorporated by reference herein.
(12) Filed with the Company's Form 8-K dated June 17, 1997 and
incorporated by reference herein.
(13) Filed with the Company's Form 10-K dated December 31, 1997
and incorporated by reference herein.
(14) Filed with the Company's Form 10-Q for the quarter ended
March 31, 1998 and incorporated by reference herein.
(15) Filed with the Company's Registration Statement No. 333-57601
on Form S-3 and incorporated by reference herein.
(16) Filed with the Company's Proxy Statement for the Annual
Meeting of Stockholders held on May 21, 1998 and incorporated by
reference herein.
(17) Filed with the Company's Form 8-K dated July 13, 1998 and
incorporated by reference herein.
(18) Filed with the Company's Form 10-K dated December 31, 1998
and incorporated by reference herein.
(19) Reference is hereby made to Consolidated Statements of
Operations on Page F-3 of Item 14(a)1. and Note 1 of Notes to
Consolidated Financial Statements on Page F-8 of Item 14(a)1.,
filed herewith.
(20) Filed with the Company's Form 8-K/A (Amendment No. 1) dated
June 3, 1999 and incorporated by reference herein.
* Filed herewith.
(b) Reports on Form 8-K.
On November 12, 1999 the Company filed a Current Report on
Form 8-K to report that on November 8, 1999 the Company
announced that its operating results for the quarter ending
September 30, 1999 had not been finalized pending the results of
a review of the insurance premium finance division of the Bank.
The Company reported that in connection with that review, loan
loss provisions could be increased or other potential
adjustments could be required that may affect the third quarter
of 1999 and prior periods and may require restatement of prior
period financial statements of the Company. The Company also
reported that the American Stock Exchange, Inc. ("AMEX") halted
trading in its securities on November 8, 1999, pending the
filing of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1999, and further review of the
Company's compliance with the continued listing requirements of
AMEX.
On December 13, 1999 the Company filed a Current Report on
Form 8-K regarding the Annual Report on Form 10-K for the fiscal
year ended December 31, 1998 (filed with the Securities and
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<PAGE>
Exchange Commission on April 15, 1999) (the "1998 Form 10-K"),
which contained audited financial statements of the Company as
of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996. The Company disclosed that loan loss
provisions could be increased or other potential adjustments
could be required that may affect the third quarter of 1999 and
prior periods and that may require restatement of prior period
financial statements of the Company. The Company and its
independent auditors determined that the financial statements of
the Company and related independent auditors reports thereon
filed in the 1998 Form 10-K may contain material errors and
should therefore not be relied upon by investors for any
purpose. The Company reported that it intends to cause the
financial statements of the Company to be re-audited for the
periods covered by the 1998 Form 10-K.
(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.
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.
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<PAGE>
SURETY CAPITAL CORPORATION
Date: May 19, 2000 By: /s/ Charles M. Ireland
-----------------------
Charles M. Ireland,
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 19th day of May,
2000.
Signature Capacity
/s/ Charles M. Ireland
- ----------------------
Charles M. Ireland Chairman of the Board, Chief Executive Officer
and Director (Principal Executive Officer)
/s/ Lloyd W. Butts
- ------------------
Lloyd W. Butts President and Director
/s/ John D. Blackmon
- --------------------
John D. Blackmon Senior Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer and
Chief Accounting Officer)
*
- --------------------
Richard N. Abrams Director
*
- --------------------
William B. Byrd Director
*
- --------------------
Margaret E. Holland Director
*
- --------------------
Michael L. Milam Director
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<PAGE>
*
- --------------------
Garrett Morris Director
*
- --------------------
Cullen W. Turner Director
* By: /s/ Charles M. Ireland
Charles M. Ireland, as Attorney-in-
Fact for each of the persons indicated
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<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Surety Capital Corporation
Fort Worth, Texas
We have audited the accompanying consolidated balance sheet of Surety
Capital Corporation as of December 31, 1999, and the related
consolidated statements of operations, comprehensive income,
shareholders' equity, and cash flows for year then ended. 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 audit.
We conducted our audit 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 audit
provides 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, 1999, and the consolidated
results of its operations and its cash flows for the year ended December
31, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated balance sheet of Surety Capital
Corporation as of December 31, 1998, and the related consolidated
statements of operations, comprehensive income, shareholders' equity,
and cash flows for the years ended December 31, 1998 and 1997 were not
audited by us and, accordingly, we do not express an opinion on them.
Fisk & Robinson, P.C.
Dallas, Texas
April 28, 2000
F-1
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
Unaudited
1999 1998
------------ ------------
Assets:
Cash and due from banks $ 5,416,633 $ 9,289,897
Federal funds sold 4,334,595 24,761,752
------------ ------------
Total cash and cash equivalents 9,751,228 34,051,649
Interest-bearing time deposits in other
financial institutions 25,000 94,939
Securities available for sale, at fair
value 12,480,492 24,886,704
Loans, net 65,772,554 97,032,336
Medical claims receivables, net -- 505,194
Premises and equipment, net 6,295,302 6,762,223
Accrued interest receivable 514,453 759,833
Deferred tax asset, net of valuation
allowance 1,179,590 --
Other real estate and repossessed
assets 825,245 205,877
Goodwill, net 5,432,346 8,374,997
Other assets 1,917,723 1,930,824
------------ ------------
Total assets $104,193,933 $174,604,576
============ ============
Liabilities:
Noninterest-bearing demand deposits $ 16,481,651 $ 31,416,730
Savings, NOW and money market accounts 22,959,487 43,282,766
Time deposits, $100,000 and over 13,225,995 24,224,817
Other time deposits 32,210,985 55,922,822
------------ ------------
Total deposits 84,878,118 154,847,135
Convertible subordinated debt 4,350,000 4,350,000
Accrued interest payable and other
liabilities 3,642,845 3,691,590
------------ ------------
Total liabilities 92,870,963 162,888,725
------------ ------------
Shareholders' Equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized,
none issued at December 31, 1999 and
1998
Common stock, $.01 par value, 20,000,000
shares authorized,
5,975,071 and 5,840,071 shares issued
at December 31, 1999 and 1998 59,751 58,401
Additional paid-in capital 17,152,587 17,093,786
Accumulated deficit (4,911,864) (5,165,947)
Stock rights issuable 57,902 57,902
Treasury stock, 79,836 shares at cost (375,443) (375,443)
Accumulated other comprehensive income
(loss) (659,963) 47,152
------------ ------------
Total shareholders' equity 11,322,970 11,715,851
------------ ------------
Total liabilities and
shareholders' equity $104,193,933 $174,604,576
============ ============
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1999, 1998 and 1997
Unaudited Unaudited
1999 1998 1997
----------- ----------- -----------
Interest income:
Loans, including fees $ 8,021,125 $11,692,597 $11,107,030
Securities:
Taxable 1,088,329 1,800,078 1,984,533
Tax-exempt 66,017 189,340 315,994
Medical claims receivables
factoring 63,928 1,044,069 1,477,510
Federal funds sold and
interest bearing deposits 672,553 1,724,808 535,108
----------- ----------- -----------
Total interest income 9,911,952 16,450,892 15,420,175
Interest expense:
Deposits 3,711,018 6,782,611 5,749,798
Notes payable 392,718 318,082 --
----------- ----------- -----------
Total interest expense 4,103,736 7,100,693 5,749,798
----------- ----------- -----------
Net interest income 5,808,216 9,350,199 9,670,377
Provision for credit losses
on loans 136,936 3,533,102 924,493
Provision for medical claims
receivables losses -- (694,194) 6,244,996
----------- ----------- -----------
Total provision for
credit losses 136,936 2,838,908 7,169,489
----------- ----------- -----------
Net interest income after
provision for credit losses 5,671,280 6,511,291 2,500,888
Noninterest income:
Service charges on deposit
accounts 705,379 1,055,632 875,143
Loan collection fees and
late charges 582,434 1,057,495 1,331,704
Net realized gain/(loss)
on sales of securities (50,931) 120,353 173,365
Net realized gain on sale of
branches 3,050,165 1,103,483 --
Other income 265,221 88,339 158,706
----------- ----------- -----------
Total noninterest income 4,552,268 3,425,302 2,538,918
Noninterest expense:
Salaries and employee
benefits 4,430,078 5,620,710 4,748,097
Occupancy and equipment 1,793,665 2,121,995 1,517,662
Impairment of long lived
assets -- -- 1,198,288
Other expenses 4,585,331 4,750,528 3,689,426
----------- ----------- -----------
Total noninterest expense 10,809,074 12,493,233 11,153,473
----------- ----------- -----------
Loss before income taxes (585,526) (2,556,640) (6,113,667)
Income tax expense (benefit) (839,609) 913,576 (2,084,750)
----------- ----------- -----------
Net income (loss) $ 254,083 $(3,470,216) $(4,028,917)
=========== =========== ===========
Net income (loss) per
share - Basic $ 0.04 $ (0.60) $ (0.70)
=========== =========== ===========
Net income (loss) per
share - Diluted $ 0.04 $ (0.60) $ (0.70)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31, 1999, 1998, and 1997
Unaudited Unaudited
1999 1998 1997
---------- ------------ ------------
Net income (loss) $ 254,083 $(3,470,216) $(4,028,917)
Other comprehensive income (loss):
Unrealized gain (loss) on
available-for-sale securities
arising during the period (1,124,524) 51,790 337,949
Reclassification adjustment for
amounts realized on securities
sales included in income 50,931 (120,353) (173,365)
---------- ------------ ------------
Net unrealized gain(loss) (1,073,593) (68,563) 164,584
Tax effect 366,478 24,700 (59,249)
---------- ------------ ------------
Total other comprehensive
income (loss) (707,115) (43,863) 105,335
---------- ------------ ------------
Comprehensive loss $ (453,032) $(3,514,079) $(3,923,582)
========== ============ ============
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1999, 1998 and 1997
Unaudited for 1998 and 1997
</TABLE>
<TABLE>
<CAPTION>
Common Stock Undivided Accumulated
------------------- Additional Profits/ Stock Other
Par Paid-In (Accumulated Rights Treasury Comprehensive Total
Shares Value Capital Deficit) Issuable Stock Income(Loss) Equity
--------- ------- ----------- ----------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 5,763,737 $57,637 $16,752,003 $ 2,391,088 $ (74,539) $ (14,320) $19,111,869
Stock rights issuable (57,902) $57,902
Purchase of 18,671 shares
of treasury stock (98,289) (98,289)
Net loss (4,028,917) (4,028,917)
Exercise of stock options,
including tax benefit 26,434 265 115,774 116,039
Change in fair value of
securities available
for sale, net of tax 105,335 105,335
--------- ------- ----------- ----------- ------- ---------- ---------- -----------
Balance at December 31, 1997 5,790,171 57,902 16,867,777 (1,695,731) 57,902 (172,828) 91,015 15,206,037
Purchase of 45,547 shares
of treasury stock (202,615) (202,615)
Net loss (3,470,216) (3,470,216)
Exercise of stock options,
including tax benefit 49,900 499 226,009 226,508
Change in fair value of
securities available
for sale, net of tax (43,863) (43,863)
--------- ------- ----------- ----------- ------- ---------- ---------- -----------
Balance at December 31, 1998 5,840,071 58,401 17,093,786 (5,165,947) 57,902 (375,443) 47,152 11,715,851
Net income 254,083 254,083
Common stock issued 135,000 1,350 58,801 60,151
Change in fair value of
securities available
for sale, net of tax (707,115) (707,115)
--------- ------- ----------- ----------- ------- ---------- ---------- -----------
Balance at December 31, 1999 5,975,071 $59,751 $17,152,587 $(4,911,864) $57,902 $(375,443) $(659,963) $11,322,970
========= ======= =========== =========== ======= ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Unaudited Unaudited
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 254,083 $(3,470,216) $(4,028,917)
Adjustments to reconcile net income
(loss) to net cash from operating
activities:
Provision for credit losses 136,936 2,838,908 7,169,489
Impairment of long lived assets -- -- 1,198,288
Depreciation 834,616 753,040 673,362
Amortization of intangible assets
and debt acquisition costs 620,114 634,821 506,172
FHLB stock dividends (44,377) (31,900) --
Net (gain) loss on sale of
securities available for sale 50,931 (120,353) (173,365)
Net (gain) loss on sale or disposal
of assets (13,958) 61,895 4,758
Gain on sale of branches, net (3,050,165) (1,103,483) --
Deferred income taxes (839,609) 2,019,410 (2,084,750)
Changes in assets and liabilities:
Accrued interest receivable 245,380 148,654 174,849
Other assets (132,905) 772,274 (1,288,718)
Accrued interest payable and
other liabilities 128,502 918,467 657,586
------------ ------------ ------------
Net cash from operating
activities (1,810,452) 3,421,517 2,808,754
Cash flows from investing activities:
Net change in loans 16,597,007 19,489,180 (3,063,743)
Payments received on purchased
medical claims receivables 1,173,830 13,739,893 18,633,246
Purchases of medical claims
receivables -- (10,477,738) (21,835,125)
Securities available for sale:
Purchases (11,465,028) (26,165,658) (14,223,479)
Maturities and repayments 18,252,985 44,130,203 6,167,712
Proceeds from sales 4,584,869 5,807,634 12,680,593
Proceeds from maturities of
securities held to maturity -- -- 5,190,666
Purchases of interest-bearing time
deposits (25,000) -- --
Proceeds from maturities of interest-
bearing time deposits 94,939 -- 190,903
Premises and equipment expenditures (1,941,970) (619,628) (604,999)
Proceeds from sales of premises and
equipment 35,868 37,850 136,898
Proceeds from sales of other real
estate 89,073 893,937 644,659
Net cash paid in sale of branches (25,194,973) (43,632,384) --
Net cash acquired in acquisitions -- 2,704,674 --
------------ ------------ ------------
Net cash from investing activities 2,201,600 5,907,963 3,917,331
------------ ------------ ------------
Cash flows from financing activities:
Net change in deposits (24,751,720) (7,697,260) (1,148,849)
Sale of common stock 60,151 -- --
Purchase of treasury stock -- (202,615) (98,289)
Exercise of stock options, including
tax benefit -- 226,508 116,039
Proceeds from issuance of debt, net
of issuance costs -- 3,934,093 --
------------ ------------ ------------
Net cash from financing activities (24,691,569) (3,739,274) (1,131,099)
------------ ------------ ------------
Net change in cash and cash equivalents (24,300,421) 5,590,206 5,594,986
Cash and cash equivalents at beginning
of year 34,051,649 28,461,443 22,866,457
------------ ------------ ------------
Cash and cash equivalents at end of
year $ 9,751,228 $ 34,051,649 $ 28,461,443
============ ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SURETY CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Unaudited Unaudited
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest $ 4,374,426 $ 7,268,131 $ 5,821,868
Cash paid for federal income taxes 1,293,200 50,000 995,000
Significant non-cash transactions:
Transfers of repossessed
collateral to other real estate 826,801 698,046 576,329
Additions to loans to facilitate
the sale of other real estate 80,000 155,038 357,037
Transfer from allowance for
medical claims receivables losses
to allowance for loan losses 668,636 -- --
Transfer of securities from held to
maturity to available for sale -- -- 17,370,604
Declaration of stock rights dividend -- -- 57,902
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SURETY CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and Unaudited December 31, 1998 and 1997
1. Summary of Significant Accounting Policies
Basis of Presentation: The accompanying consolidated financial
statements include the accounts of Surety Capital Corporation (the
"Holding Company") and its wholly-owned subsidiary, Surety Bank,
National Association (the "Bank"), together referred to as the
"Company". All significant intercompany accounts and transactions
have been eliminated in consolidation.
Nature of Operations: The Company is principally engaged in
traditional community banking activities provided through its seven
branches located in north Texas and south-central Texas. Community
banking activities include the Company's commercial and retail
lending, deposit gathering and investment and liquidity management
activities. In addition to its community banking services, the
Company offers insurance premium financing. 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. Prior to 1999, the Company was
engaged in medical claims factoring, purchasing primarily insurance
company claims from a variety of health care providers. In 1998,
the Company substantially ceased operations of the medical claims
factoring business.
Use of Estimates: To prepare financial statements in conformity
with generally accepted accounting principles, management makes
estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and actual
future results could differ. The allowance for loan losses, fair
values of financial instruments, and status of contingencies are
particularly subject to change.
Going Concern: The 1999 consolidated financial statements have
been prepared assuming the Company will continue as a going
concern. Although the Company has suffered significant losses in
its core business operations in all periods presented and is now
operating under a written formal agreement with the OCC and a
memorandum of understanding with the Federal Reserve Board (see
Note 17), management believes the Company will be able to return
to profitability. Management's plans to improve the Company's
profitability include increasing marketing efforts, introducing
new deposit products, emphasizing loan growth, and reducing
noninterest expense. Management also believes the Company is in
compliance with all of the requirements of the regulatory
agreements. While the Bank's liquidity position is sufficient to
meet its cash needs for the year ending December 31, 2000, the
Holding Company is dependent upon dividends received from the Bank
to meet its cash obligations, including interest payments on its
convertible subordinated debt (see Note 9). Since the Bank is
currently precluded from paying dividends without prior OCC
approval, certain Directors of the Company have guaranteed to
personally loan the Company up to $200,000, if necessary, to
enable the Holding Company to meet its cash obligations for 2000.
Cash Flow Reporting: Cash and cash equivalents includes cash,
deposits with other financial institutions that have an original
maturity under 90 days, and federal funds sold. Net cash flows are
reported for loan and deposit transactions and short-term
borrowings.
Securities: Securities are classified as held to maturity and
carried at amortized cost when management has the positive intent
and ability to hold them to maturity. Securities are classified
as available for sale when they might be sold before maturity.
Securities available for sale are carried at fair value, with
unrealized holding gains and losses reported in other comprehensive
income. Trading securities are carried at fair value, with changes
in unrealized holding gains and losses included in income.
Management determines the appropriate classification of securities
at the time of purchase. Other securities such as stock in the
Federal Reserve Bank and the Federal Home Loan Bank are carried at
cost.
Interest income includes amortization of purchase premiums and
discounts. Gains and losses on sales are based on the amortized
cost of the security sold. Securities are written down to fair
value when a decline in fair value is not temporary.
F-8
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Loans and Medical Claims Receivables: Loans are reported at the
principal balance outstanding net of unearned interest, deferred
loan fees and costs and the allowance for credit losses. Interest
income is reported on the level-yield interest method and includes
amortization of net deferred loan fees and costs over the loan
term. The fees on medical claims were recognized as the claims are
collected.
Interest income is not reported when full loan repayment is in
doubt, typically when the loan is impaired or payments are past due
over 90 days (120 days for insurance premium financing). Payments
received on such loans are reported as principal reductions.
Allowance for Credit Losses: The allowance for credit losses is a
valuation allowance for probable credit loss, increased by the
provision for credit losses and decreased by charge-offs less
recoveries. Management estimates the allowance balance required
using past credit loss experience, the nature and volume of the
portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific
credits, but the entire allowance is available for any credit that,
in management's judgment, should be charged-off.
A loan is considered impaired when full payment of principal and
interest under the loan terms is not expected. Impairment is
evaluated in total for smaller-balance loans of similar nature such
as residential mortgage, consumer and insurance premium finance
loans, and on an individual loan basis for other loans. If a loan
is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future
cash flows using the loan's existing rate or at the fair value of
collateral if repayment is expected solely from the collateral.
Premises and Equipment: Land is carried at cost. Premises and
equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method based on
the estimated useful lives of the assets.
Other Real Estate and Repossessed Assets: Assets acquired through
or instead of loan foreclosure are initially recorded at fair value
when acquired, establishing a new cost basis. If fair value
declines, a valuation allowance is recorded through expense. Costs
after acquisition are expensed.
Goodwill: Net assets acquired in purchase transactions are recorded
at their fair value at the date of acquisition. Goodwill, 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.
Long-term Assets: Premises and equipment, goodwill and other long-
term assets are reviewed for impairment when events indicate their
carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at discounted
amounts.
Income Taxes: Income tax expense is the total of the current year
income tax due or refundable and the change in deferred tax assets
and liabilities. Deferred tax assets and liabilities are the
expected future tax amounts for the temporary differences between
carrying amounts and tax bases of assets and liabilities, computed
using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the expected amount to be realized.
Stock Compensation: Employee compensation expense under stock
option plans is reported if options are granted below market price
at grant date. Pro forma disclosures of net income and earnings
per share are shown using the fair value method of SFAS No. 123 to
measure expense for options granted after 1994, using an option
pricing model to estimate fair value.
F-9
<PAGE>
1. Summary of Significant Accounting Policies (continued)
Fair Values of Financial Instruments: Fair values of financial
instruments are estimated using relevant market information and
other assumptions. Fair value estimates involve uncertainties and
matters of significant judgement regarding interest rates, credit
risk, prepayments, and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in
market conditions could significantly affect the estimates. The
fair value estimates of existing on- and off-balance sheet
financial instruments do not include the value of anticipated
future business or the value of assets and liabilities not
considered financial instruments.
Loss Contingencies: Loss contingencies, including claims and legal
actions arising in the ordinary course of business, are recorded
as liabilities when the likelihood of loss is probable and an
amount or range of loss can be reasonably estimated. Management
does not believe there now are such matters that will have a
material effect on the financial statements.
Dividend Restriction: Banking regulations require the maintenance
of certain capital and net income levels that may limit the amount
of dividends that may be paid. Regulatory capital requirements are
more fully disclosed in a separate note.
Restrictions on Cash: The Company was required to have $449,000 of
cash on hand or on deposit with the Federal Reserve Bank to meet
regulatory reserve and clearing requirements at year end 1999.
Deposits with the Federal Reserve Bank do not earn interest.
Additionally, the Company had time deposits with other financial
institutions totaling $25,000 pledged as security to its merchant
card clearing agent.
Earnings Per Share: Earnings per share is computed in accordance
with SFAS No. 128, which requires dual presentation of basic and
diluted earnings per share ("EPS") for entities with complex
capital structures. Basic EPS is based on net income divided by
the weighted-average number of shares outstanding during the
period. Diluted EPS includes the dilutive effect of stock options
granted using the treasury stock method.
Earnings per common share is computed by dividing net income by the
weighted-average number of shares outstanding for the year. The
weighted-average number of common shares outstanding for basic and
diluted earnings per share computations were as follows:
Unaudited Unaudited
1999 1998 1997
--------- --------- ---------
Weighted-average shares outstanding - Basic 5,760,461 5,759,579 5,751,847
Effect of stock options 41,912 -- 238,968
--------- --------- ---------
Weighted-average shares outstanding - Diluted 5,802,373 5,759,579 5,990,815
========= ========= =========
The Company reported a net loss for 1998 and 1997. Accordingly,
the dilutive effect of stock options is not considered in the net
loss per share calculations for these years.
Comprehensive Income: Comprehensive income is reported for all
periods. Comprehensive income includes both net income and other
comprehensive income, which includes the change in unrealized gains
and losses on securities available for sale.
Industry Segments: Internal financial information is primarily
reported and aggregated in three lines of business including
community banking, insurance premium financing and medical claims
receivable factoring. The Company has discontinued its medical
claims factoring operations.
F-10
<PAGE>
1. Summary of Significant Accounting Policies (continued)
New Accounting Pronouncements: Beginning January 1, 2001, a new
accounting standard, Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities," will require all derivatives to be recorded
at fair value. Unless designated as hedges, changes in these fair
values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This
standard is not expected to have a material effect but the effect
will depend on derivative holdings when this standard applies.
Reclassifications: Some items in prior financial statements have
been reclassified to conform to the current presentation.
2. Accounting Irregularities and Prior Period Adjustments
In 1999, various accounting irregularities were found during the
course of an internal audit of the Company's IPF division. Through
further investigation, internal audit identified a significant
number of transactions whereby refund amounts due to some borrowers
were inappropriately diverted. Most of the refunds were applied
against the balance of various unrelated loan accounts including
past due loan principal, past due interest, assessed late charges,
etc. The irregular transactions were reported to the Office of the
Comptroller of the Currency ("OCC"), and the Company retained the
services of a forensic accountant to conduct an independent review
of the IPF division covering the period from January 1, 1996 to
December 31, 1999.
Based on the results of the independent review of the IPF division,
the Company recognized additional losses, including interest, of
$2,611,000 ($1,723,000 on a tax-effected basis). These losses
primarily related to the recognition of previously unrecognized
loan charge-offs and, to a lesser extent, errors resulting from the
absence of appropriate accounting controls within the IPF division.
The losses were recognized as adjustments to the current and prior
years beginning in the first quarter of 1996 and extending through
the fourth quarter of 1999. The additional losses totaled $502,000
in 1999, $1,092,000 in 1998, $837,000 in 1997 and $180,000 in 1996.
Additional accounting errors related to the misclassification of
certain expenses totaling $169,000 were also recognized as prior
period adjustments in 1998. All prior year financial information
included in the accompanying consolidated financial statements has
been restated to reflect these losses. Details of the restatement
are as follows:
Impact on net income (loss):
<TABLE>
<CAPTION>
Unaudited Unaudited Unaudited
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income (loss), as previously reported $(1,863,113) $(3,476,304) $ 1,697,987
Effect of error corrections on income
before income taxes (1,261,284) (837,293) (179,822)
Tax effect (345,819) 284,680 61,139
------------ ------------ ------------
Net income (loss), as restated $(3,470,216) $(4,028,917) $ 1,579,304
============ ============ ============
</TABLE>
F-11
<PAGE>
2. Accounting Irregularities and Prior Period Adjustments (continued)
Impact on net income (loss) per share:
Unaudited Unaudited Unaudited
1998 1997 1996
--------- --------- ---------
Basic net income (loss) per
share, as previously reported $ (0.32) $ (0.60) $ 0.32
Effect of error corrections on
income before income taxes (0.22) (0.15) (0.03)
Tax effect (0.06) 0.05 0.01
--------- --------- ---------
Basic net income (loss) per
share, as restated $ (0.60) $ (0.70) $ 0.30
========= ========= =========
Diluted net income (loss) per
share, as previously reported $ (0.32) $ (0.60) $ 0.31
Effect of error corrections on
income before income taxes (0.22) (0.15) (0.03)
Tax effect (0.06) 0.05 0.01
--------- --------- ---------
Diluted net income (loss) per share,
as restated $ (0.60) $ (0.70) $ 0.29
========= ========= =========
Impact on year-end shareholders' equity:
Unaudited Unaudited Unaudited
1998 1997 1996
------------ ------------ ------------
Year-end shareholders' equity, as
previously reported $13,994,250 $15,877,333 $19,230,552
Effect of prior year error
corrections (671,296) (118,683) --
Effect of current year error
corrections (1,607,103) (552,613) (118,683)
------------ ------------ ------------
Year-end shareholders' equity,
as restated $11,715,851 $15,206,037 $19,111,869
============ ============ ============
The Company no longer employs the persons directly responsible for
managing the IPF division during the period when the diversions
were taking place.
The comparative consolidated financial statements as of and for the
years ended December 31, 1998 and 1997, as restated for the
accounting irregularities discussed above, have not been audited.
Although the Company has made every effort to have the prior
financial statements re-audited, management has been unable to
secure a qualified, independent audit firm willing to provide an
audit opinion on such periods. The Company's original auditors for
1998 and 1997, as well as the Company's current auditors, declined
the Company's request to audit the restated financial statements.
Management believes that no other accounting firm would be willing
to audit the restated financial statements for the previous years
in light of the irregularities discovered and the absence of
adequate internal controls during that time. Additionally, the
required management representations would not be available as all
members of the former senior management group are no longer
employed by the Company.
F-12
<PAGE>
3. Acquisitions and Dispositions
Sale of Waxahachie and Midlothian Branches
On June 30, 1999 the Company sold two branches located in
Waxahachie and Midlothian, Texas (the "Branches"), resulting in a
pretax gain of $3,050,000. The Company sold loans totaling
$13,111,000, real property, furniture and equipment totaling
$1,543,000, and cash and other assets totaling $105,000, relieved
goodwill associated with these branches by $2,364,000, and the
acquirer assumed deposits and other liabilities totaling
$45,368,000. After giving effect to a premium of 2.5% on loans
and 11.0% on deposits totaling $5,302,000, in addition to the cash
at the Branches, the Company paid $25,195,000 in cash as
consideration for the net deposit liabilities assumed by the
acquirer.
Sale of Chester, Kennard, Lufkin and Wells Branches (Unaudited)
On October 16, 1998 the Company sold four branches located in
Chester, Kennard, Lufkin and Wells, Texas (the "Lufkin Branches"),
resulting in a pretax gain of $1,103,000. The Company sold loans
totaling $10,912,000, real property, furniture and equipment
totaling $610,000, and cash and other assets totaling $1,268,000,
relieved goodwill associated with these branches by $476,000, and
the acquirer assumed deposits and other liabilities totaling
$56,935,000. After giving effect to a deposit premium of 3% on
the deposits assumed totaling $1,703,000, in addition to the cash
at the Lufkin Branches, the Company paid $43,632,000 in cash as
consideration for the net deposit liabilities assumed by the
acquirer.
Acquisition of TexStar National Bank, Universal City, Texas
(Unaudited)
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 and the assets and liabilities of
TexStar were recorded at fair value.
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.
1998 1997
------------- -------------
Total interest income $ 17,651,874 $ 20,901,003
Net loss (4,302,074) (3,903,570)
Net loss per share - Basic (0.75) (0.68)
F-13
<PAGE>
4. Securities
Year-end securities available for sale consisted of the following:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999:
U.S. government agencies
and corporations $11,505,376 $ -- $ 995,411 $10,509,965
Mortgage-backed securities 480,706 441 4,974 476,173
Other securities 1,494,354 -- -- 1,494,354
----------- ---------- ---------- -----------
Total securities $13,480,436 $ 441 $1,000,385 $12,480,492
=========== ========== ========== ===========
1998 (Unaudited):
U.S. Treasury $ 5,498,506 $ 13,544 $ -- $ 5,512,050
U.S. government agencies
and corporations 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 1,969,815 -- -- 1,969,815
----------- ---------- ---------- -----------
Total securities $24,813,055 $ 106,108 $ 32,459 $24,886,704
=========== ========== ========== ===========
</TABLE>
Mortgage-backed securities are backed by pools of mortgages that
are insured or guaranteed by the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Government National Mortgage
Corporation ("GNMA"). Other securities include stock holdings in
Independent Bankers Financial Corporation, the Federal Reserve Bank
and the Federal Home Loan Bank. In the 1998 unaudited financial
statements, other securities also included an equity investment in
the stock of McCoy, Meyers, Inc., the Company's data processor.
The stock was sold in 1999 for $520,000 with a realized gain of
$162.
The amortized cost and estimated fair value of securities at year-
end 1999, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations. Mortgage-backed
securities and other securities are shown separately since they are
not due at a single maturity date.
Estimated
Amortized Fair
Cost Value
----------- -----------
Due within one year $ -- $ --
Due after one year through five years -- --
Due after five years through ten years 11,505,376 10,509,965
Mortgage-backed securities 480,706 476,173
Other securities 1,494,354 1,494,354
----------- -----------
Total securities $13,480,436 $12,480,492
=========== ===========
F-14
<PAGE>
4. Securities (continued)
Sales of securities available for sale were as follows:
Unaudited Unaudited
1999 1998 1997
----------- ----------- -----------
Proceeds $ 4,584,869 $ 5,807,634 $12,680,593
Gross Gains 23,794 120,430 180,978
Gross Losses 74,725 77 7,613
At year-end 1999, there were no holdings of securities of any one
issuer, other than the U.S. government and its agencies, in an
amount greater than 10% of shareholders' equity.
At year-end 1999 and 1998 securities with a carrying amount of
$9,716,000 and $17,820,000 (unaudited), were pledged as collateral
for public deposits, as required or permitted by law.
5. Loans
Year-end loans were as follows:
Unaudited
1999 1998
----------- -----------
Real estate loans $31,529,099 $42,047,938
Insurance premium financing 20,639,094 24,570,762
Commercial loans 9,870,652 29,424,509
Installment loans 5,678,584 3,867,119
----------- -----------
Total gross loans 67,717,429 99,910,328
Unearned interest (510,834) (916,152)
Allowance for credit losses on loans (1,434,041) (1,961,840)
----------- -----------
Loans, net $65,772,554 $97,032,336
=========== ===========
During 1999, there were no loans to directors, executive officers
or principal shareholders of the Company, including their immediate
families and companies in which they are principal owners.
Activity in the allowance for credit losses on loans for 1999, 1998
and 1997 was as follows:
Unaudited Unaudited
1999 1998 1997
------------ ----------- ------------
Balance at beginning of year $ 1,961,840 $ 950,809 $ 1,067,041
Provision for credit
losses on loans 136,936 3,533,102 924,493
Bank acquisition -- 820,625 --
Loans charged off (2,373,103) (4,017,469) (1,187,947)
Recoveries 1,039,732 674,773 147,222
Transfers from allowance
for credit losses on
medical claims receivables 668,636 -- --
------------ ----------- ------------
Balance at end of year $ 1,434,041 $ 1,961,840 $ 950,809
============ =========== ============
F-15
<PAGE>
5. Loans (continued)
Impaired loans were as follows:
Unaudited
1999 1998
----------- -----------
Year-end loans with allowance allocated $ 3,958,654 $ 3,640,069
Year-end loans with no allowance allocated 414,419 1,614,945
----------- -----------
Impaired loans $ 4,373,073 $ 5,255,014
=========== ===========
Amount of the allowance allocated $ 645,899 $ 971,456
=========== ===========
Unaudited Unaudited
1999 1998 1997
----------- ----------- -----------
Average impaired loans during the year $ 4,814,044 $ 5,494,830 $ 2,304,892
Interest income recognized during
impairment - all cash-basis 383,558 608,241 253,538
Nonperforming loans were as follows:
Unaudited
1999 1998
---------- ----------
Loans past due over 90 days still on accrual $ 13,557 $ 414,969
Nonaccrual loans 705,969 1,398,800
---------- ----------
Total nonperforming loans $ 719,526 $1,813,769
========== ==========
6. Medical Claims Receivables
At year-end 1999 and 1998 the medical claims receivables portfolio
was composed of the following:
Unaudited
1999 1998
--------- ---------
Medical claims receivables $ -- $ 646,378
Unearned interest -- --
Allowance for credit losses on
medical claims receivables -- (141,184)
--------- ---------
Medical claims receivables, net $ -- $ 505,194
========= =========
F-16
<PAGE>
6. Medical Claims Receivables (continued)
Activity in the allowance for credit losses on medical claims
receivables for 1999, 1998 and 1997 was as follows:
Unaudited Unaudited
1999 1998 1997
---------- ----------- -----------
Balance at beginning of year $ 141,184 $ 4,307,885 $ 217,734
Provision for credit losses -- (694,194) 6,244,996
Receivables charged off (12,707) (4,428,530) (2,156,355)
Recoveries 540,159 956,023 1,510
Transfer to allowance for credit
losses on loans (668,636) -- --
---------- ----------- -----------
Balance at end of year $ -- $ 141,184 $ 4,307,885
========== =========== ===========
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 $1,151,000 (unaudited),
and fixed assets with a carrying value of $47,000 (unaudited),
relating to the medical claims factoring division.
7. Premises and Equipment
Year-end premises and equipment are summarized as follows:
Estimated Useful Unaudited
Lives 1999 1998
---------------- ----------- ------------
Buildings 5 - 40 years $ 3,684,887 $ 3,470,359
Furniture, fixtures
and computers 3 - 10 years 4,041,365 4,443,964
Automobiles 3 - 5 years 20,894 98,518
Leasehold improvements 3 - 5 years 139,504 139,504
----------- ------------
7,886,650 8,152,345
Less accumulated
depreciation (2,737,387) (2,414,535)
Land 1,146,039 1,024,413
----------- ------------
Premises and
equipment, net $ 6,295,302 $ 6,762,223
=========== ============
Rent expense totaled $223,000, $218,000 (unaudited) and $184,000
(unaudited) for 1999, 1998 and 1997. Rent commitments under
noncancelable operating leases were as follows at year-end 1999,
before considering renewal options that generally are present.
Year Amount
---- --------
2000 $ 50,736
2001 28,560
2002 28,560
2003 28,560
2004 28,560
Thereafter 38,080
--------
$203,056
========
F-17
<PAGE>
8. Deposits
At year-end 1999 the scheduled maturities of time deposits were as
follows:
Year Amount
---- -----------
2000 $37,329,520
2001 6,832,525
2002 952,454
2003 202,440
2004 120,041
-----------
$45,436,980
===========
9. Convertible Subordinated Debt
On 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. 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-18
<PAGE>
9. Convertible Subordinated Debt (continued)
If Redeemed During Percentage of If Redeemed During Percentage of
12 Months Ended Principal 12 Months Ended Principal
March 31, Amount March 31, Amount
- ------------------ ------------- ------------------ --------------
2000 108% 2005 103%
2001 107% 2006 102%
2002 106% 2007 101%
2003 105% 2008 100%
2004 104%
10. Stock Options
A summary of the Company's stock option plans is as follows:
1988 Incentive Stock Option Plan: Under the provisions of the
plan, 100,000 shares, as restated to reflect a 1 for 10 reverse
stock split effected on June 14, 1993, were allocated for
incentive stock options to be granted to officers and/or key
employees. Grantees are awarded 5-year options to acquire shares
at the market price on the date the option is granted. The
options are fully vested and exercisable as of the date of the
grant. All options must be granted within 10 years of the plan
adoption date. As of year-end 1999, there were no options
outstanding or available for grant under the plan.
1995 Incentive Stock Option Plan: Under the provisions of the
plan, 100,000 shares were allocated for incentive stock options to
be granted to officers and/or key employees. Grantees are awarded
10-year options to acquire shares at the market price on the date
the option is granted. The options vest and become exercisable
based on a vesting schedule determined by the Compensation
Committee of the Board of Directors on the date of grant. As of
year-end 1999, there were 10,000 options outstanding, none of
which were exercisable, and 67,158 options available for grant
under the plan. All options must be granted within 10 years of
the plan adoption date.
1996 Stock Option Plan for Directors: Under the provisions of the
plan, 100,000 shares were allocated for non-qualified stock
options to be granted to directors. The 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. On the first calendar business day
of each year, each non-employee director is automatically granted
10-year options 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. The options fully
vest and become exercisable after the first anniversary of the
grant date. As of year-end 1999, there were 40,000 options
outstanding, of which 26,000 were exercisable, and 54,000 options
available for grant under the plan.
1997 Non-Qualified Stock Option Plan for Officers and Key
Employees: Under the provisions of the plan, 500,000 shares were
allocated for non-qualified stock options to be granted to
officers and/or key employees. On January 2, 1997, grantees were
awarded 10-year options to acquire 500,000 shares at the market
price on that date. No additional options may be granted under
the plan. The options fully vest and become exercisable in five
equal installments commencing on December 31, 1997 and annually
thereafter. As of year-end 1999, there were 475,000 options
outstanding, of which 275,000 were exercisable.
F-19
<PAGE>
10. Stock Options (continued)
1997 Non-Qualified Stock Option Plan for Non-Employee Directors:
Under the provisions of the plan, 150,000 shares were allocated
for non-qualified stock options to be granted to directors. In
1997, grantees were awarded 10-year options to acquire 150,000
shares at the market price on the date the options were granted.
No options under the plan may be granted after December 31, 1997.
The options fully vest and become exercisable in five equal
installments commencing on December 31, 1997 and annually
thereafter. As of year-end 1999, there were 150,000 options
outstanding, of which 90,000 were exercisable.
1998 Incentive Stock Option Plan: Under the provisions of the
plan, 500,000 shares were allocated for incentive stock options to
be granted to officers and/or key employees. Grantees are awarded
10-year options to acquire shares at the market price on the date
the option is granted. The options vest and become exercisable
based on a vesting schedule as determined by the Stock Option
Committee of the Board of Directors on the date of grant. As of
year-end 1999, there were 490,000 options outstanding, of which
100,000 were exercisable, and no options available for grant under
the plan. All options must be granted within 10 years of the plan
adoption date.
The following is a summary of activity in the Company's stock
option plans:
<TABLE>
<CAPTION>
Unaudited Unaudited
1999 1998 1997
---------------------- ----------------------
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 751,543 $4.32 755,857 $4.18 87,292 $4.13
Granted 689,000 1.29 102,000 5.74 708,195 4.24
Exercised -- -- (49,900) 4.54 (26,434) 4.39
Expired or forfeited (275,543) 2.50 (56,414) 4.88 (13,196) 6.42
---------- ---------- ----------
Outstanding at
end of year 1,165,000 2.96 751,543 4.32 755,857 4.18
Exercisable at
end of year 491,000 3.70 344,453 4.31 200,857 4.03
Available for grant
at end of year 121,158 569,413 115,000 4.18
Weighted-average
remaining
contractual
life of options
outstanding at
end of year 7.60 years 7.16 years 8.06 years
</TABLE>
F-20
<PAGE>
10. Stock Options (continued)
The following table summarizes information about stock options
outstanding at year-end 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Number Contractual Average Number Average
Exercise Prices Outstanding Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.69 to $1.99 500,000 9.52 $1.26 100,000 $1.31
$2.00 to $3.99 14,000 9.02 $2.13 -- --
$4.00 to $5.99 639,000 6.06 $4.23 379,000 $4.23
$6.00 to $6.94 12,000 8.01 $6.94 12,000 $6.94
--------- -------
$0.69 to $6.94 1,165,000 7.60 $2.96 491,000 $3.70
========= =======
</TABLE>
The weighted-average value per share of options granted during
1999, 1998 and 1997 was $0.52, $2.80 (unaudited) and $1.98
(unaudited). The fair value of options granted was estimated on
the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions (unaudited for
1998 and 1997): dividend yield of 0% for all three years; expected
volatility of 15.63% for 1999, 47.66% for 1998, and 43.46% for
1997; risk-free interest rate of 5.49% for 1999, 5.63% for 1998,
and 6.28% for 1997, and an expected life of 5.00 years for 1999,
5.00 years for 1998, and 4.96 years for 1997.
SFAS No. 123, "Accounting for Stock Based Compensation," requires
pro forma disclosures for companies not adopting its fair value
accounting method for stock-based employee compensation.
Accordingly, the following pro forma information presents net
income (loss) and net income (loss) per share for 1999, 1998 and
1997 had the Standard's fair value method been used to measure
compensation cost for stock option plans. No compensation expense
related to stock options was actually recognized.
Unaudited Unaudited
1999 1998 1997
------------ ------------- ------------
Net income (loss):
As reported $ 254,083 $ (3,470,216) $(4,028,917)
Pro forma 148,672 (3,768,096) (4,409,206)
Net income (loss) per share:
As reported
Basic 0.04 (0.60) (0.70)
Diluted 0.04 (0.60) (0.70)
Pro forma
Basic 0.03 (0.65) (0.77)
Diluted 0.03 (0.65) (0.77)
The effects of applying SFAS 123 in this pro forma disclosure are
not indicative of future amounts. The pro forma effect may increase
in the future if more options are granted.
F-21
<PAGE>
11. Employee Benefit Plans
The Company offers a 401(k) profit sharing plan for the benefit of
all full-time employees. Participants may contribute up to 10% of
their gross compensation, subject to statutory limits. The
Company matches up to 50% of those contributions up to a maximum
match of 2.5% of the participant's compensation. The Company's
matching percentage was 50% of the employee's contribution for
1999, 1998 (unaudited) and 1997 (unaudited). The Company may also
provide an additional discretionary percentage. Employee
contributions are vested at all times and the Company's
contributions vest in equal annual installments over a period of
5 years of service. The cash contribution expense included in
salaries and employee benefits was $90,000, $86,000 (unaudited)
and $94,000 (unaudited) for 1999, 1998 and 1997.
The Company provides certain post-retirement benefits to a former
Chairman and officer. Under the agreement, the Company must
provide the former Chairman payments, payable in annual, monthly
or bi-monthly installments, totaling $54,000 per year.
Additionally, the Company must provide or reimburse the former
Chairman 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 Company. The Company's obligation under the agreement
terminates at the earlier of death or when the former Chairman
reaches 85 years of age. Generally accepted accounting principles
require the accrual of post-retirement benefits during the period
of the beneficiary's employment. As the former Chairman retired
during 1999, the Company recognized an accrual of $400,000, which
represents the estimated discounted present value of the Company's
future payment obligation.
12. Common Stock 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.
13. Financial Instruments With Off-Balance-Sheet Risk and Concentration
of Credit Risk
Some financial instruments, such as loan commitments, credit
lines, letters of credit, and overdraft protection, are issued in
the normal course of business to meet the financing needs of
customers. These are agreements to provide credit or to support
the credit of others, as long as conditions established in the
contract are met. These agreements usually have fixed expiration
dates or other termination clauses and may require payment of a
fee. Since many of the commitments are expected to expire without
being used, the total commitments do not necessarily represent
future cash requirements. Off-balance-sheet risk to credit loss
exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are
used to make such commitments as are used for loans, including
obtaining collateral at exercise of the commitment.
The total amounts of financial instruments with off-balance sheet
risk at year-end 1999 and 1998 were unfunded loan commitments of
$4,125,000 and $6,653,000 (unaudited) and letters of credit of
$158,000 and $238,000 (unaudited).
F-22
<PAGE>
13. Financial Instruments With Off-Balance-Sheet Risk and Concentration
of Credit Risk (continued)
Unfunded loan commitments and letters of credit carrying fixed
interest rates totaled $628,000 and $8,000 at year-end 1999. The
interest rates on these commitments ranged from 7.50% to 18.0%.
Federal funds sold totaled $4,335,000 and $24,762,000 (unaudited)
at year-end 1999 and 1998. These funds represent uncollateralized
loans, in varying amounts, to other commercial banks with which
the Company has correspondent relationships. The Company
maintains deposits with other financial institutions in amounts
that exceed FDIC insurance coverage. The Company 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 Company has geographic concentrations of credit in its
principal trade areas of Bexar, Comal, Grayson, and Tarrant
Counties, Texas. Additionally, the Company has a significant
concentration of credit, based upon like collateral. Insurance
premium finance loans, secured by the residual value of unearned
insurance premiums, comprise $20,639,000, or 30.5%, and
$24,571,000 (unaudited), or 24.6% (unaudited), of gross loans at
year-end 1999 and 1998.
14. Other Noninterest Expense
Other noninterest expense consisted of the following:
Unaudited Unaudited
1999 1998 1997
----------- ----------- -----------
Professional services $ 1,324,812 $ 1,020,970 $ 1,126,351
Settlements and accruals for
legal proceedings -- 336,698 --
Postage 267,376 447,312 374,233
Telephone 291,945 363,023 342,161
Office supplies 177,505 341,028 290,533
Advertising 81,793 164,163 189,510
Amortization of intangibles
and debt issuance costs 620,114 634,821 506,172
Insurance 156,441 153,260 95,957
FDIC assessment 363,525 69,976 15,626
Interest on IPF refunds 327,380 190,839 40,290
Operational losses 48,784 229,761 13,987
Other 925,656 798,677 694,606
----------- ----------- -----------
Total other noninterest expense $ 4,585,331 $ 4,750,528 $ 3,689,426
=========== =========== ===========
Professional services expense includes legal fees to a firm in
which a director of the Company holds an interest in the amount of
$333,000, $182,000 (unaudited) and $110,000 (unaudited) in 1999,
1998 and 1997.
F-23
<PAGE>
15. Federal Income Taxes
Year-end deferred tax assets and liabilities consist of the
following:
Unaudited
1999 1998
------------ ------------
Deferred tax liabilities:
Depreciation and amortization $ (692,673) $ (749,587)
Deferred loan costs (115,906) (215,219)
Other (117,006) (105,963)
Net unrealized gain on securities
available-for-sale -- (26,497)
------------ ------------
Gross deferred tax liability (925,585) (1,097,266)
Deferred tax assets:
Net operating loss carryforwards 1,228,204 1,873,100
Alternative minimum tax
loss carryforward 239,997 81,599
Deferred compensation 136,101 28,623
Allowance for credit losses 101,517 205,582
Non compete agreement -- 374,644
Other real estate losses 37,037 39,719
Other 22,338 104,963
Net unrealized loss on securities
available for sale 339,981 --
------------ ------------
Gross deferred tax assets 2,105,175 2,708,230
------------ ------------
Net deferred tax asset 1,179,590 1,610,964
Less valuation allowance for net
deferred tax asset -- (1,637,461)
------------ ------------
Total net deferred tax
asset (liability) $ 1,179,590 $ (26,497)
============ ============
As of year-end 1998 the Company had a net deferred tax asset of
$1,637,000 (unaudited), excluding the tax effect of unrealized
gains on securities available for sale. Due to going concern
uncertainties as of year-end 1998, described in Note 1, the Company
provided a 100% valuation allowance for the net deferred tax asset
which could not be utilized by a NOL carryback. The realization
of the net deferred tax asset is contingent upon the Company
generating sufficient future taxable income during the carry
forward period. As of year-end 1999, management concluded a
valuation allowance was not necessary, as management believes it
is more likely than not the Company will realize the net deferred
tax assets during the carry-forward period.
F-24
<PAGE>
15. Federal Income Taxes (continued)
The provision (benefit) for federal income taxes consists of the
following:
Unaudited Unaudited
1999 1998 1997
------------ ------------- --------------
Current $ -- $ (1,105,834) $ --
Deferred:
Federal 797,852 381,949 (2,084,750)
Valuation allowance (1,637,461) 1,637,461 --
------------ ------------- --------------
Provision (benefit) for
federal income tax
expense charged to
results of operations (839,609) 913,576 (2,084,750)
Tax effect of change in
unrealized gain
(loss) on securities
available for sale (366,478) (24,700) 59,249
------------ ------------- --------------
Comprehensive provision
(benefit) for federal
income taxes $ (1,206,087) $ 888,876 $ (2,025,501)
============= ============= ==============
The effective tax rate on net loss before income taxes differs
from the U.S. statutory tax rate as follows:
Unaudited Unaudited
1999 1998 1997
-------- ------- -------
U.S. statutory rate (34.0)% (34.0)% (34.0)%
Valuation allowance (279.7)% 59.0 % -- %
Goodwill 167.8 % 10.3 % (2.9)%
Tax-exempt interest (3.5)% (5.2)% 2.1 %
Other 6.0 % 5.6 % 0.7 %
-------- ------- -------
Effective tax rate (143.4)% 35.7 % (34.1)%
======== ======= =======
As of year-end 1999 for income tax reporting purposes, the Company
has a current net pretax operating loss carryforward of
$3,508,000, which expires, if not used, in 2019. 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 Tax Reform Act of 1986 imposed substantial restrictions on the
utilization of net operating losses and tax credits in the event
of an "ownership change" of a corporation. Accordingly, the
Company's ability to utilize net operating loss carry-forwards may
be limited as a result of such an "ownership change" as defined in
the Internal Revenue Code.
The Company also has an alternative minimum tax credit carryover
of $240,000, which can be used to offset regular tax in future
periods.
16. Commitments and Contingencies
Change in Control Agreements: The Company has change in control
agreements with certain executive officers. The agreements
provide for the payment of benefits, under certain circumstances,
to these executive officers in the event of the termination of the
employment of such officers following a change in control of the
Company.
F-25
<PAGE>
16. Commitments and Contingencies (continued)
Federal Home Loan Bank Advances: As a member of the Federal Home
Loan Bank (FHLB) system, the Bank has the ability to obtain
borrowings up to a maximum total of 50% of the Bank's total assets
subject to the level of qualified, pledgable 1-4 family
residential real estate loans and FHLB stock owned. As discussed
in a separate note, under a formal agreement with the OCC, the
Bank is prohibited from incurring additional debt without prior
approval. The advances are collateralized by a blanket pledge of
the Bank's residential mortgage loan portfolio and FHLB stock. No
FHLB advances were outstanding as of year-end 1999 or
1998 (unaudited).
Loan Purchase Agreements: On March 16, 1998, the Bank entered into
an agreement with CAA Premium Finance ("CAA") 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. The purchased
loans must meet the Bank's underwriting standards prior to
purchase. CAA retains loans that do not meet the Bank's
underwriting criteria.
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. The purchased loans
must meet the Bank's underwriting standards prior to purchase.
Cardinal retains loans that do not meet the Bank's underwriting
criteria.
Litigation: 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. The trial court's summary judgment was
appealed to the Fifth Circuit Court of Appeals, which affirmed the
judgment of the trial court.
F-26
<PAGE>
16. Commitments and Contingencies (continued)
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 been remanded to
the trial court for disposition of the remaining issues. No trial
date has been set in this matter.
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.
Various other contingent liabilities are not reflected in the
financial statements, including claims and legal actions arising
in the ordinary course of business. In the opinion of management,
after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material effect on the
Company's financial condition or results of operations.
IPF Accounting Irregularities: On September 21, 1999, the Board of
Directors and the OCC entered into an amendment to a prior formal
agreement (discussed below) whereby the Company would retain the
services of a qualified independent forensic accountant to review
certain IPF accounting transactions relating to any overpayment of
loan balances and/or refunds due to IPF customers and report to
the Board of Directors and the OCC regarding the findings of the
review. As discussed in Note 2, the Company recognized losses
totaling $2,611,000 over the current and prior years based on the
findings of the review. The results of the review have been
reported to the OCC. At this time, however, the Company cannot
reasonably predict the likelihood of any further bank regulatory
action or the likelihood of other potential investigations or
actions by additional governmental agencies.
17. Regulatory Matters
Banks and bank holding companies are subject to regulatory capital
requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective
action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under
regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by
regulators. Failure to meet capital requirements can initiate
regulatory action.
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 Federal Reserve Banking System ("FRB") and the
Federal Deposit Insurance Corporation ("FDIC"). Because the FRB
regulates the bank holding company parent of the Bank, the FRB
also has supervisory authority that 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.
F-27
<PAGE>
17. Regulatory Matters (continued)
On November 19, 1998 the Board of Directors of the Bank entered
into a 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. The Bank was also required to achieve certain
additional capital levels by December 31, 1999. Under the Formal
Agreement, by March 31, 1999, the Bank was required to achieve
total risk-based capital of at least 12% of risk-weighted assets
and Tier I leverage capital of at least 7.5% of average assets.
By December 31, 1999, the Bank was required to achieve total risk-
based capital of at least 14% of risk-weighted assets. The Bank
failed to achieve the capital requirements set forth in the Formal
Agreement by March 31, 1999 and submitted a request for an
extension to September 30, 1999. The OCC granted the extension
and the Bank achieved the required level of capital upon
completion of the sales of the Midlothian and Waxahachie branches
on June 30, 1999.
The Formal Agreement establishes higher capital requirements than
those applicable under prompt corrective action regulations for an
"adequately" and "well capitalized" bank. The table below sets
forth Consolidated and Bank only actual capital levels in addition
to the capital requirements under the Formal Agreement and prompt
corrective action regulations.
<TABLE>
<CAPTION>
Minimum Requirements
Formal Under Prompt Corrective
Actual Year-end Capital Ratios Agreement at Action Regulations
------------------------------ December 31, ------------------------
Unaudited 1999 Adequately Well
1999 1998 Capitalized Capitalized
------------- --------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Leverage Ratio:
Tier I capital to average
assets
Consolidated 5.38% 1.88% 4.00% 5.00%
Bank 9.78% 4.14% 7.50% 4.00% 5.00%
Risk-Based Capital Ratios:
Tier I capital to risk-
weighted assets
Consolidated 7.38% 3.12% 4.00% 6.00%
Bank 13.49% 6.88% 6.00% 4.00% 6.00%
Total capital to risk-
weighted assets
Consolidated 12.31% 5.92% 8.00% 10.00%
Bank 14.73% 8.12% 14.00% 8.00% 10.00%
</TABLE>
Year-end Consolidated and Bank only actual capital amounts were as
follows:
<TABLE>
<CAPTION>
Consolidated Bank Only
-------------------------- ---------------------------
Unaudited Unaudited
1999 1998 1999 1998
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Tier I capital $ 5,379,000 $ 3,294,000 $ 9,804,000 $ 7,243,000
Tier II capital 3,594,000 2,956,000 902,000 1,306,000
----------- ------------ ------------ ------------
Total capital $ 8,973,000 $ 6,250,000 $ 10,706,000 $ 8,549,000
=========== ============ ============ ============
Risk-weighted assets $72,879,000 $105,522,000 $ 72,657,000 $105,285,000
=========== ============ ============ ============
Adjusted average assets $99,942,000 $175,012,000 $100,224,000 $174,772,000
=========== ============ ============ ============
</TABLE>
F-28
<PAGE>
17. Regulatory Matters (continued)
As of year-end 1999, the Company and Bank met the level of capital
required to be categorized as well capitalized under prompt
corrective action regulations. Management is not aware of any
conditions subsequent to year-end 1999 that would change the
Company's or the Bank's capital category.
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.
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. ss. ss. 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.
The Holding Company 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 separate note).
The Bank is currently precluded from declaring and paying any
dividends to the Holding Company under the Formal Agreement. The
provisions of the subordinated debt do not allow holders to force
an interest payment. On November 9, 1999 the OCC approved a
$262,000 reduction of the Bank's surplus, the proceeds of which
were upstreamed to the Holding Company, which, together with a
$60,000 capital contribution by certain officers and directors of
the Holding Company and a $139,000 federal income tax payment by
the Bank to the Holding Company, was sufficient to enable the
Holding Company to meet its September 30, 1999 interest
obligations under the Notes and to pay certain other operating
expenses. Additionally, on March 28, 2000 the OCC approved another
reduction in the Bank's surplus in the amount of $500,000 that
enabled the Holding Company to meet debt service obligations under
the Notes and pay for other operating expenses through March 31,
2000. No assurance can be given, however, that the OCC will
continue to approve such reductions in the Bank's surplus,
particularly if the Bank is unable to commence operating
profitably in the near future. On April 26, 2000, the Holding
Company's Board of Directors resolved to guarantee to personally
loan the Company up to $200,000, if necessary, to enable the
Holding Company to meet its cash obligations in 2000.
On October 28, 1999 the Holding Company entered into a Memorandum
of Understanding (the "MOU") with the FRB. Under the MOU, the
Company is not permitted to declare or pay any corporate dividends
or incur any additional debt without the prior approval of the
FRB. Also, the Holding Company was required to develop and submit
to the FRB a written three-year capital plan, a plan to service
the Holding Company's existing debt without incurring any
additional debt, and written procedures designed to strengthen and
maintain the Holding Company's internal records and controls to
ensure that future regulatory reports are filed in a timely and
accurate manner. The Holding Company has submitted each of the
requested plans and procedures to the FRB. Finally, the Holding
Company is mandated under the MOU to comply fully with all formal
and informal supervisory actions that have been or may be imposed
on the Bank by the OCC.
F-29
<PAGE>
18. Fair Value of Financial Instruments
The estimated fair value approximates carrying value for financial
instruments except those described below:
Securities: Fair values for securities are based on quoted market
prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar instruments.
Loans: The fair value of fixed-rate loans and variable-rate loans
which reprice on an infrequent basis is estimated by discounting
future cash flows using the current interest rates at which
similar loans with similar terms would be made to borrowers of
similar credit quality.
Deposits: The fair value of deposit liabilities with defined
maturities is estimated by discounting future cash flows using the
interest rates currently offered for deposits of similar remaining
maturities.
Long-term Debt: The fair value of the Company's subordinated notes
payable is not readily determinable. The Company has estimated the
value of the notes at par plus the premium the Company would be
required to pay if the notes were retired at year-end 1999 and
1998.
Off-Balance-Sheet Instruments: The fair values of these items are
not material and are therefore not included on the following
schedule.
The estimated year-end fair values of financial instruments were
as follows:
<TABLE>
<CAPTION>
Unaudited
1999 1998
-------------------------- -----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,751,228 $ 9,751,000 $ 34,051,649 $ 34,052,000
Interest-bearing time deposits 25,000 25,000 94,939 95,000
Securities available for sale 12,480,492 12,480,000 24,886,704 24,887,000
Loans, net 65,772,554 67,033,000 97,032,336 97,719,000
Medical claims receivables, net -- -- 505,194 505,000
Accrued interest receivable 514,453 514,000 759,833 760,000
Cash surrender value of life
insurance 70,418 70,000 48,840 49,000
Financial liabilities:
Noninterest-bearing deposits $(16,481,651) $(16,482,000) $ (31,416,730) $ (31,417,000)
Interest-bearing deposits (68,396,467) (68,606,000) (123,430,405) (123,570,000)
Long-term debt (4,350,000) (4,698,000) (4,350,000) (4,742,000)
Accrued interest payable (609,333) (609,000) (743,481) (743,000)
</TABLE>
F-30
<PAGE>
19. 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 and profit or loss from
operations.
<TABLE>
<CAPTION>
Insurance Medical Claims
Community Premium Receivables
Banking Financing Factoring Total
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
1999:
Net interest income (expense) $ 3,823,898 $ 2,029,834 $ (45,516) $ 5,808,216
Provision for credit losses 99,229 37,707 -- 136,936
Noninterest income 3,989,764 562,504 -- 4,552,268
Noninterest expense 8,979,622 1,451,126 378,326 10,809,074
Net (loss) income 549,016 (478,855) 183,922 254,083
Loans, gross 47,078,335 20,639,094 -- 67,717,429
Medical claims receivables, gross -- -- -- --
Total assets 83,217,189 20,976,744 -- 104,193,933
1998 (unaudited):
Net interest income $ 7,222,819 $ 1,520,586 $ 606,794 $ 9,350,199
Provision for credit losses 435,209 3,097,893 (694,194) 2,838,908
Noninterest income 2,529,060 896,242 -- 3,425,302
Noninterest expense 9,245,045 2,297,954 950,234 12,493,233
Net (loss) income 97,219 (4,043,526) 476,091 (3,470,216)
Loans, gross 75,339,566 24,570,762 -- 99,910,328
Medical claims receivables, gross -- -- 646,378 646,378
Total assets 149,718,652 24,166,211 719,713 174,604,576
1997(unaudited):
Net interest income 5,754,941 1,751,526 2,163,910 9,670,377
Provision for credit losses 195,000 729,493 6,244,996 7,169,489
Noninterest income 1,492,582 1,046,336 -- 2,538,918
Noninterest expense 8,633,057 1,719,164 801,252 11,153,473
Net (loss) income (687,331) 229,875 (3,571,461) (4,028,917)
Loans, gross 60,472,615 40,361,185 -- 100,833,800
Medical claims receivables, gross -- -- 8,079,524 8,079,524
Total assets 125,195,936 42,438,086 4,350,905 171,984,927
</TABLE>
F-31
<PAGE>
20. Parent Company Condensed Financial Statements
The following are condensed parent company financial statements:
Condensed Balance Sheets
December 31, 1999 and 1998
Unaudited
1999 1998
------------ ------------
Assets:
Cash and cash equivalents $ 4,748 $ 274,233
Investment in subsidiary 15,360,235 15,665,087
Other assets 611,780 420,819
------------ ------------
Total assets $ 15,976,763 $ 16,360,139
============ ============
Liabilities:
Convertible subordinated debt $ 4,350,000 $ 4,350,000
Accrued interest payable 97,875 97,875
Other liabilities 205,918 196,413
------------ ------------
Total liabilities 4,653,793 4,644,288
Shareholders' equity:
Common stock 59,751 58,401
Additional paid-in capital 17,152,587 17,093,786
Accumulated deficit (4,911,864) (5,165,947)
Stock rights issuable 57,902 57,902
Treasury stock (375,443) (375,443)
Accumulated other comprehensive income (loss) (659,963) 47,152
------------ ------------
Total shareholders' equity 11,322,970 11,715,851
------------ ------------
Total liabilities and shareholders'
equity $ 15,976,763 $ 16,360,139
============ ============
F-32
<PAGE>
20. Parent Company Condensed Financial Statements (continued)
Condensed Statements of Income and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
Unaudited Unaudited
1999 1998 1997
----------- ----------- -----------
Operating income:
Interest income $ -- $ 19,806 $ 20,533
Dividends from subsidiary 261,935
Other income 1,839
----------- ----------- -----------
Total operating income 263,774 19,806 20,533
Operating expenses:
Interest expense 392,718 324,818 --
Other expenses 460,366 432,264 244,120
----------- ----------- -----------
Total operating expenses 853,084 757,082 244,120
----------- ----------- -----------
Loss before income taxes
and equity in undistributed
net income (equity in net
loss) of subsidiary (589,310) (737,276) (223,587)
Income tax expense (benefit) (441,130) 23,092 (80,528)
----------- ----------- -----------
Loss before equity in net
loss and distributions
in excess of net loss of
subsidiary (148,180) (760,368) (143,059)
Equity in undistributed
earnings (equity in net
loss) of subsidiary 402,263 (2,709,848) (3,885,858)
----------- ----------- -----------
Net income (loss) 254,083 (3,470,216) (4,028,917)
Other comprehensive income -
net change in unrealized
holding gain on securities
available for sale, net of
tax (707,115) (43,863) 105,335
----------- ----------- -----------
Comprehensive loss $ (453,032) $(3,514,079) $(3,923,582)
=========== =========== ===========
F-33
<PAGE>
20. Parent Company Condensed Financial Statements (continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Unaudited Unaudited
1999 1998 1997
---------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 254,083 $ (3,470,216) $(4,028,917)
Adjustments to reconcile net
income (loss) to net cash
from operating activities:
Amortization of debt issuance
costs 41,590 31,193 --
(Equity in undistributed earnings)
equity in net loss of subsidiary (402,263) 2,709,848 3,885,858
Net change in other assets and
other liabilities (223,046) 315,328 98,590
---------- ------------- ------------
Net cash from operating activities (329,636) (413,847) (44,469)
---------- ------------- ------------
Cash flows from investing activities:
Investment in subsidiary -- (4,000,000) --
---------- ------------- ------------
Net cash from investing activities -- (4,000,000) --
---------- ------------- ------------
Cash flows from financing activities:
Sale of common stock 60,151 -- --
Exercise of stock options, net of
tax benefit -- 226,508 116,039
Proceeds from debt, net of issuance
costs -- 3,934,093 --
Purchase of treasury stock -- (202,615) (98,289)
---------- ------------- ------------
Net cash from financing activities 60,151 3,957,986 17,750
---------- ------------- ------------
Net change in cash and cash equivalents (269,485) (455,861) (26,719)
Beginning cash and cash equivalents 274,233 730,094 756,813
---------- ------------- ------------
Ending cash and cash equivalents $ 4,748 $ 274,233 $ 730,094
========== ============ ============
</TABLE>
F-34
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit
10.08 Earnest Money Contract between Curtis F. Nooner, Norman
S. Moize, and Waldron Property Company No. Two, L.P., as seller,
and Surety Bank, National Association, as purchaser, dated April
29, 1999, and First Amendment to Earnest Money Contract, dated
June 25, 1999.
10.09 Form of Change in Control Agreement between Surety
Capital Corporation, Surety Bank, National Association and
Charles M. Ireland, John D. Blackmon and Lloyd W. Butts, dated
October 18, 1999.
10.10 Form of Redeemable Convertible Promissory Note between
Surety Capital Corporation and C. Jack Bean, Charles M. Ireland,
Margaret E. Holland, Aaron M. Siegel, Garrett Morris, Cullen W.
Turner, William B. Byrd, Michael L. Milam and Lloyd W. Butts,
and related Warrant, dated October 29, 1999.
10.11 Form of Indemnification Agreement between Surety
Capital Corporation and William B. Byrd, Lloyd W. Butts, Charles
M. Ireland, Margaret E. Holland, Michael L. Milam, Garrett
Morris, Cullen W. Turner and John D. Blackmon, dated January 18, 2000.
10.12 Form of Indemnification Agreement between Surety Bank,
National Association and William B. Byrd, Lloyd W. Butts,
Charles M. Ireland, Margaret E. Holland, Michael L. Milam,
Garrett Morris, Cullen W. Turner and John D. Blackmon, dated
January 18, 2000.
21 Subsidiaries of the Registrant.
23 Consent of Fisk & Robinson, P.C.
24 Special Power of Attorney.
27 Financial Data Schedule.
EXHIBIT 10.08
EARNEST MONEY CONTRACT
THIS EARNEST MONEY CONTRACT ("Contract") is entered into as of
the Effective Date (defined below) between Curtis F. Nooner, Norman
S. Moize, and Waldron Property Company No. Two, L.P., a Texas
limited partnership, (collectively referred to herein as the
"Seller"), and Surety Bank, N.A., a national banking association,
("Purchaser"). Sometimes Seller and Purchaser are individually
referred to in this Contract as a "party" and collectively as the
"parties."
In consideration of the mutual covenants set forth in this
Contract and for other valuable consideration, which the parties
acknowledge receiving, Seller and Purchaser agree as follows:
1. Sale and Purchase.
(a) Subject to the terms and conditions set forth in
this Contract, Seller agrees to sell and convey to Purchaser, and
Purchaser agrees to purchase and accept from Seller, for the
Purchase Price (defined below):
(1) The tract of land situated in Tarrant County,
Texas, more particularly described as follows:
Lots 9R, Block 8, a revision of a portion of
Lots 6, 9, 10, 11, 12, Part of Lot 4, Block
11, JENNINGS SOUTH ADDITION and Lot 8, Block
8, JENNINGS SOUTH ADDITION, Fort Worth, Texas,
commonly referred to as 1501 SUMMIT AVENUE,
FORT WORTH, TEXAS
together with all easements, rights-of-way, licenses, interests,
rights, and appurtenances appertaining thereto, if any ("Land");
(2) Any and all buildings, structures, open
parking areas, and other improvements located on the Land
("Improvements");
(3) All fixtures, equipment, appliances,
furniture, furnishings, and other personal property owned by Seller
and attached to or located in or on the Land ("Personal Property");
(4) All rights, titles, and interests of Seller in
and to any easements, rights-of-way, or other interests in, on, or
to any land, alley, highway, or street in, on, across, abutting, or
adjoining the Land; and all rights, titles, and interests of Seller
in and to any awards, if any, made or to be made, or payments made
or to be made in lieu thereof, and in and to any unpaid awards, if
any, for damage thereto by reason of a change of grade of any such
highway or street;
(5) All rights, titles, and interests of Seller in
all leases, subleases, and other rental agreements (written or
verbal; now or hereafter in effect) that grant a possessory
interest in and to any space situated in the Improvements
<PAGE>
(6) All rights, titles, and interests of Seller in
all service contracts, warranties, guaranties, bonds, and insurance
policies relating to the Property (as hereinafter defined) that
Purchaser elects to have transferred and assigned to Purchaser as
hereinafter set forth ("Property Agreements");
(7) All site plans, surveys, soil, and substrata
studies, architectural drawings, plans and specifications,
engineering plans and studies, floor plans, landscape plans, and
other plans or studies of any kind in Seller's possession, if any,
which relate to the Property;
(8) All utility records and other records of
operating expenses, promotional material, and other materials of
any kind in Seller's possession, if any, which are or may be used
in the continuing operation of the Property;
(9) All rights, titles, and interests of Seller in
and to any and all assignable utility, escrow, security, damage,
lease, and/or any other deposits ("Deposits") established in
connection with the Property; and
(10) Any and all other rights, titles, interests,
privileges, and appurtenances owned by Seller, if any, and in any
way related to, or used in connection with, the ownership or
operation of the Property.
(b) The above-listed items are herein collectively
called the "Property." Seller shall convey, assign, and transfer
all the Property to Purchaser at the Closing (as hereinafter
defined) free and clear of all liens, claims, easements, rights-of-
way, reservations, restrictions, encroachments, mineral interests,
royalty interests, oil, gas, or mineral leases and any other
encumbrances of whatsoever nature (herein, collectively called the
"Encumbrances") except those Encumbrances appearing in the Title
Commitment (as hereinafter defined) that either are not objected
to, or, if objected to, are not cured and that are subsequently
waived pursuant to Section 3 hereof (the "Permitted Encumbrances").
(c) Because more than one lot or parcel is required to
obtain the Property desired for Purchaser's proposed use, it is a
condition to Closing (defined below) that all the lots or parcels
together form one contiguous lot or parcel, and each parcel forming
the larger parcel share its interior boundary lines with the other
parcel or parcels so that, if Purchaser so elects, the two lots or
parcels can be re-platted into a single lot or parcel. However, it
is not a condition to Closing that the parcels be re-platted prior
to Closing.
2. Purchase Price and Earnest Money.
(a) The purchase price ("Purchase Price") for the
Property is One Million Dollars ($1,000,000).
(b) The Purchase Price is payable in cash or by wire
transfer at the Closing.
-2-
<PAGE>
(c) Within three (3) business days after the Effective
Date, Purchaser shall deliver to Title Company (defined below)
$25,000 ("Earnest Money"), either by wire transfer or by a
certified or cashier's check payable to the order of Title Company.
The Earnest Money will be held in escrow in an interest-bearing
account accruing to the benefit of the party entitled to the
Earnest Money under this Contract. Delivery of the Earnest Money
is a condition precedent to the effectiveness of this Contract. If
the contemplated transaction is consummated in accordance with this
Contract, the Earnest Money will be applied to the Purchase Price
at the Closing. If the transaction is not so consummated, the
Earnest Money will be held and delivered by the Title Company as
provided below.
3. Title Commitment and Survey.
(a) Within twenty-one (21) days after the Effective
Date, Seller, at Seller's sole cost and expense, shall deliver or
cause to be delivered to Purchaser the following:
(1) Owner's Commitment for Title Insurance ("Title
Commitment") from Southwest Land Title Company, Lincoln Plaza
Branch, Dallas, Texas ("Title Company"), which Title Commitment
shall set forth the status of the title of the Property and shall
show all Encumbrances and other matters affecting the Property; and
(2) A true and legible copy of all documents
referred to in the Title Commitment, including but not limited to
lien instruments, plats, reservations, restrictions, and easements.
(b) Within twenty-one (21) days after the Effective
Date, Purchaser may, at its election and at its sole cost and
expense, obtain a survey ("Survey") consisting of a plat and field
notes describing the Property. After the Survey has been prepared,
the legal description from the Survey will be substituted for the
legal description of the Property contained herein as if the legal
description from the Survey had originally been a part of the
Contract, and Seller agrees to execute any other documents
reasonably required by Purchaser to evidence the continued validity
of this Contract. The description of the Property prepared as a
part of the Survey will be used in all the documents set forth
herein that require a description of the Property.
(c) If the Title Commitment or Survey fails to show
indefeasible fee simple title to the Property to be in Seller, free
and clear of all Encumbrances, then Purchaser shall give Seller
written notice thereof, within ten (10) days after receipt of the
Title Commitment, the attendant documents thereto, and the Survey,
specifying Purchaser's objections ("Objections"), if any. If
Purchaser gives such notice to Seller, Seller shall cure the
Objections.
(d) If Purchaser gives such notice of Objections and
Seller does not cure the Objections and cause the Title Commitment
and Survey to be amended to give effect to matters that are cured
within the ten (10) day period following receipt of the written
notice of Objections from Purchaser, Purchaser will have the right
to either (i) terminate this Contract without penalty by giving
written notice thereof to Seller and Title Company at any time
within five (5) days after the end of such ten (10) day period, the
Earnest Money will be returned to Purchaser and neither party will
have any further rights or obligations hereunder; or (ii) waive the
Objections and consummate the purchase of the Property subject to
the Objections that will be deemed to be Permitted Encumbrances.
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4. Feasibility Period.
(a) As used in this Contract, "Feasibility Period" means
the period beginning on the Effective Date and ending at 5:00 p.m.,
Fort Worth, Texas time, on the date that is sixty (60) days after
the Effective Date. Purchaser, in its sole discretion, may extend
the Feasibility Period for an additional thirty (30) day period by
depositing with Title Company the amount of Twenty Five Thousand
Dollars ($25,000) on or before the expiration of the initial sixty
(60) day period, which amount, along with the original $25,000
Earnest Money, will, upon such payment, become non-refundable
except for Seller's default or breach of this Contract.
(b) Purchaser may terminate its obligation to purchase
the Property at any time during the Feasibility Period without
penalty if Purchaser, in its sole discretion, concludes that the
Property is not suitable for its contemplated development.
Purchaser must exercise its termination rights under this Section
4(b) by delivering written notice to Seller at any time during the
Feasibility Period. Upon Seller's receipt of such a notice during
the Feasibility Period, Seller will instruct the Title Company to
deliver the Earnest Money to Purchaser, and neither party will have
any further rights or obligations under this Contract, except as
set forth in Section 4(c) and (d). If Purchaser does not send such
a notice during the Feasibility Period, it will be deemed to have
elected to proceed with purchasing the Property.
(c) (1) Seller will permit Purchaser and its
contractors and agents to enter upon the Land to inspect and test
the Property (including soil borings and environmental tests) as
Purchaser deems necessary or desirable, and all at Purchaser's
expense. Purchaser must repair any damages to the Land resulting
from any inspection or testing conducted by it or at its direction.
Purchaser agrees to indemnify and defend Seller, and hold Seller
harmless against, all liens, claims, and liability arising out of
or related to Purchaser's or its contractors' or agents'
inspections and tests in accordance with this Section 4(c)(1),
including personal injuries or death, even if such liens, claims,
or liability was caused by Seller's concurrent negligence.
(2) Purchaser's obligations and indemnity under
this Section 4(c) survive the Closing or earlier termination of
this Contract.
(d) Within five (5) days following the Effective Date,
Seller shall provide Purchaser with all written information that
Seller possesses with regard to the Property, including, but not
limited to, all Property Agreements, copies of all tax statements
for the immediately preceding and, if available, for the current
year, certificates of occupancy, any "as-built" plans and
specifications for the Improvements, true and correct copies of all
leases relating to the Property, a complete and itemized inventory
of the Personal Property, the 1997 survey relating to the Property
prepared by Brent A. Mizell, and any existing environmental reports
(the "Information"). If this Contract is terminated before
Closing, Purchaser will return the Information to Seller.
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(e) As consideration for holding the Property available
for its purchase during the Feasibility Period, Purchaser has paid
Seller $100 ("Independent Contract Consideration"), which amount
the parties bargained for and agreed to as consideration for
Seller's execution and delivery of this Contract. Seller may
retain the Independent Contract Consideration even if this Contract
is terminated. The Independent Contract Consideration is
nonrefundable and does not apply to the Purchase Price.
5. Termination, Default, and Remedies.
(a) Purchaser will be in default under this Contract if
(i) it fails or refuses to purchase the Property at the Closing, or
(ii) it fails to perform any of its other obligations either before
or at the Closing. Purchaser will not be in default, however, if
it terminates this Contract when it has an express right to
terminate or when Seller fails to perform its obligations under
this Contract. If Purchaser is in default, then Seller, as its
exclusive remedy, is entitled to terminate this Contract by giving
written notice to Purchaser before or at the Closing. Following
the termination notice, neither party will have any further rights
or obligations under this Contract except as set forth in Section
4(c) and (d) above. Title Company will then deliver the Earnest
Money to Seller as liquidated damages, free of any claims by any
person, including Purchaser. The Earnest Money to which Seller may
be entitled is the parties' reasonable forecast of just
compensation for the harm that Purchaser's breach would cause,
which is otherwise impossible or very difficult to estimate
accurately.
(b) Seller will be in default under this Contract if (i)
it fails or refuses to sell the Property at the Closing, or (ii) it
fails to perform any of its other obligations either before or at
the Closing. Seller will not be in default, however, if it
terminates this Contract when it has an express right to terminate
or when Purchaser fails to perform its obligations under this
Contract. If Seller is in default, then Purchaser, as its
exclusive remedies, is entitled either (i) to enforce specific
performance of Seller's obligations under this Contract with
respect to the Property, or (ii) to terminate this Contract by
giving written notice to Seller before or at the Closing, whereupon
neither party will have any further rights or obligations under
this Contract except as set forth in Section 4(c) and (d) above.
Title Company will then deliver the Earnest Money to Purchaser,
free of any claims of any person, including Seller.
(c) If this Contract terminates or is terminated in
accordance with its terms, Purchaser shall execute, acknowledge,
and deliver to Seller upon demand a recordable instrument
evidencing such termination and waiving and releasing Purchaser's
rights in and to the Property. If either Seller or Purchaser
becomes entitled to the Earnest Money upon termination of this
Contract, Purchaser and Seller shall deliver an instruction letter
to the Title Company directing disbursement of the Earnest Money to
the entitled party. If either party fails or refuses to sign or
deliver such an instruction letter, the refusing party shall pay
all reasonable attorneys' fees and court costs incurred by the
party so entitled to the Earnest Money.
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6. Closing.
(a) The closing ("Closing") of the sale of the Property
by Seller to Purchaser will occur in the Title Company's office on
or before fifteen (15) days immediately following the termination
of the Feasibility Period, on a date mutually agreed upon by
Purchaser and Seller.
(b) At the Closing, all the following must occur, all of
which are concurrent conditions:
(1) Seller, at its expense, shall deliver or cause
to be delivered to Purchaser the following:
(i) A Special Warranty Deed ("Deed") in the
form of Exhibit A executed and acknowledged by Seller, conveying to
Purchaser title to the Property, subject to the Permitted
Encumbrances.
(ii) A Bill of Sale ("Bill of Sale"), fully
executed and acknowledged by Seller, conveying to Purchaser the
Personal Property subject to the Permitted Encumbrances.
(iii) The assignment, fully executed and
acknowledged by the Seller, assigning to Purchaser any property not
assigned or conveyed under the Deed or the Bill of Sale subject to
the Permitted Encumbrances.
(iv) An Owner Policy of Title Insurance
("Owner Policy") issued by Title Company to Purchaser for the
Purchase Price insuring that, upon Closing, Purchaser is the owner
of indefeasible fee simple title to the Property subject only to
the Permitted Encumbrances, and the standard printed exceptions
included in a Texas Standard Form Owner Policy of Title Insurance.
But the form survey exception -- at Seller's expense -- must be
limited to "shortages in area," the printed form exception for
restrictive covenants must be deleted unless one or more
restrictive covenants are included among the Permitted
Encumbrances, there must be no exception for rights of parties in
possession, and the standard exception for taxes must read:
"Standby fees, taxes and assessments by any taxing authority for
the year 1999 and subsequent years, and subsequent taxes and
assessments by any taxing authority for prior years due to change
in land usage or ownership."
(v) Copies of any permits and licenses issued
by a governmental authority relating to the Property that are in
Seller's possession.
(vi) All Deposits held by Seller with regard
to the Property.
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<PAGE>
(vii) Evidence reasonably satisfactory to
Purchaser and the Title Company that the person executing the
closing documents on behalf of Seller has full right, power, and
authority to do so.
(viii) Seller's affidavit setting forth its
U.S. Taxpayer Identification Number, its office address, and its
statement that it is not a "foreign person" as defined in Internal
Revenue Code ss. 1445, as amended.
(2) Purchaser, at its expense, shall deliver or
cause to be delivered to Seller the following:
(i) Immediately available funds via wire
transfer in an amount equal to the Purchase Price less the Earnest
Money.
(ii) Evidence reasonably satisfactory to
Seller and the Title Company that the person executing the closing
documents on behalf of Purchaser has full right, power, and
authority to do so.
(3) Seller and Purchaser shall each pay their
respective attorneys' fees, and Purchaser shall pay all escrow and
recording fees. Purchaser may purchase, at its expense, any title
insurance coverage in excess of that provided by the Title Company
in the Owner Policy from the Title Company or any other title
company that it selects.
(c) Ad valorem and similar taxes and assessments,
utility bills, insurance premiums, and rental payments relating to
the Property will be prorated between Seller and Purchaser as of
the Closing, Purchaser being charged and credited for all of same
on and after the Closing. If the actual amounts to be prorated are
not known as of the Closing, the prorations will be made on the
basis of the best evidence then available, and thereafter, when
actual figures are received, a cash settlement will be made between
Seller and Purchaser. This Section 6(c) will survive the Closing.
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<PAGE>
(d) Upon completion of the Closing, Seller shall deliver
to Purchaser possession of the Property free and clear of all
tenancies and parties in possession.
7. Brokers.
(a) Seller and Purchaser hereby represent and warrant
that neither party has engaged the services of any agent, broker or
other similar party in connection with this transaction except
Everett A. Roberts ("Agent").
(b) If, but only if, the Closing of the sale of the
Property by Seller to Purchaser pursuant to this Contract is
consummated, Seller shall pay to Agent a commission for all its
services with respect thereto equal to five percent (5%) of the
Purchase Price.
(c) Purchaser has been and is hereby advised that
Purchaser should have the abstract covering the Property examined
by an attorney of Purchaser's selection or that Purchaser should be
furnished with a policy of title insurance. By Purchaser's
execution of this Contract, Purchaser acknowledges that Purchaser
has been so advised in compliance with the Texas Real Estate
License Act.
(d) If the Closing is not consummated, the Agent will
not be entitled to any portion of the Earnest Money or any other
consummation.
8. Conditions to Performance by Purchaser.
(a) Purchaser's obligations under this Contract will be
further contingent and specifically conditioned until the Closing
upon the following matters:
(1) all the representations and warranties of
Seller set forth in this Contract must be true and correct at and
as of the Closing in all material respects, as though such
representations and warranties were made at and as of the Closing;
and
(2) Seller has delivered, performed, observed, and
complied with all the items, instruments, documents, covenants,
agreements, and conditions required by this Contract to be
delivered, performed, observed, and complied with by Seller prior
to or as of the Closing.
(b) If Purchaser is not satisfied in Purchaser's sole
discretion as to all the conditions precedent described in Section
8(a), Purchaser will have the option at any time before the Closing
either to (i) terminate this Contract by giving written notice
thereof, and on such termination, Purchaser will be entitled to the
return of the Earnest Money, and neither party will have any
further rights or obligations hereunder, or (ii) elect to waive any
of the conditions in Section 8(a) and close the purchase of the
Property.
9. Seller's Covenants, Agreements, Representations, and
Warranties.
(a) Seller hereby represents and warrants to Purchaser
that:
(1) One of the parties that constitutes Seller is
a Texas limited partnership that is duly organized, validly
existing, and in good standing under the laws of the State of
Texas;
(2) Seller has all requisite power and authority
to own the Property, enter into this Contract, consummate the
transactions herein contemplated and has duly authorized the
execution and delivery of this Contract and the consummation of the
transactions herein contemplated such that all documents required
hereby to be executed by Seller will be valid, legally binding
obligations of and enforceable against Seller in accordance with
their terms;
(3) The individual or individuals executing this
Contract and all documents contemplated herein on behalf of Seller
has the legal power, right and actual authority to bind Seller to
the terms and conditions herein and therein;
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<PAGE>
(4) Seller is the owner of good and indefeasible
fee simple title to the Property, free and clear of any
Encumbrances, except the Permitted Encumbrances;
(5) There are no actions, suits, or proceedings
pending, threatened, or asserted against Seller affecting Seller or
any portion of the Property, at law or in equity, or before or by
any federal, state, municipal or other governmental department,
commission, board, bureau, agency or instrumentality, domestic or
foreign;
(6) Seller has not received any notices of any
condemnation actions, special assessments, or increases in the
assessed valuation for taxes or other impositions of any nature
that are pending or being contemplated with respect to the Property
or any portion thereof;
(7) Seller has not received notice of any
violation of any ordinance, regulation law, or statute of any
governmental agency pertaining to the Property or any portion
thereof;
(8) To the best of Seller's knowledge, the
Improvements have been constructed in a good and workmanlike
manner, free from defects in workmanship and material, in
accordance with all applicable laws, rules, regulations, ordinances
and codes and are being (and, from the Effective Date until the
Closing, will be) occupied, maintained, and operated in compliance
with all applicable laws, regulations, insurance requirements,
contracts, leases, permits, licenses, ordinances, restrictions, and
easements, and Seller has received no notice, written or verbal,
claiming any violation of any of the same;
(9) At the Closing, there will be no unpaid bills
or claims in connection with any repair of the Improvements or
other work performed or material purchased in connection with the
Property;
(10) To the best of Seller's knowledge, no
permission, approval, or consent by third parties or governmental
authorities is required in order for Seller to consummate this
Contract;
(11) To the best of Seller's knowledge, all
existing utilities enter the Land through adjoining public streets
or private land in accordance with valid public or private
easements that will inure to the benefit of Purchaser and
Purchaser's successors and assigns. All of said utilities have
been fully installed and are operating, with all installation and
connection charges paid in full;
(12) Seller has not received any notice from any
taxing authority or governmental agency asserting that Seller has
failed to file or has improperly filed any tax return or report
required to be filed by Seller, or that Seller has not paid all
taxes, charges or assessments now owing by Seller (except current
taxes and assessments not yet delinquent) that could in any way now
or hereafter constitute a lien against the Property or any part
thereof; and no action or proceeding is now pending by a
governmental agency or authority for the assessment or collection
of such taxes, charges or assessments against Seller;
-9-
<PAGE>
(13) To Seller's best knowledge, information and
belief, Seller has complied with all applicable laws, ordinances,
regulations, statutes, rules, and restrictions relating to the
Property, or any part thereof, including all environmental laws and
the Americans with Disabilities Act of 1990.
(14) To Seller's best knowledge, information and
belief, neither the Property nor any part thereof is contaminated
by or contains any toxic or hazardous waste, substance, or
materials, as the same are defined or listed in 40 C.F.R. 261 and
Part 302 (collectively referred to as "Toxic Substances"), no Toxic
Substances have been stored at, disposed of, or located in, on, or
about the Property, and no permit is or has been required from the
Federal Environmental Protection Agency, or the Texas Natural
Resource Conservation Commission for the use or maintenance of any
improvement or facility on the Property. Moreover, Seller
represents that no pollutants or other toxic or hazardous
substances, including any solid, liquid, gaseous, or thermal
irritant or contaminant, such as smoke, vapor, soot, fumes, acids,
alkalis, chemicals or waste (including materials to be recycled,
reconditioned or reclaimed) have been discharged, dispersed,
released, stored, treated, generated, disposed of, or allowed to
escape on the Property.
(15) The documents, records, and information
provided by Seller pursuant to Section 3, including, but not
limited to, the tax statements, Property Agreements, certificates
of occupancy, specifications, inventory, and any other records
requested pursuant thereto constitute all such documents, records
and information held by Seller that relate to or may affect the
Property and/or the operation thereof; and
(16) No representation, warranty, or statement of
Seller in this Contract or in any document, certificate, or
schedule furnished, to be furnished, or to be available to
Purchaser pursuant hereto contains or will omit to state a material
fact necessary to make the statements or facts contained therein
not misleading.
(b) The representations, warranties, covenants, and
agreements of Seller set forth in this Section 9 and elsewhere in
this Contract will be subject to the following terms and
conditions:
(1) The representations, warranties, and covenants
of Seller will be deemed to be continuing, made both as of the
Effective Date and as of the Closing, except to the extent that
Seller otherwise notifies Purchaser in writing at or prior to
Closing. If Seller does so notify Purchaser in writing at or prior
to Closing, or if Purchaser independently discovers that any of
such representations, warranties, and covenants are no longer true,
Purchaser will have the option to either (i) terminate this
Contract without penalty by written notice to Seller, whereupon
neither party will have any further rights or obligations
hereunder, and Title Company shall deliver the Earnest Money to
Purchaser, or (ii) waive such representation, warranty, or covenant
and close on the purchase of the Property.
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<PAGE>
(2) The representations, warranties, and covenants
of Seller will not survive the Closing.
(3) No investigation or inspection by Purchaser or
Purchaser's representatives will be deemed to have in any way
diminished or waived the representations, warranties, and covenants
of Seller set forth in this Contract, unless Seller has given
Purchaser written notice of such matters, or Purchaser has
acknowledged actual knowledge of such matters in writing prior to
the Closing.
(c) Seller hereby covenants and agrees with Purchaser
that:
(1) At all times from the Effective Date until the
Closing, Seller shall cause to be maintained in force property and
liability insurance with respect to damage or injury to persons or
property occurring on the Property in at least such amounts as are
maintained by Seller as of the Effective Date;
(2) Prior to the Closing, Seller shall maintain
the Property in as good condition and repair as exists on the
Effective Date, except for normal wear and tear and any casualty or
condemnation, and Seller may not remove any Personal Property
therefrom without replacing the items removed with items of similar
quality and utility; Seller shall keep Purchaser timely advised of
any significant repair or improvement to keep the Property in such
condition as aforesaid;
(3) Seller shall not make any material alterations
in the Property without the express written consent of Purchaser;
(4) Subject to the prorations set forth in Section
6, Seller shall cause all accounts and costs and expenses of
operation and maintenance of the Property incurred prior to the
Closing to be promptly paid when due; and
(5) Seller will not enter into, extend, renew or
replace any Property Agreements or similar agreements without the
prior written consent Purchaser.
10. Notices.
(a) Any notice under this Contract must be written.
Notices must be either (i) hand-delivered to the address set forth
below for the recipient; or (ii) placed in the United States
certified mail, return receipt requested, addressed to the
recipient as specified below; or (iii) deposited with an overnight
delivery service, addressed to the recipient as specified below; or
(iv) telecopied by facsimile transmission to the party at the
telecopy number listed below, provided that the transmission is
confirmed by telephone on the date of the transmission, and is
followed with a copy sent by overnight delivery or regular mail to
the address specified below. Any mailed notice is effective upon
deposit with the U.S. Postal Service or the overnight delivery
service, as applicable; all other notices are effective upon
receipt.
(b) Seller's address for all purposes under this
Contract is:
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Curtis F. Nooner
4108 Altura Road
Fort Worth, Texas 76109 Telephone: (817) 921-1638
Telecopy: __________________
Norman S. Moize
William G. Moize
2900 Lincoln Plaza
500 North Akard
Dallas, Texas 75201
Telephone: (214) 720-1020
Telecopy: (214) 720-4083
Waldron Property Company No. Two, L.P.
Attn: A. B. Waldron, Jr.
4204 Warnock Court
Fort Worth, Texas 76109
Telephone: (817) 927-2108
Telecopy: (817) 927-5035
with a copy to:
A. Burch Waldron, III
Law, Snakard & Gambill, P.C.
500 Throckmorton Street, Suite 3200
Fort Worth, Texas 76102
Telephone: (817) 878-6319
Telecopy: (817) 332-7473
(c) Purchaser's address for all purposes under this
Contract is:
Surety Bank, N.A.
1845 Precinct Line Rd.
Hurst, Texas 76054
Attention: Mr. C. Jack Bean
Telephone: (817) 428-9141
Telecopy: (817) 498-0647
with a copy to:
Margaret E. Holland
Tracy & Holland, L.L.P.
306 West 7th Street, Suite 500
Fort Worth, Texas 76102-4982
Telephone: (817) 335-1050
Telecopy: (817) 332-3140
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<PAGE>
(d) Either party may designate another address for this
Contract by giving the other party at least five (5) business days'
advance notice of its address change. A party's attorney may send
notices on behalf of that party, but a notice is not effective
against a party if sent only to that party's attorney.
11. Entire Agreement. This Contract (including all exhibits)
contains the entire agreement between Seller and Purchaser
regarding the subject matter of this Contract. Oral statements or
prior written matter that is not specifically incorporated into
this Contract have no force or effect. No variation, modification,
or change to this Contract will be binding on either party unless
set forth in a document signed by the parties or their duly
authorized agents, officers, or representatives.
12. Assigns. This Contract inures to the benefit of and binds
the parties and their respective legal representatives, successors,
and permitted assigns. Purchaser may assign its rights and
obligations hereunder at any time at or prior to the Closing to any
other person or entity.
13. Time for Execution and Effective Date. If Seller has not
executed and returned a fully executed copy of this Contract to
Purchaser by 5:00 p.m., Central Daylight Time, on April 30, 1999,
this Contract will be null and void. The date on which this
Contract is executed by the last to sign of Seller and Purchaser
will be the "Effective Date" of this Contract. Upon execution by
both parties, this Contract will become a binding agreement between
Seller and Purchaser according to the terms, conditions, and
considerations set out in this Contract.
14. Time of the Essence. In all instances where either party
is required under the terms of this Contract to pay any amount or
do any act at a particular indicated time or within any indicated
period of time, it is understood that time is of the essence. All
performance dates, time schedules, and conditions precedent to
exercising any right will be strictly adhered to without delay
except where otherwise expressly provided. However, if the last
day of any time period stated in this Contract falls on a Saturday,
Sunday, legal, or banking holiday, then the duration of such time
period will be extended so that it will end on the next succeeding
day that is not a Saturday, Sunday, legal, or banking holiday.
15. Destruction, Damage, or Taking Before Closing. Before
the Closing, Seller bears the risk of loss with regard to the
Property. If, before the Closing, the Property or any substantial
portion of it is destroyed or damaged, or becomes subject to a
taking by eminent domain, Purchaser may either (i) terminate this
Contract and receive back the Earnest Money, and neither party will
have any further rights or obligations under this Contract except
as set forth in Section 4(c) and (d); or (ii) proceed with the
Closing of the Property, and Seller will assign to Purchaser all
insurance or condemnation proceeds available as a result of such
damage, destruction, or taking.
16. Terminology. All personal pronouns used in this
Contract, whether used in the masculine, feminine, or neuter
gender, will include all other genders. Unless the context
otherwise requires, words of the singular number include the plural
and in the plural include the singular. Capitalized terms used in
this Contract will have the meaning assigned thereto in this
Contract. Wherever the terms "hereof," "hereby," "herein," or
words of similar import are used in this Contract, they will be
construed as referring to this Contract in its entirety rather than
to a particular section or provision, unless the context
specifically indicates the contrary. Any reference to a particular
"article," "paragraph," or "section" will be construed as referring
to the indicated article or section of this Contract. Seller and
Purchaser are herein sometimes referred to individually as a
"party" and collectively as the "parties."
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<PAGE>
17. Disclaimer. Except as specifically stated in this
Contract or the Deed, Seller will convey the Property "AS IS."
Purchaser expressly acknowledges that, in consideration of Seller's
agreements, except as otherwise specified in this Contract or in
the Deed, SELLER MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR
IMPLIED, OR ARISING BY OPERATION OF LAW, INCLUDING, BUT NOT LIMITED
TO, ANY WARRANTY OF THE PROPERTY'S CONDITION, HABITABILITY,
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. Purchaser
acknowledges that it is sophisticated in the purchase of real
property and is entering into this Contract in reliance on its own
abilities and investigation and not on any representation,
warranty, or agreement of Seller, other than as stated in this
Contract and the Deed. Purchaser acknowledges that no
representations have been made by Seller or its agents or employees
to induce Purchaser to enter into this transaction other than as
expressly stated in this Contract and the Deed. Purchaser further
acknowledges that neither Seller nor its agents or employees have
made any representation or warranty to Purchaser concerning the
Property's investment potential or resale at any future date, nor
has Seller or its agents rendered any advice or expressed any
opinion to Purchaser regarding any tax consequences of owning the
Property. This Section 17 survives the Closing.
18. Counterparts. This Contract may be executed in multiple
counterparts, each of which will be an original and all such
counterparts together will represent but one and the same
instrument; but in making proof of this Contract it will not be
necessary to produce or account for more than one such counterpart.
This Contract becomes effective when one or more of the
counterparts has been signed by each of the parties and delivered
to the other party. By signing this Contract, each party
acknowledges that such party has received a duplicate original of
this Contract.
19. Governing Law. This Contract is governed by and must be
construed in accordance with Texas law.
20. Performance of Contract. The obligations under this
Contract are performable in Tarrant County, Texas, and any payments
under this Contract are to be made in Tarrant County, Texas.
21. Venue. The parties consent that venue of any action
brought under this Contract will be in Tarrant County, Texas.
-14-
<PAGE>
22. Severability. If any provision in this Contract is found
to be invalid, illegal, or unenforceable, and the basis of the
bargain between the parties is not destroyed or rendered
ineffective thereby, its invalidity, illegality, or
unenforceability will not affect any other provision, and this
Contract must be construed as if the invalid, illegal, or
unenforceable provision had never been contained in it. Moreover,
so far as is reasonable and possible, effect will be given to the
intent manifested by the portion held invalid, illegal, or
unenforceable. It is further the intention of Seller and Purchaser
that if any provision of this Contract is capable of two
constructions, one of which would render the provision invalid,
illegal, or unenforceable and the other of which would render the
provision valid, legal, or enforceable, then the provision will
have the meaning that renders it valid, legal, or enforceable.
23. Attorneys' Fees. If any action at law or in equity is
necessary to enforce or interpret this Contract, the prevailing
party will be entitled to reasonable attorneys' fees, costs, and
necessary disbursements in addition to any other relief to which
that party may be entitled.
24. Foreign Person. If Seller is not a "foreign person," as
defined in the Federal Foreign Investment in Real Property Tax Act
of 1980 and the 1984 Tax Reform Act, as amended (the "Federal Tax
Law"), then at the Closing Seller will deliver to Purchaser a
certificate so stating, in a form complying with Federal Tax Law.
If Seller is a "foreign person" or if Seller fails to deliver the
required certificate at the Closing, then in either such event the
funding to Seller at the Closing will be adjusted to the extent
required to comply with the withholding provisions of the Federal
Tax Law; and although the amount withheld will still be paid at the
Closing by Purchaser, it will be retained by a mutually acceptable
escrow agent for delivery to the Internal Revenue Service together
with the appropriate Federal Tax Law forwarding forms (and with
copies being provided both to Seller and to Purchaser). The
following parties are hereby approved as mutually acceptable escrow
agents in the event that withholding is warranted in accordance
with the immediately preceding sentence (listed in order of
decreasing preference): Title Company, Purchaser's "independent
CPA" (i.e., a certified public accountant who is associated with an
independent CPA firm), Purchaser's "outside counsel" (i.e., a
licensed attorney who is associated with an independent law firm),
Seller's "independent CPA," Seller's "independent attorney," and a
mutually acceptable financial institution.
25. Survival. Seller and Purchaser expressly agree that all
provisions of this Contract that contemplate performance after the
Closing will survive such Closing of this Contract. Moreover, no
provision of this Contract will be deemed to have been merged into
the closing of any purchase of any interest in the Property or the
closing of any other transaction contemplated or provided for under
any provision of this Contract, or any document given in connection
therewith.
26. Covenant of Further Assurances. From time to time after
the execution of this Contract, Seller shall, at Purchaser's
request, and without further consideration, execute, acknowledge,
and deliver to Purchaser any and all instruments and other writings
and do all other acts or things reasonably requested by Purchaser
in order to evidence and effect the consummation of any of the
transactions contemplated by this Contract. Purchaser shall do
likewise at Seller's request.
-15-
<PAGE>
EXECUTED as of the Effective Date.
SELLER: WALDRON PROPERTY COMPANY NO. TWO, L.P., a Texas limited
partnership
By: Waldron Property Management Co., L.L.C.
By: /s/ A. B. Waldron, Jr.
A. B. Waldron, Jr., Managing Member
Date: April 29, 1999
/s/ Curtis F. Nooner
CURTIS F. NOONER
Date: May 6, 1999
/s/ William G. Moize
NORMAN S. MOIZE, by William G. Moize,
Agent and Attorney-In-Fact
Date: May 6, 1999
PURCHASER: SURETY BANK, N.A., a national banking association
By: /s/ G. M. Heinzelmann, III
G. M. Heinzelmann, III, Executive Vice President
Date: April 28, 1999
Receipt of $25,000 Earnest Money is acknowledged in the form of
Purchaser's cashier's check no. C15207 dated April 26, 1999. Title
Company is also signing to acknowledge its agreement to comply with
the provisions of this Contract pertaining to the delivery of the
Earnest Money depending on whether the transaction contemplated by
this Contract closes.
SOUTHWEST LAND TITLE COMPANY
By: /s/ Stephen A. Terry
Stephen A. Terry, Escrow Officer
-16-
<PAGE>
Exhibit A
Special Warranty Deed
STATE OF TEXAS ss
ss KNOW ALL PEOPLE BY THESE PRESENTS:
COUNTY OF TARRANT ss
That Curtis F. Nooner, Norman S. Moize, and Waldron Property
Company No. Two, L.P., a Texas limited partnership (collectively,
"Grantor"), for and in consideration of the sum of Ten Dollars
($10.00) cash and other good and valuable consideration paid by
Surety Bank, N.A., a national banking association ("Grantee"), whose
mailing address is 1845 Precinct Line Road, Hurst, Texas 76054, the
receipt of which is hereby acknowledged, HAVE GRANTED, BARGAINED,
SOLD and CONVEYED, and by these presents GRANT, BARGAIN, SELL and
CONVEY unto Grantee all that certain land situated in Tarrant County,
Texas, and described on Exhibit A which is attached hereto and
incorporated herein by reference for all purposes, together with any
improvements and appurtenances thereon or in anywise appertaining
thereto ("Property").
This conveyance is made subject to the matters affecting title
to the Property specified in Exhibit B attached hereto and made a
part hereof ("Permitted Encumbrances").
TO HAVE AND HOLD the Property, together with all and singular
the rights and appurtenances thereunto belonging, unto Grantee, and
Grantee's successors and assigns forever, and Grantor binds Grantor,
and Grantor's successors and assigns to WARRANT and FOREVER DEFEND,
all and singular the Property unto Grantee and Grantee's successors
and assigns, against every person whomsoever lawfully claiming or to
claim the same or any part thereof, by, through, or under Grantor,
but not otherwise, and further subject to the Permitted Encumbrances.
Ad valorem taxes on the property having been prorated, the
payment thereof is assumed by Grantee.
EXECUTED THIS _____ day of____________, 1999.
GRANTOR: WALDRON PROPERTY COMPANY NO.
TWO, L.P., a Texas limited
partnership
By: __________________________
,
__________________________
Curtis F. Nooner
<PAGE>
__________________________
Norman S. Moize
STATE OF TEXAS ss
ss
COUNTY OF TARRANT ss
On this the _____ day of ____________, 1999, before me, the
undersigned, a Notary Public in and for said State, personally
appeared ________________________________, to me known to be the
_________________ of Waldron Property Company No. Two, L.P., a Texas
limited partnership, and acknowledged to me that the said instrument
is the free and voluntary act of the limited partnership, for the
uses and purposes therein mentioned, and on oath stated that he is
authorized to execute the said instrument.
WITNESS MY HAND and official seal of hereto affixed the day,
month and year in this certificate first above written.
Notary Public, State of Texas
(Print or Type Notary's Name)
My Commission Expires:
STATE OF TEXAS ss
ss
COUNTY OF TARRANT ss
This instrument was acknowledged before me this ______ day of
___________, 1999, by Curtis F. Nooner.
Notary Public, State of Texas
(Print or Type Notary's Name)
My Commission Expires:
-2-
<PAGE>
STATE OF TEXAS ss
ss
COUNTY OF TARRANT ss
This instrument was acknowledged before me this ______ day of
___________, 1999, by Norman S. Moize.
Notary Public, State of Texas
(Print or Type Notary's Name)
My Commission Expires:
-3-
<PAGE>
FIRST AMENDMENT TO
EARNEST MONEY CONTRACT
THIS FIRST AMENDMENT ("First Amendment") TO EARNEST MONEY
CONTRACT ("Agreement") is made and entered into this 25th day of
June, 1999 by and between Curtis F. Nooner, Norman S. Moize, and
Waldron Property Company No. Two, L.P., a Texas limited
partnership, hereinafter collectively referred to as "Seller," and
Surety Bank, N.A., a national banking association, hereinafter
referred to as "Purchaser."
WHEREAS, the parties to the Agreement desire to extend the
Feasibility Period and Closing Date (as those terms are defined in
the Agreement) in consideration of the payment of an additional
$25,000 by Purchaser to Seller on the terms and conditions set
forth in this First Amendment.
For and in consideration of the covenants, terms and
conditions of the Agreement and the mutual benefits to Seller and
Purchaser established by this First Amendment, Seller and Purchaser
agree as follows:
1. Paragraph 2(c) is amended in its entirety to read as
follows:
"(c) Within three (3) business days after the
Effective Date, Purchaser shall deliver to
Title Company (defined below) $25,000
("Earnest Money"), either by wire transfer or
by a certified or cashier's check payable to
the order of Title Company. On or before June
28, 1999, Purchaser shall deliver to Title
Company an additional $25,000 (the "Additional
Earnest Money"), either by wire transfer or by
certified or cashier's check payable to the
order of Title Company for immediate
disbursement to Seller. Upon receipt by Title
Company of the Additional Earnest Money, Title
Company shall immediately disburse such
Additional Earnest Money to Seller. The
Additional Earnest Money shall become part of
the Earnest Money, and any reference to
"Earnest Money" in this Contract shall also
include the "Additional Earnest Money." The
Earnest Money (other than the Additional
Earnest Money) will be held in escrow in an
interest-bearing account accruing to the
benefit of the party entitled to the Earnest
Money under this Contract. Delivery of the
Earnest Money is a condition precedent to the
effectiveness and continued effectiveness of
this Contract. If the contemplated
transaction is consummated in accordance with
this Contract, the Earnest Money will be
applied to the Purchase Price at the Closing.
If the transaction is not so consummated, the
Earnest Money will be held and delivered by
the Title Company as provided below."
2. Paragraph 4(a) is amended in its entirety to read as
follows:
<PAGE>
"(a) As used in this Contract, "Feasibility Period"
means the period beginning on the Effective Date and
ending at 5:00 p.m., Fort Worth, Texas time, on July 28,
1999."
3. Paragraph 4(b) is amended in its entirety to read as
follows:
"(b) Purchaser may terminate its obligation to
purchase the Property at any time during the Feasibility
Period without penalty if Purchaser, in its sole
discretion, concludes that the Property is not suitable
for its contemplated development. Purchaser must
exercise its termination rights under this Section 4(b)
by delivering written notice to Seller at any time during
the Feasibility Period. Upon Seller's receipt of such a
notice at any time during the Feasibility Period, Seller
will instruct the Title Company to deliver the Earnest
Money to Purchaser, and neither party will have any
further rights or obligations under this Contract, except
as set forth in Section 4(c) and (d); provided, however,
in the event Seller receives such a notice after June 28,
1999, Seller shall retain the Additional Earnest Money.
If Purchaser does not send such a notice during the
Feasibility Period, it will be deemed to have elected to
proceed with purchasing the Property."
4. The beginning of the last sentence of Paragraph 5(b) is
amended by the addition of the words "and Seller (to the extent of
the Additional Earnest Money)" after Title Company.
5. Paragraph 6(a) is amended in its entirety to read as
follows:
"(a) The closing ("Closing") of the sale of the
Property by Seller to Purchaser will occur in the Title
Company's office on or before July 30, 1999, on a date
mutually agreed upon by Purchaser and Seller."
6. Paragraph 6(c) is amended in its entirety to read as
follows:
"(c) Ad valorem and similar taxes and assessments,
utility bills, insurance premiums, and rental payments
relating to the Property will be prorated between Seller
and Purchaser as of June 1, 1999, Purchaser being charged
and credited for all of same on and after June 1, 1999.
If the actual amounts to be prorated are not known as of
the Closing, the prorations will be made on the basis of
the best evidence then available, and thereafter, when
actual figures are received, a cash settlement will be
made between Seller and Purchaser. This Section 6(c)
will survive the Closing."
Except as specifically amended by this First Amendment, the
Agreement shall remain in full force and effect.
-2-
<PAGE>
Executed in counterparts as of the date first written above.
SELLER: WALDRON PROPERTY COMPANY NO. TWO, L.P., a Texas limited
partnership
By: Waldron Property Management Co., L.L.C.
By: /s/ A. B. Waldron, Jr.
A. B. Waldron, Jr., Managing Member
/s/ Curtis F. Nooner
CURTIS F. NOONER
/s/ William G. Moize
NORMAN S. MOIZE, by William G. Moize,
Agent and Attorney-In-Fact
PURCHASER: SURETY BANK, N.A., a national banking association
By: /s/ C. Jack Bean
C. Jack Bean, Chairman
Receipt of $25,000 Additional Earnest Money is acknowledged in the
form of Purchaser's cashier's check no. 05373 dated June 25 1999.
Title Company is also signing to acknowledge its agreement to
comply with the provisions of this First Amendment pertaining to
the delivery of the Additional Earnest Money.
SOUTHWEST LAND TITLE COMPANY
By: /s/ Stephen A. Terry
Stephen A. Terry, Escrow Officer
-3-
EXHIBIT 10.09
SURETY CAPITAL CORPORATION
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
CHANGE IN CONTROL AGREEMENT
October 18, 1999
Mr. ____________________
________________________
________________________
Dear ________________:
Surety Capital Corporation (the "Company") and Surety Bank,
N. A. (the "Bank") consider it essential to the best interests
of the Company, its stockholders, and the Bank to foster the
continued employment of key management personnel. In this
connection, the Board of Directors of the Company (the "Board")
and the Board of Directors of the Bank (the "Bank Board")
recognize that the possibility of a Change in Control of the
Company (defined below) exists and that such possibility, and
the uncertainty and questions which it necessarily raises among
management, may result in the departure or distraction of
management personnel to the detriment of the Company, its
stockholders, and the Bank in a period when their undivided
attention and commitment to the business of the Company and the
Bank are particularly important.
Accordingly, the Board and the Bank Board have determined
that appropriate steps should be taken to reinforce and
encourage the continued attention and dedication of members of
the Company's and the Bank's management, including yourself, to
their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the
possibility of a Change in Control of the Company.
In order to induce you to remain in the employ of the
Company and the Bank, the Company and the Bank agree that you
shall receive the benefits set forth in this letter agreement
("Agreement") in the event of a Change in Control of the Company
under the circumstances described below.
1. Definitions. For purposes of this Agreement, the
following terms shall have the meanings set forth below. As
used in this Agreement, the terms "Company" and "Bank" as
defined above shall mean the Company or Bank, as appropriate,
and any successor to its business and/or assets which assumes
and agrees to perform this Agreement by operation of law or
otherwise.
(a) "Cause" shall mean any act that is materially
adverse to the best interests of the Company or the Bank that
constitutes, on your part, common law fraud, a felony or other
gross malfeasance of duty.
<PAGE>
Mr. _____________
October 18, 1999
Page 2
(b) A "Change in Control of the Company" shall be
deemed to have occurred if (A) any "person" or "group" (as such
terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended, the "Exchange Act"), other
than a majority-owned subsidiary of the Company or a trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing fifteen
percent (15%) or more of the combined voting power of the
Company's then outstanding voting securities; or (B) during any
period of two (2) consecutive years during the term of this
Agreement, individuals who at the beginning of such period
constitute the Board cease for any reason to constitute at least
a majority thereof, unless the election of each director who was
not a director at the beginning of such period has been approved
in advance by directors representing at least a majority of the
directors then in office who were directors at the beginning of
the period; or (C) a merger or consolidation occurs in which the
Company is a party, whether or not the Company is the surviving
corporation, in which outstanding shares of Common Stock are
converted into shares of the successor corporation or a holding
company thereof representing fifty percent (50%) or less of the
voting power of all capital stock thereof outstanding
immediately after the merger or consolidation) or other
securities (of either the Company or another company) or cash or
other property; or (D) the sale of all, or substantially all, of
the Company's or Bank's assets occurs; or (E) the stockholders
of the Company approve a plan of complete liquidation of the
Company or the Bank.
(c) "Change in Control Payment" shall mean either the
Lump Sum Payment or the Stock Payment provided for in Section
3(c) or (d) of this Agreement.
(d) "Common Stock" shall mean the common stock, $0.01
par value, of the Company.
(e) "Date of Termination" shall mean the last day of
employment as stated in the Notice of Termination.
(f) "Good Reason" shall mean:
(1) a material reduction of your duties,
responsibilities and status with the Company or the Bank as they
existed immediately before the effective date of a Change in
Control of the Company;
(2) a reduction of your base salary from that in
effect immediately before the effective date of a Change in
Control of the Company; or
(3) your relocation to offices of the Company
more that thirty (30) miles from your office location
immediately before the effective date of a Change in Control of
the Company.
<PAGE>
Mr. _____________
October 18, 1999
Page 3
(g) "Lump Sum Payment" shall have the meaning set
forth in Section 3(c) of this Agreement.
(h) "Market Value of the Common Stock" shall mean:
(A) if the Common Stock is listed on a national securities
exchange, the closing price of the Common Stock on the relevant
date, as reported on the composite tape; (B) if the Common Stock
is not listed on a national securities exchange, but is traded
in the over-the-counter market, the average of the bid and asked
prices for the Common Stock on the relevant date; and (C) if the
fair market value of the Common Stock cannot be determined
pursuant to clause (A) or (B) above, such price as the Board
shall in good faith determine.
(i) "Notice of Termination" shall have the meaning
set forth in Section 3(b) of this Agreement.
(j) "Stock Payment" shall have the meaning set forth
in Section 3(d) of this Agreement.
2. Term of Agreement. This Agreement shall commence on
the date hereof and shall continue in effect through December 1,
2000; provided, however, that commencing on December 1, 2000,
and the first day of each December thereafter, the term of this
Agreement shall automatically be extended for one (1) additional
year unless, not later than April 30 of such year, the Company
shall have given notice to you (on the Company's behalf and on
behalf of the Bank) that it does not wish to extend this
Agreement; provided, further, that notwithstanding any such
notice by the Company not to extend, if a Change in Control of
the Company shall have occurred during the original or extended
term of this Agreement, this Agreement shall continue in effect
until all payments, if any, required to be made by the Company
and the Bank to you under this Agreement shall have been paid in
full.
3. Compensation Following Change of Control.
(a) Change in Control Payment. Subject to the terms
and conditions of this Agreement, if, during the period
commencing on the effective date of a Change in Control of the
Company and ending two (2) years thereafter:
(1) your employment with the Company or the Bank
is terminated by the Company or the Bank for any reason other
than for Cause; or
(2) you terminate your employment with the
Company or the Bank with Good Reason,
you shall be entitled to receive from the Company (or its
successor, as the case may be) a Change in Control Payment
which, at your election, shall be in either the form of a Lump
Sum Payment or a Stock Payment, as provided in Section 3(c) or
(d), below. In the event the Company (or its successor, as the
case may be) is unable for any reason whatsoever to pay the Lump
Sum Payment in accordance with the terms of this Agreement, the
Bank shall pay to you the Lump Sum Payment in accordance with
the terms of this Agreement.
<PAGE>
Mr. _____________
October 18, 1999
Page 4
(b) Notice of Termination. Any termination of your
employment by the Company or the Bank or by you shall be
communicated by written notice to the other party or parties
("Notice of Termination"). The Notice of Termination shall set
forth in reasonable detail the facts and circumstances claimed
to provide a basis for the termination of your employment,
together with the Date of Termination (subject to the other
party selecting an earlier Date of Termination in accordance
with this Agreement, in which event such earlier date shall
control).
(c) Lump Sum Payment. The Lump Sum Payment shall
consist of a certified check in an amount equal to your annual
base salary rate as an employee of the Company and the Bank (but
excluding all other compensation, including bonuses and fringe
benefits) in effect immediately before the effective date of the
Change in Control of the Company. The Lump Sum Payment shall be
reduced by any deductions or withholdings required under
applicable law.
(d) Stock Payment. The Stock Payment shall consist
of shares of Common Stock of the Company in an amount equal to
the result obtained by dividing the Lump Sum Payment by the
Market Value of the Common Stock on the effective date of the
Change in Control of the Company, rounded to the nearest whole
share.
(e) Election. Within thirty (30) days after the Date
of Termination following the effective date of a Change in
Control of the Company, you shall notify the Company in writing
of your election to receive the Change in Control Payment in
either the form of a Lump Sum Payment or a Stock Payment.
Within ten (10) days following receipt of such notice, the
Company shall issue and deliver to you, or your designee or
other legal representative, either a certified check payable to
you in the amount of the Lump Sum Payment or stock
certificate(s) evidencing the Common Stock subject to the Stock
Payment, as the case may be. If the Company does not, for any
reason whatsoever, deliver the certified check payable to you in
the amount of the Lump Sum Payment, the Bank shall deliver to
you such certified check.
(f) Other Compensation and Benefits. The Change in
Control Payment shall be in addition to your base salary through
the Date of Termination at the rate in effect as of the Date of
Termination and any other payments you would otherwise be
entitled to receive from the Company or the Bank as a result of
the termination of your employment, including any benefits
payable under any employee benefit plan then in effect. The
Company shall also pay to you all legal fees and expenses
incurred by you in seeking to obtain or enforce any right or
benefit provided by this Agreement. If the Company does not pay
these amounts, these amounts shall be paid by the Bank.
<PAGE>
Mr. _____________
October 18, 1999
Page 5
(g) Nature of Change in Control Payment. The
benefits payable to you under this Agreement shall be considered
severance pay in consideration of your past service and your
continued service after the date this Agreement. You shall not
be required to mitigate the amount of any payment provided for
in this Section 3 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this
Section 3 be reduced by any compensation earned by you as the
result of employment by another employer or by retirement
benefits after the date of termination, or otherwise.
4. Additional Requirements with Respect to the Stock
Payment.
(a) All stock certificates representing any shares of
Common Stock subject to the Stock Payment shall have endorsed
thereon the following legends:
(1) "THESE SECURITIES HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(2) Any legend required to be placed thereon by
the Delaware Secretary of State or required by applicable blue
sky laws of any state.
(b) Registration Statement; Warranties and
Representations. The Company agrees to use its reasonable best
efforts to register the Common Stock you receive under the
Securities Act of 1933, as amended, on a Form S-8 registration
statement, or other appropriate form of registration statement.
For these purposes, the Company shall be considered to have used
its reasonable best efforts if the registration occurs within
one hundred twenty (120) days after the election under Section
3(e). If for any reason the Company is unable to or does not
register the Common Stock you receive, such Common Stock will
not be transferable except in accordance with appropriate
securities law exemptions. Accordingly, in connection with your
receipt of Common Stock pursuant to the Stock Payment, the
Company may require you to represent and warrant at the time you
receive the Common Stock pursuant to the Stock Payment that the
Common Stock is being acquired by you for your own account for
investment and without an intention to sell or distribute such
Common Stock if, in the opinion of counsel for the Company, such
a representation is required by applicable law.
(c) Rights as a Stockholder. You shall not have any
rights as a stockholder with respect to the Common Stock subject
to the Stock Payment until your election to receive the Change
in Control Payment in the form of a Stock Payment in accordance
with Section 3(e) of this Agreement and until the stock
certificates representing such shares of Common Stock have
actually been issued and delivered to you.
<PAGE>
Mr. _____________
October 18, 1999
Page 6
5. Successors. The Company or the Bank, as appropriate,
will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company
or the Bank to assume expressly and agree to perform this
Agreement. Failure of the Company or the Bank to obtain such
assumption and agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle
you to compensation from the Company or the Bank in the same
amount and on the same terms as you would be entitled hereunder
following a Change in Control of the Company, except that for
purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the date on
which you become entitled to such compensation.
6. Binding Agreement. This Agreement shall inure to the
benefit of and be enforceable by your personal or legal
representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If you should die while
any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this
Agreement to your devisee, legatee or other designee or, if
there is no such designee, to your estate.
7. Notice. Any notice required or permitted by any party
to this Agreement shall be in writing and may be delivered
personally to the party being given notice or to the person in
charge of the office of the party being given such notice 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 upon deposit in the mail,
postage prepaid, in the case of delivery by mail. The addresses
of the parties are as follows:
COMPANY: Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Attn: Charles M. Ireland, Chairman
BANK: Surety Bank, National Association
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
Attn: Charles M. Ireland, Chairman
__________: _________________________
_________________________
_________________________
The names and addresses of persons to receive notice as stated
in this Section 7 may be changed by notice given in accordance
with this Section 7.
<PAGE>
Mr. _____________
October 18, 1999
Page 7
8. Miscellaneous. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by you and such
officer as may be specifically designated by the Board and the
Bank Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement
shall be governed by the laws of the State of Texas.
9. Validity. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which
shall remain in full force and effect.
10. Counterparts. This Agreement may be executed in
several counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
If this letter sets forth our agreement on the subject
matter hereof, please sign and return to the Company the
enclosed copy of this letter which will then constitute our
agreement on this subject.
Sincerely,
SURETY CAPITAL CORPORATION
By:
SURETY BANK, NATIONAL ASSOCIATION
By:
AGREED TO:
____________________
____________________
EXHIBIT 10.10
THE SECURITIES REPRESENTED BY THIS NOTE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE SOLD,
MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER APPLICABLE SECURITIES LAWS.
REDEEMABLE CONVERTIBLE PROMISSORY NOTE
$_______________ Fort Worth, Texas October 29, 1999
FOR VALUE RECEIVED, the undersigned Surety Capital
Corporation, a Delaware corporation (the "Company"), with its
principal offices located at 1845 Precinct Line Road, Suite 100,
Hurst, Texas 76054, promises to pay to the order of
_________________ (the "Holder") or his assigns, at
_________________________________, the amount of
_____________________ AND NO/100 DOLLARS ($_________) (the
"Original Principal Amount") in legal and lawful money of the
United States of America. This Note shall bear no interest from
the date hereof until maturity. All past due principal will
bear interest at the lower of ten percent (10%) per annum or the
highest lawful rate for which the Company may stipulate and
agree to pay.
This Note is payable as follows: the principal is due on
December 31, 2000. Anything herein to the contrary
notwithstanding, this Note shall become immediately due and
payable on the earliest to occur of the following: (i) a Change
in Control; (ii) a Bankruptcy; or (iii) a Sale.
As used in this Note, the following terms, unless the
context otherwise requires, have the following meanings:
(a) "Bankruptcy" shall occur when the Company shall
(i) apply for, consent to or suffer the appointment of, or the
taking of possession by, a receiver, custodian, trustee,
liquidator or similar fiduciary of itself or of all or a
substantial part of its property; (ii) make a general assignment
for the benefit of creditors; (iii) commence a voluntary case
under any state or federal bankruptcy laws (as now or hereafter
in effect); (iv) be adjudicated a bankrupt or insolvent; (v)
file a petition seeking to take advantage of any other law
providing for the relief of debtors; (vi) acquiesce to, or fail
to have dismissed, within thirty (30) days, any petition filed
against it in any involuntary case under such bankruptcy laws;
or (vii) take any action for the purpose of effecting any of the
foregoing.
(b) "Change in Control" 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 Company, is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing more than twenty percent
(20%) of the combined voting power of the Company's then outstanding
voting securities; or (B) during the term of this Note,
individuals who at the beginning of such period constitute the
Board of Directors of the Company cease for any reason to
constitute at least a majority thereof, unless the election of
each director who was not a director at the beginning of such
period has been approved in advance by directors representing at
least two-thirds (2/3rds) of the directors then in office who
were directors at the beginning of the period.
<PAGE>
(c) "Company" includes any corporation which shall
succeed to or assume the obligations of the Company under this
Note.
(d) "Holder" shall mean any person who shall at the
time be the holder of this Note.
(e) "Sale" shall mean
(1) the merger or consolidation of the Company
with, or the sale of all or substantially all of the assets of
the Company to, another corporation or entity, whether in one or
a series of related transactions, and as a result of which
merger, consolidation or sale less than eighty percent (80%) of
the voting stock or other interest in the surviving or acquiring
corporation or entity, as the case may be, continues to be owned
by stockholders who were stockholders of the Company immediately
prior to such merger, consolidation or sale; or
(2) the merger or consolidation of the Company's
wholly-owned subsidiary, Surety Bank, National Association (the
"Bank"), with, or the sale of all or substantially all of the
assets of the Bank to, another corporation or entity, whether in
one or a series of related transactions, and as a result of
which merger, consolidation or sale less than eighty percent
(80%) of the voting stock or other interest in the surviving or
acquiring corporation or entity, as the case may be, continues
to be owned by the Company immediately prior to such merger,
consolidation or sale; or
(3) any combination of any of the foregoing.
(f) "Unpaid Principal Balance" means the Original
Principal Amount less (i) any principal amount converted by
Holder into Common Stock (as herein defined) and (ii) any
principal amount prepaid or redeemed by the Company.
Notwithstanding any provision herein to the contrary,
Holder shall never be entitled to receive or collect interest
hereunder, nor shall or may amounts received hereunder be
credited to interest hereunder so that Holder shall receive or
be paid interest exceeding the maximum lawful rate which the
Company may stipulate and agree to pay as determined by a court
of competent jurisdiction.
Payments under this Note shall be made in coin or currency
of the United States of America which at the time of payment is
legal tender for the payment of public and private debts.
-2-
<PAGE>
Holder has the unrestricted right, at Holder's option, to
convert, in whole or in part, the Unpaid Principal Balance of
this Note into fully paid and nonassessable shares of common
stock, $0.01 par value, of the Company (the "Common Stock").
Subject to the timing restrictions related to a redemption
notice given by the Company (as discussed below), the right to
convert may be exercised by Holder at any time after the date
hereof up to and including the maturity date of this Note. The
number of shares of Common Stock into which this Note may be
converted (the "Conversion Shares") shall be determined by
dividing the Unpaid Principal Balance of this Note by the
Conversion Price in effect at the time of such conversion. The
initial Conversion Price shall be equal to $0.50.
Before Holder shall be entitled to convert this Note into
Conversion Shares, he shall surrender this Note at the office of
the Company and shall give written notice to the Company of the
election to convert this Note and shall state therein the name
or names in which the certificate or certificates for Conversion
Shares are to be issued.
Such certificate or certificates shall bear such legends as
are required, in the opinion of counsel to the Company, by
applicable state and federal securities laws. The Company
shall, as soon as practicable thereafter, issue and deliver to
Holder a certificate or certificates for the number of
Conversion Shares to which Holder shall be entitled as
aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of
surrender of this Note, and the person or persons entitled to
receive the Conversion Shares issuable upon such conversion
shall be treated for all purposes as the record holder or
holders of such Conversion Shares as of such date.
No fractional shares of Common Stock shall be issued on
conversion of this Note.
In the event the Company should at any time or from time to
time after the date hereof fix a record date for the split or
subdivision of the outstanding shares of Common Stock or the
determination of holders of Common Stock to receive dividends or
other distributions payable in additional shares of Common Stock
or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional
shares of Common Stock ("Common Stock Equivalents") without
payment of any consideration by such holder for the additional
shares of Common Stock or the Common Stock Equivalents, then, as
of such record date (or the date of such dividend distribution,
split or subdivision if no record date is fixed), the Conversion
Price of this Note shall be appropriately decreased so that the
number of Conversion Shares issuable upon conversion of this
Note shall be increased in proportion to such increase or
potential increase of outstanding shares of Common Stock.
If the number of shares of Common Stock outstanding at any
time after the date hereof is decreased by a combination of the
outstanding shares of Common Stock, then, following the record
date of such combination, the Conversion Price for this Note
shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion hereof shall be decreased in
proportion to such decrease in outstanding shares of Common
Stock.
-3-
<PAGE>
The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock,
solely for the purpose of effecting the conversion of this Note,
such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of this Note; and if
at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of
the entire outstanding principal of this Note, in addition to
such other remedies as shall be available to Holder of this
Note, the Company will use its best efforts to take such
corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of
Common Stock to such number of shares as shall be sufficient for
such purposes.
The Company, at its option, after giving notice to Holder,
may prepay or redeem this Note at any time in whole or in part,
in the principal amount of $1,000 or a multiple thereof, on
payment of the principal amount being redeemed. Before any
redemption of this Note under the foregoing, the Company shall
notify Holder not less than ten (10) days nor more than thirty
(30) days prior to the date fixed by the Company for redemption.
The notice shall specify: (i) the principal amount to be
redeemed; (ii) the date fixed for redemption; (iii) the
applicable Conversion Price on the date of the notice; and (iv)
the location and address of the office of the Company where this
Note is required to be presented for redemption. A redemption
notice given by the Company does not restrict Holder's
conversion rights under this Note either before or after the
redemption date; provided, however, Holder may not exercise his
conversion rights during the period that is three (3) business
days before the date fixed for redemption.
This Note is being executed and delivered, and is intended
to be performed, in the State of Texas. The substantive laws of
the State of Texas and all applicable federal laws shall govern
the validity, construction, enforcement and interpretation of
this Note.
If this Note, or any part of this Note, is placed in the
hands of an attorney for collection or is collected through
bankruptcy or other judicial proceedings (including any
proceedings, state or federal, for the relief of debtors), the
Company agrees to pay to Holder reasonable attorneys' fees and
all other costs and expenses incurred in connection with any
such collection, suit or proceeding, in addition to the
principal and interest then due hereon.
Except as otherwise provided in this Note, the Company and
each guarantor, surety, and endorser of this Note, jointly and
severally, expressly waive all notices, demands for payment,
presentations for payment, notices of acceleration and of
intention to accelerate the maturity, protest and notice of
protest, as to this Note, and as to each, every and all
installments of this Note, and each agrees that their liability
under this Note shall not be affected by any renewal or
extension in the time of payment hereof, or by any indulgences,
or by any release or change in any security for the payment of
this Note, and hereby consents to any and all renewals,
extensions, indulgences, releases, or changes, regardless of the
number of such renewals, extensions, indulgences, releases or
changes.
-4-
<PAGE>
No waiver by Holder or his (His/her) assigns of any of his
rights and remedies hereunder or under any other document
relating to or securing this Note or otherwise shall be
considered a waiver of any other subsequent right or remedy of
Holder or his assigns; no delay or omission in the exercise or
enforceability by Holder or his assigns of any rights or
remedies shall ever be construed as a waiver of any right or
remedy of Holder or his assigns; and no exercise or enforcement
of any such rights or remedies shall ever be held to exhaust any
right or remedy of Holder or his assigns.
SURETY CAPITAL CORPORATION
By:________________________
Charles M. Ireland,
Chairman of the Board
-5-
<PAGE>
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE
SOLD, MORTGAGED, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF
COUNSEL OR OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT
REGISTRATION IS NOT REQUIRED UNDER APPLICABLE SECURITIES LAWS.
WARRANT
To Purchase Shares of Common Stock of
Surety Capital Corporation
Incorporated Under the Laws of the State of Delaware
1. Basic Terms. This certifies that, for value received,
__________________ or his assigns (the "Holder"), is entitled,
subject to the terms and conditions of this warrant (the
"Warrant"), to purchase _________ shares of common stock, par
value $0.01 per share (the "Common Stock"), of Surety Capital
Corporation (the "Company"), subject to adjustment as provided
in this Warrant, from the Company at the Exercise Price (as
defined below) on delivery of this Warrant to the Company with
the exercise form duly executed and payment of the Exercise
Price, in cash or by check payable to the order of the Company,
for all shares purchased.
2. Exercise Price. The purchase price per share of the
Common Stock (the "Exercise Price") shall be $0.01 per share, as
may be adjusted pursuant to the terms of this Warrant.
3. Exercise.
(a) This Warrant may be exercised at any time or from
time to time, in whole or in part, but not for less than 250
shares at a time (or such lesser number of shares which may then
constitute the maximum number purchasable, such number being
subject to adjustment as provided in this Warrant) on or after
the date of issuance until October 29, 2004. Such exercise may
occur on any day that is a business day, unless otherwise
extended pursuant to the terms of the Agreement.
(b) In order to exercise this Warrant, in whole or in
part, Holder shall deliver to the Company at its principal
office at 1845 Precinct Line Road, Suite 100, Hurst, Texas 76054,
or at such other office as shall be designated by the Company
pursuant to this Warrant, (i) a written notice of Holder's
election to exercise this Warrant which notice shall specify the
number of shares of Common Stock to be purchased pursuant to
such exercise, (ii) either cash or a check payable to the order
of the Company in an amount equal to the aggregate purchase
price for all shares of Common Stock to be purchased pursuant to
such exercise, and (iii) this Warrant, properly endorsed. Upon
receipt thereof, the Company shall, as promptly as practicable,
and in any event within five (5) days thereafter, execute or
cause to be executed and deliver to Holder a certificate or
certificates representing the aggregate number of full shares of
Common Stock issuable upon such exercise. The stock certificate
or certificates so delivered shall be registered in the name of
Holder, or such other name as shall be designated in said
notice.
<PAGE>
(c) This Warrant shall be deemed to have been
exercised and such certificate or certificates shall be deemed
to have been issued, and Holder or any other person so
designated to be named therein shall be deemed to have become a
holder of record of such shares for all purposes, as of the date
that said notice, together with said payment and this Warrant,
is received by the Company as aforesaid. Holder shall not,
solely by virtue of his ownership of this Warrant, be entitled
to any rights of a shareholder in the Company, either at law or
in equity; provided, however, Holder shall, for all purposes, be
deemed to have become the holder of record of such shares on the
date on which this Warrant is surrendered to the Company in
accordance with the immediately preceding sentence. If the
exercise is for less than all of the shares of Common Stock
issuable as provided in this Warrant, the Company will issue a
new Warrant of like tenor and date for the balance of such
shares issuable hereunder to Holder. Holder, by his acceptance
hereof, consents to and agrees to be bound by and to comply with
all of the provisions of this Warrant.
4. Transfer. Except as otherwise provided in the
Agreement, this Warrant and all options and rights hereunder are
transferable, as to all or any part of the number of shares of
Common Stock purchasable upon its exercise, by Holder in person
or by duly authorized attorney on the books of the Company upon
surrender of this Warrant at the principal offices of the
Company, together with the form of transfer authorization
attached hereto duly executed. The Company shall deem and treat
the registered Holder of this Warrant at any time as the
absolute owner hereof for all purposes and shall not be affected
by any notice to the contrary. If this Warrant is transferred
in part, the Company shall at the time of surrender of this
Warrant issue to the transferee a Warrant covering the number of
shares of Common Stock transferred and to the transferor a
Warrant covering the number of shares not transferred.
5. Adjustment of Shares.
(a) Wherever this Warrant specifies a number of shares
of Common Stock or an Exercise Price per share, the specified
number of shares of Common Stock to be received on exercise and
the Exercise Price per share shall be increased or reduced to
reflect adjustments (which may require that additional
securities or other property be delivered on exercise) required
by this Section 5, and such adjustments shall be made on a
cumulative basis for the benefit of Holder, as follows:
(1) If a stock or property dividend is declared
to the holders of shares of the same class of securities of the
Company as is issuable upon exercise of this Warrant, there
shall be added with respect to each share of Common Stock
issuable upon exercise of this Warrant the amount of the
dividend, stock or property, which would have been issued to
Holder had he been the holder of record of such issuable share
at the dividend record date. Such additional stock or property
resulting from such dividend shall be delivered without
additional cost upon the exercise of this Warrant. Any
distribution to the holders of Common Stock of the Company of
any kind, other than a distribution of cash as a dividend out of
profits of the Company for the current year of the dividend,
shall be treated as a stock or property dividend for purposes of
this Section 5(a)(1).
-2-
<PAGE>
(2) If an increase has been effected in the
number of outstanding shares of the same class of securities of
the Company as is issuable upon exercise of this Warrant by
reason of a subdivision of such shares, the number of shares
which may thereafter be purchased under this Warrant shall be
increased with respect to each share issuable upon exercise of
this Warrant by the number of shares which could have been
received by Holder at the time of such subdivision had he been
the holder of record of such issuable shares at the record
and/or effective date of the subdivision. In such event, the
Exercise Price per share under this Warrant shall be
proportionately reduced.
(3) If a decrease has been effected in the number
of outstanding shares of the same class of securities of the
Company as is issuable upon exercise of this Warrant by reason
of a reverse stock split, the number of shares which may
thereafter be purchased under this Warrant shall be reduced with
respect to each share issuable upon exercise of this Warrant to
the number of shares which would have been held by Holder at the
time of said reverse stock split had he been the holder of such
issuable share at the record and/or effective date of the
reverse stock split. In such event, the Exercise Price per
share under this Warrant shall be proportionately increased.
(4) If there is a capital reorganization,
reclassification of the capital stock of the Company, or any
consolidation or merger of the Company with any other
corporation or entity, or if there is a sale or distribution of
all or substantially all of the Company's property and assets,
the Company shall make adequate provision so that there shall
remain and be substituted under this Warrant with respect to
each share issuable upon exercise of this Warrant the stock,
securities and/or assets which would have been issuable or
payable in respect of or in exchange for such issuable shares if
Holder had been the owner of such share on the applicable record
date. All other provisions of this Warrant shall remain in full
force and effect.
(b) On the happening of any event requiring an
adjustment of the Exercise Price or the shares purchasable
hereunder, the Company shall immediately give written notice to
Holder stating the adjusted Exercise Price and the adjusted
number and kind of securities or other property purchasable
hereunder resulting from the event and setting forth in
reasonable detail the method of calculation and the facts upon
which the calculation is based.
6. Certain Notices. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable
in stock or make any special dividend or other distribution to
the holders of its Common Stock;
-3-
<PAGE>
(c) offer for subscription to the holders of any of
its Common Stock any additional shares of stock in any class or
other rights;
(d) reorganize, or reclassify the capital stock of the
Company, or consolidate, merge or otherwise combine with, or
sell all or substantially all of its assets to, another
corporation or entity;
(e) voluntarily or involuntarily dissolve, liquidate
or wind up the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock
or securities convertible into its capital stock;
then, in any one or more of said cases, the Company shall give
to Holder, by certified mail, (i) at least twenty (20) days'
prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, and (ii) in the case of such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, or winding up, at least twenty (20)
days' prior written notice of the date when the same shall take
place. Any notice required by clause (i) shall also specify, in
the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be
entitled thereto, and any notice required by clause (ii) shall
also specify the date on which the holders of Common Stock shall
be entitled to exchange their Common Stock for securities or
other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding up, as the case may be.
7. Notice. Any notice required or permitted by any party
to this Agreement shall be in writing and may be delivered
personally to the party being given notice or to the person in
charge of the office of the party being given notice or by
facsimile, national overnight courier service or by mail, at the
party's address indicated below, and any notice will be
effective only upon actual receipt by the party. The addresses
of the parties are as follows:
Company: Surety Capital Corporation
1845 Precinct Line Road, Suite 100
Hurst, TX 76054
Attention: Mr. Charles M. Ireland
Holder: _______________________________
_______________________________
_______________________________
The names and addresses of persons to receive notice as stated
in this Section 7 may be changed by notice given in accordance
with this Section 7.
-4-
<PAGE>
8. Replacement of Warrant. On receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of this Warrant and, in the case of
loss, theft or destruction, on delivery of an indemnity
agreement reasonably satisfactory in form and substance to the
Company or, in the case of mutilation, on surrender and
cancellation of this Warrant, the Company at its expense shall
execute and deliver, in lieu of this Warrant, a new warrant of
like tenor and amount.
9. No Impairment. The Company will not, by amendment of
its charter or certificate or articles of incorporation, through
any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, through any Board of
Director action or inaction, or any other action, avoid or seek
to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Company, but will at all
times in good faith carry out all of the provisions of this
Warrant and take all such action as may be necessary or
appropriate in order to protect against impairment of the rights
of Holder herein.
10. Parties. This Warrant shall bind the respective
successors and assigns of the parties.
11. Entire Agreement. This Warrant represents the entire
agreement of the parties with respect to the subject matter
hereof and supersedes any prior or contemporaneous oral or
written agreements or understandings. The terms of this Warrant
may be amended only a written instrument executed by the Company
and Holder.
WITNESS the seal of the Company and the signature of its
authorized officer.
Dated: October 29, 1999 SURETY CAPITAL CORPORATION
By: _______________________
Charles M. Ireland,
Chairman of the Board
-5-
<PAGE>
Assignment Form
(To be executed by Holder in order to transfer the Warrant)
For value received the undersigned hereby sells, assigns,
and transfers to:
Name ______________________________________________________________________
Address __________________________________________________________________
this Warrant and irrevocably appoints __________________________ attorney
(with full power of substitution) to transfer this Warrant on the books of
the Company.
Date: ___________________ ________________________________
(Please sign exactly as name
appears on Warrant)
Taxpayer ID No. ________________
In the Presence of Signature guaranteed by
________________________ ________________________________
<PAGE>
Exercise Form
(To be executed by Holder to purchase
Common Stock pursuant to the Warrant)
Surety Capital Corporation
Attention: Charles M. Ireland
1845 Precinct Line Road, Suite 100
Hurst, Texas 76054
The undersigned hereby: (1) irrevocably subscribes for
____________ shares of the Company's Common Stock pursuant to
this Warrant, and encloses payment of $____________ therefor;
(2) requests that a certificate for the shares be issued in the
name of the undersigned and delivered to the undersigned at the
address below; and (3) if such number of shares is not all of
the shares purchasable hereunder, that a new Warrant of like
tenor for the balance of the remaining shares purchasable
hereunder be issued in the name of the undersigned and delivered
to the undersigned at the address below.
Date: ____________________ _______________________________
(Please sign exactly as name
appears on Warrant)
_______________________________
_______________________________
Address
EXHIBIT 10.11
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into
as of January 18, 2000 by and between Surety Capital
Corporation, a Delaware corporation (the "Corporation"), and
_____________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the
Corporation;
WHEREAS, the Board (as hereinafter defined) has adopted
Articles of Incorporation (the "Articles") and Bylaws (the
"Bylaws") providing for the indemnification of the officers and
directors of the Corporation to the maximum extent authorized by
applicable laws ("Law");
WHEREAS, pursuant to 12 USC 1828(k) of the Federal Deposit
Insurance Act ("FDIA") and the implementing regulations
thereunder, a bank holding company may only make or agree to
make indemnification payments to an officer or director of the
bank holding company with respect to a Federal Proceeding (as
hereinafter defined) that are reasonable and consistent with the
requirements of 12 USC 1828(k) of the FDIA and the implementing
regulations thereunder;
WHEREAS, the Articles, Bylaws and the Law, by their
nonexclusive nature, permit contracts between the Corporation
and the officers or directors of the Corporation with respect to
indemnification of such officers or directors;
WHEREAS, the Corporation has designated in its Bylaws the
law of the State of Delaware (the state in which the Corporation
is incorporated) as the body of law selected for making
indemnification payments to an officer or director of the
Corporation in all cases involving an administrative proceeding
or civil action other than a Federal Proceeding;
WHEREAS, in accordance with the authorization as provided
by the Law, the Corporation may purchase and maintain a policy
or policies of directors' and officers' liability insurance ("D
& O Insurance"), covering certain liabilities which may be
incurred by its officers or directors in the performance of
their obligations to the Corporation; and
WHEREAS, in order to induce Indemnitee to continue to serve
as an officer or director of the Corporation, the Corporation
has determined and agreed to enter into this Agreement with
Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as
an officer or director after the date hereof, the parties hereto
agree as follows:
1. Indemnity of Indemnitee. The Corporation hereby
agrees to hold harmless and indemnify Indemnitee to the full
extent authorized or permitted by the provisions of the Law, as such
may be amended from time to time, and Section 6.04 of the Bylaws, as
such may be amended. In furtherance of the foregoing indemnification,
and without limiting the generality thereof:
<PAGE>
(a) Proceedings Other Than Proceedings by or in the
Right of the Corporation. Indemnitee shall be entitled to the
rights of indemnification provided in this Section 1(a) if, by
reason of his Corporate Status (as hereinafter defined), he is,
or is threatened to be made, a party to or participant in any
Proceeding (as hereinafter defined) other than a Proceeding by
or in the right of the Corporation. Pursuant to this Section
1(a), Indemnitee shall be indemnified against all Expenses (as
hereinafter defined), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or on
his behalf in connection with such Proceeding or any claim,
issue or matter therein, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the
best interests of the Corporation and, with respect to any
criminal Proceeding, had no reasonable cause to believe his
conduct was unlawful.
(b) Proceedings by or in the Right of the
Corporation. Indemnitee shall be entitled to the rights of
indemnification provided in this Section 1(b) if, by reason of
his Corporate Status, he is, or is threatened to be made, a
party to or participant in any Proceeding brought by or in the
right of the Corporation. Pursuant to this Section 1(b),
Indemnitee shall be indemnified against all Expenses actually
and reasonably incurred by him or on his behalf in connection
with such Proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best
interests of the Corporation; provided, however, that, if
applicable law so provides, no indemnification against such
Expenses shall be made in respect of any claim, issue or matter
in such Proceeding as to which Indemnitee shall have been
adjudged to be liable to the Corporation unless and to the
extent that the Court of Chancery of the State of Delaware shall
determine that such indemnification may be made.
(c) Indemnification for Expenses of a Party Who is
Wholly or Partly Successful. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is,
by reason of his Corporate Status, a party to and is successful,
on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all
Expenses actually and reasonably incurred by him or on his
behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits
or otherwise, as to one or more but less than all claims, issues
or matters in such Proceeding, the Corporation shall indemnify
Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf in connection with each successfully
resolved claim, issue or matter. For purposes of this Section
1(c) and without limitation, the termination of any claim, issue
or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such
claim, issue or matter.
2. Additional Indemnity and Limitations on Indemnity. In
addition to, and without regard to any limitations on, the
indemnification provided for in Section 1, the Corporation shall
and hereby does indemnify and hold harmless Indemnitee against
all Expenses, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by him or on his
behalf if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the
Corporation), including, without limitation, all liability
arising out of the negligence or active or passive wrongdoing of
Indemnitee. The only limitations that shall exist upon the
Corporation's obligations pursuant to this Agreement shall be
that the Corporation shall not be obligated to make any payment
to Indemnitee that is finally determined (under the procedures,
and subject to the presumptions, set forth in Sections 6 and 7
hereof) to be unlawful under Delaware law, and with respect to a
Federal Proceeding only, that is not reasonable and consistent
with the requirements of 12 USC 1828(k) of the FDIA and the
implementing regulations thereunder.
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3. Contribution in the Event of Joint Liability.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any
threatened, pending or completed action, suit or proceeding in
which the Corporation is jointly liable with Indemnitee (or
would be if joined in such action, suit or proceeding), the
Corporation shall pay, in the first instance, the entire amount
of any judgment or settlement of such action, suit or proceeding
without requiring Indemnitee to contribute to such payment and
the Corporation hereby waives and relinquishes any right of
contribution it may have against Indemnitee. The Corporation
shall not enter into any settlement of any action, suit or
proceeding in which the Corporation is jointly liable with
Indemnitee (or would be if joined in such action, suit or
proceeding) unless such settlement provides for a full and final
release of all claims asserted against Indemnitee.
(b) Without diminishing or impairing the obligations
of the Corporation set forth in the preceding subparagraph, if,
for any reason, Indemnitee shall elect or be required to pay all
or any portion of any judgment or settlement in any threatened,
pending or completed action, suit or proceeding in which the
Corporation is jointly liable with Indemnitee (or would be if
joined in such action, suit or proceeding), the Corporation
shall contribute to the amount of expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred and paid or payable by Indemnitee in
proportion to the relative benefits received by the Corporation
and all officers, directors or employees of the Corporation
other than Indemnitee who are jointly liable with Indemnitee (or
would be if joined in such action, suit or proceeding), on the
one hand, and Indemnitee, on the other hand, from the
transaction from which such action, suit or proceeding arose;
provided, however, that the proportion determined on the basis
of relative benefit may, to the extent necessary to conform to
law, be further adjusted by reference to the relative fault of
the Corporation and all officers, directors or employees of the
Corporation other than Indemnitee who are jointly liable with
Indemnitee (or would be if joined in such action, suit or
proceeding), on the one hand, and Indemnitee, on the other hand,
in connection with the events that resulted in such expenses,
judgments, fines or settlement amounts, as well as any other
equitable considerations which the law may require to be
considered. The relative fault of the Corporation and all
officers, directors or employees of the Corporation other than
Indemnitee who are jointly liable with Indemnitee (or would be
if joined in such action, suit or proceeding), on the one hand,
and Indemnitee, on the other hand, shall be determined by
reference to, among other things, the degree to which their
actions were motivated by intent to gain personal profit or
advantage, the degree to which their liability is primary or
secondary, and the degree to which their conduct is active or
passive.
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(c) The Corporation hereby agrees to fully indemnify
and hold Indemnitee harmless from any claims of contribution
which may be brought by officers, directors or employees of the
Corporation other than Indemnitee who may be jointly liable with
Indemnitee.
4. Indemnification for Expenses of a Witness.
Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a
witness in any Proceeding to which Indemnitee is not a party, he
shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection
therewith.
5. Advancement of Expenses. Notwithstanding any other
provision of this Agreement, the Corporation shall advance all
Expenses incurred by or on behalf of Indemnitee in connection
with any Proceeding by reason of Indemnitee's Corporate Status
within ten (10) days after the receipt by the Corporation of a
statement or statements from Indemnitee requesting such advance
or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements
shall reasonably evidence the Expenses incurred by Indemnitee
and shall include or be preceded or accompanied by an
undertaking by or on behalf of Indemnitee (a) to repay any
Expenses advanced if it shall ultimately be determined that
Indemnitee is not entitled to be indemnified against such
Expenses and (b) to repay, with respect to a Federal Proceeding
only, that portion of the advances which subsequently become a
Prohibited Indemnification Payment (as hereinafter defined).
Any advances and undertakings to repay pursuant to this Section
5 shall be unsecured and interest free. Notwithstanding the
foregoing, the obligation of the Corporation to advance Expenses
pursuant to this Section 5 shall be subject to the condition
that, if, when and to the extent that the Corporation determines
that Indemnitee would not be permitted to be indemnified under
applicable law, the Corporation shall be entitled to be
reimbursed, within thirty (30) days of such determination, by
Indemnitee (who hereby agrees to reimburse the Corporation) for
all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee should be indemnified under
applicable law, any determination made by the Corporation that
Indemnitee would not be permitted to be indemnified under
applicable law shall not be binding and Indemnitee shall not be
required to reimburse the Corporation for any advance of
Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed).
6. Procedures and Presumptions for Determination of
Entitlement to Indemnification. It is the intent of this
Agreement to secure for Indemnitee rights of indemnity that are
as favorable as may be permitted under the law and public policy
of the State of Delaware. Accordingly, the parties agree that
the following procedures and presumptions shall apply in the
event of any question as to whether Indemnitee is entitled to
indemnification under this Agreement:
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(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the
Corporation) under this Agreement, Indemnitee shall submit to
the Corporation a written request, including therein or
therewith such documentation and information as is reasonably
available to Indemnitee and is reasonably necessary to determine
whether and to what extent Indemnitee is entitled to
indemnification. The Secretary of the Corporation shall,
promptly upon receipt of such a request for indemnification,
advise the Board in writing that Indemnitee has requested
indemnification.
(b) Upon written request by Indemnitee for
indemnification pursuant to the first sentence of Section 6(a)
hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the
specific case by one of the following three methods, which shall
be at the election of Indemnitee: (1) by a majority vote of the
Disinterested Directors, even though less than a quorum, or (2)
by Independent Counsel (as hereinafter defined) in a written
opinion, or (3) by the stockholders.
(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to
Section 6(b) hereof, the Independent Counsel shall be selected
as provided in this Section 6(c). The Independent Counsel shall
be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board). Indemnitee or the
Corporation, as the case may be, may, within ten (10) days after
such written notice of selection shall have been given, deliver
to the Corporation or to Indemnitee, as the case may be, a
written objection to such selection; provided, however, that
such objection may be asserted only on the ground that the
Independent Counsel so selected does not meet the requirements
of "Independent Counsel" as defined in Section 13 of this
Agreement, and the objection shall set forth with particularity
the factual basis of such assertion. Absent a proper and timely
objection, the person so selected shall act as Independent
Counsel. If a written objection is made and substantiated, the
Independent Counsel selected may not serve as Independent
Counsel unless and until such objection is withdrawn or a court
has determined that such objection is without merit. If, within
twenty (20) days after submission by Indemnitee of a written
request for indemnification pursuant to Section 6(a) hereof no
Independent Counsel shall have been selected and not objected
to, either the Corporation or Indemnitee may petition the Court
of Chancery of the State of Delaware or other court of competent
jurisdiction for resolution of any objection which shall have
been made by the Corporation or Indemnitee to the other's
selection of Independent Counsel and/or for the appointment as
Independent Counsel of a person selected by the court or by such
other person as the court shall designate, and the person with
respect to whom all objections are so resolved or the person so
appointed shall act as Independent Counsel under Section 6(b)
hereof. The Corporation shall pay any and all reasonable fees
and expenses of Independent Counsel incurred by such Independent
Counsel in connection with acting pursuant to Section 6(b)
hereof, and the Corporation shall pay all reasonable fees and
expenses incident to the procedures of this Section 6(c),
regardless of the manner in which such Independent Counsel was
selected or appointed.
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<PAGE>
(d) In making a determination with respect to
entitlement to indemnification hereunder, the person or persons
or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement
if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking
to overcome this presumption shall have the burden of proof and
the burden of persuasion, by clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good
faith if Indemnitee's action is based on the records or books of
account of the Enterprise (as hereinafter defined), including
financial statements, or on information supplied to Indemnitee
by the officers of the Enterprise in the course of their duties,
or on the advice of legal counsel for the Enterprise or on
information or records given or reports made to the Enterprise
by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Enterprise.
In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall
not be imputed to Indemnitee for purposes of determining the
right to indemnification under this Agreement. Whether or not
the foregoing provisions of this Section 6(e) are satisfied, it
shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation.
Anyone seeking to overcome this presumption shall have the
burden of proof and the burden of persuasion, by clear and
convincing evidence.
(f) If the person, persons or entity empowered or
selected under Section 6 to determine whether Indemnitee is
entitled to indemnification shall not have made a determination
within thirty (30) days after receipt by the Corporation of the
request therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of
a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification
under applicable law; provided, however, that such thirty (30)
day period may be extended for a reasonable time, not to exceed
an additional fifteen (15) days, if the person, persons or
entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information
relating thereto; and provided, further, that the foregoing
provisions of this Section 6(f) shall not apply if the
determination of entitlement to indemnification is to be made by
the stockholders pursuant to Section 6(b) of this Agreement and
if (A) within fifteen (15) days after receipt by the Corporation
of the request for such determination the Board or the
Disinterested Directors, if appropriate, resolve to submit such
determination to the stockholders for their consideration at an
annual meeting thereof to be held within seventy five (75) days
after such receipt and such determination is made thereat, or
(B) a special meeting of stockholders is called within fifteen
(15) days after such receipt for the purpose of making such
determination, such meeting is held for such purpose within
sixty (60) days after having been so called and such
determination is made thereat.
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<PAGE>
(g) Indemnitee shall cooperate with the person,
persons or entity making such determination with respect to
Indemnitee's entitlement to indemnification, including providing
to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged
or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such
determination. Any Independent Counsel, member of the Board, or
stockholder of the Corporation shall act reasonably and in good
faith in making a determination under the Agreement of the
Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred
by Indemnitee in so cooperating with the person, persons or
entity making such determination shall be borne by the
Corporation (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Corporation
hereby indemnifies and agrees to hold Indemnitee harmless
therefrom.
(h) The Corporation acknowledges that a settlement or
other disposition short of final judgment may be successful if
it permits a party to avoid expense, delay, distraction,
disruption and uncertainty. In the event that any action, claim
or proceeding to which Indemnitee is a party is resolved in any
manner other than by adverse judgment against Indemnitee
(including, without limitation, settlement of such action, claim
or proceeding with or without payment of money or other
consideration) it shall be presumed that Indemnitee has been
successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall
have the burden of proof and the burden of persuasion, by clear
and convincing evidence.
(i) Anything herein to the contrary notwithstanding,
the determination with respect to entitlement by Indemnitee to
indemnification in connection with a Federal Proceeding shall be
subject to the following terms and conditions:
(1) the determination shall be made by the Board
in good faith and in writing after due investigation and
consideration that Indemnitee acted in good faith and in a
manner Indemnitee believed to be in the best interests of the
Corporation and that the payment will not materially adversely
affect the Corporation's safety and soundness;
(2) Indemnitee must agree in writing to reimburse
the Corporation for that portion of the advanced indemnification
payments which subsequently become Prohibited Indemnification
Payments (as hereinafter defined);
(3) Indemnitee shall not participate in any way
in the discussion and approval of such indemnification payments
by the Board, but Indemnitee may present Indemnitee's request to
the Board and respond to any inquiries from the Board concerning
Indemnitee's involvement in the circumstances giving rise to the
Federal Proceeding;
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<PAGE>
(4) in the event that a majority of the members
of the Board are named as respondents in the Federal Proceeding
and request indemnification, the Disinterested Directors may
authorize Independent Counsel to review the indemnification
request and provide the Disinterested Directors with a written
opinion of counsel as to whether the conditions delineated in
Section 6(i) have been met and if Independent Counsel opines
that such conditions have been met, the Disinterested Directors
may rely on such opinion in authorizing the requested
indemnification;
(5) in the event that all of the members of the
Board are named as respondents in the Federal Proceeding and
request indemnification, the Board shall authorize Independent
Counsel to review the indemnification request and provide the
Board with a written opinion of counsel as to whether the
conditions delineated in Section 6(i) have been met and if
Independent Counsel opines that such conditions have been met,
the Board may rely on such opinion in authorizing the requested
indemnification; and
(6) to the extent not inconsistent with the terms
and provisions of this Section 6, the other terms and provisions
of this Agreement shall apply.
7. Remedies of Indemnitee.
(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not
entitled to indemnification under this Agreement, (ii)
advancement of Expenses is not timely made pursuant to Section 5
of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of
this Agreement within ninety (90) days after receipt by the
Corporation of the request for indemnification, (iv) payment of
indemnification is not made pursuant to this Agreement within
ten (10) days after receipt by the Corporation of a written
request therefor, or (v) payment of indemnification is not made
within ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination
is deemed to have been made pursuant to Section 6 of this
Agreement, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding
seeking an adjudication within one hundred eighty (180) days
following the date on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 7(a). The
Corporation shall not oppose Indemnitee's right to seek any such
adjudication.
(b) In the event that a determination shall have been
made pursuant to Section 6(b) of this Agreement that Indemnitee
is not entitled to indemnification, any judicial proceeding
commenced pursuant to this Section 7 shall be conducted in all
respects as a de novo trial, on the merits and Indemnitee shall
not be prejudiced by reason of that adverse determination under
Section 6(b).
(c) If a determination shall have been made pursuant
to Section 6(b) of this Agreement that Indemnitee is entitled to
indemnification, the Corporation shall be bound by such
determination in any judicial proceeding commenced pursuant to
this Section 7, absent a prohibition of such indemnification
under applicable law.
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<PAGE>
(d) In the event that Indemnitee, pursuant to this
Section 7, seeks a judicial adjudication of his rights under, or
to recover damages for breach of, this Agreement, or to recover
under any D & O Insurance policies maintained by the
Corporation, the Corporation shall pay on his behalf, in
advance, any and all expenses (of the types described in the
definition of Expenses in Section 13 of this Agreement) actually
and reasonably incurred by him in such judicial adjudication,
regardless of whether Indemnitee ultimately is determined to be
entitled to such indemnification, advancement of expenses or
insurance recovery.
(e) The Corporation shall be precluded from asserting
in any judicial proceeding commenced pursuant to this Section 7
that the procedures and presumptions of this Agreement are not
valid, binding and enforceable and shall stipulate in any such
court that the Corporation is bound by all the provisions of
this Agreement.
8. Non-Exclusivity; Survival of Rights; Insurance;
Subrogation.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable
law, the Articles, the Bylaws, any agreement, a vote of
stockholders or a resolution of directors, or otherwise. No
amendment, alteration or repeal of this Agreement or of any
provision hereof shall limit or restrict any right of Indemnitee
under this Agreement in respect of any action taken or omitted
by such Indemnitee in his Corporate Status prior to such
amendment, alteration or repeal. To the extent that a change in
the Law, whether by statute or judicial decision, permits
greater indemnification than would be afforded currently under
the Bylaws and this Agreement, it is the intent of the parties
hereto that Indemnitee shall enjoy by this Agreement the greater
benefits so afforded by such change. No right or remedy herein
conferred is intended to be exclusive of any other right or
remedy, and every other right and remedy shall be cumulative and
in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent assertion or
employment of any other right or remedy.
(b) To the extent that the Corporation maintains an
insurance policy or policies providing liability insurance for
directors, officers, employees, or agents or fiduciaries of the
Corporation or of any other corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise which
such person serves at the request of the Corporation, Indemnitee
shall be covered by such policy or policies in accordance with
its or their terms to the maximum extent of the coverage
available for any such director, officer, employee or agent
under such policy or policies.
(c) In the event of any payment under this Agreement,
the Corporation shall be subrogated to the extent of such
payment to all of the rights of recovery of Indemnitee, who
shall execute all papers required and take all action necessary
to secure such rights, including execution of such documents as
are necessary to enable the Corporation to bring suit to enforce
such rights.
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(d) The Corporation shall not be liable under this
Agreement to make any payment of amounts otherwise indemnifiable
hereunder if and to the extent that Indemnitee has otherwise
actually received such payment under any insurance policy,
contract, agreement or otherwise.
9. Exception to Right of Indemnification.
Notwithstanding any other provision of this Agreement,
Indemnitee shall not be entitled to indemnification under this
Agreement with respect to any Proceeding brought by Indemnitee,
or any claim therein, unless (a) the bringing of such Proceeding
or making of such claim shall have been approved by the Board or
(b) such Proceeding is being brought by the Indemnitee to
assert, interpret or enforce his rights under this Agreement.
10. Duration of Agreement. All agreements and obligations
of the Corporation contained herein shall continue during the
period Indemnitee is an officer or director of the Corporation
(or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise) and shall
continue thereafter so long as Indemnitee shall be subject to
any Proceeding (or any proceeding commenced under Section 7
hereof) by reason of his Corporate Status, whether or not he is
acting or serving in any such capacity at the time any liability
or expense is incurred for which indemnification can be provided
under this Agreement. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto
and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business or assets
of the Corporation), assigns, spouses, heirs, executors and
personal and legal representatives. This Agreement shall
continue in effect regardless of whether Indemnitee continues to
serve as an officer or director of the Corporation or any other
Enterprise at the Corporation's request.
11. Security. To the extent requested by the Indemnitee
and approved by the Board, the Corporation may at any time and
from time to time provide security to the Indemnitee for the
Corporation's obligations hereunder through an irrevocable bank
line of credit, funded trust or other collateral. Any such
security, once provided to the Indemnitee, may not be revoked or
released without the prior written consent of the Indemnitee.
12. Enforcement.
(a) The Corporation expressly confirms and agrees
that it has entered into this Agreement and assumed the
obligations imposed on it hereby in order to induce Indemnitee
to serve as an officer or director of the Corporation, and the
Corporation acknowledges that Indemnitee is relying upon this
Agreement in serving as an officer or director of the
Corporation.
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(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings,
oral, written and implied, between the parties hereto with
respect to the subject matter hereof.
13. Definitions. For purposes of this Agreement:
(a) "Board" means the Board of Directors of the
Corporation.
(b) "Corporate Status" describes the status of a
person who is or was a director, officer, employee or agent or
fiduciary of the Corporation or of any other corporation,
partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the
express written request of the Corporation.
(c) "Disinterested Director" means a director of the
Corporation who is not and was not a party to the Proceeding in
respect of which indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Corporation and any
other corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise of which Indemnitee is or was
serving at the express written request of the Corporation as a
director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable
attorneys' fees, retainers, court costs, transcript costs, fees
of experts, witness fees, travel expenses, duplicating costs,
printing and binding costs, telephone charges, postage, delivery
service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting,
defending, preparing to prosecute or defend, investigating,
participating, or being or preparing to be a witness in a
Proceeding.
(f) "Federal Proceeding" means an administrative
proceeding or civil action initiated by a Federal banking
agency.
(g) "Independent Counsel" means a law firm, or a
member of a law firm, that is experienced in matters of
corporation law and neither presently is, nor in the past five
years has been, retained to represent: (i) the Corporation or
Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under
this Agreement, or of other indemnitees under similar
indemnification agreements), or (ii) any other party to the
Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel"
shall not include any person who, under the applicable standards
of professional conduct then prevailing, would have a conflict
of interest in representing either the Corporation or Indemnitee
in an action to determine Indemnitee's rights under this
Agreement. The Corporation agrees to pay the reasonable fees of
the Independent Counsel referred to above and to fully indemnify
such counsel against any and all Expenses, claims, liabilities
and damages arising out of or relating to this Agreement or its
engagement pursuant hereto.
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(h) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute
resolution mechanism, investigation, inquiry, administrative
hearing or any other actual, threatened or completed proceeding,
whether brought by or in the right of the Corporation or
otherwise and whether civil, criminal, administrative or
investigative, in which Indemnitee was, is or will be involved
as a party or otherwise, by reason of the fact that Indemnitee
is or was a director of the Corporation, by reason of any action
taken by him or of any inaction on his part while acting as an
officer or director of the Corporation, or by reason of the fact
that he is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other Enterprise; in each
case whether or not he is acting or serving in any such capacity
at the time any liability or expense is incurred for which
indemnification can be provided under this Agreement; including
one pending on or before the date of this Agreement; and
excluding one initiated by an Indemnitee pursuant to Section 7
of this Agreement to enforce his rights under this Agreement.
(i) "Prohibited Indemnification Payment" means any
payment by the Corporation for the benefit of Indemnitee to pay
or reimburse Indemnitee for any civil monetary payment or
judgment resulting from any Federal Proceeding or any other
Expense with regard to any Federal Proceeding which results in a
final order or settlement pursuant to which Indemnitee: (a) is
assessed a civil money penalty; (b) is removed from office or
prohibited from participating in the conduct of the affairs of
the Corporation; or (c) is required to cease and desist from or
take any affirmative action described in Section 8(b) of the
FDIA with respect to the Corporation. The term "Prohibited
Indemnification Payment" does not include any reasonable payment
by the Corporation which is used to purchase any commercial
insurance policy or fidelity bond, provided that such insurance
policy or bond shall not be used to pay or reimburse Indemnitee
for the cost of any judgment or civil money penalty assessed
against Indemnitee in a Federal Proceeding, but may pay any
legal or professional expenses incurred in connection with such
a Federal Proceeding or the amount of any restitution to the
Corporation or a receiver. Additionally, the term "Prohibited
Indemnification Payment" does not include any reasonable payment
by the Corporation that represents partial indemnification for
legal or professional expenses specifically attributable to
particular charges for which there has been a formal and final
adjudication or finding in connection with a settlement that
Indemnitee has not violated certain banking laws or regulations
or has not engaged in certain unsafe or unsound banking
practices or breaches of fiduciary duty, unless the Federal
Proceeding has resulted in a final prohibition order against
Indemnitee.
14. Severability. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to
be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability
of the remaining provisions of this Agreement (including without
limitation, each portion of any section of this Agreement
containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent
permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation,
each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable,
that is not itself invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested thereby.
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<PAGE>
15. Modification and Waiver. No supplement, modification,
termination or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
16. Notice By Indemnitee. Indemnitee agrees promptly to
notify the Corporation in writing upon being served with any
summons, citation, subpoena, complaint, indictment, information
or other document relating to any Proceeding or matter which may
be subject to indemnification covered hereunder. The failure to
so notify the Corporation shall not relieve the Corporation of
any obligation which it may have to the Indemnitee under this
Agreement or otherwise unless and only to the extent that such
failure or delay materially prejudices the Corporation.
17. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed
to have been duly given if (i) delivered by hand and receipted
for by the party to whom said notice or other communication
shall have been directed, or (ii) mailed by certified mail with
postage prepaid, on the third business day after the date on
which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee's signature hereto.
(b) If to the Corporation, to:
Surety Capital Corporation
Attention: Chairman of the Board
1501 Summit Avenue
Fort Worth, Texas 76102
or to such other address as may have been furnished to
Indemnitee by the Corporation or to the Corporation by
Indemnitee, as the case may be.
18. Identical Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall for
all purposes be deemed to be an original but all of which
together shall constitute one and the same Agreement. Only one
such counterpart signed by the party against whom enforceability
is sought needs to be produced to evidence the existence of this
Agreement.
19. Headings. The headings of the paragraphs of this
Agreement are inserted for convenience only and shall not be
deemed to constitute part of this Agreement or to affect the
construction thereof.
20. Governing Law. The parties agree that this Agreement
shall be governed by, and construed and enforced in accordance
with, the laws of the State of Delaware without application of
the conflict of laws principles thereof.
21. Gender. Use of the masculine pronoun shall be deemed
to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
CORPORATION: SURETY CAPITAL CORPORATION
By:_______________________________
INDEMNITEE:
__________________________________
Address:
__________________________________
__________________________________
EXHIBIT 10.12
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into
as of January 18, 2000 by and between Surety Bank, National
Association, a national banking association (the "Bank"), and
_______________ ("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the
Bank;
WHEREAS, the Board (as hereinafter defined) has adopted
Articles of Association (the "Articles") and Bylaws (the
"Bylaws") providing for the indemnification of the officers and
directors of the Bank to the maximum extent authorized by the
national banking laws, as amended ("Law");
WHEREAS, pursuant to Interpretative Ruling ss 7.2014 of the
Regulations of the Comptroller of the Currency ("Ruling ss
7.2014"), a national bank may only make or agree to make
indemnification payments to an officer or director of the bank
with respect to a Federal Proceeding (as hereinafter defined)
that are reasonable and consistent with the requirements of 12
USC 1828(k) of the Federal Deposit Insurance Act ("FDIA") and
the implementing regulations thereunder;
WHEREAS, pursuant to Ruling ss 7.2014, in all other cases
involving an administrative proceeding or civil action, a
national bank may indemnify an officer or director of the bank
for damages and expenses and legal fees, in accordance with the
law of the state in which the main office of the bank is
located, the law of the state in which the bank holding company
is incorporated, or the relevant provisions of the Model
Business Corporations Act (1984, as amended 1994, and as amended
thereafter) or Delaware General Corporation Law, Del. Code Ann.
tit. 8 (1991, as amended 1994, and as amended thereafter)
provided such payments are consistent with sound banking
practices;
WHEREAS, the Bank has designated in its Bylaws the law of
the State of Delaware (the state in which the Bank's holding
company is incorporated) as the body of law selected for making
indemnification payments to an officer or director of the Bank
in all cases involving an administrative proceeding or civil
action other than a Federal Proceeding;
WHEREAS, the Articles, Bylaws and the Law, by their
nonexclusive nature, permit contracts between the Bank and the
officers or directors of the Bank with respect to
indemnification of such officers or directors;
WHEREAS, in accordance with the authorization as provided
by the Law, the Bank may purchase and maintain a policy or
policies of directors' and officers' liability insurance ("D & O
Insurance"), covering certain liabilities which may be incurred
by its officers or directors in the performance of their
obligations to the Bank; and
<PAGE>
WHEREAS, in order to induce Indemnitee to continue to serve
as an officer or director of the Bank, the Bank has determined
and agreed to enter into this Agreement with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's service as
an officer or director after the date hereof, the parties hereto
agree as follows:
1. Indemnity of Indemnitee. The Bank hereby agrees to
hold harmless and indemnify Indemnitee to the full extent
authorized or permitted by the provisions of the Law, as such
may be amended from time to time, and Article Tenth of the
Articles and Article X of the Bylaws, as such may be amended.
In furtherance of the foregoing indemnification, and without
limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the
Right of the Bank. Indemnitee shall be entitled to the rights
of indemnification provided in this Section 1(a) if, by reason
of his Corporate Status (as hereinafter defined), he is, or is
threatened to be made, a party to or participant in any
Proceeding (as hereinafter defined) other than a Proceeding by
or in the right of the Bank. Pursuant to this Section 1(a),
Indemnitee shall be indemnified against all Expenses (as
hereinafter defined), judgments, penalties, fines and amounts
paid in settlement actually and reasonably incurred by him or on
his behalf in connection with such Proceeding or any claim,
issue or matter therein, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the
best interests of the Bank and, with respect to any criminal
Proceeding, had no reasonable cause to believe his conduct was
unlawful.
(b) Proceedings by or in the Right of the Bank.
Indemnitee shall be entitled to the rights of indemnification
provided in this Section 1(b) if, by reason of his Corporate
Status, he is, or is threatened to be made, a party to or
participant in any Proceeding brought by or in the right of the
Bank. Pursuant to this Section 1(b), Indemnitee shall be
indemnified against all Expenses actually and reasonably
incurred by him or on his behalf in connection with such
Proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best
interests of the Bank; provided, however, that, if applicable
law so provides, no indemnification against such Expenses shall
be made in respect of any claim, issue or matter in such
Proceeding as to which Indemnitee shall have been adjudged to be
liable to the Bank unless and to the extent that the Court of
Chancery of the State of Delaware shall determine that such
indemnification may be made.
(c) Indemnification for Expenses of a Party Who is
Wholly or Partly Successful. Notwithstanding any other
provision of this Agreement, to the extent that Indemnitee is,
by reason of his Corporate Status, a party to and is successful,
on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all
Expenses actually and reasonably incurred by him or on his
behalf in connection therewith. If Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits
or otherwise, as to one or more but less than all claims, issues
or matters in such Proceeding, the Bank shall indemnify
Indemnitee against all Expenses actually and reasonably incurred
by him or on his behalf in connection with each successfully
resolved claim, issue or matter. For purposes of this Section
1(c) and without limitation, the termination of any claim, issue
or matter in such a Proceeding by dismissal, with or without
prejudice, shall be deemed to be a successful result as to such
claim, issue or matter.
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<PAGE>
2. Additional Indemnity and Limitations on Indemnity. In
addition to, and without regard to any limitations on, the
indemnification provided for in Section 1, the Bank shall and
hereby does indemnify and hold harmless Indemnitee against all
Expenses, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by him or on his
behalf if, by reason of his Corporate Status, he is, or is
threatened to be made, a party to or participant in any
Proceeding (including a Proceeding by or in the right of the
Bank), including, without limitation, all liability arising out
of the negligence or active or passive wrongdoing of Indemnitee.
The only limitations that shall exist upon the Bank's
obligations pursuant to this Agreement shall be that the Bank
shall not be obligated to make any payment to Indemnitee (i)
that is finally determined (under the procedures, and subject to
the presumptions, set forth in Sections 6 and 7 hereof) to be
unlawful under Delaware law, (ii) that is inconsistent with safe
and sound banking practices, and (iii) with respect to a Federal
Proceeding only, that is not reasonable and consistent with the
requirements of 12 USC 1828(k) of the FDIA and the implementing
regulations thereunder.
3. Contribution in the Event of Joint Liability.
(a) Whether or not the indemnification provided in
Sections 1 and 2 hereof is available, in respect of any
threatened, pending or completed action, suit or proceeding in
which the Bank is jointly liable with Indemnitee (or would be if
joined in such action, suit or proceeding), the Bank shall pay,
in the first instance, the entire amount of any judgment or
settlement of such action, suit or proceeding without requiring
Indemnitee to contribute to such payment and the Bank hereby
waives and relinquishes any right of contribution it may have
against Indemnitee. The Bank shall not enter into any
settlement of any action, suit or proceeding in which the Bank
is jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding) unless such settlement provides for
a full and final release of all claims asserted against
Indemnitee.
(b) Without diminishing or impairing the obligations
of the Bank set forth in the preceding subparagraph, if, for any
reason, Indemnitee shall elect or be required to pay all or any
portion of any judgment or settlement in any threatened, pending
or completed action, suit or proceeding in which the Bank is
jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), the Bank shall contribute to the
amount of expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred
and paid or payable by Indemnitee in proportion to the relative
benefits received by the Bank and all officers, directors or
employees of the Bank other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action,
suit or proceeding), on the one hand, and Indemnitee, on the
other hand, from the transaction from which such action, suit or
proceeding arose; provided, however, that the proportion
determined on the basis of relative benefit may, to the extent
necessary to conform to law, be further adjusted by reference to
the relative fault of the Bank and all officers, directors or
employees of the Bank other than Indemnitee who are jointly
liable with Indemnitee (or would be if joined in such action,
suit or proceeding), on the one hand, and Indemnitee, on the
other hand, in connection with the events that resulted in such
expenses, judgments, fines or settlement amounts, as well as any
other equitable considerations which the law may require to be
considered. The relative fault of the Bank and all officers,
directors or employees of the Bank other than Indemnitee who are
jointly liable with Indemnitee (or would be if joined in such
action, suit or proceeding), on the one hand, and Indemnitee, on
the other hand, shall be determined by reference to, among other
things, the degree to which their actions were motivated by
intent to gain personal profit or advantage, the degree to which
their liability is primary or secondary, and the degree to which
their conduct is active or passive.
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<PAGE>
(c) The Bank hereby agrees to fully indemnify and hold
Indemnitee harmless from any claims of contribution which may be
brought by officers, directors or employees of the Bank other
than Indemnitee who may be jointly liable with Indemnitee.
4. Indemnification for Expenses of a Witness.
Notwithstanding any other provision of this Agreement, to the
extent that Indemnitee is, by reason of his Corporate Status, a
witness in any Proceeding to which Indemnitee is not a party, he
shall be indemnified against all Expenses actually and
reasonably incurred by him or on his behalf in connection
therewith.
5. Advancement of Expenses. Notwithstanding any other
provision of this Agreement, the Bank shall advance all Expenses
incurred by or on behalf of Indemnitee in connection with any
Proceeding by reason of Indemnitee's Corporate Status within ten
(10) days after the receipt by the Bank of a statement or
statements from Indemnitee requesting such advance or advances
from time to time, whether prior to or after final disposition
of such Proceeding. Such statement or statements shall
reasonably evidence the Expenses incurred by Indemnitee and
shall include or be preceded or accompanied by an undertaking by
or on behalf of Indemnitee (a) to repay any Expenses advanced
if it shall ultimately be determined that Indemnitee is not
entitled to be indemnified against such Expenses and (b) to
repay, with respect to a Federal Proceeding only, that portion
of the advances which subsequently become a Prohibited
Indemnification Payment (as hereinafter defined). Any advances
and undertakings to repay pursuant to this Section 5 shall be
unsecured and interest free. Notwithstanding the foregoing, the
obligation of the Bank to advance Expenses pursuant to this
Section 5 shall be subject to the condition that, if, when and
to the extent that the Bank determines that Indemnitee would not
be permitted to be indemnified under applicable law, the Bank
shall be entitled to be reimbursed, within thirty (30) days of
such determination, by Indemnitee (who hereby agrees to
reimburse the Bank) for all such amounts theretofore paid;
provided, however, that if Indemnitee has commenced or
thereafter commences legal proceedings in a court of competent
jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the
Bank that Indemnitee would not be permitted to be indemnified
under applicable law shall not be binding and Indemnitee shall
not be required to reimburse the Bank for any advance of
Expenses until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed).
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<PAGE>
6. Procedures and Presumptions for Determination of
Entitlement to Indemnification. It is the intent of this
Agreement to secure for Indemnitee rights of indemnity that are
as favorable as may be permitted under the law and public policy
of the State of Delaware. Accordingly, the parties agree that
the following procedures and presumptions shall apply in the
event of any question as to whether Indemnitee is entitled to
indemnification under this Agreement:
(a) To obtain indemnification (including, but not
limited to, the advancement of Expenses and contribution by the
Bank) under this Agreement, Indemnitee shall submit to the Bank
a written request, including therein or therewith such
documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and
to what extent Indemnitee is entitled to indemnification. The
Secretary of the Bank shall, promptly upon receipt of such a
request for indemnification, advise the Board in writing that
Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for
indemnification pursuant to the first sentence of Section 6(a)
hereof, a determination, if required by applicable law, with
respect to Indemnitee's entitlement thereto shall be made in the
specific case by one of the following three methods, which shall
be at the election of Indemnitee: (1) by a majority vote of the
Disinterested Directors, even though less than a quorum, or (2)
by Independent Counsel (as hereinafter defined) in a written
opinion, or (3) by the stockholders.
(c) If the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to
Section 6(b) hereof, the Independent Counsel shall be selected
as provided in this Section 6(c). The Independent Counsel shall
be selected by Indemnitee (unless Indemnitee shall request that
such selection be made by the Board). Indemnitee or the Bank,
as the case may be, may, within ten (10) days after such written
notice of selection shall have been given, deliver to the Bank
or to Indemnitee, as the case may be, a written objection to
such selection; provided, however, that such objection may be
asserted only on the ground that the Independent Counsel so
selected does not meet the requirements of "Independent Counsel"
as defined in Section 13 of this Agreement, and the objection
shall set forth with particularity the factual basis of such
assertion. Absent a proper and timely objection, the person so
selected shall act as Independent Counsel. If a written
objection is made and substantiated, the Independent Counsel
selected may not serve as Independent Counsel unless and until
such objection is withdrawn or a court has determined that such
objection is without merit. If, within twenty (20) days after
submission by Indemnitee of a written request for
indemnification pursuant to Section 6(a) hereof no Independent
Counsel shall have been selected and not objected to, either the
Bank or Indemnitee may petition the Court of Chancery of the
State of Delaware or other court of competent jurisdiction for
resolution of any objection which shall have been made by the
Bank or Indemnitee to the other's selection of Independent
Counsel and/or for the appointment as Independent Counsel of a
person selected by the court or by such other person as the
court shall designate, and the person with respect to whom all
objections are so resolved or the person so appointed shall act
as Independent Counsel under Section 6(b) hereof. The Bank
shall pay any and all reasonable fees and expenses of
Independent Counsel incurred by such Independent Counsel in
connection with acting pursuant to Section 6(b) hereof, and the
Bank shall pay all reasonable fees and expenses incident to the
procedures of this Section 6(c), regardless of the manner in
which such Independent Counsel was selected or appointed.
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<PAGE>
(d) In making a determination with respect to
entitlement to indemnification hereunder, the person or persons
or entity making such determination shall presume that
Indemnitee is entitled to indemnification under this Agreement
if Indemnitee has submitted a request for indemnification in
accordance with Section 6(a) of this Agreement. Anyone seeking
to overcome this presumption shall have the burden of proof and
the burden of persuasion, by clear and convincing evidence.
(e) Indemnitee shall be deemed to have acted in good
faith if Indemnitee's action is based on the records or books of
account of the Enterprise (as hereinafter defined), including
financial statements, or on information supplied to Indemnitee
by the officers of the Enterprise in the course of their duties,
or on the advice of legal counsel for the Enterprise or on
information or records given or reports made to the Enterprise
by an independent certified public accountant or by an appraiser
or other expert selected with reasonable care by the Enterprise.
In addition, the knowledge and/or actions, or failure to act, of
any director, officer, agent or employee of the Enterprise shall
not be imputed to Indemnitee for purposes of determining the
right to indemnification under this Agreement. Whether or not
the foregoing provisions of this Section 6(e) are satisfied, it
shall in any event be presumed that Indemnitee has at all times
acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Bank. Anyone
seeking to overcome this presumption shall have the burden of
proof and the burden of persuasion, by clear and convincing
evidence.
(f) If the person, persons or entity empowered or
selected under Section 6 to determine whether Indemnitee is
entitled to indemnification shall not have made a determination
within thirty (30) days after receipt by the Bank of the request
therefor, the requisite determination of entitlement to
indemnification shall be deemed to have been made and Indemnitee
shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact, or an omission of
a material fact necessary to make Indemnitee's statement not
materially misleading, in connection with the request for
indemnification, or (ii) a prohibition of such indemnification
under applicable law; provided, however, that such thirty (30)
day period may be extended for a reasonable time, not to exceed
an additional fifteen (15) days, if the person, persons or
entity making the determination with respect to entitlement to
indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information
relating thereto; and provided, further, that the foregoing
provisions of this Section 6(f) shall not apply if the
determination of entitlement to indemnification is to be made by
the stockholders pursuant to Section 6(b) of this Agreement and
if (A) within fifteen (15) days after receipt by the Bank of the
request for such determination the Board or the Disinterested
Directors, if appropriate, resolve to submit such determination
to the stockholders for their consideration at an annual meeting
thereof to be held within seventy five (75) days after such
receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after
such receipt for the purpose of making such determination, such
meeting is held for such purpose within sixty (60) days after
having been so called and such determination is made thereat.
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<PAGE>
(g) Indemnitee shall cooperate with the person,
persons or entity making such determination with respect to
Indemnitee's entitlement to indemnification, including providing
to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged
or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such
determination. Any Independent Counsel, member of the Board, or
stockholder of the Bank shall act reasonably and in good faith
in making a determination under the Agreement of the
Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred
by Indemnitee in so cooperating with the person, persons or
entity making such determination shall be borne by the Bank
(irrespective of the determination as to Indemnitee's
entitlement to indemnification) and the Bank hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(h) The Bank acknowledges that a settlement or other
disposition short of final judgment may be successful if it
permits a party to avoid expense, delay, distraction, disruption
and uncertainty. In the event that any action, claim or
proceeding to which Indemnitee is a party is resolved in any
manner other than by adverse judgment against Indemnitee
(including, without limitation, settlement of such action, claim
or proceeding with or without payment of money or other
consideration) it shall be presumed that Indemnitee has been
successful on the merits or otherwise in such action, suit or
proceeding. Anyone seeking to overcome this presumption shall
have the burden of proof and the burden of persuasion, by clear
and convincing evidence.
(i) Anything herein to the contrary notwithstanding,
the determination with respect to entitlement by Indemnitee to
indemnification in connection with a Federal Proceeding shall be
subject to the following terms and conditions:
(1) the determination shall be made by the Board
in good faith and in writing after due investigation and
consideration that Indemnitee acted in good faith and in a
manner Indemnitee believed to be in the best interests of the
Bank and that the payment will not materially adversely affect
the Bank's safety and soundness;
(2) Indemnitee must agree in writing to reimburse
the Bank for that portion of the advanced indemnification
payments which subsequently become Prohibited Indemnification
Payments;
(3) Indemnitee shall not participate in any way
in the discussion and approval of such indemnification payments
by the Board, but Indemnitee may present Indemnitee's request to
the Board and respond to any inquiries from the Board concerning
Indemnitee's involvement in the circumstances giving rise to the
Federal Proceeding;
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<PAGE>
(4) in the event that a majority of the members
of the Board are named as respondents in the Federal Proceeding
and request indemnification, the Disinterested Directors may
authorize Independent Counsel to review the indemnification
request and provide the Disinterested Directors with a written
opinion of counsel as to whether the conditions delineated in
Section 6(i) have been met and if Independent Counsel opines
that such conditions have been met, the Disinterested Directors
may rely on such opinion in authorizing the requested
indemnification;
(5) in the event that all of the members of the
Board are named as respondents in the Federal Proceeding and
request indemnification, the Board shall authorize Independent
Counsel to review the indemnification request and provide the
Board with a written opinion of counsel as to whether the
conditions delineated in Section 6(i) have been met and if
Independent Counsel opines that such conditions have been met,
the Board may rely on such opinion in authorizing the requested
indemnification; and
(6) to the extent not inconsistent with the terms
and provisions of this Section 6, the other terms and provisions
of this Agreement shall apply.
7. Remedies of Indemnitee.
(a) In the event that (i) a determination is made
pursuant to Section 6 of this Agreement that Indemnitee is not
entitled to indemnification under this Agreement, (ii)
advancement of Expenses is not timely made pursuant to Section 5
of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of
this Agreement within ninety (90) days after receipt by the Bank
of the request for indemnification, (iv) payment of
indemnification is not made pursuant to this Agreement within
ten (10) days after receipt by the Bank of a written request
therefor, or (v) payment of indemnification is not made within
ten (10) days after a determination has been made that
Indemnitee is entitled to indemnification or such determination
is deemed to have been made pursuant to Section 6 of this
Agreement, Indemnitee shall be entitled to an adjudication in an
appropriate court of the State of Delaware, or in any other
court of competent jurisdiction, of his entitlement to such
indemnification. Indemnitee shall commence such proceeding
seeking an adjudication within one hundred eighty (180) days
following the date on which Indemnitee first has the right to
commence such proceeding pursuant to this Section 7(a). The
Bank shall not oppose Indemnitee's right to seek any such
adjudication.
(b) In the event that a determination shall have been
made pursuant to Section 6(b) of this Agreement that Indemnitee
is not entitled to indemnification, any judicial proceeding
commenced pursuant to this Section 7 shall be conducted in all
respects as a de novo trial, on the merits and Indemnitee shall
not be prejudiced by reason of that adverse determination under
Section 6(b).
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<PAGE>
(c) If a determination shall have been made pursuant
to Section 6(b) of this Agreement that Indemnitee is entitled to
indemnification, the Bank shall be bound by such determination
in any judicial proceeding commenced pursuant to this Section 7,
absent a prohibition of such indemnification under applicable
law.
(d) In the event that Indemnitee, pursuant to this
Section 7, seeks a judicial adjudication of his rights under, or
to recover damages for breach of, this Agreement, or to recover
under any D & O Insurance policies maintained by the Bank, the
Bank shall pay on his behalf, in advance, any and all expenses
(of the types described in the definition of Expenses in Section
13 of this Agreement) actually and reasonably incurred by him in
such judicial adjudication, regardless of whether Indemnitee
ultimately is determined to be entitled to such indemnification,
advancement of expenses or insurance recovery.
(e) The Bank shall be precluded from asserting in any
judicial proceeding commenced pursuant to this Section 7 that
the procedures and presumptions of this Agreement are not valid,
binding and enforceable and shall stipulate in any such court
that the Bank is bound by all the provisions of this Agreement.
8. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
(a) The rights of indemnification as provided by this
Agreement shall not be deemed exclusive of any other rights to
which Indemnitee may at any time be entitled under applicable
law, the certificate of incorporation of the Bank, the Bylaws,
any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of
this Agreement or of any provision hereof shall limit or
restrict any right of Indemnitee under this Agreement in respect
of any action taken or omitted by such Indemnitee in his
Corporate Status prior to such amendment, alteration or repeal.
To the extent that a change in the Law, whether by statute or
judicial decision, permits greater indemnification than would be
afforded currently under the Bylaws and this Agreement, it is
the intent of the parties hereto that Indemnitee shall enjoy by
this Agreement the greater benefits so afforded by such change.
No right or remedy herein conferred is intended to be exclusive
of any other right or remedy, and every other right and remedy
shall be cumulative and in addition to every other right and
remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right
or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Bank maintains an insurance
policy or policies providing liability insurance for directors,
officers, employees, or agents or fiduciaries of the Bank or of
any other corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise which such person
serves at the request of the Bank, Indemnitee shall be covered
by such policy or policies in accordance with its or their terms
to the maximum extent of the coverage available for any such
director, officer, employee or agent under such policy or
policies.
-9-
<PAGE>
(c) In the event of any payment under this Agreement,
the Bank shall be subrogated to the extent of such payment to
all of the rights of recovery of Indemnitee, who shall execute
all papers required and take all action necessary to secure such
rights, including execution of such documents as are necessary
to enable the Bank to bring suit to enforce such rights.
(d) The Bank shall not be liable under this Agreement
to make any payment of amounts otherwise indemnifiable hereunder
if and to the extent that Indemnitee has otherwise actually
received such payment under any insurance policy, contract,
agreement or otherwise.
9. Exception to Right of Indemnification. Notwithstanding
any other provision of this Agreement, Indemnitee shall not be
entitled to indemnification under this Agreement with respect to
any Proceeding brought by Indemnitee, or any claim therein,
unless (a) the bringing of such Proceeding or making of such
claim shall have been approved by the Board or (b) such
Proceeding is being brought by the Indemnitee to assert,
interpret or enforce his rights under this Agreement.
10. Duration of Agreement. All agreements and obligations
of the Bank contained herein shall continue during the period
Indemnitee is an officer or director of the Bank (or is or was
serving at the request of the Bank as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) and shall continue
thereafter so long as Indemnitee shall be subject to any
Proceeding (or any proceeding commenced under Section 7 hereof)
by reason of his Corporate Status, whether or not he is acting
or serving in any such capacity at the time any liability or
expense is incurred for which indemnification can be provided
under this Agreement. This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the parties hereto
and their respective successors (including any direct or
indirect successor by purchase, merger, consolidation or
otherwise to all or substantially all of the business or assets
of the Bank), assigns, spouses, heirs, executors and personal
and legal representatives. This Agreement shall continue in
effect regardless of whether Indemnitee continues to serve as an
officer or director of the Bank or any other Enterprise at the
Bank's request.
11. Security. To the extent requested by the Indemnitee
and approved by the Board, the Bank may at any time and from
time to time provide security to the Indemnitee for the Bank's
obligations hereunder through an irrevocable bank line of
credit, funded trust or other collateral. Any such security,
once provided to the Indemnitee, may not be revoked or released
without the prior written consent of the Indemnitee.
12. Enforcement.
(a) The Bank expressly confirms and agrees that it has
entered into this Agreement and assumed the obligations imposed
on it hereby in order to induce Indemnitee to serve as an
officer or director of the Bank, and the Bank acknowledges that
Indemnitee is relying upon this Agreement in serving as an
officer or director of the Bank.
-10-
<PAGE>
(b) This Agreement constitutes the entire agreement
between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings,
oral, written and implied, between the parties hereto with
respect to the subject matter hereof.
13. Definitions. For purposes of this Agreement:
(a) "Board" means the Board of Directors of the Bank.
(b) "Corporate Status" describes the status of a
person who is or was a director, officer, employee or agent or
fiduciary of the Bank or of any other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise
which such person is or was serving at the express written
request of the Bank.
(c) "Disinterested Director" means a director of the
Bank who is not and was not a party to the Proceeding in respect
of which indemnification is sought by Indemnitee.
(d) "Enterprise" shall mean the Bank and any other
corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise of which Indemnitee is or was serving
at the express written request of the Bank as a director,
officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys'
fees, retainers, court costs, transcript costs, fees of experts,
witness fees, travel expenses, duplicating costs, printing and
binding costs, telephone charges, postage, delivery service
fees, and all other disbursements or expenses of the types
customarily incurred in connection with prosecuting, defending,
preparing to prosecute or defend, investigating, participating,
or being or preparing to be a witness in a Proceeding.
(f) "Federal Proceeding" means an administrative
proceeding or civil action initiated by a Federal banking
agency.
(g) "Independent Counsel" means a law firm, or a
member of a law firm, that is experienced in matters of
corporation law and neither presently is, nor in the past five
years has been, retained to represent: (i) the Bank or
Indemnitee in any matter material to either such party (other
than with respect to matters concerning the Indemnitee under
this Agreement, or of other indemnitees under similar
indemnification agreements), or (ii) any other party to the
Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel"
shall not include any person who, under the applicable standards
of professional conduct then prevailing, would have a conflict
of interest in representing either the Bank or Indemnitee in an
action to determine Indemnitee's rights under this Agreement.
The Bank agrees to pay the reasonable fees of the Independent
Counsel referred to above and to fully indemnify such counsel
against any and all Expenses, claims, liabilities and damages
arising out of or relating to this Agreement or its engagement
pursuant hereto.
-11-
<PAGE>
(h) "Proceeding" includes any threatened, pending or
completed action, suit, arbitration, alternate dispute
resolution mechanism, investigation, inquiry, administrative
hearing or any other actual, threatened or completed proceeding,
whether brought by or in the right of the Bank or otherwise and
whether civil, criminal, administrative or investigative, in
which Indemnitee was, is or will be involved as a party or
otherwise, by reason of the fact that Indemnitee is or was a
director of the Bank, by reason of any action taken by him or of
any inaction on his part while acting as an officer or director
of the Bank, or by reason of the fact that he is or was serving
at the request of the Bank as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust
or other Enterprise; in each case whether or not he is acting or
serving in any such capacity at the time any liability or
expense is incurred for which indemnification can be provided
under this Agreement; including one pending on or before the
date of this Agreement; and excluding one initiated by an
Indemnitee pursuant to Section 7 of this Agreement to enforce
his rights under this Agreement.
(i) "Prohibited Indemnification Payment" means any
payment by the Bank for the benefit of Indemnitee to pay or
reimburse Indemnitee for any civil monetary payment or judgment
resulting from any Federal Proceeding or any other Expense with
regard to any Federal Proceeding which results in a final order
or settlement pursuant to which Indemnitee: (a) is assessed a
civil money penalty; (b) is removed from office or prohibited
from participating in the conduct of the affairs of the Bank; or
(c) is required to cease and desist from or take any affirmative
action described in Section 8(b) of the FDIA with respect to the
Bank. The term "Prohibited Indemnification Payment" does not
include any reasonable payment by the Bank which is used to
purchase any commercial insurance policy or fidelity bond,
provided that such insurance policy or bond shall not be used to
pay or reimburse Indemnitee for the cost of any judgment or
civil money penalty assessed against Indemnitee in a Federal
Proceeding, but may pay any legal or professional expenses
incurred in connection with such a Federal Proceeding or the
amount of any restitution to the Bank or a receiver.
Additionally, the term "Prohibited Indemnification Payment" does
not include any reasonable payment by the Bank that represents
partial indemnification for legal or professional expenses
specifically attributable to particular charges for which there
has been a formal and final adjudication or finding in
connection with a settlement that Indemnitee has not violated
certain banking laws or regulations or has not engaged in
certain unsafe or unsound banking practices or breaches of
fiduciary duty, unless the Federal Proceeding has resulted in a
final prohibition order against Indemnitee.
14. Severability. If any provision or provisions of this
Agreement shall be held by a court of competent jurisdiction to
be invalid, void, illegal or otherwise unenforceable for any
reason whatsoever: (a) the validity, legality and enforceability
of the remaining provisions of this Agreement (including without
limitation, each portion of any section of this Agreement
containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or
unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent
permitted by law; and (b) to the fullest extent possible, the
provisions of this Agreement (including, without limitation,
each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable,
that is not itself invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested thereby.
-12-
<PAGE>
15. Modification and Waiver. No supplement, modification,
termination or amendment of this Agreement shall be binding
unless executed in writing by both of the parties hereto. No
waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute
a continuing waiver.
16. Notice By Indemnitee. Indemnitee agrees promptly to
notify the Bank in writing upon being served with any summons,
citation, subpoena, complaint, indictment, information or other
document relating to any Proceeding or matter which may be
subject to indemnification covered hereunder. The failure to so
notify the Bank shall not relieve the Bank of any obligation
which it may have to the Indemnitee under this Agreement or
otherwise unless and only to the extent that such failure or
delay materially prejudices the Bank.
17. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed
to have been duly given if (i) delivered by hand and receipted
for by the party to whom said notice or other communication
shall have been directed, or (ii) mailed by certified mail with
postage prepaid, on the third business day after the date on
which it is so mailed:
(a) If to Indemnitee, to the address set forth below
Indemnitee's signature hereto.
(b) If to the Bank, to:
Surety Bank, National Association
Attention: Chairman of the Board
1501 Summit Avenue
Fort Worth, Texas 76102
or to such other address as may have been furnished to
Indemnitee by the Bank or to the Bank by Indemnitee, as the case
may be.
18. Identical Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall for all
purposes be deemed to be an original but all of which together
shall constitute one and the same Agreement. Only one such
counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this
Agreement.
19. Headings. The headings of the paragraphs of this
Agreement are inserted for convenience only and shall not be
deemed to constitute part of this Agreement or to affect the
construction thereof.
20. Governing Law. The parties agree that this Agreement
shall be governed by, and construed and enforced in accordance
with, the laws of the State of Delaware without application of
the conflict of laws principles thereof.
-13-
<PAGE>
21. Gender. Use of the masculine pronoun shall be deemed
to include usage of the feminine pronoun where appropriate.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on and as of the day and year first above written.
BANK: SURETY BANK, NATIONAL ASSOCIATION
By:_______________________________
INDEMNITEE: __________________________________
Address: ________________________
__________________________________
-14-
EXHIBIT 21
SUBSIDIARIES OF SURETY CAPITAL CORPORATION
Subsidiary Jurisdiction of Organization
- ---------- ----------------------------
Surety Bank, National Association National Banking Association
EXHIBIT 23
We hereby consent to the incorporation by reference in the
following registration statements and related prospectuses of
our report dated April 28, 2000 on the consolidated balance
sheet of Surety Capital Corporation as of December 31, 1999, and
the related consolidated statements of operations, comprehensive
income, changes in shareholders' equity, and cash flows for the
year then ended, which report is included in this Annual Report
on Form 10-K.
Form S-8 - File No. 33-63695
Form S-8 - File No. 333-20615
Form S-8 - File No. 333-57253
/s/Fisk & Robinson, P.C.
May 18, 2000
EXHIBIT 24
SPECIAL POWER OF ATTORNEY
The undersigned hereby appoint Charles M. Ireland and Lloyd
W. Butts, 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, 1999, 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 May, 2000.
/s/ Richard N. Abrams
-----------------------
Richard N. Abrams
/s/ Lloyd W. Butts
-----------------------
Lloyd W. Butts
/s/ William B. Byrd
-----------------------
William B. Byrd
/s/ Margaret E. Holland
-----------------------
Margaret E. Holland
/s/ Charles M. Ireland
-----------------------
Charles M. Ireland
/s/ Michael L. Milam
-----------------------
Michael L. Milam
/s/ Garrett Morris
-----------------------
Garrett Morris
/s/ Cullen W. Turner
-----------------------
Cullen W. Turner
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED
STATEMENT OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<S> <C>
<CASH> 5,417
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 4,334
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,480
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 67,207
<ALLOWANCE> 1,434
<TOTAL-ASSETS> 104,194
<DEPOSITS> 84,878
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,643
<LONG-TERM> 4,350
0
0
<COMMON> 60
<OTHER-SE> 11,263
<TOTAL-LIABILITIES-AND-EQUITY> 104,194
<INTEREST-LOAN> 8,021
<INTEREST-INVEST> 1,154
<INTEREST-OTHER> 737
<INTEREST-TOTAL> 9,912
<INTEREST-DEPOSIT> 3,711
<INTEREST-EXPENSE> 4,104
<INTEREST-INCOME-NET> 5,808
<LOAN-LOSSES> 137
<SECURITIES-GAINS> (51)
<EXPENSE-OTHER> 10,809
<INCOME-PRETAX> (586)
<INCOME-PRE-EXTRAORDINARY> 254
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 254
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
<YIELD-ACTUAL> 4.98
<LOANS-NON> 706
<LOANS-PAST> 14
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,103
<CHARGE-OFFS> 2,386
<RECOVERIES> 1,580
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</TABLE>
